<PAGE>
As filed with the Securities and Exchange Commission on October 6, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM 10
GENERAL FORM FOR
REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934
----------------
CIRCOR International, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-3477276
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
35 Corporate Drive
Burlington, Massachusetts 01803
(781) 273-6268
------------
(Address, including zip code, and
telephone number, including
area code, of the principal
executive offices of the registrant)
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CIRCOR International, Inc.
INFORMATION INCLUDED IN INFORMATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- ---- ------------ ---------------------------------
<S> <C> <C>
1. Business ........................ "Summary;" "Management's Discussion and Analysis
of Financial Condition and Results of
Operations" and "Business."
2. Financial Information............ "Summary;" "Pro Forma Combined Financial
Information;" "Selected Financial Data" and
"Management's Discussion and Analysis of
Financial Condition and Results of Operations."
3. Properties....................... "Business."
4. Security Ownership of Certain
Beneficial Owners and "Security Ownership of CIRCOR Common Stock By
Management...................... Certain Beneficial Owners, Directors and
Executive Officers of CIRCOR."
5. Directors and Executive "Management" and "Description of Capital Stock--
Officers......................... Certain Provisions of Certificate of
Incorporation and
By-laws."
6. Executive Compensation........... "Management."
7. Certain Relationships and Related
Transactions.................... "Summary;" "Relationship Between CIRCOR and
Watts" and "Certain Relationships and Related
Transactions."
8. Legal Proceedings................ "Business."
9. Market Price of and Dividends on
the Registrant's Common Equity
and Related Shareholder "Summary;" "The Distribution" and "Dividend
Matters......................... Policy."
10. Recent Sales of Unregistered
Securities...................... Not Applicable.
11. Description of Registrant's
Securities to be Registered..... "Description of Capital Stock."
12. Indemnification of Directors and
Officers........................ "Description of Capital Stock--Certain
Provisions of Certificate of Incorporation and
By-laws."
13. Financial Statements and
Supplementary Data.............. "Summary;" "Pro Forma Combined Financial
Information;" "Selected Financial Data;"
"Management's Discussion and Analysis of
Financial Condition and Results of Operations"
and "Index to CIRCOR Combined Financial
Statements."
14. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............ Not Applicable.
15. Financial Statements and "Combined Financial Statements" and "Exhibit
Exhibits......................... List."
</TABLE>
<PAGE>
815 Chestnut St., North Andover,
MA 01845-609_______________USA8
Tel. (978) 688-181___Fax1(978) 688-
5841
[Watts logo]
- -------------------------------------------------------------------------------
Chairman & Chief Executive Officer
October 6, 1999
Dear Shareholder:
I am pleased to inform you that the Board of Directors of Watts Industries,
Inc. has approved a distribution to our shareholders of all of the outstanding
shares of common stock of CIRCOR International, Inc. The stock distribution
will be made to holders of record of Watts stock as of October 6, 1999. You
will receive one share of CIRCOR common stock for every two shares of Watts
common stock you hold on such date. The IRS has ruled that the distribution
will generally be tax-free, however, you should refer to pages 6-7 for a
detailed review of the tax consequences of the distribution.
Following completion of the distribution, CIRCOR and its affiliates will own
and operate all of the businesses which presently comprise Watts'
instrumentation and fluid regulation and petrochemical businesses (formerly
known as the industrial, oil and gas businesses). David A. Bloss, Sr., Watts'
current President and Chief Operating Officer, who has been with us for six
years, will be the Chairman, Chief Executive Officer and President of CIRCOR.
Your Board of Directors believes that the distribution will enable Watts and
CIRCOR to focus their respective management teams on enhancing each company's
competitive position in its respective industries with a view towards
increasing the value of each of its businesses, thereby producing greater
total shareholder value over the long term. In reaching this conclusion,
Watts' Board of Directors and management considered that, among other things,
as a result of these transactions, CIRCOR will be better able to raise equity
capital in the financial markets to fund its plan for future growth, reduce
debt incurred as well as obtain working capital for its future growth
strategies. This transaction will also allow Watts to focus on its own
business plan for enhancing shareholder value in its plumbing and heating and
water quality businesses.
The enclosed Information Statement explains the proposed distribution in
greater detail and provides financial and other important information
regarding CIRCOR. We urge you to read it carefully. Holders of Watts stock are
not required to take any action to participate in the distribution. A
shareholder vote is not required in connection with this matter and,
accordingly, your proxy is not being sought.
We are enthusiastic about the distribution and look forward to the future
success of Watts and CIRCOR as highly focused, independent publicly traded
companies.
Sincerely,
[Signature of Timothy P. Horne appears here]
Timothy P. Horne
Chairman and Chief Executive Officer
Watts Regulator Over 120 Years of Leadership Since 1874
Water Quality Valves [_] Water Safety & Flow Control Valves [_] Steam Valves
[_] Industrial Valves [_] Oil & Gas Valves
<PAGE>
[Circor logo]
35 Corporate Drive
Burlington, Massachusetts
01803
Tel: 781-273-6266
David A. Bloss, Sr.
Chairman, President, and
CEO
October 6, 1999
Dear Shareholder:
I am very pleased that you will soon be a shareholder of CIRCOR
International, Inc. As we approach the stock distribution date, I would like
to take this opportunity to briefly introduce you to your new company and to
convey the commitment of all CIRCOR employees to build an exciting and
rewarding enterprise worthy of your investment.
As further described in this document, CIRCOR has been established to
operate the former industrial, oil and gas product lines of Watts Industries,
Inc. In this respect, CIRCOR is a new company. However, its underlying
businesses have long histories with well recognized brand names in each of the
markets they serve. The formation of CIRCOR creates a unique business entity
that supplies valves and related products and services to original equipment
manufacturers, petrochemical and industrial processors, the military,
utilities and others who rely on fluid control to accomplish their missions.
CIRCOR's products enable them and their customers to use fluids safely and
efficiently. Our objective is to create a diversified international fluid-
control company with exceptional growth prospects. Our strategy will be to use
internal product development and acquisitions to enhance our core
competencies, thereby enabling us to address more customer application needs
than our competitors.
I believe that CIRCOR, as an independent company, will be better able to
effectively focus on the needs of its customers and to manage its business by
more closely aligning management objectives to fewer and a less diversified
mix of businesses. Given the competitive environment in the industry and the
accelerated rate of change in the global markets we serve, our success will
depend on our ability to focus on our specific industry and the unique needs
of our customers.
We expect that before the distribution, the New York Stock Exchange will
approve shares of CIRCOR common stock for listing under the symbol "CIR,"
subject to official notice of issuance.
CIRCOR's Board of Directors, management and employees are excited about our
future as an independent company and look forward to your participation in our
success.
Sincerely,
[Signature of David A. Bloss, Sr. appears here]
David A. Bloss, Sr.
Chairman of the Board, Chief Executive Officer
and President
<PAGE>
INFORMATION STATEMENT
CIRCOR International, Inc.
[Circor logo] Common Stock
Par Value $0.01 per Share
This information statement relates to the distribution of 100% of the common
stock of CIRCOR International, Inc. ("CIRCOR") by Watts Industries, Inc.
("Watts"). Watts will make the distribution to record holders of Watts class A
and class B common stock as of October 6, 1999. In the distribution, Watts
shareholders will receive one share of CIRCOR common stock for every two
shares of Watts common stock that they hold on that date. If you are a record
holder of Watts common stock on October 6, 1999, you will receive your CIRCOR
common shares automatically. You do not need to take any further action.
Currently, we expect the distribution to occur on or about October 18, 1999.
----------------
We currently expect that before the distribution, the New York Stock
Exchange will approve shares of CIRCOR common stock for listing under the
symbol "CIR," subject to official notice of issuance, although we cannot
guarantee that the New York Stock Exchange will approve such shares for
listing.
----------------
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS AFFECTING CIRCOR'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
THE VALUE OF ITS COMMON SHARES THAT THIS DOCUMENT DESCRIBES IN DETAIL UNDER
THE HEADING "RISK FACTORS" BEGINNING ON PAGE ONE.
----------------
SHAREHOLDER APPROVAL IS NOT REQUIRED FOR THE DISTRIBUTION OR ANY OF THE
OTHER TRANSACTIONS THAT THIS DOCUMENT DESCRIBES. WE ARE NOT ASKING YOU FOR A
PROXY AND WE REQUEST THAT YOU NOT SEND US ONE.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS DOCUMENT IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS DOCUMENT IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES.
The date of this document is October 6, 1999, and we first mailed this
document
to CIRCOR shareholders on October 7, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION............................. (ii)
SUMMARY.................................................................. (vi)
RISK FACTORS............................................................. 1
THE DISTRIBUTION......................................................... 5
RELATIONSHIP BETWEEN CIRCOR AND WATTS.................................... 8
CAPITALIZATION........................................................... 10
DIVIDEND POLICY.......................................................... 10
PRO FORMA COMBINED FINANCIAL INFORMATION................................. 11
SELECTED FINANCIAL DATA.................................................. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 14
DESCRIPTION OF FINANCINGS................................................ 20
BUSINESS................................................................. 21
MANAGEMENT............................................................... 31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 44
SECURITY OWNERSHIP OF CIRCOR COMMON STOCK BY CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS OF CIRCOR.............................. 45
DESCRIPTION OF CAPITAL STOCK............................................. 47
WHERE TO FIND ADDITIONAL INFORMATION..................................... 51
INDEX TO CIRCOR INTERNATIONAL, INC. COMBINED FINANCIAL STATEMENTS........ F-1
INDEPENDENT AUDITORS' REPORT............................................. F-2
</TABLE>
(i)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
The following questions and answers highlight important information about the
distribution. For a more complete description of the terms of the distribution,
please read this entire document and the other materials to which it refers.
Q:WHAT IS THE DISTRIBUTION?
A: Watts Industries, Inc., which has consisted of two principal businesses, (i)
plumbing & heating and water quality, and (ii) industrial, oil and gas, has
created a new company called CIRCOR International, Inc., which will operate
all of the industrial, oil and gas product lines after the distribution.
References to CIRCOR in this document will include the historical activities
of Watts' industrial, oil and gas product lines.
Q: WHAT WILL HAPPEN IN THE DISTRIBUTION?
A: Watts will distribute all of the outstanding common stock of CIRCOR to Watts
shareholders of record as of October 6, 1999 (this date is sometimes
referred to as the "record date"). On October 18, 1999, Watts will issue all
of the common stock of CIRCOR in a tax-free distribution to Watts'
shareholders on a pro-rata basis. CIRCOR will then begin to operate as a
separate, independent public company. Upon completion of the distribution,
you will own shares in two separately traded public companies, Watts
Industries, Inc. and CIRCOR International, Inc.
Q: WHAT WILL CIRCOR AND WATTS LOOK LIKE AFTER THE DISTRIBUTION?
A: CIRCOR will primarily consist of the Instrumentation and Fluid Regulation
Products Group (Aerodyne Controls, Atkomatic Valve, Circle Seal Controls,
Inc., Go Regulator, Inc., Hoke, Inc., Leslie Controls, Inc., Nicholson Steam
Trap and Spence Engineering Company, Inc.) and the Petrochemical Products
Group (Contromatics Industrial Products, Eagle Check Valve, KF Industries,
Inc., Pibiviesse SpA, Suzhou Watts Valve Co., Ltd., SSI Equipment Inc. and
Telford Valve and Specialities, Inc.).
Watts' companies will primarily consist of its flagship subsidiary Watts
Regulator Company, as well as Ames Company, Inc., Anderson-Barrows Metals
Corporation, Tianjin Tanggu Watts Valve Co. Ltd., Watts Brass & Tubular,
Watts Drainage Products, Inc., Watts Industries (Canada), Inc. and Watts
Industries Europe B.V. and its subsidiaries.
Q: WHAT ARE CIRCOR's KEY OBJECTIVES?
A: We intend to continue to build market positions in the global fluid-control
industry through acquisitions and internal product development in order to
capitalize on integration opportunities; expand our product offerings;
diversify our product offerings into a variety of fluid-control industries
and markets and expand our geographic coverage. These objectives are
discussed in greater detail in "Business."
Q: WHAT WILL I RECEIVE IN THE DISTRIBUTION?
A: You will receive one share of CIRCOR common stock for every two shares of
Watts common stock, either class A or class B, that you own of record on
October 6, 1999, the record date for the distribution. CIRCOR will have only
one class of stock entitled to one vote per share. After the distribution,
you will also continue to own your shares of Watts common stock.
Q: WHAT ABOUT FRACTIONAL SHARES?
A: Watts will pay cash in lieu of distributing fractional shares. Shortly after
the distribution date, the distribution agent will aggregate and sell all
fractional shares and distribute the net proceeds of those sales to
shareholders in accordance with their fractional share interests. No
interest will be paid on any cash distributed in lieu of fractional shares.
(ii)
<PAGE>
Q: WHAT DO I HAVE TO DO TO PARTICIPATE IN THE DISTRIBUTION?
A: Nothing. No proxy or vote is necessary for the distribution or the other
transactions described in this document to occur. You do not need to, and
should not, mail in any certificates of Watts common stock to receive shares
of CIRCOR common stock in the distribution.
Q: HOW WILL WATTS DISTRIBUTE CIRCOR COMMON STOCK TO ME?
A: If you are a record holder of Watts class A or class B common stock as of
the close of business on the record date, Watts' distribution agent will
automatically credit your shares of CIRCOR common stock to a book-entry
account established to hold your CIRCOR common stock. This credit will occur
on or around October 18, 1999. At that time, the distribution agent will
mail you a statement of your CIRCOR common stock ownership. Following the
distribution, you may retain your shares of CIRCOR common stock in your
book-entry account, sell them or transfer them to a brokerage or other
account.
You will not receive new CIRCOR stock certificates in the distribution.
However, if you wish, you may request a physical stock certificate for your
shares after you receive your statement of CIRCOR common stock ownership.
The statement will contain instructions on how to do this.
Q: WHAT IF I HOLD MY SHARES OF WATTS COMMON STOCK THROUGH MY STOCKBROKER, BANK
OR OTHER NOMINEE?
A: If you hold your shares of Watts common stock through your stockbroker, bank
or other nominee, your receipt of CIRCOR common stock depends on your
arrangements with the broker, bank or nominee that holds your shares of
Watts common stock for you. CIRCOR anticipates that stockbrokers and banks
will credit their customers' accounts with CIRCOR common stock on or about
October 18, 1999, but you should confirm that with your stockbroker, bank or
other nominee.
After the distribution, you may instruct your stockbroker, bank or other
nominee to transfer your shares of CIRCOR common stock into your own name
to be held in book-entry form through the direct registration system
operated by the distribution agent.
Q: ON WHICH EXCHANGE WILL SHARES OF CIRCOR COMMON STOCK TRADE?
A: CIRCOR currently expects that shares of its common stock will trade on the
New York Stock Exchange. Before the distribution, CIRCOR expects that the
New York Stock Exchange will approve shares of CIRCOR common stock for
listing under the symbol "CIR," subject to official notice of issuance. We
cannot guarantee, however, that the New York Stock Exchange will approve the
shares for listing.
Q: WHEN WILL I BE ABLE TO BUY AND SELL CIRCOR COMMON STOCK?
A: Regular trading in CIRCOR common stock will begin on the New York Stock
Exchange, if the shares are approved for listing, on or about the
distribution date of October 18, 1999. However, "when-issued" trading for
CIRCOR common stock may develop before the distribution date.
"When-issued" trading means that you may trade CIRCOR common shares before
the distribution date. "When-issued" trading reflects the value at which
the market expects the CIRCOR common shares to trade after the
distribution.
If "when-issued" trading develops in CIRCOR common shares, you may buy and
sell those shares before the distribution date. None of these trades will
settle, however, until after the distribution date, when regular trading in
CIRCOR common stock has begun. If the distribution does not occur, all
"when-issued" trading will be null and void. If "when-issued" trading in
CIRCOR common stock occurs, the symbol on the New York Stock Exchange will
be "CIRwi."
(iii)
<PAGE>
Q: WHAT WILL HAPPEN TO THE LISTING OF WATTS COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE AFTER THE DISTRIBUTION?
A: Following the distribution, The New York Stock Exchange will continue to
list the Watts common stock under the symbol "WTS." You will not receive new
share certificates for Watts common stock, nor will the distribution change
the number of Watts common shares that you own.
Q: HOW WILL I BE ABLE TO BUY AND SELL WATTS COMMON STOCK BEFORE THE
DISTRIBUTION DATE?
A: Watts expects that its common stock will continue to trade on a regular
basis through the distribution date under the current symbol "WTS." Any
shares of Watts common stock sold on a regular basis in the period between
the date that is two days before the record date and the distribution date
(i.e., between October 4 and October 18, 1999) will be accompanied by an
attached "due bill" representing CIRCOR common stock to be distributed in
the distribution.
Additionally, "ex-distribution" trading for Watts common stock may develop
after the record date but before the distribution date. "Ex-distribution"
trading means that you may trade Watts common shares before the completion
of the distribution, but on a basis that reflects the value at which the
market expects the Watts common shares to trade after the distribution.
If "ex-distribution" trading develops in Watts common shares, you may buy
and sell those shares before the distribution date on the New York Stock
Exchange under the symbol "WTSwi." None of these trades, however, will
settle until after the distribution date, when regular trading in CIRCOR
common stock has begun. If the distribution does not occur, all "ex-
distribution" trading will be null and void.
Q: HOW WILL THIS AFFECT MY DIVIDENDS?
A: After the distribution, the boards of directors of each of CIRCOR and Watts
will be responsible for determining their respective companies' dividend
policies. While CIRCOR currently intends to pay cash dividends as a
proportion of earnings similar to that historically paid by Watts, payments
of dividends will necessarily depend on the CIRCOR Board of Directors'
assessment of CIRCOR's earnings, financial condition, capital requirements
and other factors, including restrictions, if any, imposed by CIRCOR's
lenders.
For its fiscal year ended June 30, 1999, Watts paid a regular cash dividend
at the annual rate of $0.35 per share of its common stock. While Watts
currently intends to pay cash dividends as a proportion of earnings similar
to that historically paid by Watts, payments of dividends will necessarily
depend on the Watts Board of Directors' assessment of Watts' earnings after
the distribution, financial condition, capital requirements and other
factors, including restrictions, if any, imposed by Watts' lenders.
Q: WILL I BE SUBJECT TO UNITED STATES INCOME TAXES AS A RESULT OF THE
DISTRIBUTION?
A: Watts has received a ruling from the IRS to the effect that, for United
States federal income tax purposes, your receipt of CIRCOR common stock in
the distribution will be tax-free to you. However, you will be taxed on gain
attributable to cash that you receive in the distribution instead of a
fractional share of CIRCOR common stock. The ruling does not address the
state, local or foreign tax consequences of the distribution that may be
applicable to you. You should consult your tax advisor as to the particular
tax consequences of the distribution to you.
(iv)
<PAGE>
Q: WHAT WILL BE THE RELATIONSHIP BETWEEN WATTS AND CIRCOR AFTER THE
DISTRIBUTION?
A: Watts and CIRCOR will be separate, publicly owned companies. After the
distribution, Watts will not own any of CIRCOR's common stock. After the
distribution, two of CIRCOR's five initial directors will also be Watts
directors. For further information on common ownership of stock in Watts and
CIRCOR following the distribution, see page 44 of this document.
In connection with the distribution, Watts and CIRCOR are entering into
agreements regarding supply and licensing arrangements, tax sharing
arrangements, benefits and indemnification matters. This document describes
these agreements in detail on pages 8-10.
Q: HOW WILL CIRCOR FINANCE ITS ACTIVITIES AFTER THE DISTRIBUTION?
A: Concurrent with the distribution, CIRCOR will enter into a $75 million
revolving credit facility. Concurrent with or shortly after the
distribution, CIRCOR will sell between $65 million and $75 million of senior
unsecured notes to institutional investors in a private placement. On the
distribution date, CIRCOR will pay off approximately $97 million of debt
assumed by CIRCOR from Watts. If the senior notes offering closes on or
before the distribution date, then CIRCOR will pay off the assumed debt with
the net proceeds of the notes offering, approximately $7 million of cash,
and between $15 million and $25 million from the credit facility. If the
senior notes offering does not close by the distribution date, then CIRCOR
will pay off the assumed debt with funds from the credit facility, an
additional $35 million bridge loan from ING (U.S.) Capital LLC, and
approximately $7 million of cash. In that case, CIRCOR will use the net
proceeds of the senior notes offering to pay off the bridge loan and pay
down the credit facility. In addition, to fulfill representations made to
the Internal Revenue Service as part of the request for tax-free treatment
of the distribution, CIRCOR intends to engage in a public offering of
approximately $35 million of its common stock within one year after the
distribution. The timing, completion and size of any public offering will be
subject to market conditions.
Q: WHOM SHOULD I CALL WITH QUESTIONS ABOUT THE DISTRIBUTION?
A: Before the distribution, shareholders of Watts with inquiries relating to
the distribution should contact:
Watts Investor Relations Department
815 Chestnut Street
North Andover, Massachusetts 01845-6098
Telephone: (978) 688-1811
After the distribution, shareholders of CIRCOR with inquiries relating to
their investment in CIRCOR common stock should contact:
CIRCOR Investor Relations Department
35 Corporate Drive
Burlington, Massachusetts 01803
Telephone: (781) 273-6268
The agent responsible for the distribution of CIRCOR common stock in the
distribution and acting as transfer agent and registrar for CIRCOR common
stock after the distribution is:
BankBoston, N.A.
c/o EquiServe
150 Royall Street
Canton, MA 02021
Telephone: (781) 575-3010
(v)
<PAGE>
SUMMARY
The following is a brief summary of the matters that this document addresses.
This summary does not contain all of the information that may be important to
you. For a more complete description of the distribution, you should read this
entire document and the other materials to which it refers.
CIRCOR
CIRCOR was incorporated under the laws of Delaware on July 1, 1999. Our
principal executive offices are located at 35 Corporate Drive, Burlington,
Massachusetts 01803, and our telephone number is (781) 273-6268.
Our objective is to create a diversified, international fluid-control
company. Our key strategies will be to:
. Continue to build market positions through acquisitions;
. Capitalize on integration opportunities;
. Expand our product offerings through internal product development;
. Diversify into a variety of fluid-control industries and markets; and
. Expand our geographic coverage.
THE DISTRIBUTION
The following is a brief summary of the principal terms of the distribution.
Primary Purposes of the The Board of Directors and management of Watts
Distribution have concluded that separation of the plumbing &
heating and water quality businesses and the
instrumentation and fluid regulation and
petrochemical businesses by means of the
distribution is in the best interests of Watts,
CIRCOR and Watts' shareholders. In reaching this
conclusion, Watts' Board of Directors and
management considered that, among other things,
as a result of these transactions:
. CIRCOR will be better able to raise equity
capital in the financial markets to fund its
plan for future growth in order to expand its
market positions in the instrumentation and
fluid regulation and petrochemical industries;
and
. Watts' plumbing & heating and water quality
businesses and CIRCOR's instrumentation and
fluid regulation and petrochemical businesses
will be better able to respond to
opportunities and challenges in their
respective industries and thereby achieve
their full potential under separate ownership;
. management of Watts and CIRCOR will be able to
focus on their respective businesses;
. CIRCOR will be able to offer employee
incentives that are more directly linked to
the performance of the instrumentation and
fluid regulation and petrochemical businesses
so that these incentives are better aligned
with the interests of CIRCOR shareholders; and
. investors and financial markets will be better
able to understand and evaluate the respective
businesses of Watts and CIRCOR.
(vi)
<PAGE>
Securities to be Distributed All of the outstanding shares of CIRCOR common
stock will be distributed to Watts shareholders
of record as of October 6, 1999. Based on the
number of shares of Watts common stock
outstanding as of September 10, 1999 and the
distribution ratio of one CIRCOR common share for
every two Watts class A or class B common shares,
Watts will distribute approximately 13,228,877
shares of CIRCOR common stock to Watts
shareholders. After the distribution, CIRCOR will
have approximately 193 shareholders of record.
Distribution Ratio You will receive one share of CIRCOR common stock
for every two shares of Watts common stock,
either class A or class B, that you own as of the
close of business on October 6, 1999.
Record Date October 6, 1999.
Distribution Date October 18, 1999. On the distribution date,
Watts' distribution agent will credit the shares
of CIRCOR common stock that you will receive in
the distribution to your new book-entry account
or to your stockbroker, bank or other nominee if
you are not a registered shareholder of record.
Distribution Agent Watts has appointed BankBoston, N.A., as its
distribution agent for the distribution.
Trading Market and Symbol There has been no trading market for CIRCOR
common stock. We expect that a "when-issued"
trading market will develop before the
distribution date. We also anticipate that,
before the distribution, the New York Stock
Exchange will approve our common stock for
listing under the symbol "CIR," subject to
official notice of issuance, although we cannot
guarantee that the New York Stock Exchange will
approve the shares for listing.
Federal Income Tax Consequences
Watts has received a ruling from the IRS to the
effect that, for federal income tax purposes, the
distribution of CIRCOR common stock will be tax-
free to Watts and its shareholders. However, you
will be taxed on any gain attributable to cash
you receive instead of a fractional CIRCOR common
share in the distribution. For a detailed review
of the tax consequences of the distribution, see
pages 6-7 of this document.
Risk Factors For a discussion of factors which may affect our
financial condition and results of operation
and/or the value of our common stock, you should
carefully consider the matters discussed under
the section of this document entitled "Risk
Factors."
Fractional Share Treatment Watts will pay cash in lieu of distributing
fractional shares. Shortly after the distribution
date, the distribution agent will aggregate and
sell all fractional shares and distribute the net
proceeds of those sales to shareholders in
accordance with their fractional share interests.
No interest will be paid on any cash distributed
in lieu of fractional shares.
Relationship with Watts After the Distribution
We have entered into a distribution agreement
with Watts. We will also enter into other short-
term arrangements with Watts on or before the
distribution date. This document describes these
agreements on pages 8-10.
(vii)
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
On December 15, 1998 Watts announced that it intended to complete the
distribution and began to report the results of CIRCOR as discontinued
operations as of January 1, 1999, and accordingly has restated its historical
financial statements to conform with this presentation. For comparison
purposes, based upon prior presentations before this change in reporting,
Watts' fiscal year ended June 30, 1999 combined revenues would have been $796.1
million and Watts' June 30, 1999 total assets would have been $841.7 million.
During the following fiscal years, based upon prior presentations before the
change in reporting, CIRCOR and Watts results represented the following
percentages of Watts' overall revenues and assets:
<TABLE>
<CAPTION>
Fiscal Years Ended
June 30,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CIRCOR revenues........................................ 40% 39% 38% 36% 37%
Watts revenues......................................... 60% 61% 62% 64% 63%
CIRCOR total assets.................................... 43% 38% 34% 31% 31%
Watts total assets..................................... 57% 62% 66% 69% 69%
</TABLE>
(viii)
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
We are providing you with the following summary financial information to
highlight our selected financial information for your benefit.
The selected combined historical financial data shown below is derived from
the Combined Financial Statements of the Company. The combined operating
results data set forth below for each of the fiscal years ended June 30, 1999,
1998 and 1997 and the combined balance sheet data as of June 30, 1999 and 1998
are derived from, and are qualified by reference to, the audited combined
financial statements of CIRCOR included on pages F-3 to F-6, and should be read
in conjunction with those financial statments and notes thereto. The combined
operating results data set forth below for each of the fiscal years ended June
30, 1996 and 1995 and the combined balance sheet data as of June 30, 1997, 1996
and 1995 are derived from unaudited combined financial statements of CIRCOR not
included herein. Per share data has not been presented because CIRCOR was
wholly-owned by Watts during the periods presented below.
The selected unaudited pro forma financial data set forth below are derived
from the unaudited pro forma combined financial statements of CIRCOR at June
30, 1999 and for the year then ended set forth under the heading "Unaudited Pro
Forma Combined Financial Statements" and give effect to the transactions
described in that section of the document as if those transactions occurred, in
the case of the pro forma balance sheet, on the date of the balance sheet and,
in the case of the pro forma income statement, as of July 1, 1998.
The combined historical financial data and pro forma financial data below may
not necessarily reflect future results of operations or financial position of
CIRCOR or what the results of operations or financial position of CIRCOR would
actually have been had CIRCOR operated as an independent company during the
periods shown.
CIRCOR International, Inc.
FIVE YEAR FINANCIAL SUMMARY
(in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
---------------------------------------------------------
Pro Forma
1999 1999 1998 1997 1996(1) 1995
----------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Selected Data
Net revenues............ $323,077 $323,077 $288,969 $274,716 $230,473 $216,052
Gross profit............ 104,726 104,726 94,657 88,623 68,675 77,063
Operating income (loss)
....................... 29,297 29,550 38,191 33,906 (23,469) 28,282
Net income (loss)....... 12,011 12,510 22,425 19,614 (31,609) 14,837
Total assets............ 362,370 362,370 256,914 212,727 202,956 216,112
Long term debt.......... 112,070 22,404 12,776 12,891 13,645 16,273
</TABLE>
(1) Fiscal 1996 includes an after tax charge of $48,304 related to:
restructuring costs of $3,025; an impairment of long-lived assets of
$38,462; other non-recurring charges of $3,875 principally for product
liability costs, additional bad debt reserves and environmental remediation
costs; and additional inventory valuation reserves of $2,942.
(ix)
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should carefully
review the following factors which may affect CIRCOR's financial condition or
results of operations and/or the value of its common stock.
Our petrochemical business is cyclical.
We have experienced and expect to continue to experience fluctuations in
revenues and operating results due to economic and business cycles. One
segment of our business, specifically the petrochemical business, is cyclical
in nature as the worldwide demand for oil and gas fluctuates. When the
worldwide demand for oil and gas is depressed, the demand for our products
used in maintenance and repair of existing oil and gas applications, as well
as exploration and new oil and gas project applications, is reduced. As a
result, we have historically generated lower revenues in periods of declining
demand for petrochemical products. Results of operations for any particular
period therefore are not necessarily indicative of the results of operations
for any future period. Future downturns in demand for petrochemical products
could have a material adverse effect on our business, financial condition and
results of operations. Similarly, although not to the same extent as the
petrochemical markets, the aerospace, military and maritime markets have
historically experienced cyclical fluctuations in demand which could also have
a material adverse effect on our business, financial condition and results of
operations.
Implementation of our acquisition strategy may not be successful.
One of our strategies is to increase our revenues and the markets we serve
through the acquisition of additional instrumentation and fluid regulation and
petrochemical products companies. We expect to spend significant time and
effort in expanding our existing businesses and identifying, completing and
integrating acquisitions. We expect to face competition for acquisition
candidates which may limit the number of acquisition opportunities available
to us and may result in higher acquisition prices. We cannot be certain that
we will be able to identify, acquire or profitably manage additional companies
or successfully integrate such additional companies into CIRCOR without
substantial costs, delays or other problems. In addition, there can be no
assurance that companies acquired in the future will achieve revenues and
profitability that justify our investment in them. In addition, acquisitions
may involve a number of special risks, including adverse short-term effects on
our reported operating results, diversion of management's attention, loss of
key personnel at acquired companies, risks associated with unanticipated
problems or legal liabilities and amortization of acquired intangible assets,
some or all of which could have a material adverse effect on our business,
financial condition and results of operations.
Our efforts to develop and market new products may not be successful.
We believe that to successfully implement our future growth strategy we must
develop and market new products to respond to demand from the instrumentation
and fluid regulation and petrochemical industries. The success of our new
products depends on a number of factors, including our ability to develop
products that will be useful to our customers and will respond to market
trends in a timely manner. We cannot be certain that our efforts to develop
new products will be successful or that our customers will accept our new
products.
We face competition from other instrumentation, fluid regulation and
petrochemical products companies.
The domestic and international markets for fluid-control products are highly
competitive. Some of our competitors have substantially greater financial,
marketing, personnel and other resources than we do. We consider product
quality and performance, price, distribution capabilities and breadth of
product offerings to be the primary competitive factors in these markets. Our
competitors with greater financial, marketing and other resources have the
ability to increase competition for customer orders by significantly
discounting the price of their products. In order to compete successfully in
this market we may be required to offer similar discounting which could have a
material adverse effect on our business, financial condition and results of
operations.
We may not be able to continue operating successfully overseas or to
successfully expand into new international markets.
We derive a significant portion of our revenue from sales outside the United
States. In addition, one of our key growth strategies is to market our
products in international markets not currently served in Europe, Latin
America and the Far East. We may not succeed in marketing, selling and
distributing our products in these new markets. Moreover, conducting business
outside the United States is subject to risks, including foreign currency
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exchange rate fluctuations, changes in regional, political or economic
conditions, trade protection measures such as tariffs or import/export
restrictions, and unexpected changes in regulatory requirements. One or more
of these factors could prevent us from successfully expanding into new
international markets and could also have a material adverse effect on our
current international operations, which would adversely affect our financial
condition and results of operations.
Prices of raw materials that we use may increase.
We obtain our raw materials for the manufacture of our products from third-
party suppliers, some of whom are international companies. We do not have
contracts with many of these suppliers that require them to sell us the
materials we need to manufacture our products. In the last few years,
stainless steel, in particular, has increased in price as a result of
increases in demand. While we have not historically experienced difficulties
in obtaining the raw materials we require (including stainless steel), we
cannot be certain that our suppliers will provide us with the raw materials we
need in the quantities requested or at a price we are willing to pay. In the
past we have been able to partially offset increases in the cost of raw
materials by increased sales prices, an active materials management program
and the diversity of materials used in our production processes. However, we
cannot be certain that we will be able to accomplish this in the future. Since
we do not control the actual production of these raw materials, we may be
subject to delays caused by interruption in production of materials for
reasons we cannot control. These include job actions or strikes by employees
of suppliers, transportation interruptions and natural disasters or other
catastrophic events. Our inability to obtain adequate supplies of raw
materials for our products at favorable prices, or at all, could have a
material adverse effect on our business, financial condition and results of
operations.
The absence of a prior market for CIRCOR common stock and/or the sale of large
amounts of CIRCOR's common stock after the distribution could result in
significant fluctuation of the trading price for CIRCOR stock.
There has been no prior trading market for CIRCOR common stock. Until the
CIRCOR common stock is fully distributed and an orderly market develops, the
trading prices for CIRCOR common stock may fluctuate. Prices for the CIRCOR
common stock will be determined in the trading markets and may be influenced
by many factors, including, among others, the depth and liquidity of the
market for CIRCOR common stock, investor perceptions of CIRCOR, performance of
the instrumentation and fluid regulation and petrochemical industries
generally, quarter-to-quarter variations in our actual or anticipated
financial results or those of other companies in the markets we serve and
other general economic or market conditions. The CIRCOR common stock
distributed to Watts shareholders in the distribution will be freely
transferable under the Securities Act of 1933, as amended, except for
securities received by persons who are affiliates of CIRCOR. The sale of a
substantial number of shares of CIRCOR common stock after the distribution by
shareholders could adversely affect the market price of the CIRCOR common
stock.
We face risks from product liability lawsuits.
CIRCOR, like other manufacturers and distributors of products designed to
control and regulate fluids and chemicals, faces an inherent risk of exposure
to product liability claims in the event that the use of its products results
in injury or business interruption to its customers. We may be subjected to
various product liability claims, including, among others, that our products
include inadequate or improper instructions for use or installation or
inadequate warnings concerning the effects of the failure of our products. In
addition, although we maintain strict quality controls and procedures,
including the testing of raw materials and safety testing of selected finished
products, we cannot be certain that our products will be completely free from
defect. In addition, in certain cases, we rely on third-party manufacturers
for our products or components of our products. With respect to product
liability claims, we have resorted to liability insurance coverage. However,
we cannot be certain that this insurance coverage will continue to be
available to us at a reasonable cost, or, if available, will be adequate to
cover liabilities. We generally seek to obtain contractual indemnification
from parties supplying raw materials or components for our products or
manufacturing or marketing our products, and to be added as an additional
insured party under such parties' insurance policies. Any such indemnification
or insurance is limited by its terms and any such indemnification, as a
practical matter, is limited to the creditworthiness of the indemnifying
party. In the event that we do not have adequate insurance or contractual
indemnification, product liabilities relating to our products could have a
material adverse effect on our business, financial condition and results of
operations.
2
<PAGE>
We have no operating history as an independent company.
We do not have an operating history as an independent public company and
have historically relied on Watts for various financial, administrative and
managerial expertise relevant to operating as an independent, public company.
After the distribution, we will maintain our own lines of credit and banking
relationships, perform our own administrative functions and employ senior
executives, including the former President and Chief Operating Officer of
Watts and other former executives of Watts, to manage CIRCOR. While we have
been profitable as part of Watts, we cannot be certain that, as a stand-alone
company, our future profits will be comparable to reported historical
consolidated results before the distribution.
There may be conflicts of interest between CIRCOR and Watts.
Conflicts of interest may arise between CIRCOR and Watts in a number of
areas relating to their past and ongoing relationships, including tax and
employee benefit matters and indemnity arrangements. Several of the current
executive officers of CIRCOR are former executives of Watts. In addition, the
Chief Executive Officer and Chairman of the Board of Watts, as well as another
director of Watts, will serve on the Board of Directors of CIRCOR. These
relationships may create conflicts of interest with respect to matters
potentially or actually involving or affecting CIRCOR and Watts.
We may be responsible for certain historical liabilities in the event Watts
and its affiliates are ultimately unable to satisfy such liabilities.
Until the distribution occurs, we will be a member of Watts' consolidated
group for federal income tax purposes. Each member of a consolidated group is
liable for the federal income tax liability of the other members of the group,
as well as for pension and benefit funding liabilities of the other group
members. After the distribution, we will continue to be liable for these
Watts' liabilities incurred for periods before the distribution.
CIRCOR and Watts have entered into a distribution agreement which allocates
tax, pension and benefit funding liabilities between Watts and CIRCOR. Under
this agreement, Watts will generally retain the authority to file returns,
respond to inquiries and conduct proceedings on CIRCOR's behalf with respect
to consolidated tax returns for years beginning before the distribution. These
arrangements may result in conflicts of interest among Watts and CIRCOR. In
addition, if Watts is ultimately unable to satisfy its liabilities, CIRCOR
could be responsible for satisfying them despite the distribution agreement.
The IRS may treat the distribution as taxable to Watts and its shareholders if
undertakings made to the IRS are not complied with or if representations made
to the IRS were inaccurate.
Watts has received a ruling from the IRS to the effect that, for United
States federal income tax purposes, the distribution will be tax-free to Watts
and its shareholders. However, Watts shareholders will be taxed on gain
attributable to cash received in lieu of fractional shares. In addition, Watts
and its shareholders could be subject to a material amount of tax as a result
of the distribution if Watts and CIRCOR do not comply with undertakings made
to the IRS in connection with obtaining the ruling, or if representations made
by Watts to the IRS in connection with obtaining the ruling are determined to
be inaccurate. Under United States federal income tax law, Watts and CIRCOR
would be jointly and severally liable for Watts' federal income taxes
resulting from the distribution being taxable. For a description of the tax
sharing provisions of the distribution agreement between Watts and CIRCOR, see
"Relationship Between CIRCOR and Watts--Distribution Agreement," on page 8 of
this document. For a detailed description of the tax consequences of the
distribution, see "The Distribution--United States Federal Income Tax
Consequences of the Distribution," on pages 6-7 of this document.
Voting control by our directors, executive officers and principal shareholders
could delay or prevent a "change in control" of CIRCOR.
After giving effect to the distribution, our directors and executive
officers and their affiliates will beneficially own in the aggregate
approximately 30% of the outstanding common stock of CIRCOR. This percentage
ownership does not give effect to the exercise of options to purchase 787,318
shares of common stock to be granted
3
<PAGE>
to certain of these individuals, which, if exercised in whole or in part, will
further concentrate ownership of the common stock. As a result, these
shareholders, if they were to act together, could have the ability, as a
practical matter, to significantly influence the outcome of the election of
our directors and all other matters requiring approval by a majority of our
shareholders including, in many cases, significant corporate transactions,
such as mergers and sales of all or substantially all of our assets. Such
concentration of ownership, together, in some cases, with certain provisions
of our Amended and Restated Certificate of Incorporation and Amended and
Restated By-laws and certain sections of the Delaware General Corporation Law,
may have the effect of delaying or preventing a "change in control" of CIRCOR.
Delaying or preventing a takeover of CIRCOR could result in shareholders of
CIRCOR ultimately receiving less for their shares by deterring potential
bidders for CIRCOR's stock or assets. For additional information about common
stock ownership in Watts and CIRCOR following the distribution, see page 45
under the heading "Security Ownership of CIRCOR Common Stock by Certain
Beneficial Owners, Directors and Executive Officers of CIRCOR."
Various restrictions and agreements could hinder a takeover of CIRCOR which is
not supported by our Board of Directors or which is leveraged.
Our Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, the Delaware General Corporation Law and our shareholder
rights plan contain provisions that could delay or prevent a change in control
of CIRCOR in a transaction that is not approved by our Board of Directors or
that is on a leveraged basis or otherwise. These include provisions creating a
staggered board, limiting the shareholders' powers to remove directors, and
prohibiting shareholders from calling a special meeting or taking action by
written consent in lieu of a shareholders' meeting. In addition, our Board of
Directors has the authority, without further action by the shareholders, to
set the terms of and to issue preferred stock. Issuing preferred stock could
adversely affect the voting power of the owners of CIRCOR common stock,
including the loss of voting control to others. Additionally, we are entering
into a shareholder rights agreement providing for the issuance of rights that
will cause substantial dilution to a person or group of persons that acquires
15% or more of the CIRCOR common shares unless the rights are redeemed. You
can find more information on these provisions under the heading "Description
of Capital Stock."
Furthermore, for a period of two years following the distribution, the terms
of the Distribution Agreement prohibit CIRCOR from engaging in any transaction
that results in one or more persons acquiring a 50% or greater interest in
CIRCOR unless CIRCOR obtains a supplemental ruling from the Internal Revenue
Service or an opinion of legal counsel that the transaction will not adversely
affect the qualification of the distribution as a tax-free transaction. See
"Relationship Between CIRCOR and Watts--Distribution Agreement."
Delaying or preventing a takeover of CIRCOR could result in shareholders of
CIRCOR ultimately receiving less for their shares by deterring potential
bidders for CIRCOR's stock or assets.
Year 2000 Compliance.
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize using "00" as the year 1900 rather than the year 2000. If we and/or
third parties on which we rely do not successfully update computer systems to
avoid this issue, we and/or third parties upon which we rely could experience
system failures or miscalculations and, as a result, disruptions in
operations.
We initiated our Year 2000 compliance program in fiscal 1997 and believe
that only minor modifications remain to be completed to make our systems Year
2000 compliant. We are presently developing a Year 2000 contingency plan which
we expect to be substantially completed in the fall of 1999. However, we
cannot be certain that we will be in full Year 2000 compliance or that we will
have developed a successful contingency plan by the Year 2000. Failure by us
or any of our key suppliers or customers to achieve full Year 2000 compliance
in a timely manner or consistent with our current cost estimates, or to
rectify deficiencies through any contingency plans, could have a material
adverse effect on our business, financial condition and results of operations.
For a more detailed discussion of our Year 2000 Compliance Program, see page
18 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
4
<PAGE>
Forward-looking statements are subject to uncertainties that may cause actual
results to differ materially from those projected.
This document contains forward-looking statements about CIRCOR and Watts.
When used in this document, the words "anticipates," "believes," "expects,"
"intends," "projects," "forecasts," and similar expressions as they relate to
CIRCOR and/or Watts or the management or board of directors of either of those
companies are intended to identify the statements in which they are used as
forward-looking statements. In making any forward-looking statement, CIRCOR
believes that the expectations are based on reasonable assumptions. However,
the subject of any of those statements may be influenced by risks and
uncertainties, some of which are beyond the control of CIRCOR and/or Watts,
that could cause actual outcomes and results to be materially different from
those projected.
The actual results, performance or achievement by CIRCOR and/or Watts could
differ materially from those expressed in, or implied by, any forward-looking
statements. Accordingly, there is no assurance that any of the events
anticipated by the forward-looking statements will transpire or occur, or if
any of them do, what impact they will have on the results of operations and
financial condition of CIRCOR and/or Watts. Neither CIRCOR nor Watts
undertakes any obligation to revise any forward-looking statement to reflect
events or circumstances after the date of this document.
THE DISTRIBUTION
Background and Reasons for the Distribution
The Board of Directors and management of Watts have determined that
separation of the plumbing & heating and water quality businesses and the
instrumentation and fluid regulation and petrochemical businesses by means of
the distribution of CIRCOR common stock to Watts' shareholders is in the best
interests of Watts, CIRCOR and Watts' shareholders. In reaching this
conclusion, Watts' Board of Directors and management considered, among other
things, that:
. the separation will allow CIRCOR to raise equity capital in the financial
markets to fund its plan for future growth in order to expand its market
positions in the instrumentation and fluid regulation and petrochemical
industries;
. Watts' plumbing & heating and water quality businesses and CIRCOR's
instrumentation and fluid regulation and petrochemical businesses are
distinct, complex businesses with different challenges, strategies and
means of doing business and that, the businesses will be better positioned
to respond to the opportunities and challenges in their respective
industries and thereby achieve their full potential under separate
ownership;
. the separation will permit the management of Watts and CIRCOR to focus on
the opportunities and challenges specific to that company's business;
. the separation will allow CIRCOR to offer employee incentives that are more
directly linked to the performance of the instrumentation and fluid
regulation and petrochemical businesses so that these incentives are better
aligned with the interests of CIRCOR shareholders; and
. the separation will result in two distinct publicly traded equity
securities that will enable investors to better understand and evaluate the
respective businesses of Watts and CIRCOR.
Description of the Distribution
The distribution agreement between Watts and CIRCOR sets forth the general
terms and conditions relating to, and their relationship after, the
distribution. For a description of the distribution agreement, see the section
of this document found under the heading "Relationship Between CIRCOR and
Watts--Distribution Agreement."
5
<PAGE>
Watts will effect the distribution on or about October 18, 1999 by
distributing all of the issued and outstanding shares of CIRCOR common stock
to the record holders of Watts common stock on the record date for this
transaction, which is October 6, 1999. Watts will distribute one share of
CIRCOR common stock to each record holder for every two shares of Watts common
stock owned as of the record date by that holder. The actual total number of
shares of CIRCOR common stock that Watts will distribute will depend on the
number of shares of Watts common stock outstanding on the record date. Based
upon the one-for-two distribution ratio and the number of shares of Watts
common stock outstanding on September 10, 1999, Watts will distribute
approximately 13,228,877 shares of CIRCOR common stock to holders of Watts
common stock. CIRCOR common shares will be fully paid and nonassessable, and
the holders of those shares will not be entitled to preemptive rights. For a
further description of CIRCOR common stock and the rights of its holders, see
"Description of Capital Stock."
As part of the distribution, CIRCOR will be adopting a book-entry stock
transfer and registration system for its common stock. Watts' distribution
agent, BankBoston, N.A., will credit the shares of CIRCOR common stock
distributed on the distribution date to book-entry accounts established for
all CIRCOR common stock holders. The distribution agent will mail an account
statement to each of those holders stating the number of shares of CIRCOR
common stock received by that holder in the distribution. After the
distribution, registered holders of CIRCOR common stock may request a transfer
of their shares to a brokerage or other account or physical stock certificates
for their whole shares of CIRCOR common stock.
For those holders of Watts common stock who hold their shares of Watts
common stock through a stockbroker, bank or other nominee, the distribution
agent will transfer the shares of CIRCOR common stock to the registered
holders of record who will make arrangements to credit their customers'
accounts with CIRCOR common stock. Watts anticipates that stockbrokers and
banks will credit their customers' accounts with CIRCOR common stock on or
about October 18, 1999.
Watts will pay cash in lieu of distributing fractional shares. Shortly after
the distribution date, the distribution agent will aggregate and sell all
fractional shares and distribute the net proceeds of those sales to
shareholders in accordance with their fractional share interests. The
distribution agent will pay the net proceeds from sales of fractional shares
based upon the average selling price per share of CIRCOR common stock of all
of those sales, less any brokerage commissions. CIRCOR expects the
distribution agent to make sales on behalf of holders who will receive less
than one whole CIRCOR common share in the aggregate in the distribution as
soon as practicable after the distribution date. None of Watts, CIRCOR or the
distribution agent will be certain any minimum sale price for those fractional
shares of CIRCOR common stock, and no interest will be paid on the proceeds of
those shares.
United States Federal Income Tax Consequences of the Distribution
The following is a summary of the material United States federal income tax
consequences relating to the distribution. This summary is based on the
Internal Revenue Code of 1986, as amended, the Treasury regulations
promulgated thereunder, and interpretations of the Code and Treasury
regulations by the courts and the IRS, all as of the date of this document.
This summary does not discuss all tax considerations that may be relevant to
Watts shareholders in light of their particular circumstances, nor does it
address the consequences to Watts shareholders subject to special treatment
under United States federal income tax laws, such as tax-exempt entities, non-
resident alien individuals, foreign entities, foreign trusts and estates and
fiduciaries thereof, persons who acquired their Watts stock pursuant to the
exercise of employee stock options or otherwise as compensation, insurance
companies, and dealers in securities. In addition, this summary does not
address the United States federal income tax consequences of the distribution
to shareholders who do not hold their Watts stock as a capital asset, nor does
this summary address any state, local or foreign tax consequences of the
distribution. Watts shareholders are urged to consult their tax advisors as to
the particular tax consequences of the distribution to them.
Watts has received a ruling from the IRS to the effect that, for United
States federal income tax purposes, the distribution will qualify under
Section 355 of the Code as a distribution that is tax-free to Watts and its
6
<PAGE>
shareholders. However, cash, if any, received by a Watts shareholder instead
of a fractional share of CIRCOR common stock will be treated as if the
shareholder received the fractional share in the distribution and then
exchanged it for cash. The shareholder will recognize gain or loss to the
extent of the difference between its tax basis in the fractional share and the
amount of cash received. If the fractional share is held as a capital asset,
the gain or loss will be capital gain or loss.
Watts, CIRCOR and Watts' shareholders will not be able to rely on the ruling
if any factual representations made to the IRS in Watts' request for the
ruling are incorrect or untrue in any material respect or any undertakings
made to the IRS are not complied with. Neither Watts nor CIRCOR is aware of
any facts or circumstances that would cause any representation made to the IRS
in Watts' request for the ruling to be incorrect or untrue in any material
respect.
If Watts completes the distribution and, notwithstanding the ruling, the
distribution is held to be taxable for United States federal income tax
purposes, both Watts and the Watts shareholders would be subject to a material
amount of tax as a result of the distribution. Under United States federal
income tax laws, Watts and CIRCOR would be jointly and severally liable for
Watts' federal income taxes resulting from the distribution being taxable. For
a summary of the arrangements between Watts and CIRCOR relating to tax
sharing, tax indemnification and other tax matters, see "Relationship Between
CIRCOR and Watts--Distribution Agreement," on page 8 of this document.
The ruling received from the IRS provides that for United States federal
income tax purposes:
1. The distribution will qualify as a tax-free distribution under Section
355 of the Code.
2. No gain or loss will be recognized by, and no amount will be included in
the income of, Watts as a result of the distribution of CIRCOR common
stock.
3. No gain or loss will recognized by, and no amount will be included in
the income of, the Watts shareholders as a result of their receipt of
CIRCOR common stock in the distribution.
4. In connection with the distribution, a shareholder's tax basis in Watts
common stock held at the time of the distribution will be apportioned
between the Watts common stock and the CIRCOR common stock received in
the distribution in accordance with their relative fair market values.
5. The holding period of the CIRCOR common stock received in the
distribution will include the holding period of the Watts common stock
with respect to which the CIRCOR common stock will be distributed,
provided the Watts common stock is held as a capital asset on the
distribution date.
United States Treasury regulations require each Watts shareholder to attach
to the shareholder's United States federal income tax return for the year of
the distribution a detailed statement setting forth such data as may be
appropriate in order to show the applicability of Section 355 of the Code to
the distribution. Within a reasonable time after the distribution Watts will
provide Watts shareholders with the information necessary to comply with such
requirement, and will provide information regarding the allocation of tax
basis described in point 4 of the preceding paragraph. The ruling received
from the IRS does not specifically address the tax basis allocation rules
applicable to Watts shareholders who hold blocks of Watts stock with different
per-share tax bases. Such shareholders are urged to consult their tax advisors
regarding basis allocation. All Watts shareholders are urged to consult their
tax advisors as to the particular tax consequences of the distribution to
them, including the application of state, local and foreign tax laws and any
changes in United States federal income tax law that may occur after the date
of this document.
Trading Market
Before the distribution, there has been no trading market for CIRCOR common
stock, and we cannot assure you that a trading market will arise or continue.
However, we currently expect that, before the distribution, the New York Stock
Exchange will approve the CIRCOR common stock for listing under the symbol
"CIR," subject to official notice of issuance. There is, however, no guarantee
that the New York Stock Exchange will approve the shares for listing. We also
anticipate that a "when-issued" trading market will develop in our common
stock before the distribution date.
7
<PAGE>
We cannot predict at what prices our common stock may trade (either before the
distribution, on a "when-issued" basis, or after the distribution). The
marketplace will determine the prices at which the CIRCOR common stock will
trade, and these prices may fluctuate significantly. Many factors could affect
these prices, including, among others, the depth and liquidity of the market
for CIRCOR common stock, investor perceptions of CIRCOR, performance of the
instrumentation and fluid regulation and petrochemical industries generally
and quarter-to-quarter variations in our actual or anticipated financial
results or those of other companies in the markets we serve and other general
economic or market conditions. These and other factors may adversely affect
the market price of CIRCOR common stock. For a description of some of the
factors that may affect the prices at which shares of CIRCOR common stock may
trade, see "Risk Factors."
CIRCOR common stock received in the distribution will be freely
transferable, except for those shares received by any person who is a CIRCOR
"affiliate" within the meaning of Rule 144 under the Securities Act of 1933.
Persons who are CIRCOR affiliates after the distribution are individuals or
entities that directly, or indirectly through one or more intermediaries,
control, are controlled by, or are under common control with CIRCOR. CIRCOR
affiliates may sell their CIRCOR common stock received in the distribution
only under an effective registration statement under the Securities Act or
under another exemption from registration under the Securities Act.
In addition to the approximately 13,228,877 shares being distributed,
options to purchase CIRCOR common stock will be issued to certain of our
employees after the distribution. We cannot predict the number of CIRCOR
options that we will issue after the distribution, although the total number
of shares of CIRCOR common stock authorized for issuance under the CIRCOR
stock option plan will initially be limited to 2,000,000. Shares of CIRCOR
common stock issued upon exercise of all options referred to above will be
registered on a Registration Statement on Form S-8 under the Securities Act
and will therefore generally be freely transferable under the securities laws,
except by affiliates as described above. Except as described above and except
for the shareholder rights plan which is discussed below under the heading
"Shareholder Rights Plan," we will not have any other securities outstanding
as of or immediately after the distribution and we have not entered into any
agreement or otherwise committed to register any shares of the CIRCOR common
stock under the Securities Act for sale by shareholders. CIRCOR has agreed in
the tax sharing provisions of the distribution agreement to engage in a public
offering of approximately $35 million of CIRCOR common stock within a year of
the distribution. The timing, completion and size of any public offering will
be subject to market conditions.
RELATIONSHIP BETWEEN CIRCOR AND WATTS
This section describes the primary agreements between CIRCOR and Watts that
will define the ongoing relationship between them and their subsidiaries and
affiliates after the distribution and will provide for an orderly separation
of the two companies. The following description of agreements summarizes the
material terms of the agreements. All shareholders should read the agreements,
which we filed as exhibits to the registration statement of which this
document is a part.
Distribution Agreement
We have entered into a distribution agreement with Watts providing for,
among other things, the principal corporate transactions required to effect
the distribution, the conditions precedent to the distribution, the allocation
between Watts and CIRCOR of certain assets and liabilities, the settlement of
intercompany accounts between Watts and CIRCOR, indemnification obligations of
Watts and CIRCOR, and certain other transition arrangements.
The distribution agreement provides generally that all assets and
liabilities that are associated exclusively with the business of CIRCOR will
be transferred to or retained by CIRCOR, including certain capitalized lease
obligations and obligations under industrial revenue bonds totaling
approximately $12.5 million. Under the distribution agreement, Watts will
retain sole responsibility for all other external debt for borrowed money and
8
<PAGE>
other financings (including Watts' publicly held bonds) with the exception of
approximately $97 million outstanding under Watts' credit facility, which will
be assumed by CIRCOR. The distribution agreement provides that all assets and
liabilities of Watts that are not identified or described as being the
property or responsibility of CIRCOR will remain the property or
responsibility of Watts.
Watts and CIRCOR have each agreed to indemnify, defend and hold harmless the
other party and its subsidiaries and their respective directors, officers,
employees and agents from and against any and all damage, loss, liability and
expense arising out of or due to the failure of the indemnitor or its
subsidiaries to pay, perform or otherwise discharge any of the liabilities or
obligations for which it is responsible under the terms of the distribution
agreement, which include, subject to certain exceptions, all liabilities and
obligations arising out of the conduct or operation of their respective
businesses before, on or after the distribution date. The distribution
agreement includes procedures for notice and payment of indemnification claims
and provides that the indemnifying party may assume the defense of the claim
or suit brought by a third party.
The distribution agreement provides generally that a portion of the assets
of the tax-qualified retirement plans currently maintained by Watts will be
transferred after the distribution to similar qualified retirement plans
established by CIRCOR. In the case of the Watts 401(k) plan, the amount
transferred will be the value of the accounts of employees of companies in the
instrumentation and fluid regulation and petrochemical businesses. In the case
of the other Watts pension plans, the portion of plan assets transferred will
be based generally on the percentage of plan liabilities attributable to plan
participants who will be CIRCOR employees after the distribution.
CIRCOR and its subsidiaries have historically been included with Watts and
its subsidiaries in a single consolidated group for United States federal
income tax purposes. Under United States federal income tax law, each member
of a consolidated group is jointly and severally liable for the United States
federal income tax liability of each other member of the consolidated group.
Accordingly, members of the CIRCOR group could be held liable by the IRS for
federal income tax liabilities arising from periods beginning before the
distribution date.
The tax sharing provisions of the distribution agreement provide that Watts
will be responsible for all domestic income taxes attributable to taxable
periods beginning before the distribution date. For domestic income taxes
attributable to taxable periods beginning on or after the distribution date,
the tax sharing provisions of the distribution agreement provide that Watts
will be responsible for domestic income taxes of the Watts group, and that
CIRCOR will be responsible for domestic income taxes of the CIRCOR group. The
tax sharing provisions also provide that taxes other than domestic income
taxes will be the responsibility of Watts or CIRCOR according to whether the
tax is attributable to the assets or business operations of the Watts group or
the CIRCOR group.
In addition, the tax sharing provisions of the distribution agreement
provide that CIRCOR will indemnify Watts for taxes arising from any act or
omission by CIRCOR which causes the distribution to be taxable. The tax
sharing provisions of the distribution agreement also provide that Watts will
indemnify CIRCOR for taxes arising from any act or omission by Watts which
causes the distribution to be taxable.
CIRCOR has agreed in the tax sharing provisions of the distribution
agreement to engage in a public offering of a significant amount of CIRCOR
stock within one year of the distribution in accordance with statements and
representations made by Watts in its request for the ruling from the IRS
regarding the distribution. The timing, completion and size of any public
offering will be subject to market conditions. CIRCOR has also agreed in the
tax sharing provisions of the distribution agreement not to engage within two
years of the distribution in any merger, reorganization, acquisition, equity
restructuring or other transaction that results in one or more individuals or
entities acquiring a 50% or greater interest in CIRCOR. CIRCOR has also agreed
in the tax sharing provisions of the distribution agreement that it will not
take any action that is inconsistent with the statements and representations
made by Watts in its request for the ruling from the IRS regarding the
distribution. Watts has agreed in the tax sharing provisions of the
distribution agreement not to engage within two years of the distribution in
any merger, reorganization, acquisition, equity restructuring or other
transaction that results in one or more individuals or entities acquiring a
50% or greater interest in Watts. Watts has also agreed in the tax
9
<PAGE>
sharing provisions of the distribution agreement that it will not take any
action that is inconsistent with the statements and representations made by
Watts in its request for the ruling from the IRS regarding the distribution.
The tax sharing provisions of the distribution agreement provide, however,
that CIRCOR or Watts may act or fail to act in a way contrary to the
commitments referred to in this paragraph after first obtaining an opinion
from Goodwin, Procter & Hoar llp (or other mutually acceptable law firm) or a
ruling from the IRS to the effect that such action (or inaction) will not
cause the distribution to be taxable to either Watts or the Watts
shareholders.
Supply Agreement
On or before the distribution date, Watts and CIRCOR will enter into a
supply agreement under which Watts will provide certain products to CIRCOR
after the distribution. Watts will sell these products under market or
formula-based pricing mechanisms.
Trademark License Agreement
On or before the distribution date, Watts and CIRCOR will enter into a
trademark license agreement under which Watts will grant to KF Industries,
Inc. a royalty-free, non-exclusive license to use the name "Watts" as part of
a brand name of CIRCOR or one of its subsidiaries for a period of 12 months
following the distribution date.
CAPITALIZATION
The following table sets forth the combined capitalization of CIRCOR as of
June 30, 1999 on an historical basis and as adjusted to reflect (1) the
distribution and (2) the assumption by CIRCOR of debt under the Watts credit
facility as described on page 20 of this document under the heading
"Description of Financings," as if they had occurred as of that date. You
should read this table in conjunction with the information located under the
heading "Unaudited Pro Forma Combined Financial Statements" and the historical
combined financial statements and notes thereto of the Company, included on
pages F-1 to F-18 of this document.
<TABLE>
<CAPTION>
Pro Forma As
Actual Adjustments Adjusted
-------- ----------- --------
(in thousands)
<S> <C> <C> <C>
Short-term borrowings........................... $ 4,178 $ -- $ 4,178
Long-term debt.................................. 22,404 89,666 112,070
-------- --------- --------
Total debt.................................... 26,582 89,666 $116,248
Common stock.................................... -- 1,322 1,322
Additional paid-in capital...................... -- 168,959 168,959
Accumulated other comprehensive income.......... (691) -- (691)
Equity from Watts Industries, Inc............... 259,947 (259,947) --
-------- --------- --------
Total shareholders' equity.................... 259,256 (89,666) $169,590
-------- --------- --------
Total capitalization.......................... $285,838 $ -- $285,838
======== ========= ========
</TABLE>
DIVIDEND POLICY
CIRCOR does not currently have a formal dividend policy. While CIRCOR
currently intends to pay cash dividends as a proportion of earnings similar to
that historically paid by Watts, payments of dividends will necessarily depend
on the CIRCOR Board of Directors' assessment of CIRCOR's earnings, financial
condition, capital requirements and other factors, including restrictions, if
any, imposed by CIRCOR's lenders.
10
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited Pro Forma Combined Statement of Operations of CIRCOR for the
fiscal year ended June 30, 1999 presents the pro forma combined results of
operations of CIRCOR, assuming that the transactions contemplated by the
distribution, including the borrowing to be incurred by the Company in
connection with the distribution, had been completed as of July 1, 1998, and
include all material adjustments necessary to restate CIRCOR's historical
results. The adjustments required to reflect such transactions are set forth
in the "Pro Forma Adjustments" column.
The unaudited Pro Forma Combined Balance Sheet of CIRCOR as of June 30, 1999
presents the pro forma combined financial position of CIRCOR, assuming that
the transactions contemplated by the distribution described in the preceding
paragraph had been completed as of that date. The adjustments required to
reflect such transactions are set forth in the "Pro Forma Adjustments" column.
The unaudited pro forma combined financial statements of CIRCOR should be
read in conjunction with the historical financial statements and related notes
of the Company included on pages F-1 to F-18 of this document. The pro forma
financial information presented is for informational purposes only and may not
necessarily reflect future results of operations or financial position of
CIRCOR or what the results of operations or financial position of CIRCOR would
actually have been had CIRCOR operated as an independent company during the
period shown.
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- --------
<S> <C> <C> <C>
Net revenues......................... $323,077 $ -- $323,077
Cost of goods sold................... 218,351 -- 218,351
-------- ------ --------
GROSS PROFIT 104,726 -- 104,726
Selling, general and administrative
expenses............................ 75,176 253 (a) 75,429
-------- ------ --------
OPERATING INCOME 29,550 (253) 29,297
Other (income) expense:
Interest income..................... (333) -- (333)
Interest expense.................... 9,141 (b) 1,037 (b) 10,178
Other............................... (229) -- (229)
-------- ------ --------
INCOME BEFORE INCOME TAXES 20,971 (1,290) 19,681
Provision for income taxes........... 8,461 (516)(c) 7,945
-------- ------ --------
NET INCOME $ 12,510 $ (774) $ 11,736
======== ====== ========
Net income per share--basic.......... $ .88 (d)
========
Net income per share--diluted........ $ .88 (d)
========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
11
<PAGE>
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 6,714 $ -- $ 6,714
Trade accounts receivable................ 49,857 -- 49,857
Inventories.............................. 108,910 -- 108,910
Other current assets..................... 18,736 -- 18,736
-------- --------- --------
TOTAL CURRENT ASSETS.................... 184,217 -- 184,217
Property, plant and equipment............. 76,682 -- 76,682
Goodwill.................................. 96,900 -- 96,900
Other assets.............................. 4,571 -- 4,571
-------- --------- --------
TOTAL ASSETS.............................. $362,370 $ -- $362,370
======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................... $ 25,543 $ -- $ 25,543
Accrued expenses......................... 25,153 -- 25,153
Income taxes payable..................... 3,275 -- 3,275
Current portion of long-term debt........ 4,178 -- 4,178
-------- --------- --------
TOTAL CURRENT LIABILITIES............... 58,149 -- 58,149
Long term debt, net of current portion.... 22,404 89,666 112,070
Deferred income taxes..................... 10,766 -- 10,766
Other noncurrent liabilities.............. 11,795 -- 11,795
SHAREHOLDER'S EQUITY:
Common stock............................. -- 1,322 1,322
Additional paid-in capital............... -- 168,959 168,959
Accumulated other comprehensive income... (691) -- (691)
Shareholders' Equity..................... 259,947 (259,947) --
-------- --------- --------
TOTAL SHAREHOLDERS' EQUITY.............. 259,256 (89,666)(e) 169,590
-------- --------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................... $362,370 $ -- $362,370
======== ========= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
12
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
(in thousands)
(a) To record estimated additional administrative expenses that would
have been incurred by CIRCOR as a publicly held, independent company.
CIRCOR would have incurred additional compensation and related costs for
employees to perform functions that have been performed at Watts' corporate
headquarters (treasury, investor relations, regulatory compliance, risk
management, etc.). CIRCOR would have also incurred additional amounts for
corporate governance costs, stock transfer agent costs, incremental
professional fees and other administrative activities. Approximately
$253,000 of such incremental costs are expected above the $5,617,000 of
general and administrative expenses allocated from Watts.
(b) Historical interest expense includes $6,455,000 of interest
expense allocated from Watts to CIRCOR. Pro forma interest expense includes
$7,492,000 of interest expense on borrowings under the CIRCOR credit
facility and from the issuance of senior unsecured notes. The borrowings
under the CIRCOR credit facility and senior unsecured notes are assumed to
bear an annualized interest rate, including amortization of related fees,
of 8.5%, which is management's estimate of the currently available rate for
borrowings under comparable credit facilities. This rate may change prior
to the incurrence of such debt on or before the distribution date; further,
after the distribution the interest rate on the borrowings under the CIRCOR
credit facility will continue to be subject to changes in interest rates
generally. The historical allocation of Watts' interest expense was based
on Watts' weighted average interest rate applied to the average balance of
investments by and advances from Watts to CIRCOR.
(c) To record income tax benefits attributable to adjustments (a) and
(b) at a combined Federal and state tax rate of 40.0%.
(d) Pro forma earnings per share information is based upon the
weighted average number of common and common equivalent shares used by
Watts to determine its earnings per share for the respective periods,
adjusted in accordance with the distribution ratio (one share of CIRCOR
Common Stock for every two shares of Watts Common Stock held). The pro
forma number of common and common equivalent shares for the fiscal year
ended June 30, 1999 are 13,368,064 for basic and 13,374,834 for diluted.
(e) To record payments to be made to Watts by CIRCOR, anticipated to
aggregate $89,666,000, which will be applied to settle all intercompany
loans and advances with any balance to be paid as a cash dividend.
SELECTED FINANCIAL DATA
The following table summarizes certain selected historical financial and
operating information of CIRCOR and is derived from the Combined Financial
Statements of the Company. The information shown below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical combined financial statements of
CIRCOR and the notes thereto included on pages F-1 to F-18 of this document.
The combined operating results data shown below for each of the fiscal years
ended June 30, 1999, 1998 and 1997 and the combined balance sheet data as of
June 30, 1999 and 1998 are derived from, and are qualified by reference to,
the audited combined financial statements of CIRCOR included elsewhere in this
document, and should be read in conjunction with those financial statements
and notes thereto. The combined operating results data shown below for each of
the fiscal years ended June 30, 1996 and 1995 and the combined balance sheet
data as of June 30, 1997, 1996 and 1995 are derived from unaudited combined
financial statements of CIRCOR not included herein. Per share data has not
been presented because CIRCOR was wholly-owned by Watts during the periods
presented below.
The combined historical financial information presented below may not
necessarily reflect future results of operations or financial position of
CIRCOR or what the results of operations or financial position of CIRCOR would
actually have been had CIRCOR operated as an independent company during the
periods shown.
13
<PAGE>
FIVE YEAR FINANCIAL SUMMARY
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996(1) 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Data
Net revenues..................... $323,077 $288,969 $274,716 $230,473 $216,052
Gross profit..................... 104,726 94,657 88,623 68,675 77,063
Operating income (loss).......... 29,550 38,191 33,906 (23,469) 28,282
Net income (loss)................ 12,510 22,425 19,614 (31,609) 14,837
Total assets..................... 362,370 256,914 212,727 202,956 216,112
Long term debt................... 22,404 12,776 12,891 13,645 16,273
</TABLE>
(1) Fiscal 1996 includes an after tax charge of $48,304 related to:
restructuring costs of $3,025; an impairment of long-lived assets of $38,462;
other charges of $3,875 principally for product liability costs, additional
bad debt reserves and environmental remediation costs; and additional
inventory valuation reserves of $2,942.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is based upon and should be read in conjunction
with the "Pro Forma Combined Financial Information," "Selected Financial Data"
and CIRCOR's Combined Financial Statements, including the notes thereto,
included elsewhere in this document.
Results of Operations for the Twelve Months Ended June 30, 1999 Compared to
the Twelve Months Ended June 30, 1998
Net revenues for the twelve months ended June 30, 1999 increased by $34.1
million, or 11.8%, from $289.0 million to $323.1 million compared to the
fiscal year ended June 30, 1998. The increase in net revenues is attributable
to the following factors:
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Acquisitions............................................ $ 79,171 27.4%
Operations.............................................. (45,552) (15.8%)
Foreign Exchange........................................ 489 0.2%
-------- ------
TOTAL CHANGE........................................... $ 34,108 11.8%
</TABLE>
The growth in net revenues is primarily attributable to the inclusion of the
revenues of recently acquired companies, including Hoke, Inc., which was
acquired during July 1998, and Telford Valve and Specialties, Inc. acquired in
March 1998. Hoke is part of CIRCOR's Instrumentation and Fluid Regulation
Products Group and Telford Valve is part of CIRCOR's Petrochemical Products
Group. The decrease in revenues from operations is primarily attributable to
decreases in unit shipments of both domestic and international oil and gas
valves. Revenues of these products have been adversely affected by the reduced
demand for our products used in petrochemical facility projects and
maintenance programs which has been caused by reduced energy prices during
CIRCOR's last fiscal year.
International business accounted for approximately 41.4% of net revenues in
fiscal year 1999 compared to 31.9% in fiscal year 1998. CIRCOR monitors its
revenues in two market segments: Instrumentation and Fluid Regulation Products
Group and the Petrochemical Products Group. The Instrumentation and Fluid
Regulation Products Group accounted for approximately 54.3% of net revenues in
fiscal year 1999 compared to 38.2% in fiscal year 1998. The Petrochemical
Products Group accounted for approximately 45.7% of net revenues in fiscal
14
<PAGE>
year 1999 compared to 61.8% in fiscal year 1998. CIRCOR's revenues in these
groups for fiscal year 1999 and fiscal year 1998 were as follows:
(in thousands)
<TABLE>
<CAPTION>
1999 Revenues 1998 Revenues Change in Revenues
------------- ------------- ------------------
<S> <C> <C> <C>
Instrumentation and Fluid
Regulation.................... $175,444 $110,332 $ 65,112
Petrochemical.................. 147,633 178,637 (31,004)
-------- -------- --------
TOTAL......................... $323,077 $288,969 $ 34,108
</TABLE>
The decrease in petrochemical net revenues of $31.0 million, or 17.4%, for
the fiscal year ended June 30, 1999 was predominantly in the domestic markets
which reflected a 23.8% decrease over the previous fiscal year. The increase
in instrumentation and fluid regulation net revenues of $65.1 million, or
59.0%, for the fiscal year ended June 30, 1999 consisted primarily of volume
derived from acquisitions consisting of Hoke, Inc. and several product lines.
CIRCOR's gross profit increased $10.1 million, or 10.6%, to $104.7 million.
Gross margin declined slightly from 32.8% in fiscal 1998 to 32.4% in fiscal
1999. The increased gross profit is attributable to the increased sales due to
the acquisitions discussed above. These acquisitions operated at a gross
margin slightly higher than the remainder of CIRCOR. The increased gross
profits from acquisitions were partially offset by decreased gross profits in
CIRCOR's domestic and international oil and gas valve product lines. Lower
energy prices resulted in lower demand, increased competition and adversely
impacted unit pricing. Additionally, the reduced manufacturing levels, caused
by these reduced revenues, also created unfavorable overhead absorption of
fixed manufacturing expenses thereby decreasing gross margins in fiscal year
1999 compared to fiscal year 1998.
Selling, general and administrative expenses increased $18.7 million to
$75.2 million for the fiscal year ended June 30, 1999. This increase is
attributable to the inclusion of the expenses related with recent
acquisitions. This increase was partially offset by both cost reductions and
reduced variable selling expenses within CIRCOR's oil and gas business units.
CIRCOR's operating income by segment for fiscal year 1999 and fiscal year
1998 were as follows:
(in thousands)
<TABLE>
<CAPTION>
Change in
1999 Operating Income 1998 Operating Income Operating Income
--------------------- --------------------- ----------------
<S> <C> <C> <C>
Instrumentation and
Fluid Regulation....... $24,844 $17,883 $ 6,961
Petrochemical........... 10,323 25,256 (14,933)
Corporate............... (5,617) (4,948) (669)
------- ------- --------
TOTAL.................. $29,550 $38,191 $ (8,641)
</TABLE>
The increase in operating income in the Instrumentation and Fluid Regulation
Products Group is attributable primarily to acquisitions. The decrease in
operating income in the Petrochemical Products Group reflects reduced energy
prices and reduced demand for our products used in petrochemical facility
projects and maintenance programs.
The effective tax rate increased to 40.3% from 36.0%. The increase is a
result of increased earnings in foreign jurisdictions with higher tax rates.
Net income decreased $9.9 million to $12.5 million. This decrease is
primarily attributable to the decreased net revenues and gross margins in the
petrochemical market.
CIRCOR's combined results of operations are impacted by the effect that
changes in foreign exchange rates have on its international subsidiaries'
operating results. Changes in foreign exchange rates had an immaterial impact
on net income in fiscal 1999.
15
<PAGE>
Results of Operations for the Twelve Months Ended June 30, 1998 Compared to
the Twelve Months Ended June 30, 1997
Net revenues for the twelve months ended June 30, 1998 increased $14.3
million, or 6.2%, from $274.7 million to $289.0 million compared to the fiscal
year ended June 30, 1997. This increase in net revenues is attributable to the
following factors:
(in
thousands)
<TABLE>
<S> <C> <C>
Acquisitions................................................... $14,624 5.3%
Operations..................................................... 4,008 1.5%
Foreign Exchange............................................... (4,379) (1.6%)
------- -----
TOTAL CHANGE................................................. $14,253 5.2%
</TABLE>
The growth in net revenues due to acquired companies is primarily
attributable to the inclusion of the net revenues of Telford Valve which was
acquired in March 1998 and the net revenues of Aerodyne Controls Corporation
which was acquired in December 1997. Aerodyne Controls Corporation is part of
CIRCOR's Instrumentation and Fluid Regulation Products Group. The increase in
net revenues from operations is primarily attributable to increased unit
shipments of international oil and gas valves and increased unit shipments of
domestic instrumentation valves. CIRCOR's net revenues were adversely impacted
by a change in foreign exchange rates primarily associated with the Italian
lire during fiscal year 1998.
CIRCOR monitors its performance in two segments: the Instrumentation and
Fluid Regulation Products Group and the Petrochemical Products Group. CIRCOR's
revenues in these markets for fiscal 1997 and fiscal 1998 were as follows:
(in thousands)
<TABLE>
<CAPTION>
Change
1998 1997 in
Revenues Revenues Revenues
-------- -------- --------
<S> <C> <C> <C>
Instrumentation and Fluid Regulation................. $110,332 $102,691 $ 7,641
Petrochemical........................................ 178,637 172,025 6,612
-------- -------- -------
TOTAL.............................................. $288,969 $274,716 $14,253
</TABLE>
The increase in instrumentation and fluid regulation revenues is primarily
attributable to the acquisition of Aerodyne Controls Corporation, increased
unit shipments of domestic valves and two product line acquisitions. The
increase in petrochemical revenues is primarily attributable to increased unit
shipments of international oil and gas valves and the acquisition of Telford
Valve. These increases were partially offset by the unfavorable foreign
exchange rates associated with the Italian lire.
CIRCOR's gross profit increased $6.0 million, or 6.8%, to $94.7 million for
the fiscal year ended June 30, 1998 and gross margin increased from 32.2% to
32.8% compared to the fiscal year ended June 30, 1997. This percentage
increase is primarily attributable to improved gross margins for international
oil and gas valves and domestic steam valves. These improvements were
partially offset by the inclusion of certain acquisitions which operated at a
lower gross margin than the remainder of CIRCOR.
Selling, general and administrative expenses increased $1.8 million, or
3.2%, to $56.5 million. This increase is primarily attributable to the
inclusion of the expenses of acquired companies and increased selling expenses
for oil and gas valves. This increase is partially offset by the effect of the
change in foreign exchange rates.
CIRCOR's operating income increased by $4.3 million, or 12.6%, from $33.9
million to $38.2 million and increased as a percentage of revenues from 12.3%
in fiscal 1997 to 13.2% in fiscal 1998.
16
<PAGE>
CIRCOR's operating income by market segments for fiscal year 1998 and fiscal
year 1997 were as follows:
(in thousands)
<TABLE>
<CAPTION>
Change in
1998 Operating Income 1997 Operating Income Operating Income
--------------------- --------------------- -----------------
<S> <C> <C> <C>
Petrochemical........... $25,256 $21,012 $4,244
Instrumentation and
Fluid Regulation....... 17,883 17,280 603
Corporate............... (4,948) (4,386) (562)
------- ------- ------
TOTAL................. $38,191 $33,906 $4,285
</TABLE>
The increase in operating income in the Instrumentation and Fluid Regulation
Products Group is primarily attributable to increased net revenues.
The increase in operating income in the Petrochemical Products Group is
primarily attributable to the increase in net revenues and increased gross
margins on international oil and gas valves.
The effective tax rate increased to 36.0% from 34.5%. This increase is
attributable to acquisition related goodwill amortization which is not
deductible for US Federal Income Tax purposes.
Net income increased by nearly $2.8 million, or 14.3%, to $22.4 million.
This increase is primarily attributable to increased net revenues and improved
gross margins.
CIRCOR's combined results of operations are impacted by the effect that
changes in foreign exchange rates have on its international subsidiaries'
operating results. Changes in foreign exchange rates had an adverse impact on
net income for fiscal 1998 of approximately $700,000.
Liquidity and Capital Resources
During the twelve month period ended June 30, 1999, CIRCOR generated $20.5
million in cash flow from continuing operations, which was principally used to
fund capital expenditures of $9.5 million. The capital expenditures were
primarily for manufacturing, machinery, equipment and upgrading the Company's
information technology. CIRCOR reduced $19.7 million of accounts payable,
accrued expenses and other current liabilities during the twelve month period.
This decrease was partially offset by decreases in accounts receivable and
inventories. Most of the changes in working capital were attributable to the
decrease in CIRCOR's revenues from international oil and gas valves.
On July 21, 1998, a wholly owned subsidiary of CIRCOR acquired the common
equity of Hoke, Inc. headquartered in Cresskill, New Jersey. Hoke is a
manufacturer and distributor of industrial valves and fittings, including its
well known line of Gyrolok(R) tube fittings for instrumentation applications.
Hoke sells its products primarily to the industrial, OEM and analytical
instrumentation markets. Sales are conducted through owned and independent
stocking distributors world-wide with nearly one-half of its sales outside of
North America. The purchase price, including the assumption of debt, was
approximately $85.0 million and was funded using Watts' line of credit.
CIRCOR has access to Watts' unsecured $125.0 million line of credit until
CIRCOR is spun-off as a separate entity. CIRCOR has utilized this credit
facility to support its acquisition program, working capital requirements, and
for general corporate purposes.
In anticipation of the spin-off of CIRCOR from Watts, CIRCOR is (i)
negotiating with ING (U.S.) Capital LLC, BankBoston, N.A. and First Union
National Bank for a $75.0 million unsecured revolving credit facility and (ii)
negotiating the sale of between $65.0 million and $75.0 million of senior
unsecured notes to institutional investors. On the distribution date, CIRCOR
will pay off approximately $97 million of debt assumed by CIRCOR from Watts.
If the senior notes offering closes on or before the distribution date, then
CIRCOR will pay off the assumed debt with the net proceeds of the notes
offering, approximately $7.0 million of cash, and between
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$15 million and $25 million from the credit facility. If the senior notes
offering does not close by the distribution date, then CIRCOR will pay off the
assumed debt with funds from the credit facility, an additional $35 million
bridge loan from ING (U.S.) Capital LLC, and approximately $7 million of cash.
In that case, CIRCOR will use the net proceeds of the senior notes offering to
pay off the bridge loan and pay down the credit facility. Also, to fulfill
representations made to the Internal Revenue Service as part of the request
for tax-free treatment of the distribution, CIRCOR intends to engage in a
public offering of approximately $35.0 million of its common stock within one
year after the distribution. The timing, completion and size of any public
offering will be subject to market conditions.
The ratio of current assets to current liabilities was 3.2 to 1 at June 30,
1999 and 2.8 to 1 at June 30, 1998. This improvement is primarily attributable
to inclusion of Hoke's inventory in conjunction with the decrease in CIRCOR's
accounts payable and accrued expenses. At June 30, 1999, CIRCOR was in
compliance with all covenants related to its existing debt.
CIRCOR anticipates that available funds and those funds provided from
ongoing operations will be sufficient to meet current operating requirements
and anticipated capital expenditures over the next 24 months.
CIRCOR, from time to time, is involved with product liability, environmental
proceedings and other litigation proceedings and incurs costs on an ongoing
basis related to these matters. CIRCOR has not incurred material expenditures
in fiscal 1999 in connection with any of these matters. See "Business--Product
Liability, Environmental and Other Litigation Matters" on page 30 of this
document.
Year 2000 Compliance
CIRCOR has developed a comprehensive program to address its potential
exposure to the Year 2000 issue. CIRCOR manages the program by having each
subsidiary and operating unit identify their own Year 2000 issues and develop
appropriate corrective action steps, while instituting a series of management
processes that coordinate and manage the program across CIRCOR. Watts'
Corporate Vice President of Administration has been assigned responsibility
for the overall coordination and monitoring of the program, including
establishment of policies, tracking progress, and leveraging solutions across
CIRCOR.
A significant portion of CIRCOR's Year 2000 issues relative to its
information technology systems are being addressed as part of a CIRCOR-wide
initiative to upgrade and replace its information systems which began in
fiscal 1997. At June 30, 1999, approximately 98% of CIRCOR's critical
information technology systems and approximately 95% its other information
technology systems have been replaced or upgraded and are Year 2000 compliant.
CIRCOR expects to complete the replacement or upgrade of the remaining systems
in the fall of 1999.
Inventories, assessments and remediation activities for non-information
technology systems, including manufacturing equipment, have been completed at
June 30, 1999.
CIRCOR has identified critical vendors, suppliers of information processing
services, customers, financial institutions and other third parties and
surveyed their Year 2000 remediation efforts. Additionally, CIRCOR has
contacted all vendors and third party suppliers in this regard. All but three
vendors have responded. These three vendors and those determined not to be
Year 2000 compliant have been replaced with vendors who are Year 2000
compliant. This vendor survey and review process is complete. The cost of the
program was immaterial. CIRCOR did not utilize any independent verification
processes to confirm that these vendor responses were reliable. However,
CIRCOR purchasing department personnel communicate regularly with critical
vendors. This communication includes Year 2000 compliance confirmation.
CIRCOR considers less than ten of its vendors critical and has developed
contingency plans for those vendors. Critical vendors supply CIRCOR with base
raw materials and certain component parts. Contingency plans include
increasing levels of on-site and consigned inventory. Additionally, raw
materials are readily available and most can be supplied by a number of
alternative vendors who are Year 2000 compliant. These contingency plans for
vendors are complete.
CIRCOR's operations depend on infrastructure in a number of foreign
countries in which it operates, and, therefore, a failure of any of those
infrastructures could adversely affect its operations. CIRCOR's most
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<PAGE>
significant foreign markets are Canada, China, Germany, Italy and the United
Kingdom. In these countries, CIRCOR is not aware of any significant weaknesses
in their infrastructure.
CIRCOR continues to develop detailed contingency plans to deal with
unexpected issues which may occur. These plans include the identification of
appropriate resources and response teams. Individual business managers at each
of CIRCOR's subsidiaries and operating units are responsible to ensure their
business functions continue to operate normally. While the specifics vary by
operation, the general contingency planning strategies include: increasing the
on-hand supply of raw materials and finished goods; identifying alternate
suppliers of raw materials; ensuring key personnel (both business and
technical) are physically on-site; backing up critical systems just before
year-end; and identifying alternative methods of doing business with customers
as necessary. CIRCOR expects to complete its contingency plans in the fall of
1999.
Despite CIRCOR's comprehensive program CIRCOR cannot be certain that issues
will not develop or events occur that could have material adverse affects on
CIRCOR's financial condition or results of operations. Nevertheless, CIRCOR
does not expect a material failure. CIRCOR's Year 2000 program is designed to
minimize the likelihood of any failure occurring. The most reasonably likely
worst case scenario is that a short-term disruption will occur with a small
number of customers or suppliers requiring an appropriate response.
Spending for the program is budgeted and expensed as incurred. Spending to
date for the program has amounted to approximately $3.7 million. Additional
spending to complete the program is estimated at $1.4 million.
Conversion to Euro
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed
conversion rates between their existing sovereign currencies and the Euro. The
Euro trades on currency exchanges and is available for non-cash transactions.
The introduction of the Euro will affect CIRCOR as CIRCOR has manufacturing
and distribution facilities in several of the member countries and trades
extensively across Europe. The long-term competitive implications of the
conversion are currently being assessed by CIRCOR. At this time, CIRCOR is not
anticipating that any significant costs will be incurred due to the
introduction and conversion to the Euro.
Other
In 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits," and
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The
Company has adopted SFAS 132. The Company will adopt SFAS 133 on January 1,
2001. The impact of SFAS 133 on the combined financial statements is still
being evaluated, but is not expected to be material.
Also in 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed of Obtained
for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities." The Company will adopt SOP 98-1 and SOP 98-5 in fiscal 2000.
These statements are not expected to have a material affect the combined
financial statements.
Quantitative and Qualitative Disclosures About Market Risk
CIRCOR uses derivative financial instruments primarily to reduce exposure to
adverse fluctuations in foreign exchange rates. CIRCOR does not enter into
derivative financial instruments for trading purposes. As a matter of policy
all derivative positions are used to reduce risk by hedging underlying
economic exposure. The derivatives the Company uses are straightforward
instruments with liquid markets.
CIRCOR manages most of its foreign currency exposures on a consolidated
basis. CIRCOR identifies all of its known exposures. As part of that process,
all natural hedges are identified. CIRCOR then nets these natural hedges from
its gross exposures.
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CIRCOR's consolidated earnings are subject to fluctuations due to changes in
foreign currency exchange rates. However, its overall exposure to such
fluctuations is reduced by the diversity of its foreign operating locations
which encompass a number of different European locations, Canada, and China.
CIRCOR's foreign subsidiaries transact most business, including certain
intercompany transactions, in foreign currencies. Such transactions
principally relate to material purchases and sales to customers. CIRCOR uses
foreign currency forward exchange contracts to manage the risk related to
intercompany purchases that occur during the course of a fiscal year and
certain open foreign currency denominated commitments to sell products to
third parties. At June 30, 1998, there were no significant amounts of open
foreign currency forward exchange contracts or related unrealized gains or
losses.
CIRCOR has historically had a very low exposure to changes in interest
rates. Additionally, the Company historically has strong cash flows, and any
amounts of variable rate debt could be paid down through cash generated from
operations. Information about related interest rates appears in Note 9 to the
financial statements included herein.
CIRCOR purchases significant amounts of bronze ingot, brass rod, stainless
steel, cast iron, and carbon steel which are utilized in manufacturing its
many product lines. CIRCOR's operating results can be adversely affected by
changes in commodity prices if it is unable to pass on related price increases
to its customers. CIRCOR manages this risk by monitoring related market
prices, working with its suppliers to achieve the maximum level of stability
in their costs and related pricing, seeking alternative supply sources when
necessary and passing increases in commodity costs to its customers, to the
maximum extent possible, when they occur. CIRCOR does not use derivative
financial instruments to manage this risk.
DESCRIPTION OF FINANCINGS
Following the distribution CIRCOR plans to have a $75.0 million unsecured
revolving credit facility with ING (U.S.) Capital LLC, BankBoston, N.A. and
First Union National Bank. The credit facility will provide that CIRCOR may
borrow an aggregate principal amount of up to $75.0 million, subject to the
terms and conditions of the credit agreement. On the distribution date, CIRCOR
will pay off approximately $97 million of debt assumed by CIRCOR from Watts.
If the senior notes offering described below closes on or before the
distribution date, then CIRCOR will pay off the assumed debt with the net
proceeds of the senior notes offering, approximately $7 million of cash, and
between $15 million and $25 million from the credit facility. If the senior
notes offering does not close by the distribution date, then CIRCOR will pay
off the assumed debt with funds from the credit facility, an additional $35
million bridge loan from ING (U.S.) Capital LLC, and approximately $7 million
of cash. In that case, CIRCOR will use the net proceeds of the senior notes
offering to pay off the bridge loan and pay down the credit facility. CIRCOR
will use the balance of the funds available under the credit facility for
capital expenditure needs, working capital and general corporate purposes. The
credit facility will contain representations, warranties, affirmative,
negative and financial covenants, and events of default customary for such
facilities. Interest rates charged on borrowings outstanding under the credit
facility will be based on market rates which can vary over time.
Before or shortly after the distribution, CIRCOR intends to sell between
$65.0 million and $75.0 million of senior unsecured notes to institutional
investors. The agreement under which CIRCOR sells the notes will contain
representations, warranties, affirmative, negative and financial covenants,
and events of default customary for such agreements.
Also, to fulfill representations made to the Internal Revenue Service as
part of the request for tax-free treatment of the distribution, CIRCOR intends
to engage in a public offering of approximately $35.0 million of its common
stock within one year after the distribution. The timing, completion and size
of any public offering will be subject to market conditions.
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BUSINESS
CIRCOR designs, manufactures and distributes valves and related products and
services for use in a wide range of applications to optimize the efficiency or
ensure the safety of fluid-control systems. The valves and related fluid-
control products we manufacture are used in processing industries; oil and gas
production, pipeline construction and maintenance; aerospace, military and
commercial aircraft; and maritime manufacturing and maintenance. We have used
both internal product development and strategic acquisitions to assemble a
complete array of fluid-control products and technologies that enables us to
address our customers' unique fluid-control application needs. CIRCOR has two
major product groups: Instrumentation and Fluid Regulation Products and
Petrochemical Products. For the year ended June 30, 1999, CIRCOR had the
following sales composition: 54.3% instrumentation and fluid regulation
products; and 45.7% petrochemical products.
Instrumentation and Fluid Regulation Products Group
The Instrumentation and Fluid Regulation Products Group designs,
manufactures and supplies valves and controls for diverse end-uses including
hydraulic, pneumatic, cryogenic and steam applications. Selected products
include precision valves, compression tube and pipe fittings, control valves
and regulators. The Instrumentation and Fluid Regulation Products Group
consists primarily of the following: Aerodyne Controls, Atkomatic Valve,
Circle Seal Controls, Inc., Go Regulator, Inc., Hoke, Inc., Leslie Controls,
Inc., Nicholson Steam Trap, and Spence Engineering Company, Inc. The
Instrumentation and Fluid Regulation Products Group had combined revenues of
approximately $175.4 million for the year ended June 30, 1999.
CIRCOR entered the instrumentation valve market in October 1990, with the
acquisition of Circle Seal, based in Corona, California. Circle Seal designs
and manufactures a broad range of valve products, including check valves,
relief valves, solenoid valves, motor operated valves, regulators, plug
valves, needle valves, control systems and manifolded valve solutions. Circle
Seal specializes in providing custom solutions for applications requiring
precise performance, quality and reliability. From its initial focus on the
aerospace and military markets, Circle Seal has diversified into many other
industrial markets where performance, quality and reliability attributes are
most valued, such as medical, food processing, ultra high purity and fluid
power.
Since acquiring Circle Seal, we have acquired eight complementary
instrumentation and fluid regulation businesses, including Aerodyne (December
1997), Atkomatic (April 1998), Hoke (July 1998) and Go Regulator (April 1999).
Aerodyne, based in Ronkonkoma, New York, manufactures high-precision valve
components for the medical, analytical, military and aerospace markets.
Aerodyne also provides advanced technologies and control systems capabilities
to other companies in the Instrumentation and Fluid Regulation Products Group.
Atkomatic, formerly based in Indianapolis, Indiana, makes heavy-duty process
solenoid valves for clean air, gases, liquids, steam, corrosive fluids and
cryogenic fluids. In July 1998, we combined the Atkomatic product line with
Circle Seal's administrative, manufacturing and distribution facilities in
Corona, California. Go Regulator of San Dimas, California, offers a complete
line of pneumatic pressure regulators for instrumentation, analytical and
process applications, in addition to an emerging product line of regulators
for the ultra high purity market, specialized cylinder valves and customized
valves.
We significantly expanded the breadth of our instrumentation valve product
line with the acquisition of Hoke in July 1998. CIRCOR's largest acquisition
to date, Hoke brought to CIRCOR its leading line of Gyrolok(R) compression
tube fittings as well as instrumentation ball valves, plug valves, metering
valves and needle valves. Circle Seal and Hoke serve several common markets
and their products are cross-marketed through their respective distribution
channels. Furthermore, Hoke, with nearly 50% of its revenues derived outside
of the United States, significantly expanded Circle Seal's geographic
marketing and distribution capabilities. We are currently in the process of
integrating Circle Seal's and Hoke's administrative and distribution
activities as well as combining manufacturing operations. We believe that our
ability to provide the instrumentation market a complete fluid-control
solution is enhanced by combining the product line offerings of Circle Seal,
Hoke and Go Regulator.
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CIRCOR has had a long-standing presence in the steam industry, starting with
its acquisition of Spence Engineering in 1985. Our steam product offering grew
substantially with the acquisitions of Leslie Controls of Tampa, Florida and
Nicholson Steam Trap of Wilkes Barre, Pennsylvania in 1989. Management
believes that we have a very strong franchise in steam valve products, with
both Leslie Controls and Spence Engineering having been in the steam pressure
reduction business for over 75 years. Our steam valve products are used in
municipal and institutional heating and air-conditioning applications, as well
as, in power plants, industrial processing and commercial and military
maritime applications.
Petrochemical Products Group
The Petrochemical Products Group designs, manufactures and supplies flanged
and threaded floating and trunnion ball valves, needle valves, check valves,
butterfly valves and large forged steel ball valves, gate valves and strainers
for use in oil, gas and chemical processing and industrial applications.
Management believes that the Petrochemical Products Group is one of the top
three producers of ball valves for the oil and gas market worldwide. The
Petrochemical Products Group consists primarily of the following: Contromatics
Industrial Products, Eagle Check Valve, KF Industries, Inc., Pibiviesse SpA,
Suzhou Watts Valve Co., Ltd., SSI Equipment Inc. and Telford Valve and
Specialties, Inc. The Petrochemical Products Group had combined revenues of
approximately $147.6 million for the year ended June 30, 1999.
CIRCOR entered the petrochemical products market in 1978 with the formation
of the industrial products division and its development of the floating ball
valve for industrial and chemical processing applications. With the
acquisition of KF Industries in July 1988, CIRCOR expanded its product
offerings to floating and trunnion-supported valves, ball valves and needle
valves. KF Industries gave CIRCOR entry into the oil and gas transmission,
distribution and exploration markets. In 1989, CIRCOR acquired Eagle Check
Valve, which added check valves to CIRCOR's product line. Pibiviesse SpA,
based in Nerviano, Italy, was acquired in November 1994. Pibiviesse
manufactures ball valves for the petrochemical market, including a complete
range of trunnion mounted ball valves. Pibiviesse's manufacturing capabilities
include up through 60" diameter valves, including Class 2500 pressure ratings
to meet demanding international oil and gas pipeline and production
requirements. In March 1998, Telford Valve was added to KF Industries. Telford
Valve had been one of KF Industries' largest distributors and, with its
acquisition, KF Industries increased its presence in Canada as well as
introduced Telford Valve's products (check valves, pipeline closures, and
specialty gate valves for use in industrial and oil and gas applications)
through its worldwide representative network. Telford Valve has also assumed
the Canadian sales activities for other Petrochemical Products Group divisions
to strengthen our overall presence in Canada. In January 1999, SSI Equipment
was acquired and added a wide variety of strainers to the KF Industries
product line. During 1999, the industrial product division of Watts was
consolidated into the KF Industries facility in Oklahoma City, Oklahoma. The
industrial products division consists of carbon steel and stainless steel ball
valves, butterfly valves and pneumatic actuators that are used in a variety of
industrial, pulp and paper and chemical processing applications. We believe
that this consolidation, together with the combining of the sales,
manufacturing, engineering and other administrative activities of these
business units, will result in cost savings.
We also own 60% of Suzhou Watts Valve Company, Ltd., a joint venture located
in Suzhou, Peoples Republic of China. Suzhou Watts Valve manufactures carbon
and stainless steel ball valves sizes 2" through 12" for us and SUFA, our
joint venture partner, which is a valve company publicly-traded on the China
Exchange. We sell products manufactured by Suzhou Watts Valve Company, Ltd. to
customers worldwide for oil and gas applications and outside the People's
Republic of China for all industrial applications. SUFA has exclusive rights
to sell Suzhou Watts Valve products for all industrial (i.e., non-oil and gas)
applications within the People's Republic of China.
Industry Background / Market Overview
Oil and Gas and Petrochemical Markets. The oil and gas and petrochemical
markets include domestic and international oil and gas exploration,
production, pipeline construction and maintenance, chemical processing and
general industrial applications. Both KF Industries and Pibiviesse have
positioned themselves favorably within the industry with both major oil
companies and major distributors of valve products. Also, on the project side
of
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the business, where KF Industries and Pibiviesse deal directly with
engineering firms who specify product purchases, many companies have specified
KF Industries and Pibiviesse products in many applications.
The oil and gas market has historically been subject to cyclicality
depending upon supply and demand of crude oil and its derivatives as well as
natural gas. When oil and gas prices decrease, expenditures on maintenance and
repair decline rapidly and outlays for exploration and in-field drilling
projects decrease and, accordingly, demand for valve products is reduced. When
oil and gas prices rise, maintenance and repair activity increase and we
benefit from increased demand for valve products.
Process and Power Markets. The industrial and process markets use steam and
other fluids for a variety of applications, including heating of facilities,
production of hot water, heat tracing of external piping, heating of
industrial processes, cleaning by laundries, food processing, cooking,
sterilization, vulcanization, pulp making, textiles and other processes found
across a wide range of industries.
The power industry uses steam and other fluid-control products in the
production of electric power. While some steam applications have been
eliminated by the introduction of certain alternative methods, such as
combined cycle units and portable peaking units, the use of steam in the
generation of electrical power continues to prevail. The U. S. power industry
is currently undergoing deregulation that management believes will result in
increased emphasis on cost efficiency and a greater need for the high
performance, high pressure control valves that we produce.
Aerospace and Military Markets. The aerospace and military markets we serve
include applications used on military combat and transport aircraft,
helicopters, missiles, tracked vehicles and ships. CIRCOR products are also
used on commercial aircraft, smaller commuter and business aircraft, and space
launch vehicles, space shuttles and satellites. Our products are also sold
into the support infrastructure for these markets, from laboratory equipment
to ground support maintenance equipment. The products supplied are used in
hydraulic systems, fuel systems, water systems and air systems. These products
are typically custom-designed for specific applications to optimize
performance, reliability, quality and minimum weight/volume.
HVAC and Maritime Markets. The heating, air conditioning and ventilation
market utilizes valves and control systems, primarily in steam-related
applications. Although certain new commercial applications are converting to
hot water heating, most metropolitan areas, universities and commercial
institutions are heated by a central steam loop.
Steam control products are also used in the maritime market, which includes
US Navy and commercial shipping. Leslie Controls sells steam regulators, water
regulators, and electric actuated shut-off valves to this market. Leslie
Controls has focused its sales efforts towards growth of its international
business, where steam use is more prevalent, especially in emerging markets.
Building on established relationships in Europe and creating new channels of
distribution in Latin America and Asia, CIRCOR is positioning itself for
growth in these areas.
Pharmaceutical, Medical and Analytical Instrumentation Markets. The
pharmaceutical industry uses products manufactured by our Instrumentation and
Fluid Regulation Products Group in research & development, analytical
instrumentation, steam generation, pilot plant and process measurement
applications. We believe that automation and control of process and increased
efficiency requirements in the pharmaceutical industry will continue to drive
the demand for these products.
The medical devices market CIRCOR serves consists of the following
categories: surgical and medical instruments, orthopedic devices and surgical
supplies, diagnostic reagents, electromedical equipment, x-ray equipment and
dental equipment. The Instrumentation and Fluid Regulation Products Group
markets its products to original equipment manufacturers of surgical and
medical instruments.
The analytical instrumentation market includes laboratory instruments and
measuring and controlling instruments. The key drivers in the laboratory
instrumentation and analytical instrumentation market are industrial capital
investment spending in research and development and plant equipment. Non-
industrial construction spending and government spending on research and
development and defense are secondary drivers.
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Laboratory instruments requiring valves and fittings include gas
chromatographs, mass spectrometers and liquid chromatographs. This represents
a significant original equipment manufacturers' market for valves, fittings
and other products from the Instrumentation and Fluid Regulation Products
Group.
Process control instruments requiring valves and fittings include process
analytical instruments and differential pressure transmitters. These
categories not only require valves and fittings in or attached to the
instrument, but also often require extensive sampling extraction systems
installed by the manufacturer, system integrators or site contractors. The
primary economic driver of process control instruments is spending on
nondurable-goods plant and equipment, including chemicals, pulp & paper,
electric and gas utilities, and petroleum refining.
Business Objectives and Strategies
Our objective is to create a diversified, international fluid-control company.
Our key strategies will be to:
. Continue to build market positions through acquisitions;
. Capitalize on integration opportunities;
. Expand product offerings through internal product development;
. Diversify into a variety of fluid-control industries and markets; and
. Expand our geographic coverage
Continue to build market positions through acquisitions. We plan to continue
our acquisition strategy, having completed 24 transactions since September
1984. We believe that the global valve industry remains highly fragmented,
with numerous potential acquisition candidates. We plan to expand our current
market positions, primarily through acquisitions in the Instrumentation and
Fluid Regulation Product Group, thereby reducing our exposure to the
cyclicality of the petrochemical industry. Although we are constantly
evaluating acquisition opportunities, at this time there are no discussions or
negotiations taking place with any potential acquisition candidate.
Capitalize on integration opportunities. Management believes that there
remain meaningful synergies to be realized from the reorganization of CIRCOR
as an independent company and from recent acquisitions. The integration of Go
Regulator and of Hoke, our largest acquisition to date, with Circle Seal
should result in cost savings and revenue growth. We are completing
integration of two manufacturing facilities into existing operations of the
Instrumentation and Fluid Regulation Products Group. The acquisition of Hoke
has enabled Circle Seal and Go Regulator to expand their presence in overseas
markets, most notably in Europe. Circle Seal has also incorporated Hoke's and
Go Regulator's product lines into its strong domestic marketing and
distribution channels.
Within the Petrochemical Products Group, KF Industries' recent consolidation
of the Watts industrial products division has allowed it to merge the
administrative and manufacturing functions, which is expected to reduce
operating costs and improve manufacturing efficiencies within this group of
businesses. The acquisition of the Telford Valve "Top Flow" brand name product
line not only expands KF Industries' product offering through existing oil
field distribution channels, but also provides an entry into the industrial
market segment. The SSI acquisition provided KF Industries with a strainer
product line that can be marketed through KF Industries' existing
petrochemical distribution networks. While this acquisition broadens KF
Industries' product offerings to the petrochemical market, our strategy is to
continue to expand the strainer product line to other markets through internal
development and/or acquisitions. KF Industries expects to reduce the selling,
general and administrative costs of both Telford Valve and SSI by centralizing
and/or eliminating functions that can be combined with KF Industries' existing
operations.
Management's consolidation strategy is expected to provide continued fold-in
acquisitions which offer integration savings opportunities and marketing and
distribution benefits.
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Expand product offerings through internal product development. New products
are being developed through engineering efforts within our existing
businesses. Our Instrumentation and Fluid Regulation Products Group focuses on
providing our customers with customized products designed to meet their
specifications. Circle Seal's product development efforts are currently
directed to provide new products under the Circle Seal, Hoke and Go Regulator
franchises which can be mass-marketed through its global distributor network.
Recent product offerings include an excess flow check valve line, three new
check valve lines, a new diaphragm shut-off valve line and a miniature
solenoid valve line. Leslie Controls is developing control valves up to the
4,500 pound class, 16" diameter range. They have also developed Hastelloy-C
construction valves for chemical weapons disarmament programs. KF Industries
and Pibiviesse are developing products to take our international gas
transmission expertise and compete more effectively in the North American
market for these products. KF Industries is also developing products such as
Class 150 and 300 3-way diverter valves, Class 150, 300 and 600 check valves
and floating ball valves with spring energized lip seal designed for chemical
plants and refineries. Management plans to continue to invest in its internal
research and development program and to integrate product development across
its businesses.
Diversify into a variety of fluid-control industries and markets. Through
the acquisition of businesses, we intend to diversify our product offerings to
appeal to an increasing variety of industries and markets. In addition to
focusing on acquisitions outside of the petrochemical market, we are
implementing strategic actions to broaden our distribution and product
offerings in companies such as KF Industries, which historically has earned
the majority of its revenues in the oil and gas industry, to expand its
industrial market presence.
Expand our geographic coverage. Management believes there are ample
opportunities to grow through expanding geographic coverage. KF Industries is
broadening its presence in Latin America, Western Africa and the Middle East,
often expanding to meet US customers' growing international businesses.
Pibiviesse is joint marketing with KF Industries to increase its presence in
North America as well as increasing its penetration of markets such as China,
Russia, Latin America, and the Middle East. Within the Instrumentation and
Fluid Regulation Products Group, Hoke's strong international distribution
network is benefitting other companies within the group.
Products
The following table lists the principal products and markets served by each
of the companies within our two groups. Within a majority of our product
lines, we believe that we have the broadest product offerings in terms of the
distinct designs, sizes and configurations of our valves.
<TABLE>
<S> <C> <C>
INSTRUMENTATION AND FLUID REGULATION PRODUCTS GROUP
<CAPTION>
Company Principal Products Primary Markets Served
<S> <C> <C>
Circle Seal Motor operated valves; check valves; General industrial; semiconductors;
relief valves; pneumatic valves; medical; pharmaceutical; cryogenics;
solenoid valves; regulators aerospace; military
Hoke Compression tube fittings; pipe Petrochemical; oil and gas; general
fittings; instrument ball and needle industrial; analytical instrumentation;
valves; cylinders and cylinder valves; compressed natural gas/natural gas
actuators vehicles
Leslie Controls Regulators; steam control valves; General industrial and power;
actuators; steam-water heaters maritime; chemical processing
Spence Engineering/ Pilot operated and direct steam Heating, ventilation and air
Nicholson Steam Trap regulators; steam control valves; conditioning; general industrial
safety and relief valves; steam traps
</TABLE>
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<TABLE>
<S> <C> <C>
PETROCHEMICAL PRODUCTS GROUP
<CAPTION>
Company Principal Products Primary Markets Served
<S> <C> <C>
KF Industries Threaded and flanged-end floating ball Oil and gas exploration, production,
valves; butterfly valves; gate valves; refining and transmission; general
actuators; pipeline closures; trunnion industrial; maritime; chemical
supported ball valves; needle valves; processing
check valves; strainers
Pibiviesse Forged steel ball valves Oil and gas exploration, production
and transmission
</TABLE>
Sales and Distribution
CIRCOR sells its products to distributors and end-users primarily through
commissioned representatives and secondarily through a direct sales force. Our
representative network offers a technically trained sales force with strong
relationships to key markets without fixed costs to us. Our representatives
also have established distributors and resellers who stock products that have
more predictable demand and usage patterns.
Management believes that CIRCOR's multifaceted sales and distribution
channel is a competitive strength, providing access to all markets. Management
believes that it has good relationships with its representatives and
distributors and continues to implement marketing programs to enhance these
relationships. Ongoing distribution-enhancement programs include maximizing
shelf stock delivery and turns, reducing assemble-to-order lead times, new
product introductions and competitive pricing.
KF Industries has a strong distribution and consigned warehouse network,
making it the preferred choice for many of the larger and independent supply
stores. We also sell products directly to certain large original equipment
manufacturers, contractors and end users. Such accounts require custom
specification engineering support and other individualized services that we
can best offer directly. KF Industries is positioned to increase its sales
through this distribution channel as it continues to acquire and accumulate a
wider variety of valve products.
Manufacturing
We have fully integrated and highly automated manufacturing capabilities
including machining operations and assembly. Our machining operations feature
computer-controlled machine tools, high-speed chucking machines and automatic
screw machines for machining brass, iron and steel components. Management
believes that fully integrated manufacturing capabilities are essential in the
valve industry in order to control product quality, to be responsive to
customers' custom design requirements and to ensure timely delivery. Product
quality and performance are a priority for our customers, especially since
many of the product applications involve caustic or volatile chemicals and, in
many cases, involve processes that require precise control of fluids. We have
implemented or are currently implementing integrated enterprise-wide software
systems at all of our major locations to make operations more efficient and to
improve communications with suppliers and customers.
We are committed to maintaining our manufacturing equipment at a level
consistent with current technology in order to maintain high levels of quality
and manufacturing efficiencies. As part of this commitment, we have spent a
total of $9,499,000, $6,115,000 and $5,457,000 on capital expenditures for the
fiscal years ended June 30, 1999, 1998 and 1997, respectively. Depreciation
and amortization for such periods were $12,762,000, $7,844,000 and $6,916,000,
respectively.
Management believes that its current facilities will meet near-term
production requirements without the need for additional facilities.
26
<PAGE>
Quality Control
Products representing a majority of our sales have been approved by
applicable industry standards agencies in the United States and European
markets. We have consistently advocated the development and enforcement of
performance and safety standards, and are currently planning new investments
and implementing additional procedures as part of our commitment to meet these
standards. We maintain quality control and testing procedures at each of our
manufacturing facilities in order to produce products in compliance with code
requirements. Additionally, all of our major manufacturing subsidiaries have
acquired ISO 9000, 9001 or 9002 certification from the International
Organization for Standardization and, for those in the Petrochemical Products
Group, American Petroleum Institute certification.
Our products are designed, manufactured and tested to meet the requirements
of various government or industry regulatory bodies. The primary industry
standards that our Instrumentation and Fluid Regulation Products Group meet
are Underwriters' Laboratory, American National Standards Institute, American
Society of Mechanical Engineers, U.S. Military Standards, the American Gas
Association and the Department of Transportation. The primary industry
standards that our Petrochemical Products Group meet are American National
Standards Institute, American Society of Mechanical Engineers, the American
Petroleum Institute and Factory Mutual.
Product Development
We continue to develop new and innovative products to enhance our market
positions. Our product development capabilities include the ability to design
and manufacture custom applications to meet high tolerance or close precision
requirements. For example, KF Industries has fire-safe testing capabilities,
Circle Seal has the ability to meet all the testing specifications of the
aerospace industry and Pibiviesse can meet the tolerance requirements of sub-
sea and cryogenic environments. These testing and manufacturing capabilities
have enabled us to develop customer-specified applications, unique
characteristics of which have been subsequently utilized in broader product
offerings. Research and development expenditures by the Company during fiscal
years 1999, 1998 and 1997 were $6,094,000, $5,479,000 and $5,581,000,
respectively.
Raw Materials
The raw materials used most often in our production processes are stainless
steel, carbon steel, cast iron, and brass. We purchase these materials from
numerous suppliers nationally and internationally, and have not historically
experienced significant difficulties in obtaining these commodities in
quantities sufficient for our operations. However, these materials are subject
to price fluctuations which may adversely affect our results of operations.
Historically, increases in the prices of raw materials have been partially
offset by increased sales prices, an active materials management program and
the diversity of materials used in our production processes.
Properties
We maintain 15 major facilities worldwide, including 14 manufacturing
facilities located in the United States, Canada, Europe and the People's
Republic of China. Many of these facilities contain sales offices or
warehouses from which we ship finished goods to customers, distributors and
commissioned representative organizations.
In general, we believe that our properties, including machinery, tools and
equipment, are adequate and suitable for their intended uses. We believe that
the manufacturing facilities are currently operating at normal capacity. This
utilization is subject to change as a result of increases or decreases in
revenues.
27
<PAGE>
Our corporate headquarters are located in Burlington, Massachusetts. The
following is a list of our major properties.
<TABLE>
<CAPTION>
Approx.
Company Location Sq. Ft. Owned/Leased Principal Use
- ------- -------- ------- ------------------ --------------
<S> <C> <C> <C> <C>
Instrumentation and Fluid Regulation Products Group
Circle Seal Controls Corona, California 105,000 Owned Manufacturing,
Administrative
Hoke Berlin, Connecticut 25,000 Leased Manufacturing
Hoke Spartanburg, South Carolina 116,000 Leased Manufacturing
Circle Seal Controls
(Aerodyne) Ronkonkoma, New York 26,000 Leased Manufacturing
Go Regulator San Dimas, California 114,000 Owned Manufacturing
Leslie Controls Tampa, Florida 150,000 Owned Manufacturing,
Administrative
Spence Engineering Walden, New York 80,000 Owned Manufacturing
Petrochemical Products
Group
KF Industries Oklahoma City, Oklahoma 162,000 Owned Manufacturing,
Administrative
KF Industries Houston, Texas 58,000 Owned Warehouse
SSI Burlington, Ontario, Canada 25,000 Owned Manufacturing
Telford Valve Edmonton, Alberta, Canada 25,000 Leased Manufacturing
KF Industries
(Contromatics
Industrial Products) New Hampshire 25,000 Leased Manufacturing
Suzhou (Joint Venture) Suzhou, PR China 70,000 Owned Manufacturing
(30 yr land lease)
Pibiviesse Nerviano, Italy 170,000 Leased Manufacturing,
Administrative
DeMartin Naviglio, Italy 22,000 Leased Manufacturing
</TABLE>
Competition
The domestic and international markets for fluid-control products are highly
competitive. Some of our competitors have substantially greater financial,
marketing, personnel and other resources than CIRCOR. We consider product
quality and performance, price, distribution capabilities and breadth of
product offerings to be the primary competitive factors in these markets.
Management believes that new product development and product engineering are
also important to CIRCOR' success and that our position in the industry is
attributable, in significant part, to our ability to develop innovative
products quickly and to adapt and enhance existing products.
The primary competitors of our Instrumentation and Fluid Regulation Products
Group include: Swagelok, Parker Hannifin Corporation, Spirax-Sarco Engineering
plc, Hoffman Specialty (a subsidiary of ITT Industries, Inc.), Keystone and
Kunkle Industries, Inc. (a division of Tyco International, Inc.), Fisher
Controls Corp. (a subsidiary of Emerson Electric Co.), Armstrong
International, Inc., Jordon Valve (a division of Richards Industries),
Masoneilan North America (a division of Dresser Industries, Inc.), Flowseal (a
division of Crane Co.), Flowserve Corporation and Copes-Vulcan Inc. The
primary competitors of our Petrochemical Products Group include: Grove Valve
and Regulator Co. (a division of the Halliburton Company), Cooper Cameron
Corporation, Apollo (a division of Conbraco Industries, Inc.), Jamesbury, Inc.
(a division of Neles Control Group which is part of the Rauma Corporation),
Worcester Controls Corp. (a subsidiary of BTR, Inc.), Kitz Corp. of America,
Velan Valve Corp., Balon Corp. and Flow Control Technologies.
28
<PAGE>
Trademarks & Patents
We own patents that are scheduled to expire between 2004 and 2016 and
trademarks that can be renewed as long as we continue to use them. We do not
believe that the vitality and competitiveness of our business as a whole
depends on any one or more patents or trademarks. We also own certain licenses
such as software licenses, but we do not believe that our business as a whole
depends on any one or more licenses.
Customers, Cyclicality and Seasonality
For the year ended June 30, 1999, no single customer accounted for more than
10% of revenues for either the Instrumentation and Fluid Regulation Products
Group or the Petrochemical Products Group.
We have experienced and expect to continue to experience fluctuations in
revenues and operating results due to economic and business cycles. Our
business, specifically the petrochemical business, is cyclical in nature as
the worldwide demand for oil and gas fluctuates. When the worldwide demand for
oil and gas is depressed, the demand for our products used in those markets is
reduced. Future changes in demand for petrochemical products could have a
material effect on our business, financial condition and results of
operations. Similarly, although not to the same extent as the petrochemical
markets, the aerospace, military and maritime markets have historically
experienced cyclical fluctuations in demand which could also have a material
effect on our business, financial condition and results of operations.
We do not believe that our business is subject to seasonal fluctuations of a
material nature.
Backlog
Backlog was $55,664,000 at June 30, 1999, compared to $70,072,000 at June
30, 1998. The decrease in backlog is primarily due to the reduction in major
oil and gas project activity in response to lower world-wide oil and gas
prices. The decrease in project activity principally affected the backlog of
Pibiviesse SpA and KF Industries, Inc.
Employees
As of June 30, 1999, our worldwide operations directly employed
approximately 1,635 people, in addition to 80 employees in the Suzhou joint
venture. We have approximately 75 employees in the United States and Canada
who are covered by collective bargaining agreements. We also have 80 employees
in Italy covered by union regulations. We believe that our employee relations
are good.
Government Regulation
As a result of their manufacturing and assembly operations, our businesses
are subject to federal, state, local and foreign laws as well as other legal
requirements relating to the generation, storage, transport and disposal of
materials. These laws include, without limitation, the Resource Conservation
and Recovery Act, the Clean Air Act, the Clean Water Act and the Comprehensive
Environmental Response, Compensation and Liability Act.
We do not currently anticipate any materially adverse impact on our results
of operations, financial condition or competitive position as a result of
compliance with federal, state, local and foreign environmental laws or other
legal requirements. However, risk of environmental liability and charges
associated with maintaining compliance with environmental laws is inherent in
the nature of our manufacturing operations and there is no assurance that
material liabilities or charges could not arise. During fiscal 1999 CIRCOR
capitalized approximately $273,000 related to environmental and safety control
facilities and expects to capitalize $286,000 during the next twelve months.
CIRCOR also incurred and expensed $235,000 of other related charges during
fiscal 1999 and expects to incur approximately $553,000 during the next twelve
months.
29
<PAGE>
Product Liability, Environmental and Other Litigation Matters
We, like other worldwide manufacturing companies, are subject to a variety
of potential liabilities connected with our business operations, including
potential liabilities and expenses associated with possible product defects or
failures and compliance with environmental laws. We maintain $5.0 million in
aggregate product liability insurance and $85.0 million coverage available
under an excess umbrella liability insurance policy. We believe this coverage
to be generally in accordance with industry practices. Nonetheless, such
insurance coverage may not be adequate to protect us fully against substantial
damage claims which may arise from product defects and failures or from
environmental liability.
Leslie Controls, Inc. and Spence Engineering Company, both subsidiaries of
CIRCOR, are third-party defendants in 314 civil product liability actions
filed against ship owner defendants in the U.S. District Court, Northern
District of Ohio (Cleveland) between the 1980s and 1996. These cases are part
of tens of thousands of maritime asbestos cases filed in this court against
multiple defendants. The ship owner defendants' third-party claims in the
Leslie and Spence cases typically involve 20-30 third-party defendants. The
claims against Leslie and Spence assert that the packing in metal pumps and
the gaskets in metal valves supplied by Leslie and Spence contained asbestos
which contributed to the asbestos exposure of plaintiffs who worked on the
defendants' ships. To date, two cases involving Leslie only have settled in a
way that required a payment from Leslie. One case settled in 1995 with a
$2,000 payment from Leslie; another settled in 1989 with a $500 payment from
Leslie. These thousands of cases are subject to court ordered moratoriums on
answers and motion practice, and the very small percentage of these cases that
have come to trial since 1996 have not involved Leslie or Spence. Although new
cases continue to be filed against the defendant ship owners, third-party
claims against Leslie or Spence have not been filed since 1996.
Leslie and its insurers are in dispute over payment of approximately
$560,000 in legal fees incurred to defend these cases through 1994. The
dispute resulted from a gap in Leslie's insurance coverage from 1965 to 1973,
and discussions regarding the $560,000 payment are ongoing. Of the
approximately $295,000 of legal fees incurred after 1994 and through December
1998, it is likely that Leslie will pay 41%, or approximately $121,000.
We have established total reserves of $1.7 million for all of the claims
discussed above, including reserves of $681,000 relating to the claims
disputed by our insurance carriers, and we do not believe it is reasonably
likely that a range of loss could occur in excess of the amounts accrued. We
have not recorded any probable third-party recoveries of our own on these
claims.
We are currently a party to or otherwise involved in various administrative
or legal proceedings under federal, state or local environmental laws or
regulations involving a number of sites, in some cases as a participant in a
group of potentially responsible parties, referred to as PRPs. Two of these
sites, the Sharkey and Combe Landfills in New Jersey, are listed on the
National Priorities List. With respect to the Sharkey Landfill, we have been
allocated 0.75% of the remediation costs, an amount which is not material to
us. With respect to the Combe Landfill, we have settled the Federal
Government's claim for an amount which is immaterial and anticipate settling
with the State of New Jersey for an amount not greater than that paid to the
Federal Government. In addition we are involved as a PRP with respect to the
Solvent Recovery Service of New England site and the Old Southington landfill
site, both in Connecticut. These sites are on the National Priorities List
but, with respect to both sites, we have the right to indemnification from
third parties. Based on currently available information, we believe that our
share of clean-up costs at these sites will not be material.
30
<PAGE>
MANAGEMENT
Directors
The directors of CIRCOR are described below.
<TABLE>
<CAPTION>
Class (Year of
Annual Shareholders
Principal Occupation or Meeting on Which
Name Employment for Past Five Years Age Term Expires)
---- ------------------------------ --- -------------------
<C> <S> <C> <C>
David A. Bloss, Sr. Mr. Bloss was appointed 49 III (2002)
Chairman, President and Chief
Executive Officer of CIRCOR in
1999. He joined Watts as
Executive Vice President in
July 1993 and has served as
President and Chief Operating
Officer from April 1997 until
the distribution. Prior to
joining Watts, Mr. Bloss was
associated for five years with
the Norton Company, a
manufacturer of abrasives and
cutting tools, serving most
recently as President of the
Superabrasives Division. Mr.
Bloss is also a director of
Watts and will resign as a
director of Watts immediately
after the distribution.
Dewain K. Cross Mr. Cross was the Senior Vice 61 II (2001)
President of Finance for
Cooper Industries, Inc. and is
now retired. Mr. Cross is also
a director of Magnetek, Inc.
David F. Dietz Mr. Dietz or his professional 50 I (2000)
corporation has been a partner
of the law firm of Goodwin,
Procter & Hoar LLP since 1984.
Mr. Dietz is also a director
of the Andover Companies, a
property and casualty
insurance company and High
Liner Foods (USA), Inc., a
frozen foods company.
Timothy P. Horne Mr. Horne has been the Chief 61 III (2002)
Executive Officer of Watts
since 1978 and Chairman of the
Board of Watts since 1986.
Prior to that, Mr. Horne
served as the President of
Watts from 1976 to 1978 and
again from 1994 to April 1997.
Mr. Horne joined Watts in
September 1959 and has been a
director of Watts since 1962.
Daniel J. Murphy, III Mr. Murphy has been the 57 II (2001)
Chairman of Northmark Bank
since August 1987. Prior to
forming Northmark Bank in
1987, Mr. Murphy was a
Managing Director of
Knightsbridge Partners, Inc.,
a venture capital firm, from
January to August 1987, and
President and Director of
Arltru Bancorporation, a bank
holding company, and its
wholly owned subsidiary,
Arlington Trust Company from
1980 to 1986. Mr. Murphy is
also a director of Bay State
Gas Company and has been a
director of Watts since 1986.
</TABLE>
31
<PAGE>
Executive Officers
The executive officers of CIRCOR are described below.
<TABLE>
<CAPTION>
Name Position Age
---- -------- ---
<C> <S> <C>
David A. Bloss, Sr. Chairman of the Board, Chief Executive Officer, 49
President and Director
Cosmo S. Trapani Chief Financial Officer, Treasurer and Secretary 60
Alan R. Carlsen Vice President, Operations 51
George M. Orza Vice President, Operations 50
</TABLE>
David A. Bloss, Sr. was appointed Chairman, President and Chief Executive
Officer in 1999. He joined Watts as Executive Vice President in July 1993 and
served as President and Chief Operating Officer from April 1997 until the
distribution. Prior to joining Watts, Mr. Bloss was associated for five years
with the Norton Company, a manufacturer of abrasives and cutting tools,
serving most recently as President of the Superabrasives Division.
Cosmo S. Trapani joined CIRCOR in August 1999 as Chief Financial Officer,
Treasurer and Secretary. From 1990 to 1999, Mr. Trapani was the Chief
Financial Officer of Unitrode Corporation, a publicly traded manufacturer of
analog and mixed signal integrated circuits.
Alan R. Carlsen joined CIRCOR in August 1999 as Vice President, Operations.
Mr. Carlsen served as Group Vice President of Steam Products for Watts from
September 1998 until the distribution. Prior to that time, Mr. Carlsen was the
Vice President and General Manager of Leslie Controls, Inc. from July 1997 to
September 1998, was the corporate Vice President of Manufacturing of Watts
from June 1995 to July 1997 and prior to that was Director of Manufacturing
for Senior Flexonics, Inc., a manufacturer of tubular goods.
George M. Orza joined CIRCOR in August 1999 as Vice President, Operations.
Mr. Orza served as Group Vice President of KF Industries from April 1999 until
the distribution. Mr. Orza served as Vice President/General Manager of KF
Industries from December 1995 to April 1999. Prior to that time, Mr. Orza was
associated for 19 years with ITT Barton, a manufacturer of measurement and
control instrumentation products and services, most recently as Director of
Marketing Oil & Gas.
32
<PAGE>
Summary Compensation Table
The following table presents information regarding the compensation, if any,
paid by Watts to each of CIRCOR's four most highly compensated executive
officers for the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
-------------------- -------------------
Name and Bonus Restricted
Principal Fiscal Salary ($) Stock Units Options
Position (1) Year ($) (2) ($) (3) (4) (#)
- ------------ ------ ------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
David A. Bloss, Sr.................... 1999 326,667 -- 4,093 45,000
Chairman of the Board, Chief
Executive Officer and President
Cosmo S. Trapani...................... 1999 -- -- -- --
Chief Financial Officer, Treasurer,
Secretary
Alan R. Carlsen....................... 1999 158,333 -- 8,336 10,000
Vice President, Operations
George M. Orza........................ 1999 167,885 -- 527 10,000
Vice President, Operations
</TABLE>
- --------
(1) Each of Messrs. Bloss, Trapani, Carlsen and Orza became an officer of
CIRCOR as of August 10, 1999.
(2) Represents the cash portion of bonuses awarded under the Watts Executive
Incentive Bonus Plan.
(3) Represents the dollar value (net of any consideration paid by the named
executive officer) of restricted stock units received under the Watts
Management Stock Purchase Plan in August 1999, determined by multiplying
the number of restricted stock units received by the closing market price
of Watts class A common stock of $19.25 on the date of grant of the
restricted stock units.
(4) Each of the named executive officers other than Mr. Trapani made an
election in December 1998 under the Watts Management Stock Purchase Plan
to receive restricted stock units in lieu of a specified percentage or
dollar amount of his actual annual incentive cash bonus or for a specified
dollar amount, up to 100% of his targeted maximum cash bonus. The named
executive officers received these awards in Watts restricted stock units
on August 9, 1999 under the Watts Management Stock Purchase Plan. The
number of restricted stock units awarded was equal to the named executive
officer's election amount divided by the restricted stock unit cost, which
was 67% of the closing market price of Watts common stock on August 9,
1999. After the distribution, Watts restricted stock units held by CIRCOR
employees will be replaced by CIRCOR restricted stock units of equivalent
value under the CIRCOR management stock purchase plan.
33
<PAGE>
Option Grants
The following table shows option grants by Watts to the named executive
officers during fiscal year 1999. After the distribution, these options will
be terminated and will be replaced with CIRCOR options of comparable value.
Option Grants During Fiscal Year 1999
<TABLE>
<CAPTION>
Potential
Realizable
Value of Assumed
Annual Rates of
Stock
Price
Appreciation
for Option Term
Individual Grants (3)
----------------------------------------------- -----------------
% of Total
Number Options
of Securities Granted to Exercise
Underlying Employees Or Base
Options In Fiscal Price Expiration
Name Granted(#)(1)(2) Year (%) ($/Sh) Date 5% ($) 10% ($)
- ---- ---------------- ---------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
David A. Bloss, Sr.
(4).................... 45,000 23.3 18.4375 8/11/08 521,663 1,322,213
Cosmo S. Trapani........ -- -- -- -- -- --
Alan R. Carlsen (5)..... 10,000 5.2 18.4375 8/11/08 115,925 293,825
George M. Orza (5)...... 10,000 5.2 18.4375 8/11/08 115,925 293,825
</TABLE>
- --------
(1) All options were granted on August 11, 1998.
(2) Options vest over five years at the rate of 20% per year on successive
anniversaries of the respective dates on which the options were granted
and generally terminate upon the earlier of the optionee's termination of
employment, subject to certain exceptions, or ten years from the date of
grant.
(3) Based upon the market price on the date of grant and an annual
appreciation at the rate stated on such market price through the
expiration date of such options. The dollar amounts in these columns are
the result of calculations at the 5% and 10% rate set by the SEC and
therefore are not intended to forecast possible future appreciation, if
any, of Watts' stock price.
(4) Awarded under the Watts 1989 Nonqualified Stock Option Plan.
(5) Awarded under the Watts 1996 Stock Option Plan.
34
<PAGE>
Option Exercises
The following table shows Watts stock option exercises for named executive
officers during fiscal year 1999 and the fiscal year-end value of unexercised
Watts options. After the distribution, any remaining unexercised Watts options
will be terminated and will be replaced by CIRCOR options of comparable value.
Aggregated Option Exercises In Fiscal Year 1999 and Fiscal Year Option Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year End (#)(2) at Fiscal Year End ($)(3)
------------------------- -------------------------
Shares
Acquired Value
On Exercise Realized
Names (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
- ----- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Bloss, Sr...... 0 0 96,000 129,000 119,875 109,687
Cosmo S. Trapani........ -- -- -- -- -- --
Alan R. Carlsen......... 0 0 14,500 33,000 16,875 32,813
George M. Orza.......... 0 0 4,500 26,000 5,625 24,375
</TABLE>
- --------
(1) Represents the difference between the market price on the date of exercise
and the exercise price of the options before income taxes.
(2) Options vest over five years at the rate of 20% per year on successive
anniversaries of the respective dates on which the options were granted
and generally terminate upon the earlier of the optionee's termination of
employment, subject to certain exceptions, or ten years from the date of
grant.
(3) Represents the difference between the market price on the last day of the
fiscal year and the exercise price of the options before income taxes.
Treatment of Options and Restricted Stock Units in the Distribution
Watts currently maintains the Watts 1986 Incentive Stock Option Plan, the
Watts 1989 Non-qualified Stock Option Plan and the Watts 1996 Stock Option
Plan, and options are currently outstanding under each plan. Each current
holder of options to purchase shares of Watts common stock under these plans
who will continue to be an employee or director of Watts following the
distribution will have the exercise price and number of shares subject to his
or her Watts options equitably adjusted to give effect to the distribution.
Watts options held by individuals who will be CIRCOR employees after the
distribution will be terminated and will be replaced by CIRCOR options with
comparable values, based upon the closing price on the New York Stock Exchange
of Watts stock immediately before the date on which when-issued trading in
CIRCOR common stock begins and the closing price on the New York Stock
Exchange of CIRCOR stock as of the date on which when-issued trading in CIRCOR
common stock begins. Both the exercise prices and the number of shares of
CIRCOR common stock subject to the replacement CIRCOR options will be
equitably adjusted to give effect to the distribution. The vesting provisions
and the other terms and conditions of the replacement CIRCOR options will
remain the same.
In addition, Watts currently maintains the Watts Management Stock Purchase
Plan, under which participants may elect to receive restricted stock units in
lieu of all or a portion of their pre-tax annual incentive bonus and, in some
circumstances, make after-tax contributions in exchange for restricted stock
units. When vested, each restricted stock unit is payable in a share of Watts
common stock. Each current participant in the Watts Management Stock Purchase
Plan who will continue to be employed by Watts following the distribution will
have the number of shares attributable to him or her under the Watts
Management Stock Purchase Plan equitably adjusted to give effect to the
distribution.
35
<PAGE>
Furthermore, in connection with the distribution, each restricted stock unit
outstanding under the Watts Management Stock Purchase Plan which is
attributable to an individual who will be a CIRCOR employee after the
distribution will be appropriately converted into a restricted stock unit
payable in CIRCOR common stock after the distribution, pursuant to the terms
of the CIRCOR Management Stock Purchase Plan (which is a component plan of the
CIRCOR 1999 Stock Option and Incentive Plan). Each restricted stock unit will
be 100% vested three years after the date of its original grant, and at the
end of a deferral period, if one is specified by the participant, CIRCOR will
issue one share of CIRCOR common stock for each vested restricted stock unit.
Cash dividends equivalent to those paid on Watts common stock (or CIRCOR
common stock after the distribution) will be credited to the participant's
account for each nonvested restricted stock unit and will be paid in cash to
such person when such restricted stock units become vested. Such dividends
will also be paid in cash to individuals for each vested restricted stock unit
held during any deferral period.
CIRCOR 1999 Stock Option and Incentive Plan
The CIRCOR 1999 Stock Option and Incentive Plan (the "1999 Stock Plan") was
adopted by our Board of Directors and approved by Watts, in its capacity as
our sole shareholder, on August 10, 1999. In order to ensure that compensation
paid pursuant to the 1999 Stock Plan will qualify as "performance-based
compensation" not subject to the federal tax limitations on deductibility of
certain executive compensation in excess of $1 million, we intend to seek
shareholder approval of the material terms of the performance goals under the
1999 Stock Plan at our first shareholder meeting, which is anticipated to
occur in the spring of 2000. Such shareholder approval is not required for any
other purpose.
Generally, the 1999 Stock Plan permits the grant of the following types of
awards:
. incentive stock options;
. non-qualified stock options;
. deferred stock awards;
. restricted stock awards;
. unrestricted stock awards;
. performance share awards; and
. dividend equivalent rights.
Grants of awards may be made under the 1999 Stock Plan to our officers,
other employees and directors. The 1999 Stock Plan currently provides for the
issuance of up to 2,000,000 shares of common stock (subject to adjustment for
stock splits and similar events). The number of shares available for grant
under the 1999 Stock Plan will not be reduced by the issuance of shares of
CIRCOR common stock as a result of the substitution of awards under the 1999
Stock Plan for stock and stock-based awards held by employees of an acquired
or merged corporation. Options with respect to no more than 500,000 shares of
common stock (subject to adjustment for stock splits and similar events) may
be granted to any one individual in any calendar year. The maximum award of
restricted stock, deferred stock or performance shares (or combination
thereof) for any one individual that is intended to qualify as "performance-
based compensation" under Section 162(m) of the Internal Revenue Code may not
exceed 200,000 shares of common stock (subject to adjustment for stock splits
and similar events) for any performance cycle.
Summary of the 1999 Stock Plan
The following is a summary of material terms of the 1999 Stock Plan, which
is filed as an exhibit to the registration statement of which this document is
a part.
36
<PAGE>
Administration. The 1999 Stock Plan provides for administration by either
the Board of Directors or a committee of not fewer than two non-employee
directors, as appointed by the Board of Directors from time to time.
The Administrator has full power to select, from among the employees and
directors eligible for awards, the individuals to whom awards will be granted,
to make any combination of awards to participants, and to determine the
specific terms and conditions of each award, subject to the provisions of the
1999 Stock Plan. The Administrator may permit common stock, and other amounts
payable pursuant to an award, to be deferred. In such instances, the
Administrator may permit interest, dividends or deemed dividends to be
credited to the amount of deferrals.
Eligibility and Limitations on Grants. All officers, employees and directors
of the Company are eligible to participate in the 1999 Stock Plan, subject to
the discretion of the Administrator. In no event may any one participant
receive options to purchase more than 500,000 shares of common stock (subject
to adjustment for stock splits and similar events) during any one calendar
year, as stated above. In addition, as stated above, the maximum award of
restricted stock, deferred stock or performance shares (or combination
thereof) for any one individual that is intended to qualify as "performance-
based compensation" under Section 162(m) of the Code may not exceed 200,000
shares of common stock (subject to adjustment for stock splits and similar
events) for any performance cycle.
Stock Options. Options granted under the 1999 Stock Plan may be either
incentive options (within the definition of Section 422 of the Code) or non-
qualified options. Options granted under the 1999 Stock Plan will be non-
qualified options if they (1) fail to meet such definition of incentive
options, (2) are granted to a person not eligible to receive incentive
options, or (3) otherwise so provide. Incentive options may be granted only to
our officers or other employees. Non-qualified options may be granted to
persons eligible to receive incentive options and to non-employee directors.
Other Option Terms. The Administrator has authority to determine the terms
of options granted under the 1999 Stock Plan. Generally, except in the case of
options granted in replacement of terminated Watts options, incentive options
granted to employees and non-qualified options granted to non-employee
directors will be granted with an exercise price that is not less than the
100% of the fair market value of the shares of common stock on the grant date,
and all other non-qualified options will be granted at not less than 80% of
the fair market value of the shares of common stock on the grant date. The
fair market value will be the last reported sale price of our common stock on
the NYSE on the date of grant.
The term of each option will be fixed by the Administrator and may not
exceed ten years from date of grant. The Administrator will determine at what
time or times each option may be exercised and, subject to the provisions of
the 1999 Stock Plan, the period of time, if any, after retirement, death,
disability or termination of employment during which options may be exercised.
Options may be made exercisable in installments, based on achievement of
performance requirements and/or the completion of a specified period of
service, and the exercisability of options may be accelerated by the
Administrator. In general, unless otherwise permitted by the Administrator, no
option granted under the 1999 Stock Plan is transferable by the optionee other
than by will or by the laws of descent and distribution, and options may be
exercised during the optionee's lifetime only by the optionee, or by the
optionee's legal representative or guardian in the case of the optionee's
incapacity.
Options granted under the 1999 Stock Plan may be exercised for cash or, if
permitted by the Administrator:
. by transfer to us (either actually or by attestation) of shares of
common stock which are not then subject to restrictions under any stock
plan, which have been held by the optionee for at least six months or
were purchased on the open market, and which have a fair market value
equivalent to the option exercise price of the shares being purchased;
or
. by compliance with certain provisions pursuant to which a securities
broker delivers the purchase price for the shares to us.
37
<PAGE>
At the discretion of the Administrator, stock options granted under the 1999
Stock Plan may include a "re-load" feature pursuant to which an optionee
exercising an option by the delivery of shares of common stock would
automatically be granted an additional stock option (with an exercise price
equal to the fair market value of the common stock on the date the additional
stock option is granted) to purchase that number of shares of common stock
equal to the number delivered to exercise the original stock option and
withheld to satisfy tax liabilities. The purpose of this feature is to enable
participants to maintain an equity interest in the Company without dilution.
To qualify as incentive options, options must meet additional Federal tax
requirements, including a $100,000 limit on the value of shares subject to
incentive options which first become exercisable in any one calendar year, and
a shorter term and higher minimum exercise price in the case of certain large
stockholders.
Tax Withholding. Participants under the 1999 Stock Plan are responsible for
the payment of any federal, state or local taxes which we are required by law
to withhold upon any option exercise or vesting of other awards. Participants
may elect to have the minimum tax withholding obligation satisfied either by
authorizing us to withhold shares of common stock to be issued pursuant to an
option exercise or other award, or by transferring to us shares of common
stock having a value equal to the amount of such taxes.
Restricted Stock Awards. The Administrator may grant shares (at par value or
for a higher purchase price determined by the Administrator) of common stock
to any participant subject to such conditions and restrictions as the
Administrator may determine. These conditions and restrictions may include the
achievement of pre-established performance goals and/or continued employment
(or other business relationship) with us through a specified vesting period.
The vesting period will be determined by the Administrator. The purchase price
of shares of restricted stock will be determined by the Administrator. If the
applicable performance goals and other restrictions are not attained, the
participant will forfeit his or her award of restricted stock. Dividends paid
on restricted stock may be paid, waived, deferred or invested, as set forth in
the award agreement.
Deferred Stock Awards. The Administrator may also award phantom stock units
as deferred stock awards to participants. Deferred stock awards are ultimately
payable in the form of shares of common stock and may be subject to such
conditions and restrictions as the Administrator may determine. These
conditions and restrictions may include the achievement of certain performance
goals and/or continued employment (or other business relationship) with us
through a specified vesting period. During the deferral period, subject to
terms and conditions imposed by the Administrator, the deferred stock awards
may be credited with dividend equivalent rights. Subject to the consent of the
Administrator, a participant may make an advance election to receive a portion
of his or her compensation or restricted stock award otherwise due in the form
of a deferred stock award.
The CIRCOR Management Stock Purchase Plan, which is filed as an exhibit to
this registration statement, is a component of the 1999 Stock Plan. Certain
key employees and directors are eligible to participate in the plan, which
provides that eligible employees may elect to receive restricted stock units
in lieu of all or a portion of their pre-tax annual incentive bonus and, in
some circumstances, make after-tax contributions in exchange for restricted
stock units. In addition, non-employee directors may elect to receive
restricted stock units in lieu of all or a portion of their annual directors'
fees. Participants are required to make an election no later than December 31
of the calendar year prior to calendar year for which the annual incentive
bonus will be determined or the compensation or directors' fees will be paid.
Each restricted stock unit represents the right to receive one share of CIRCOR
common stock after a three-year vesting period, and a participant may elect to
defer receipt of shares of common stock for an additional period of time after
the vesting period. Furthermore, income and the associated income taxes will
be deferred until the time that the restricted stock units are converted to
shares of common stock. Restricted stock units are granted at a discount of
33% from the fair market value of the shares of common stock on the date of
grant. The date of grant is the date that the annual incentive bonuses,
compensation or directors' fees are paid or would otherwise be paid.
Unrestricted Stock Awards. The Administrator may also grant shares (at par
value or for a higher purchase price determined by the Administrator) of
common stock which are free from any restrictions under the 1999 Stock Plan.
Unrestricted stock may be granted to any participant in recognition of past
services or other valid consideration, and may be issued in lieu of cash
compensation due to such participant.
38
<PAGE>
Performance Share Awards. The Administrator may grant performance share
awards to any participant, which will entitle the recipient to receive shares
of common stock upon the achievement of specified individual or company
performance goals and such other conditions as the Administrator shall
determine. The Administrator may require that the vesting of certain awards of
restricted stock, performance shares and deferred stock be conditioned on the
satisfaction of performance criteria, which may include any or all of the
following:
. our return on equity, assets, capital or investment;
. our pre-tax or after-tax profit levels or those of any subsidiary,
division, operating unit or business segment, or any combination of the
foregoing;
. cash flow or similar measures;
. total stockholder return;
. changes in the market price of our common stock;
. sales or market share; or
. earnings per share.
The Administrator will select the particular performance criteria within 90
days following the commencement of a performance cycle. In addition, as noted
above, the maximum award of restricted stock, deferred stock or performance
shares (or combination thereof) for any one individual that is intended to
qualify as "performance-based compensation" under Section 162(m) of the Code
may not exceed 200,000 shares of common stock (subject to adjustment for stock
splits and similar events) for any performance cycle.
Dividend Equivalent Rights. The Administrator may grant dividend equivalent
rights which entitle the recipient to receive credits for dividends that would
be paid if the recipient had held specified shares of common stock. Dividend
equivalent rights may be granted as a component of another award or as a
freestanding award. Dividend equivalent rights credited under the 1999 Stock
Plan may be paid currently or be deemed to be reinvested in additional shares
of common stock, which may thereafter accrue additional dividend equivalent
rights at fair market value at the time of deemed reinvestment or on the terms
then governing the reinvestment of dividends under our dividend reinvestment
plan, if any. Dividend equivalent rights may be settled in cash, shares of
common stock or a combination thereof, in a single installment or
installments, as specified in the award. Awards under the 1999 Stock Plan that
are payable in cash on a deferred basis may provide for crediting and payment
of interest equivalents.
Mergers and Other Transactions. The 1999 Stock Plan provides that in the
event of a merger, consolidation, dissolution or liquidation or similar
transaction affecting us, all stock options will automatically become fully
exercisable, and all other awards with conditions relating solely to the
passage of time and continued employment will automatically become fully
vested, unless the Administrator otherwise specifies with respect to
particular awards. Unless a provision is made for the assumption or
substitution of outstanding awards (as appropriately adjusted), the 1999 Stock
Plan and all outstanding awards will terminate upon the consummation of the
transaction, although optionees will be permitted to exercise any vested
outstanding options prior to, and subject to, the consummation of the
transaction.
Adjustments for Stock Dividends, Stock Splits, etc. The 1999 Stock Plan
authorizes the Administrator to make appropriate adjustments to the number of
shares of common stock that are subject to the 1999 Stock Plan and to any
outstanding awards to reflect stock dividends, stock splits and similar
changes in our capital stock.
Amendments and Termination. The Board of Directors may at any time amend or
discontinue the 1999 Stock Plan and the Administrator may at any time amend or
cancel any outstanding award for the purpose of satisfying changes in law or
for any other lawful purpose, but no such action may be taken that would
adversely affect the rights of a holder under an outstanding award without the
holder's consent. To the extent required by the Code to ensure that options
granted under the 1999 Stock Plan qualify as incentive options, and to ensure
that compensation earned under certain awards qualifies as performance-based
compensation under Section 162(m) of the Code, certain amendments to the 1999
Stock Plan will be subject to approval by our shareholders.
39
<PAGE>
Initial CIRCOR Option Grants
The following table shows (i) new CIRCOR options and (ii) replacement CIRCOR
options, each to be granted under the CIRCOR 1999 Stock Option and Incentive
Plan to the named executive officers and directors immediately after the
distribution. All options will be granted as of the distribution date. The
options may be partially or fully vested at grant and will generally continue
to vest at the rate of 20% of the specific grant per year. Generally, the
options will terminate upon the earlier of the optionee's termination of
employment or directorship, subject to certain exceptions, or ten years from
the date of grant (or, if applicable, ten years from the date of grant of the
Watts options being replaced).
Initial CIRCOR Option Grants
<TABLE>
<CAPTION>
Potential Realizable
Value of Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term (8)
----------------------------------------------- ------------------------
% of Total
Number Options
of Securities Granted to Exercise
Underlying Employees Or Base
Options In Fiscal Price Expiration
Name Granted(#)(1) Year (%) ($/Sh) Date 5% ($) 10% ($)
- ---- ------------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David A. Bloss, Sr...... 100,000(2)(6) 11.3% (6) 10/18/09
25,000(3)(6) 2.8% (6) 10/18/09
73,636(4)(7) 8.4% (7) 8/11/08
73,636(4)(7) 8.4% (7) 8/4/07
73,636(4)(7) 8.4% (7) 8/5/06
57,273(4)(7) 6.5% (7) 9/1/05
57,273(4)(7) 6.5% (7) 9/1/04
32,727(4)(7) 3.7% (7) 7/19/03
493,182 55.9%
Cosmo S. Trapani........ 42,000(2)(6) 4.8% (6) 10/18/09
14,000(3)(6) 1.6% (6) 10/18/09
56,000 6.4%
Alan R. Carlsen......... 25,000(2)(6) 2.8% (6) 10/18/09
12,500(3)(6) 1.4% (6) 10/18/09
16,364(4)(7) 1.9% (7) 8/11/08
20,455(4)(7) 2.3% (7) 8/4/07
24,545(4)(7) 2.9% (7) 8/5/06
16,364(4)(7) 1.9% (7) 9/1/05
115,227 13.1%
George M. Orza.......... 22,000(2)(6) 2.5% (6) 10/18/09
11,000(3)(6) 1.2% (6) 10/18/09
16,364(4)(7) 1.9% (7) 8/11/08
20,455(4)(7) 2.3% (7) 8/4/07
13,091(4)(7) 1.5% (7) 8/5/06
82,909 9.4%
Dewain K. Cross......... 12,000(5)(6) (6) 10/18/09
David F. Dietz.......... 12,000(5)(6) (6) 10/18/09
Timothy P. Horne........ 12,000(5)(6) (6) 10/18/09
Daniel J. Murphy, III... 12,000(5)(6) (6) 10/18/09
</TABLE>
40
<PAGE>
- --------
(1) All options will be granted as of the distribution date.
(2) Options vest over five years at the rate of 20% per year on successive
anniversaries of the date on which the options were granted.
(3) Options are a one-time grant of performance accelerated stock options and
have a seven-year cliff vesting provision with a performance accelerator
that triggers earlier vesting if certain of our financial goals are met.
(4) Options, granted as replacements for terminated Watts options, continue to
vest at the rate of 20% of the specific grant per year.
(5) Options vest over three years at the rate of 33 1/3% per year on
successive anniversaries of the date on which the options were granted.
(6) The number of securities underlying each option is shown for illustrative
purposes only, and is based upon targeted Black-Scholes values using an
assumed price for CIRCOR common stock on the distribution date. The actual
number of securities underlying each option and the exercise price of each
option will be based upon the reported closing price of CIRCOR common
stock on the New York Stock Exchange on the distribution date, and the
number of securities will be appropriately adjusted after the distribution
date to maintain a pre-determined Black-Scholes value per grant, based
upon the Black-Scholes value of CIRCOR common stock on the distribution
date.
(7) The number of securities underlying each option is shown for illustrative
purposes only, and is based upon an assumed pre-distribution price for
Watts common stock and an assumed price for CIRCOR common stock. The
actual number of securities underlying each option and the exercise price
of each option will be based upon the reported closing price for Watts
common stock on the New York Stock Exchange on the day before the date on
which when-issued trading in CIRCOR common stock begins and the reported
closing price for CIRCOR common stock on the New York Stock Exchange on
the date on which when-issued trading in CIRCOR common stock begins.
(8) The actual exercise price of all options initially granted will be
calculated as described in footnotes (6) and (7), and cannot be calculated
prior to the date on which when-issued trading in CIRCOR common stock
begins and the distribution date. Therefore, the potential realizable
values cannot be projected.
Director Compensation
Each non-employee director will receive a fee of $27,500 per year and also
receive reimbursement for out-of-pocket expenses incurred in connection with
attending board of directors or committee meetings. In addition, each non-
employee director is eligible to receive grants of stock options under the
1999 Stock Option and Incentive Plan and defer compensation under the CIRCOR
Management Stock Purchase Plan. Directors of CIRCOR who are our employees will
not receive compensation for their services as directors.
Pension Plan and Supplemental Plan
CIRCOR sponsors a qualified noncontributory defined benefit pension plan for
eligible salaried employees, including the named executive officers specified
in the Summary Compensation Table above (except for Mr. Trapani, who is not
currently eligible to participate in the pension plan), and maintains a
nonqualified noncontributory defined benefit supplemental plan for certain
highly compensated employees, which also covers the named executive officers
specified in the Summary Compensation Table (except for Mr. Trapani, who is
not currently eligible to participate in the supplemental plan). The
eligibility requirements of the pension plan are generally the attainment of
age 21 and the completion of at least 1,000 hours of service in a specified
12-month period. The assets of the pension plan are maintained in a trust fund
at State Street Bank and Trust Company. The pension plan is administered by
the compensation committee, which is appointed by our board of directors.
Annual contributions to the pension plan are computed by an actuarial firm
based on normal pension costs and a portion of past service costs. The pension
plan provides for monthly benefits to, or on behalf of, each participant at
age 65 and has provisions for early retirement after attainment of age 55 and
five or ten years of service and surviving spouse benefits after five years of
service. Participants in the pension plan who terminate employment prior to
retirement with at least five years of service are vested in their accrued
retirement benefit. The pension plan is subject to the Employee Retirement
Income Security Act of 1974, as amended.
41
<PAGE>
The normal retirement benefit for participants in the pension plan is an
annuity payable monthly over the participant's life. If the participant is
married, he or she will receive a spousal joint and 50% survivor annuity,
unless an election out is made. Generally, the annual normal retirement
benefit is an amount equal to 1.67% of the participant's final average
compensation (as defined in the pension plan), reduced by the maximum offset
allowance (as defined in the pension plan) multiplied by years of service
(maximum 25 years). For the 1997, 1998 and 1999 plan years, annual
compensation in excess of $160,000 per year is disregarded for all purposes
under the pension plan ($150,000 for plan years prior to 1997). However,
benefits accrued prior to the 1994 plan year may be based on compensation in
excess of $150,000. Compensation recognized under the pension plan generally
includes base salary and annual bonus.
The supplemental plan provides additional monthly benefits to (i) a select
group of key executives, (ii) individuals who were projected to receive
reduced benefits as a result of changes made to the pension plan to comply
with the Tax Reform Act of 1986 and (iii) executives who will be affected by
IRS limits on compensation under the pension plan. The supplemental plan is
not a tax-qualified plan, and is subject to certain provisions of the Employee
Retirement Income Security Act of 1974, as amended. The supplemental plan is
not funded.
Tier one benefits are provided under the supplemental plan to a select group
of key executives. The annual benefit under tier one payable at normal
retirement is equal to the difference between (1) 2% of the highest three year
average pay multiplied by years of service up to ten years, plus 3% of average
pay times years of service in excess of ten years, to a maximum of 50% of
average pay, less (2) the annual benefit payable under the pension plan
formula described above. Normal retirement age under tier one is age 62.
The following table illustrates total annual normal retirement benefits
(payable from both the pension plan and from the supplemental plan and
assuming attainment of age 62 during 1999) for various levels of final average
compensation and years of benefit service under tier one of the supplemental
plan.
<TABLE>
<CAPTION>
Final Average Compensation for Estimated total Annual Retirement Benefit
Three Highest Consecutive Years (Pension Plan plus Supplemental Plan, Tier One)
in Last 10 Years Based on Years of Service(1)
- ------------------------------- --------------------------------------------------
5 Years 10 Years 15 Years 20 Years
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
$100,000................... $ 10,000 $ 20,000 $ 35,000 $ 50,000
150,000................... 15,000 30,000 52,500 75,000
200,000................... 20,000 40,000 70,000 100,000
250,000................... 25,000 50,000 87,500 125,000
300,000................... 30,000 60,000 105,000 150,000
350,000................... 35,000 70,000 122,500 175,000
400,000................... 40,000 80,000 140,000 200,000
450,000................... 45,000 90,000 157,500 225,000
500,000................... 50,000 100,000 175,000 250,000
550,000................... 55,000 110,000 192,500 275,000
600,000................... 60,000 120,000 210,000 300,000
</TABLE>
- --------
(1) The annual pension plan and supplemental plan benefits are computed on the
basis of a straight life annuity.
Messrs. Bloss, Carlsen and Orza have 7, 5 and 3 years, respectively, of
benefit service under the pension plan (which includes years of benefit
service credited under the Watts pension plan) and are eligible for tier one
benefits. Mr. Trapani has no years of benefit service under the pension plan
and is accordingly not currently eligible for any retirement benefits under
the pension plan or the supplemental plan. Eligible employees are currently
limited to a maximum annual benefit under the pension plan of $130,000
(subject to cost of living adjustments) under Internal Revenue Code
requirements regardless of their years of service or final average
compensation. Accordingly, under current salary levels and law, annual
benefits are limited to such amount under the pension plan.
42
<PAGE>
401(k) Plan
CIRCOR sponsors a defined contribution 401(k) plan for eligible employees,
including the named executive officers specified in the Summary Compensation
Table above (except for Mr. Trapani, who is not currently eligible to
participate in the 401(k) plan). The eligibility requirements of the 401(k)
plan are generally the attainment of age 21 and the completion of at least
1,000 or more hours of service in a specified 12-month period. The assets of
the 401(k) plan are maintained in a trust fund at Fidelity Institutional
Retirement Services Company. The 401(k) plan is administered by the
compensation committee, which is appointed by our Board of Directors.
The 401(k) plan permits eligible employees to make pretax 401(k)
contributions of 1% to 18% of compensation, which is defined in the 401(k)
plan generally as W-2 pay, plus amounts deferred pursuant to the 401(k) plan
and section 125 of the Internal Revenue Code, but excluding income realized
upon the exercise of stock options and subject to certain other limitations.
Compensation in excess of $160,000 per year ($150,000 for years prior to 1997)
is disregarded under the 401(k) plan.
In addition, the 401(k) plan provides for employer matching contributions of
30% of the first 4% of compensation (up to $40,000) contributed by a
participant to the 401(k) plan. However, certain participants with
compensation in excess of $60,000 and certain other participants are not
eligible for employer matching contributions.
Participants' accounts are always fully vested with respect to their 401(k)
contributions and are fully vested with respect to employer matching
contributions after five (5) years of vesting service or upon the
participant's retirement date (as defined in the 401(k) plan). Participants
may direct the investment of their accounts among the available investment
funds. Participants may request hardship withdrawals and loans from the 401(k)
plan while still employed. Participants may request a withdrawal of all or
part of their vested account at or after age 59 1/2, whether or not still
employed. Distributions at retirement, disability, death or termination of
employment for any other reason are made in a single lump sum cash payment.
Employment Agreements
We will enter into an employment agreement as of the distribution with Mr.
Bloss, pursuant to which Mr. Bloss will serve as our Chief Executive Officer
and President and as our Chairman of the Board for a term of three years
beginning on the distribution date. The agreement will be automatically
extended for an additional one-year term unless either we or Mr. Bloss elects
to terminate it by notice in writing at least 90 days prior to the third
anniversary of the agreement or each anniversary thereafter. Mr. Bloss's base
salary is $400,000. Mr. Bloss is also eligible to receive incentive
compensation in an amount to be determined by the Board.
Upon termination of employment due to the death or disability of Mr. Bloss,
all unexercisable stock options will immediately vest and will be exercisable
for one year and we will pay health insurance premiums for Mr. Bloss and his
family for one year.
If employment is terminated by Mr. Bloss for "good reason," or if we
terminate his employment without "cause," we will pay Mr. Bloss a severance
payment equal to two times the sum of his average base salary and average
incentive compensation (as determined in accordance with the agreement),
payable over 24 months. In addition, certain CIRCOR options and restricted
stock units held by Mr. Bloss will become exercisable or nonforfeitable, and
Mr. Bloss will receive additional vesting credit under the supplemental plan.
If a "change in control" (as defined in the agreement) occurs and Mr.
Bloss's employment is terminated by us without cause or by Mr. Bloss with good
reason within 18 months of such change in control, we will pay Mr. Bloss a
lump sum amount in cash equal to three times the sum of his then current base
salary and most recent bonus, all of his stock options and stock-based awards
will become immediately exercisable, he will be
43
<PAGE>
fully vested in his accrued benefit under the supplemental plan, and we will
pay health insurance premiums for Mr. Bloss and his family for one year. In
addition, we will provide Mr. Bloss with a tax gross-up payment to cover any
excise tax due.
We will also enter into an employment agreement as of the distribution date
with Mr. Trapani, who will have a base salary of $225,000. Pursuant to the
agreement, Mr. Trapani will serve as our Chief Financial Officer, Treasurer
and Secretary. The agreement has a term of one year and has substantially
similar provisions as Mr. Bloss's agreement, except that the severance payment
is equal to the sum of Mr. Trapani's average base salary and average incentive
compensation (as determined in accordance with the agreement), payable over 12
months. In addition, if a "change in control" (as defined in the agreement)
occurs and Mr. Trapani's employment is terminated by us without cause or by
Mr. Trapani with good reason within 12 months of such change in control, we
will pay Mr. Trapani a lump sum amount in cash equal to two times the sum of
his then current base salary and most recent bonus. Mr. Trapani will not
receive a tax gross-up payment with respect to any excise taxes; instead, if
any excise taxes would apply, Mr. Trapani's severance payments will be reduced
by us if Mr. Trapani would be better off on an after-tax basis.
Compensation Committee Interlocks and Insider Participation
The members of our compensation committee are Messrs. Cross, Dietz and
Murphy. None of these individuals is an executive officer of CIRCOR.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
After the distribution, Watts and CIRCOR will have continuing obligations to
one another under the distribution agreement and certain other agreements
described in "Relationship Between CIRCOR and Watts."
Mr. Timothy P. Horne, a director of CIRCOR, is also a director of Watts and
will, immediately after the distribution, beneficially own voting securities
entitled to approximately 78.1% of the voting power of the outstanding Watts
common stock and approximately 29.9% of the voting power of the outstanding
CIRCOR common stock.
Mr. David F. Dietz, a director of CIRCOR, has a professional corporation
which is a partner of Goodwin, Procter & Hoar LLP, a law firm which provides
legal services to CIRCOR.
Mr. Daniel J. Murphy, III, a director of CIRCOR, is also a director of
Watts.
Policy Regarding Insider Transactions
Our policy is that any future transactions with our directors, officers,
employees or affiliates be approved in advance by a majority of the Board of
Directors, including a majority of the disinterested members of the Board, and
be on terms no less favorable to CIRCOR than we could obtain from non-
affiliated parties.
44
<PAGE>
SECURITY OWNERSHIP OF CIRCOR COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
EXECUTIVE OFFICERS OF CIRCOR
The table below sets forth certain projected information regarding the
direct beneficial ownership of shares of CIRCOR common stock and the indirect
beneficial ownership of CIRCOR common stock associated with the contemplated
issuance of CIRCOR stock options immediately following the distribution, by:
(1) each person we estimate will beneficially own more than five percent (5%)
of the outstanding shares of CIRCOR common stock; (2) each director of CIRCOR;
(3) each named executive officer; and (4) the directors and executive officers
of CIRCOR as a group. The ownership information presented below with respect
to all persons and organizations:
. is based on beneficial ownership of Watts' common stock at September 10,
1999 excluding for this purpose any options to purchase Watts common
stock;
. reflects the distribution ratio of one share of CIRCOR common stock for
every two shares of Watts common stock;
. assumes no change in beneficial ownership of Watts' common stock or
beneficial ownership of Watts options between such dates and the
distribution date; and
. "Beneficial ownership" means the sole or shared power to vote, or to
direct the voting of, a security, or the sole or shared power to dispose
of, or to direct the disposition of, a security. A person is deemed, as
of any date, to have "beneficial ownership" of any security that such
person has the right to acquire within 60 days after such date.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially
Name of Beneficial Owner (1) Owned(2) Options(3) Total Percent
- ---------------------------- ------------ ---------- -------------
<S> <C> <C> <C>
Timothy P. Horne (4).................. 3,955,391(5)(6) 12,000 29.9%
George B. Horne (4)(7)................ 1,062,300 -- 8.03%
Frederic B. Horne (8)................. 920,236 -- 6.96%
Daniel W. Horne (4)(9)................ 667,920 -- 5.05%
Deborah Horne (4)(9).................. 667,920 -- 5.05%
Franklin Resources, Inc. (10)......... 690,775 -- 5.22%
David A. Bloss, Sr.................... 4,500 493,182 1.70%
Dewain K. Cross....................... 0 12,000 *
David F. Dietz........................ 0 12,000 *
Daniel J. Murphy, III................. 2,200 12,000 *
Cosmo S. Trapani...................... 0 56,000 *
Alan R. Carlsen....................... 4,429 115,227 *
George M. Orza........................ 0 82,909 *
All executive officers and
directors as a group (8) persons..... 3,966,520 787,318 30.0%
</TABLE>
- --------
* Less than one percent.
(1) The address of each shareholder in the table is c/o CIRCOR International,
Inc., 35 Corporate Drive, Burlington, Massachusetts 01803, except that
Frederic B. Horne's address is c/o Conifer Ledges, Ltd., 219 Liberty
Square, Danvers, Massachusetts 01923 and Franklin Resources, Inc.'s
address is 777 Mariners Island Blvd., San Mateo, California 94403.
(2) Assumes distribution of shares of CIRCOR common stock in accordance with
the distribution ratio of one CIRCOR share for each two shares of Watts
owned as of the record date.
(3) Reflects CIRCOR stock options to be issued as of the distribution date.
See "Management--Initial CIRCOR Option Grants."
45
<PAGE>
(4) Timothy P. Horne, George B. Horne, Daniel W. Horne and Deborah Horne,
together with Tara V. Horne and Judith Rae Horne (as trustee and custodian
for her minor daughter), as depositors under the 1997 Voting Trust (see
footnote 6), may be deemed a "group" as that term is used in Section
13(d)(3) of the Exchange Act.
(5) Includes (i) 1,406,981 shares of common stock beneficially owned by
Timothy P. Horne (for purposes of this footnote, "Mr. Horne"), (ii)
667,920 shares held for the benefit of Daniel W. Horne, Mr. Horne's
brother, under a revocable trust for which Mr. Horne serves as sole
trustee, (iii) 667,920 shares held for the benefit of Deborah Horne, Mr.
Horne's sister, under a trust for which Mr. Horne serves as sole trustee,
which trust is revocable with the consent of the trustee, (iv) 1,062,300
shares held for the benefit of George B. Horne, Mr. Horne's father, under
a revocable trust for which Mr. Horne serves as co-trustee, (v) 20,000
shares owned by Tara V. Horne, Mr. Horne's daughter, (vi) 103,870 shares
held by Judith Rae Horne, Mr. Horne's wife, as trustee and custodian for
her minor daughter, (vii) 15,100 shares held for the benefit of Tara V.
Horne, under an irrevocable trust for which Mr. Horne serves as trustee
and (viii) 11,300 shares held for the benefit of Mr. Horne's minor
daughter, under an irrevocable trust for which Mr. Horne serves as
trustee. See footnote 7. A total of 1,375,610 of the shares noted in
clause (i) and all of the shares noted in clauses (ii) through (viii) of
this footnote (3,924,020 shares in the aggregate) are held in a voting
trust for which Mr. Horne serves as trustee. See footnote 6.
(6) 1,375,610 shares of common stock held by Timothy P. Horne, individually,
all shares of common stock held by trusts for the benefit of Daniel W.
Horne, Deborah Horne, Tara V. Horne, Timothy P. Horne's minor daughter and
George B. Horne, 103,870 shares of common stock held by Judith Rae Horne,
as custodian and trustee for her minor daughter, and 20,000 shares of
common stock held by Tara V. Horne (3,924,020 shares in the aggregate) are
subject to the terms of The Amended and Restated George B. Horne Voting
Trust Agreement--1997 (the "1997 Voting Trust"). Under the terms of the
1997 Voting Trust, the trustee (currently Timothy P. Horne) has sole power
to vote all shares subject to the 1997 Voting Trust. Timothy P. Horne, for
so long as he is serving as trustee of the 1997 Voting Trust, has the
power to determine in his sole discretion whether or not proposed actions
to be taken by the trustee of the 1997 Voting Trust shall be taken,
including the trustee's right to authorize the withdrawal of shares from
the 1997 Voting Trust (for purposes of this footnote, the "Determination
Power"). In the event that Timothy P. Horne ceases to serve as trustee of
the 1997 Voting Trust, no trustee thereunder shall have the Determination
Power except in accordance with a duly adopted amendment to the 1997
Voting Trust. Under the terms of the 1997 Voting Trust, in the event
Timothy P. Horne ceases to serve as trustee of the 1997 Voting Trust, then
Walter J. Flowers, David F. Dietz and Daniel J. Murphy, III (the
"Successor Trustees") shall thereupon become co-trustees of the 1997
Voting Trust. At any time, Timothy P. Horne, if then living and not
subject to incapacity, may designate up to two additional persons, one to
be designated as the primary designee (the "Primary Designee") and the
other as the secondary designee ("Secondary Designee"), to serve in the
stead of any Successor Trustee who shall be unable or unwilling to serve
as a trustee of the 1997 Voting Trust. Such designations are revocable by
Timothy P. Horne at any time prior to the time at which such designees
become trustees. If any of the Successor Trustees is unable or unwilling
or shall otherwise fail to serve as a trustee of the 1997 Voting Trust, or
after becoming a co-trustee shall cease to serve as such for any reason,
then there shall continue to be two trustees and a third trustee shall be
selected in accordance with the following line of succession: first, any
individual designated as the Primary Designee, next, any individual
designated as the Secondary Designee, and then, any individual appointed
by the holders of a majority in interest of the voting trust certificates
then outstanding. In the event that the Successor Trustees shall not
concur on matters not specifically contemplated by the terms of the 1997
Voting Trust, the vote of a majority of the Successor Trustees shall be
determinative. No trustee or Successor Trustee shall possess the
Determination Power unless it is specifically conferred upon such trustee
by way of an amendment to the 1997 Voting Trust.
The 1997 Voting Trust expires on August 26, 2021, subject to extension on
or after August 26, 2019 by shareholders (including the trustee of any
trust stockholder, whether or not such trust is then in existence) who
deposited shares of common stock in the 1997 Voting Trust and are then
living or, in the case of shares
46
<PAGE>
in the 1997 Voting Trust the original depositor of which (or the trustee of
the original deposit of which) is not then living, the holders of voting
trust certificates representing such shares. The 1997 Voting Trust may be
amended by vote of the holders of a majority of the voting trust
certificates then outstanding and by the number of trustees authorized to
take action at the relevant time or, if the trustees (if more than one) do
not concur with respect to any proposed amendment at any time when any
trustee holds the Determination Power, then by the trustee having the
Determination Power. In certain cases (i.e., changes to the extension,
termination and amendment provisions), each individual depositor must also
approve amendments. Shares may not be removed from the 1997 Voting Trust
during its term without the consent of the requisite number of trustees
required to take action under the 1997 Voting Trust. Voting trust
certificates are subject to any restrictions on transfer applicable to the
stock which they represent.
Timothy P. Horne holds 35.1% of the total beneficial interest in the 1997
Voting Trust (the "Beneficial Interest") individually, 17.0% of the
Beneficial Interest as trustee of a revocable trust, 17.0% of the
Beneficial Interest as trustee of a trust revocable with the consent of the
trustee, 26.8% of the Beneficial Interest as co-trustee of a revocable
trust and 0.7% of the Beneficial Interest as trustee of two irrevocable
trusts (representing an aggregate of 96.85% of the Beneficial Interest).
George B. Horne holds 26.8% of the Beneficial Interest as co-trustee of a
revocable trust. Tara V. Horne, individually and as a beneficiary of an
irrevocable trust holds 0.9% of the Beneficial Interest, and Judith Rae
Horne, as trustee or custodian for Timothy P. Horne's minor daughter, holds
2.7% of the Beneficial Interest.
(7) Consists of 1,062,300 shares held in a revocable trust for which Timothy
P. Horne and George B. Horne serve as co-trustees. All of such shares are
subject to the 1997 Voting Trust. See footnote 6.
(8) The information relating to the number and nature of Frederic B. Horne's
beneficial ownership is based on a Schedule 13D filed with the Securities
and Exchange Commission on September 17, 1999 by Frederic B. Horne (for
purposes of this footnote, "Mr. Horne"). The equity and voting percentages
were calculated as of September 10, 1999. Includes (i) 903,436 shares of
common stock beneficially owned by Mr. Horne, (ii) 11,300 shares held for
the benefit of Mr. Horne's minor daughter, under an irrevocable trust for
which Mr. Horne serves as trustee, and (iii) 5,500 shares beneficially
owned by Mr. Horne's minor daughter for which Mr. Horne is custodian.
(9) Shares held in a revocable trust for which Timothy P. Horne serves as sole
trustee, and are subject to the 1997 Voting Trust. See footnote 6.
(10) The information is based on a Form 13F filed with the Securities and
Exchange Commission by Franklin Resources, Inc., Franklin Advisory
Services, Inc., Franklin Management, Inc. and Franklin Advisers, Inc.
reporting their aggregate holdings of shares of Class A Common Stock as
of February 10, 1999. Franklin Advisory Services, Inc., Franklin
Management, Inc. and Franklin Advisors, Inc. have stated in the Form 13F
that they are investment advisers registered under the Investment
Advisers Act of 1940, and that as direct or indirect investment advisory
subsidiaries of Franklin Resources, Inc. have all investment and/or
voting power of the shares.
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
Upon completion of this offering, the authorized capital stock of the
Company will consist of 29,000,000 shares of common stock, of which 13,228,877
shares will be issued and outstanding, and 1,000,000 shares of undesignated
preferred stock issuable in one or more series by the Board of Directors, of
which no shares will be issued and outstanding.
47
<PAGE>
Common Stock. The holders of common stock are entitled to one vote per share
on all matters to be voted on by stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of preferred
stock with a dividend preference over common stock could adversely affect the
dividend rights of holders of common stock. Holders of common stock are not
entitled to cumulative voting rights. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election, subject to any voting rights of the holders of any
then outstanding preferred stock. The holders of common stock have no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to the common stock. All
outstanding shares of common stock, including the shares offered hereby, are,
or will be upon completion of the offering, fully paid and non-assessable.
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated By-laws, which will be effective upon completion of this
offering, provide that the number of directors shall be fixed by the Board of
Directors, subject to the rights of the holders of any preferred stock then
outstanding. The directors, other than those who may be elected by the holders
of any preferred stock, are divided into three classes, as nearly equal in
number as possible, with each class serving for a three-year term. Subject to
any rights of the holders of any preferred stock to elect directors, and to
remove any director whom the holders of any preferred stock had the right to
elect, any director of CIRCOR may be removed from office only with cause and
by the affirmative vote of at least two-thirds of the total votes which would
be eligible to be cast by stockholders in the election of such director.
Undesignated Preferred Stock. The Board of Directors of CIRCOR is
authorized, without further action of the stockholders, to issue up to
1,000,000 shares of preferred stock in one or more series and to fix the
designations, powers, preferences and the relative, participating, optional or
other special rights of the shares of each series and any qualifications,
limitations and restrictions thereon as set forth in the Certificate. Any such
preferred stock issued by CIRCOR may rank prior to the common stock as to
dividend rights, liquidation preference or both, may have full or limited
voting rights and may be convertible into shares of common stock.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding
common stock.
Certain Provisions of Certificate of Incorporation and By-laws
A number of provisions of the Certificate and By-laws which will be
effective upon completion of this offering concern matters of corporate
governance and the rights of shareholders. Certain of these provisions, as
well as the ability of the Board of Directors to issue shares of preferred
stock and to set the voting rights, preferences and other terms thereof, may
be deemed to have an anti-takeover effect and may discourage takeover attempts
not first approved by the Board of Directors, including takeovers which
shareholders may deem to be in their best interests. To the extent takeover
attempts are discouraged, temporary fluctuations in the market price of the
common stock, which may result from actual or rumored takeover attempts, may
be inhibited. These provisions, together with the classified Board of
Directors and the ability of the Board to issue preferred stock without
further shareholder action, also could delay or frustrate the removal of
incumbent directors or the assumption of control by shareholders, even if such
removal or assumption would be beneficial to shareholders of the Company.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy contest, even if favorable to the interests of shareholders,
and could depress the market price of the common stock. The Board of Directors
believes that these provisions are appropriate to protect the interests of
CIRCOR and all of its shareholders.
Meetings of Shareholders. The By-laws provide that a special meeting of
shareholders may be called only by a majority of Board of Directors unless
otherwise required by law. The By-laws provide that only those matters set
forth in the notice of the special meeting may be considered or acted upon at
that special meeting
48
<PAGE>
unless otherwise provided by law. In addition, the By-laws set forth certain
advance notice and informational requirements and time limitations on any
director nomination or any new proposal which a shareholder wishes to make at
an annual meeting of shareholders.
No Shareholder Action by Written Consent. The Certificate provides that any
action required or permitted to be taken by the shareholders of CIRCOR at an
annual or special meeting of shareholders must be effected at a duly called
meeting and may not be taken or effected by a written consent of shareholders
in lieu thereof.
Indemnification and Limitation of Liability. The By-laws provide that
directors and officers of CIRCOR shall be, and in the discretion of the Board
of Directors non-officer employees may be, indemnified by the Company to the
fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of shareholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence
or gross negligence in business combinations, unless the director has breached
his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation
Law or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or recision, for
breach of fiduciary duty. CIRCOR also entered into indemnification agreements
with each of its directors reflecting the foregoing and requiring the
advancement of expenses in proceedings involving the directors in most
circumstances.
Amendment of the Certificate. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and
(with certain exceptions) thereafter approved by a majority (or two-thirds in
the case of any proposed amendment to the provisions of the Certificate
relating to stockholder action, the composition of the Board, limitation of
liability or amendments of the Certificate) of the total votes eligible to be
cast by holders of voting stock with respect to such amendment.
Amendment of By-laws. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the shareholders. Such
action by the Board of Directors requires the affirmative vote of a majority
of the directors then in office. Such action by the shareholders requires the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by holders of voting stock with respect to such amendment or repeal at an
annual meeting of shareholders or a special meeting called for such purpose
unless the Board of Directors recommends that the shareholders approve such
amendment or repeal at such meeting, in which case such amendment or repeal
shall only require the affirmative vote of a majority of the total votes
eligible to be cast by holders of voting stock with respect to such amendment
or repeal.
Statutory Business Combination Provision
Upon completion of the offering, CIRCOR will be subject to the provisions of
Section 203 of the Delaware General Corporation Law. Section 203 provides,
with certain exceptions, that a Delaware corporation may not engage in any of
a broad range of business combinations with a person or affiliate, or
associate of such person, who is an "interested shareholder" for a period of
three years from the date that such person became an interested shareholder
unless: (i) the transaction resulting in a person becoming an interested
shareholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
shareholder; (ii) the interested shareholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested shareholder (excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by certain employee
stock ownership plans); or (iii) on or after the date the person becomes an
interested shareholder, the business
49
<PAGE>
combination is approved by the corporation's board of directors and by the
holders of at least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
shareholder. Under Section 203, an "interested shareholder" is defined (with
certain limited exceptions) as any person that is (i) the owner of 15% or more
of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested shareholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action
of its shareholders to exempt itself from coverage, provided that such by-law
or charter amendment shall not become effective until 12 months after the date
it is adopted. Neither the Certificate nor the By-laws contains any such
exclusion; however, the Board of Directors of CIRCOR has voted to exempt from
the coverage of Section 203 persons who will own 15% or more of the
outstanding CIRCOR common stock immediately after the distribution.
Shareholder Rights Plan
We have adopted a shareholder rights plan to help ensure that our
shareholders receive fair and equal treatment in the event of any proposed
acquisition of CIRCOR. The rights plan may delay, defer or prevent a change of
control of CIRCOR and, therefore, could adversely affect shareholders' ability
to realize a premium over the then-prevailing market price for our common
stock in connection with such a transaction.
In connection with the adoption of the rights plan, our Board of Directors
will declare a dividend distribution of one preferred stock purchase right for
each outstanding share of common stock to shareholders of record (the "rights
plan record date") as of a specified date following the record date for the
distribution. Each right will entitle its registered holder to purchase from
us a unit consisting of one ten-thousandth of a share of CIRCOR's Series A
Junior Participating Cumulative Preferred Stock, par value $0.01 per share, at
a cash exercise price per unit of $48.00, subject to adjustment.
The rights initially will not be exercisable and will be attached to and
will trade with all shares of common stock outstanding as of, and issued
subsequent to, the rights plan record date. The rights will separate from the
common stock and will become exercisable upon the earlier of the following (a
"distribution event"):
. the close of business on the tenth calendar day following the first
public announcement that a person or group of affiliated or associated
persons, referred to as an "acquiring person," has acquired beneficial
ownership of 15% or more of the outstanding shares of common stock; or
. the close of business on the tenth business day following the
commencement of a tender offer or exchange offer that could result upon
its completion in a person or group becoming the beneficial owner of 15%
or more of the outstanding shares of common stock; or
. the declaration by the board of directors that a person or group that
has become the beneficial owner of 10% or more of the outstanding shares
of common stock is an "adverse person."
Some of our shareholders will be "grandfathered persons" under the rights
plan. They will be Timothy P. Horne, George B. Horne, Daniel W. Horne, Deborah
Horne, Judith Rae Horne, Tara Horne, the George B. Horne Trust, the Daniel W.
Horne Trust, the Deborah Horne Trust, the Tara Horne 1995 Trust, the Tiffany
Horne 1984 Trust, the Tiffany Horne 1995 Trust, the George B. Horne Voting
Trust, any trustees of that trust, and any other trust or entity of which
Timothy P. Horne has the exclusive right to vote the shares held in such trust
or by such entity. These individuals, trusts and entities are referred to in
the rights plan as "family stockholders" and the family stockholders are
permitted to own, collectively, 35% of the common stock. The rights plan also
grandfathers any other person who or which, together with all their respective
affiliates and associates, beneficially owns 15% or more of the outstanding
shares of common stock as of the date on which CIRCOR announces the adoption
of the rights plan. In the case of a grandfathered person, the rights will
separate from the
50
<PAGE>
common stock and will become exercisable upon the earlier of the first two
events described above, provided that for such purposes the applicable
percentage for such grandfathered person is not 15% but is instead 35% in the
case of the family stockholders and in the case of any other grandfathered
person is the percentage ownership of the outstanding common stock owned by
such person as of the date on which CIRCOR announces the adoption of the
rights plan, plus 1%. In addition, a grandfathered person will not be an
acquiring person unless it acquires additional shares of our common stock
after the date on which CIRCOR announces the adoption of the rights plan in
excess of the applicable grandfathered percentage.
If a person becomes an acquiring person, the shareholder rights plan
provides that as of the close of business ten calendar days after the first
public announcement of that event, each holder of a right will be entitled to
receive, upon payment of the exercise price, shares of preferred stock of our
company having a market value of twice the exercise price of the right. If
CIRCOR is acquired in a merger or similar transaction, the shareholder rights
plan provides that as of the close of business ten calendar days following the
first public announcement of that event, each holder of a right will be
entitled to receive, upon payment of the exercise price, shares of common
stock of the acquiring company having a market value of twice the exercise
price of the right.
In the event that our board of directors approves a transaction that it has
determined is in the best interest of our shareholders but that otherwise
would cause a distribution event under the rights plan, the board may, in
connection with such approval, redeem the rights for a nominal price. Once the
rights are redeemed, the transaction can proceed without causing a
distribution event. The rights plan could make it more difficult for a third
party to acquire, and could discourage a third party from acquiring or seeking
to acquire, CIRCOR or a large block of the common stock of CIRCOR.
WHERE TO FIND ADDITIONAL INFORMATION
CIRCOR has filed a registration statement with the Commission under the
Exchange Act concerning the shares of CIRCOR common stock being received by
Watts' shareholders in the distribution. This document does not contain all of
the information set forth in the registration statement and the exhibits and
schedules filed with it. Statements made in this document concerning the
contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Exchange Act Registration Statement,
you should refer to that exhibit for a more complete description of the matter
involved.
The registration statement and the exhibits and schedules filed with it may
be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Regional Offices of the Securities
and Exchange Commission at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such information can be obtained by mail from the
Public Reference Branch of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005 or accessed electronically by means of the
Securities and Exchange Commission's home page on the Internet
(http://www.sec.gov).
Following the distribution, CIRCOR will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Securities and Exchange Commission. CIRCOR will also be
subject to the proxy solicitation requirements of the Exchange Act and,
accordingly, will furnish audited financial statements to its shareholders in
connection with its annual meetings of shareholders.
No person is authorized by Watts or CIRCOR to give any information or to
make any representations other than those contained in this document, and if
given or made, such information or representations must not be relied upon as
having been authorized.
51
<PAGE>
INDEX TO CIRCOR INTERNATIONAL, INC.
COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Combined Balance Sheets..................................................... F-3
Combined Statements of Operations........................................... F-4
Combined Statements of Cash Flows........................................... F-5
Combined Statements of Changes in Shareholder's Equity...................... F-6
Notes to the Combined Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Watts Industries, Inc.
We have audited the accompanying combined balance sheets of CIRCOR
International, Inc. as of June 30, 1999 and 1998, and the related combined
statements of operations, cash flows and shareholder's equity for each of the
years in the three-year period ended June 30, 1999. In connection with our
audits of the combined financial statements, we also audited the accompanying
financial statement schedule of valuation and qualifying accounts. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of CIRCOR
International, Inc. as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for the each of the years in the three-year
period ended June 30, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial schedule, when
considered in relation to the basic combined financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Boston, Massachusetts
August 3, 1999
F-2
<PAGE>
CIRCOR INTERNATIONAL, INC.
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 6,714 $ 6,241
Trade accounts receivable, less allowance for doubtful
accounts of $2,949 in 1999 and $2,092 in 1998............. 49,857 53,565
Inventories................................................ 108,910 89,788
Prepaid expenses and other assets.......................... 6,817 2,634
Deferred income taxes...................................... 11,919 5,619
-------- --------
Total Current Assets...................................... 184,217 157,847
PROPERTY, PLANT AND EQUIPMENT............................... 76,682 55,982
OTHER ASSETS:
Goodwill, net of accumulated amortization of $10,353 in
1999 and $7,688 in 1998................................... 96,900 39,173
Other...................................................... 4,571 3,912
-------- --------
TOTAL ASSETS................................................ $362,370 $256,914
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... $ 25,543 $ 28,345
Accrued expenses and other current liabilities............. 19,448 15,238
Accrued compensation and benefits.......................... 5,705 5,099
Income taxes payable....................................... 3,275 5,344
Current portion of long-term debt.......................... 4,178 2,977
-------- --------
Total Current Liabilities................................. 58,149 57,003
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 22,404 12,776
DEFERRED INCOME TAXES....................................... 10,766 9,647
OTHER NONCURRENT LIABILITIES................................ 7,675 4,568
MINORITY INTEREST........................................... 4,120 4,264
SHAREHOLDER'S EQUITY:
Accumulated Other Comprehensive Income..................... (691) 479
Shareholder's Equity....................................... 259,947 168,177
-------- --------
Total Shareholder's Equity................................ 259,256 168,656
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................. $362,370 $256,914
======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
CIRCOR INTERNATIONAL, INC.
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues..................................... $323,077 $288,969 $274,716
Cost of goods sold............................... 218,351 194,312 186,093
-------- -------- --------
GROSS PROFIT.................................... 104,726 94,657 88,623
Selling, general and administrative expenses..... 75,176 56,466 54,717
-------- -------- --------
OPERATING INCOME................................ 29,550 38,191 33,906
-------- -------- --------
Other (income) expense:
Interest income................................. (333) (427) (148)
Interest expense................................ 9,141 3,898 3,422
Other........................................... (229) (306) 673
-------- -------- --------
8,579 3,165 3,947
-------- -------- --------
INCOME BEFORE INCOME TAXES....................... 20,971 35,026 29,959
Provision for income taxes....................... 8,461 12,601 10,345
-------- -------- --------
NET INCOME...................................... $ 12,510 $ 22,425 $ 19,614
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
CIRCOR INTERNATIONAL, INC.
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended June
30,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income....................................... $12,510 $22,425 $19,614
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 9,440 6,312 5,844
Amortization................................... 3,322 1,532 1,072
Deferred income taxes (benefit)................ 4,193 173 (151)
(Gain) loss on disposal of property, plant and
equipment..................................... (54) 19 119
Changes in operating assets and liabilities,
net of
effects from business acquisitions:
Accounts receivable.......................... 13,665 (6,254) (204)
Inventories.................................. 209 (9,783) (1,988)
Prepaid expenses and other assets............ (3,102) 1,491 (1,842)
Accounts payable, accrued expenses and other
liabilities................................. (19,655) 5,160 5,378
------- ------- -------
Net cash provided by operating activities...... 20,528 21,075 27,842
------- ------- -------
INVESTING ACTIVITIES
Additions to property, plant and equipment....... (9,499) (6,115) (5,457)
Disposal of property, plant and equipment........ 1,208 146 --
Increase in other assets......................... (237) (725) (402)
Business acquisitions, net of cash acquired...... (74,176) (22,503) (933)
------- ------- -------
Net cash used in investing activities.......... (82,704) (29,197) (6,792)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings............... 4,331 2,957 93
Payments of long-term debt....................... (20,646) (428) (862)
Net intercompany activity with Watts Industries,
Inc............................................. 79,260 9,104 (17,036)
------- ------- -------
Net cash used in financing activities.......... 62,945 11,633 (17,805)
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents..................................... (296) 143 (44)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 473 3,654 3,201
Cash and cash equivalents at beginning of year... 6,241 2,587 (614)
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $ 6,714 $ 6,241 $ 2,587
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
CIRCOR INTERNATIONAL, INC.
COMBINED STATEMENTS OF CHANGES
IN SHAREHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Shareholder's Comprehensive Comprehensive
Equity Income Income
------------- ------------- -------------
<S> <C> <C> <C>
YEARS ENDED JUNE 30,
BALANCE AT JUNE 30, 1996.............. $134,070 $ 1,051
Net Income........................... 19,614 -- $19,614
Cumulative translation adjustment.... -- (422) (422)
Net Intercompany activity............ (17,036) -- --
-------
COMPREHENSIVE INCOME.................. $19,192
-------- ------- =======
BALANCE AT JUNE 30, 1997.............. 136,648 629
Net Income........................... 22,425 -- $22,425
Cumulative translation adjustment.... -- (150) (150)
Net intercompany activity............ 9,104 -- --
-------
COMPREHENSIVE INCOME.................. $22,275
-------- ------- =======
BALANCE AT JUNE 30, 1998.............. 168,177 479
Net Income........................... 12,510 -- $12,510
Cumulative translation adjustment.... -- (1,170) (1,170)
Net Intercompany activity............ 79,260 -- --
-------
COMPREHENSIVE INCOME.................. $11,340
-------- ------- =======
BALANCE AT JUNE 30, 1999.............. $259,947 $ ( 691)
======== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE>
CIRCOR INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(1)Description of Business
On December 15, 1998 the Board of Directors of Watts Industries, Inc.
("Watts") approved a plan to spin off its industrial, oil and gas
businesses as an independent, publicly-traded company through a
distribution (the "Distribution") to its shareholders of all of the
outstanding shares of CIRCOR International, Inc. "CIRCOR" or the
"Company"). CIRCOR will own the assets and assume the liabilities of Watts'
industrial, oil and gas businesses. Watts expects the Distribution to be
completed by October 18, 1999, after the appropriate approvals of third
parties and the receipt of a private letter ruling from the Internal
Revenue Service that the receipt of the Company shares by Watts
shareholders will be tax-free and that no gain or loss will be recognized
by Watts or Watts' shareholders on the Distribution. However, Watts'
shareholders will be subject to tax on gains attributable to cash received
in lieu of fractional shares.
Prior to the Distribution, it is anticipated that CIRCOR will obtain an
unsecured credit facility which is intended to provide sufficient liquidity
for the Company's current funding needs. The Company expects the unsecured
credit facility will have a four year term.
In addition, CIRCOR and Watts will enter into several agreements providing
for the separation of the companies and governing various relationships
between CIRCOR and Watts, including a Distribution Agreement, Supply
Agreement, and Tradename License Agreement.
(2) Basis of Presentation
The accompanying Combined Financial Statements of CIRCOR include the
results of operations and assets and liabilities directly related to
CIRCOR's operations. CIRCOR's intercompany accounts and transactions have
been eliminated.
CIRCOR was allocated approximately $5,600,000, $4,900,000, and $4,400,000
of costs related to Watts' shared administrative functions in 1999, 1998
and 1997, respectively. The allocation was based on CIRCOR's revenue as a
percent of Watts' total revenue and payroll as a percent of Watts' total
payroll, and the allocation costs are included in the general,
administrative and other expenses in the combined statements of operations.
Management believes that such allocation methodology is reasonable. The
expenses allocated to CIRCOR for these services are not necessarily
indicative of the expenses that would have been incurred if CIRCOR had been
a separate, independent entity and had otherwise managed these functions.
Subsequent to the Distribution, CIRCOR will be required to manage these
functions and will be responsible for the expenses associated with the
management of CIRCOR as a public corporation. It is anticipated that when
CIRCOR becomes a separate public company, administration expenses will
increase by approximately $250,000 (unaudited) per year as a result of
additional financial reporting requirements, stock transfer fees,
director's fees, insurance and executive compensation and benefits.
CIRCOR's operations have been financed through its operating cash flows.
CIRCOR's interest expense includes an allocation of Watts' interest expense
(Watts' weighted average interest rate applied to the average balance of
investments by and advances from Watts to CIRCOR) and interest expense on
its external debt. CIRCOR's external debt is primarily limited to capital
lease obligations and, to a much lesser extent, assumed debt of acquired
businesses and international third-party debt. CIRCOR is expected to have a
capital structure different from the capital structure in the combined
financial statements and accordingly, interest expense is not necessarily
indicative of the interest expense that CIRCOR would have incurred as a
separate, independent company.
Income tax expense was calculated as if CIRCOR filed separate income tax
returns. As Watts manages its tax position on a consolidated basis, which
takes into account the results of all of its businesses, CIRCOR's effective
tax rate in the future could vary from its historical effective tax rates.
CIRCOR's future effective tax rate will largely depend on its structure and
tax strategies as a separate, independent company.
F-7
<PAGE>
(3)Accounting Policies
Revenue Recognition
Revenue is recognized upon shipment, net of a provision for estimated
returns and allowances.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of investments with maturities of three months or
less at the date of original issuance. Short-term investments consist of
participation in mutual funds whose portfolios consist principally of
United States Government securities. Short-term investments are valued at
cost, which approximates market.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-
out method) or market.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired. This balance is amortized over 40 years using the
straight-line method. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of
goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Plant and equipment
under capital leases are stated at the present value of minimum lease
payments.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets which range from 10 to 40 years for buildings and
improvements and 3 to 15 years for machinery and equipment. Plant and
equipment held under capital leases and leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term or
estimated useful life of the asset.
Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. In such instances, the carrying value of long-lived assets
is reduced to their estimated fair value, as determined using an appraisal
or a discounted cash flow approach, as appropriate.
Income Taxes
Prior to the Distribution, the Company's operations are included in the
U.S. federal consolidated tax returns of Watts. The provision for income
taxes includes the Company's allocated share of Watts' consolidated income
tax provision and is calculated on a separate company basis pursuant to the
requirements of the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Allocated income taxes payable are reflected
herein as being settled with Watts on a current basis. Deferred taxes are
provided for differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Foreign Currency Translation
Balance sheet accounts of foreign subsidiaries are translated into United
States dollars at fiscal year-end exchange rates. Operating accounts are
translated at weighted average exchange rates for each year. Net
translation gains or losses are adjusted directly to a separate component
of shareholder's equity. The
F-8
<PAGE>
Company does not provide for U.S. income taxes on foreign currency
translation adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
Stock Based Compensation
As allowed under Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, the Company accounts for its
stock-based employee compensation plans in accordance with the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees.
Derivative Financial Instruments
The Company uses foreign currency forward exchange contracts to manage
currency exchange exposures in certain foreign currency denominated
transactions. Gains and losses on contracts designated as hedges are
recognized when the contracts expire, which is generally in the same time
period as the underlying foreign currency denominated transactions.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits,"
and SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company has adopted SFAS 132. The Company will adopt SFAS
133 on January 1, 2001. The impact of SFAS 133 on the combined financial
statements is still being evaluated, but is not expected to be material.
Also in 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed of
Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-
Up Activities." The Company will adopt SOP 98-1 and SOP 98-5 in fiscal
2000. These statements are not expected to have a material affect the
combined financial statements.
(4)Business Acquisitions
On July 22, 1998, CIRCOR acquired Hoke, Inc. ("Hoke"), a multinational
manufacturer of industrial valves and fittings, for approximately
$85,000,000, including assumption of debt. The following table reflects
unaudited pro forma combined results of operations of the Company and Hoke
on the basis that the acquisition had taken place and was recorded at the
beginning of the fiscal year for each of the periods presented:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
Revenues............. $ 326,707 $ 358,191
Net income........... $ 12,436 $ 19,365
</TABLE>
In management's opinion the unaudited pro forma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of fiscal
1998 or at the beginning of fiscal 1999 or of future operations of the
combined companies under the ownership and management of CIRCOR.
F-9
<PAGE>
As allowed in the purchase agreement, the Company has initiated an
arbitration proceeding against the former shareholders of Hoke to recover a
portion of the purchase price based on alleged misrepresentations made by
the former shareholders and errors in the financial information provided to
the Company. At this time, the Company cannot determine how much, if any,
of the purchase price will be recovered.
In connection with the Hoke acquisition, the Company has implemented a plan
to integrate certain of Hoke's operations and activities into the existing
operations of the Company. This plan includes the closure of Hoke's
headquarters facility and relocation of certain manufacturing operations to
other CIRCOR facilities. As a result of this plan, it is anticipated that
170 former Hoke employees will be involuntarily terminated (45 employees
have been involuntarily terminated to date). Details of costs recorded as
part of the acquisition for the integration activities and the related
activity to date are as follows:
<TABLE>
<CAPTION>
Original Activity to Remaining
Accrual Date Balance
-------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Employee severance and related benefits..... $ 3,167 $838 $2,329
Relocation of employees..................... 45 -- 45
Other exit costs............................ 1,365 76 1,289
------- ---- ------
$ 4,577 $914 $3,663
======= ==== ======
</TABLE>
During fiscal 1999, the Company also acquired SSI Equipment, Inc. of
Burlington, Ontario, Canada, and Go Regulator, Inc. of San Dimas,
California. In fiscal 1998 the Company acquired Telford Valve and
Specialities, Inc. of Edmonton, Alberta, Canada, Atkomatic Valve Company,
located in Indianapolis, Indiana and Aerodyne Controls Corp. of Ronkonoma,
New York. All of these acquired companies are valve manufacturers and the
aggregate purchase price of these acquisitions was approximately
$33,400,000. The goodwill which resulted from these acquisitions is being
amortized on a straight-line basis over a 40-year period.
All acquisitions have been accounted for under the purchase method and the
results of operations of the acquired businesses have been included in the
combined financial statements from the date of acquisition. Had these
acquisitions, other than Hoke, occurred at the beginning of fiscal year
1999, 1998 or 1997, the effect on operating results would not have been
material.
(5)Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------
1999 1998
--------- -------
(in thousands)
<S> <C> <C>
Raw materials.......................................... $ 45,098 $32,874
Work in process........................................ 23,087 25,970
Finished goods......................................... 40,725 30,944
--------- -------
$ 108,910 $89,788
========= =======
</TABLE>
F-10
<PAGE>
(6)Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
Land..................................................... $ 6,222 $ 4,445
Buildings and improvements............................... 26,022 22,041
Machinery and equipment.................................. 105,085 85,881
Construction in progress................................. 6,548 2,106
-------- -------
143,877 114,473
Accumulated depreciation................................. (67,195) (58,491)
-------- -------
$ 76,682 $55,982
======== =======
</TABLE>
(7)Income Taxes
The significant components of the Company's deferred income tax liabilities
and assets are as follows:
<TABLE>
<CAPTION>
June 30,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Excess tax over book depreciation....................... $ 6,819 $ 5,373
Inventory............................................... 3,327 3,437
Other................................................... 620 837
------- -------
Total deferred income tax liabilities................... 10,766 9,647
------- -------
Deferred income tax assets:
Accrued expenses........................................ 5,554 1,849
Net operating loss carryforward......................... 716 --
Other................................................... 5,649 3,770
------- -------
Total deferred income tax assets........................ 11,919 5,619
Valuation allowance..................................... -- --
------- -------
Net deferred income tax assets.......................... 11,919 5,619
------- -------
Net deferred income tax asset (liability)............... $ 1,153 $(4,028)
======= =======
</TABLE>
The provision for income taxes is based on the following pre-tax income:
<TABLE>
<CAPTION>
Fiscal Year Ended June
30,
-----------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Domestic............................................ $14,011 $22,864 $25,238
Foreign............................................. 6,960 12,162 4,721
------- ------- -------
$20,971 $35,026 $29,959
======= ======= =======
</TABLE>
F-11
<PAGE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended June
30,
-----------------------
1999 1998 1997
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Current tax expense (benefit):
Federal........................................... $ 173 $ 7,156 $ 8,481
Foreign........................................... 2,408 3,085 (312)
State............................................. 26 1,678 1,737
------ ------- -------
2,607 11,919 9,906
------ ------- -------
Deferred tax expense (benefit):
Federal........................................... 4,684 599 364
Foreign........................................... 613 (22) 11
State............................................. 557 105 64
------ ------- -------
5,854 682 439
------ ------- -------
$8,461 $12,601 $10,345
====== ======= =======
</TABLE>
Actual income taxes reported from operations are different than those which
would have been computed by applying the federal statutory tax rate to
income before income taxes. The reasons for these differences are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June
30,
------------------------
1999 1998 1997
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Computed expected federal income tax expense
(benefit)...................................... $7,340 $12,259 $10,486
State income taxes, net of federal tax benefit.. 416 703 1,069
Goodwill amortization........................... 806 284 314
Foreign tax rate differential................... 384 (1,124) (1,329)
Other, net...................................... (485) 479 (195)
------ ------- -------
$8,461 $12,601 $10,345
====== ======= =======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
$3,216,629, $831,399 and $86,926 at June 30, 1999, 1998 and 1997,
respectively. Those earnings are considered to be indefinitely reinvested
and, accordingly, no provision for U.S. federal and state income taxes has
been recorded thereon. Upon distribution of those earnings, in the form of
dividends or otherwise, the Company will be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the amount
of U.S. income tax liability that would be incurred is not practicable
because of the complexities associated with its hypothetical calculation;
however, unrecognized foreign tax credits would be available to reduce some
portion of any U.S. income tax liability. Withholding taxes of $160,831
would be payable upon remittance of all previously unremitted earnings at
June 30, 1999. The Company made income tax payments of $4,715,782,
$4,282,482 and $7,567,927 in fiscal years 1999, 1998 and 1997,
respectively.
F-12
<PAGE>
(8)Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Commissions and sales incentives payable................... $ 4,272 $ 2,846
Acquisition related costs.................................. 4,708 1,507
Other...................................................... 10,468 10,885
------- -------
$19,448 $15,238
======= =======
</TABLE>
(9)Financing Arrangements
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Industrial Revenue Bonds, maturing periodically from 2003
through 2020, accruing interest at a variable rate based
on weekly tax-exempt interest rates (3.88% and 3.60% at
June 30, 1999 and 1998, respectively)..................... $12,540 $12,265
Term Loan, maturing 2003, due in monthly installments of
$108,333, bearing interest at prime or LIBOR plus 150
basis points (8.5% at June 30, 1999)...................... 4,658 --
Capital Lease Obligations.................................. 4,081 --
Other borrowings........................................... 5,303 3,488
------- -------
26,582 15,753
Less current portion....................................... 4,178 2,977
------- -------
$22,404 $12,776
======= =======
</TABLE>
The Company has an available revolving credit facility that provides for
borrowings up to $13,000,000 at an interest rate of either prime or LIBOR
plus 150 basis points. This credit facility expires on June 30, 2000, and
no amounts were outstanding at June 30, 1999 or 1998.
Certain of the Company's loan agreements contain covenants that require,
among other items, maintenance of certain financial ratios and limit the
Company's ability to enter into secured borrowing arrangements.
Principal payments during each of the next five fiscal years are due as
follows (in thousands): 2000-$4,178; 2001-$2,839; 2002-$3,149; 2003-$1,766;
and 2004-$1,421. Interest paid for all periods presented in the
accompanying combined financial statements approximates interest expense.
(10) Stock-Based Compensation
CIRCOR employees were granted options under several Watts stock option
plans through which key employees have been granted incentive (ISOs) and
nonqualified (NSOs) options to purchase Watts class A common stock.
Generally, options become exercisable over a five-year period at the rate
of 20% per year and expire ten years after the date of grant. ISOs and NSOs
granted under the plans have exercise prices of not less than 100% and 50%
of the fair market value of the common stock on the date of grant,
respectively. The total number of options granted to CIRCOR employees under
the Watts stock option plans was 75,000 in fiscal 1999, 97,500 in fiscal
1998 and 111,000 in fiscal 1997.
F-13
<PAGE>
Certain CIRCOR employees also participated in Watts' Management Stock
Purchase Plan which allows for the granting of Restricted Stock Units
(RSUs) to key employees to purchase up to 1,000,000 shares of Watts class A
common stock at 67% of the fair market value on the date of grant. RSUs
vest annually over a three-year period from the date of grant. The
difference between the RSU price and fair market value at the date of award
is amortized to compensation expense ratably over the vesting period. At
June 30, 1999, 47,756 RSUs were outstanding for CIRCOR employees.
Compensation expense related to nonqualified stock options and restricted
stock units recognized by the Company during fiscal years 1999, 1998 and
1997 amounted to $98,000, $72,000 and $26,000, respectively.
Following the distribution, vested and non-vested Watts options held by
CIRCOR employees will terminate in accordance with their terms, and vested
and nonvested Watts RSUs held by CIRCOR employees will be converted into
comparable awards based on CIRCOR stock under the CIRCOR Management Stock
Purchase Plan and will be payable in shares of CIRCOR stock. CIRCOR will
issue new CIRCOR options of equivalent value to CIRCOR employees.
Pro forma information regarding net income (loss) is required by SFAS No.
123 for awards granted as if the Company had accounted for its stock-based
awards to employees under the fair value method of SFAS 123. The weighted
average grant date fair value of Watts options granted to CIRCOR employees
during fiscal years 1999, 1998 and 1997 was $3.82, $5.52 and $3.72,
respectively. The fair value of the Watts stock-based awards granted to
CIRCOR employees was estimated using a Black-Scholes option pricing model
and the following assumptions:
<TABLE>
<CAPTION>
Fiscal Year Ended June
30,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expected life (years)............................. 4.0 4.0 4.0
Expected stock price volatility................... 15.0% 15.0% 15.0%
Expected dividend yield........................... 1.9% 1.3% 1.8%
Risk-free interest rate........................... 5.92% 5.54% 6.56%
The Company's pro forma information follows:
<CAPTION>
Fiscal Year Ended June
30,
-------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Net income--as reported........................... $12,510 $22,425 $19,614
Net income--pro forma............................. $12,177 $22,153 $19,448
</TABLE>
The pro forma amounts above are not necessarily representative of the
effects of stock-based awards on future pro forma net income because (1)
future grants of employee stock options by CIRCOR management may not be
comparable to awards made to employees while CIRCOR was part of Watts, (2)
the assumptions used to compute the fair value of any stock option awards
will be specific to CIRCOR and may not be comparable to the Watts
assumptions used and (3) because SFAS 123 is applicable only to awards
granted subsequent to June 30, 1995, the amounts exclude the pro forma
compensation expense related to unvested options granted before 1995, and
the pro forma effects will not be fully reflected until fiscal year 2000.
(11)Employee Benefit Plans
Employees of CIRCOR participate in defined benefit pension plans sponsored
by Watts covering substantially all of its domestic non-union employees.
Benefits are based primarily on years of service and employees'
compensation. The funding policy of Watts for these plans is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes.
Following the Distribution, the Company will establish a defined benefit
pension plan for the Company's domestic non-union employees that will
provide benefits based on service with Watts and the Company. The Company
will be liable for payment of all pension plan benefits earned by Company
employees prior
F-14
<PAGE>
to and following the Distribution who retire after the Distribution. Watts
will transfer assets to the Company's pension plan and the amount of the
assets will be calculated as required using the asset allocation
methodology set forth in Section 4044 of the Employee Retirement Income
Security Act of 1974, as amended. The following tables reflect the
components of the net pension cost and the funded status of the portion of
the Watts retirement plans which represent the Company's share and are
reflected in the combined financial statements.
<TABLE>
<CAPTION>
Fiscal Year Ended June
30,
------------------------
1999 1998 1997
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Change in projected benefit obligation
Balance at beginning of year.................... $ 7,021 $ 5,035 $4,718
Service costs................................... 1,085 786 684
Interest costs.................................. 531 459 378
Actuarial loss/(gain)........................... (623) 624 (849)
Amendments...................................... -- 117 104
------- ------- ------
Balance at end of year......................... $ 8,014 $ 7,021 $5,035
======= ======= ======
Change in fair value of plan assets
Balance at beginning of year.................... $ 6,459 $ 4,784 $4,472
Actual return on assets......................... 595 1,323 164
Employer contributions.......................... 119 352 148
------- ------- ------
Fair value of plan assets at end of year....... $ 7,173 $ 6,459 $4,784
======= ======= ======
Funded Status
Unrecognized transition obligation/(asset)...... $ (257) $ (313) $ (370)
Unrecognized prior service cost................. 207 229 136
Unrecognized net actuarial loss/(gain).......... (1,047) (450) (160)
------- ------- ------
Prepaid (accrued) benefit cost................. $(1,938) $(1,096) $ (645)
======= ======= ======
Weighted Average Assumptions used
Discount rate................................... 7.00% 7.00% 8.00%
Expected return on plan assets.................. 9.00% 9.00% 8.00%
Rate of compensation............................ 5.00% 5.00% 5.00%
</TABLE>
Substantially all domestic non-union employees of the Company participate
in a 401(k) Savings Plan sponsored by Watts. Under the Plan, the Company
matches a specified percentage of employee contributions, subject to
certain limitations. Company expense incurred in connection with this plan
was $216,287, $209,685 and $137,608 in fiscal years 1999, 1998 and 1997,
respectively.
(12)Contingencies and Environmental Remediation
Contingencies
The Company has lawsuits and proceedings or claims arising from the
ordinary course of operations pending or threatened. The Company has
established reserves which management presently believes are adequate in
light of probable and estimable exposure to the pending or threatened
litigation of which it has knowledge. Such contingencies are not expected
to have a material effect on financial position, results of operations, or
liquidity of the Company.
Environmental Remediation
The Company has been named a potentially responsible party with respect to
identified contaminated sites. The level of contamination varies
significantly from site to site as do the related levels of remediation
efforts. Environmental liabilities are recorded based on the most probable
cost, if known, or on the estimated
F-15
<PAGE>
minimum cost of remediation. The Company's accrued estimated environmental
liabilities are based on assumptions which are subject to a number of
factors and uncertainties. Circumstances which can affect the reliability
and precision of these estimates include identification of additional
sites, environmental regulations, level of cleanup required, technologies
available, number and financial condition of other contributors to
remediation and the time period over which remediation may occur. The
Company recognizes changes in estimates as new remediation requirements are
defined or as new information becomes available. The Company estimates that
its accrued environmental remediation liabilities will likely be paid over
the next five to ten years. Such environmental remediation contingencies
are not expected to have a material effect on the financial position,
results of operation, or liquidity of the Company.
(13)Financial Instruments
Fair Value
The carrying amounts of cash and cash equivalents, short-term investments,
trade receivables and trade payables approximate fair value because of the
short maturity of these financial instruments.
The fair value of the Company's variable rate debt approximates its
carrying value.
Use of Derivatives
The Company uses foreign currency forward exchange contracts to reduce the
impact of currency fluctuations on certain anticipated intercompany
purchase transactions that are expected to occur within the fiscal year and
certain other foreign currency transactions. Related gains and losses are
recognized when the contracts expire, which is generally in the same period
as the underlying foreign currency denominated transaction. These contracts
do not subject the Company to significant market risk from exchange
movement because they offset gains and losses on the related foreign
currency denominated transactions. At June 30, 1998, there were no
significant amounts of open foreign currency forward exchange contracts or
related unrealized gains or losses. At June 30, 1999, the Company had
forward contracts to buy foreign currencies with a face value $9,000,000.
These contracts mature on various dates between July 1999 and January 2000
and have a fair market value of $632,491 at June 30, 1999. The
counterparties to these contracts are major financial institutions. The
risk of loss to the Company in the event of non-performance by a
counterparty is not significant.
(14)Related Party Transactions
The Company conducts, under various contracts and agreements, business with
various subsidiaries of Watts, which are not included in the combined
financial statements. The following table summarizes transactions with
these related parties:
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
--------------------
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Purchases of Inventory............................ $7,484 $7,672 $8,182
Sales of Goods.................................... $1,366 $1,081 $1,611
</TABLE>
F-16
<PAGE>
(15)Segment Information
The following table presents certain operating segment information:
<TABLE>
<CAPTION>
Instrumentation &
Fluid Regulation Petrochemical Corporate Combined
Products Products Adjustments Total
----------------- ------------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C>
Fiscal Year Ended June
30, 1999
Net Revenues............ $175,444 $147,633 $ -- $323,077
Operating income
(loss)................. 24,844 10,323 (5,617) 29,550
Identifiable assets..... 136,328 218,732 7,310 362,370
Capital expenditures.... 6,592 2,907 -- 9,499
Depreciation and
amortization........... 7,939 4,823 -- 12,762
Fiscal Year Ended June
30, 1998
Net Revenues............ $110,332 $178,637 $ -- $288,969
Operating income
(loss)................. 17,883 25,256 (4,948) 38,191
Identifiable assets..... 97,245 153,186 6,483 256,914
Capital expenditures.... 1,586 4,529 -- 6,115
Depreciation and
amortization........... 3,611 4,233 -- 7,844
Fiscal Year Ended June
30, 1997
Net Revenues............ $102,691 $172,025 $ -- $274,716
Operating income
(loss)................. 17,280 21,012 (4,386) 33,906
Identifiable assets..... 85,069 121,840 5,818 212,727
Capital expenditures.... 2,148 3,309 -- 5,457
Depreciation and
amortization........... 3,544 3,372 -- 6,916
</TABLE>
Each operating segment is individually managed and has separate financial
results that are reviewed by the Company's chief operating decision-maker.
Each segment contains closely related products that are unique to the
particular segment. Refer to the Business section on pages 21 to 30 for
further discussion of the products included in each segment.
In calculating profit from operations for individual operating segments,
substantial administrative expenses incurred at the operating level that
are common to more than one segment are allocated on a net revenues basis.
Certain headquarters expenses of an operational nature also are allocated
to segments and geographic areas.
All intercompany transactions have been eliminated, and inter-segment
revenues are not significant.
Net revenues by geographic area follow:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
United States.................................... $189,193 $196,927 $198,398
Italy............................................ 42,491 49,708 45,475
Canada........................................... 27,830 23,783 7,682
Other............................................ 63,563 18,551 23,161
-------- -------- --------
$323,077 $288,969 $274,716
======== ======== ========
</TABLE>
F-17
<PAGE>
Long-lived assets by geographical area follow:
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
United States....................................... $64,773 $43,916 $44,388
Italy............................................... 4,254 4,942 3,868
Canada.............................................. 2,671 1,154 353
Other............................................... 4,984 5,970 6,102
------- ------- -------
$76,682 $55,982 $54,711
======= ======= =======
</TABLE>
(16)Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Fiscal year ended June 30, 1999:
Net revenues.............................. $80,997 $85,089 $79,234 $77,757
Gross profit.............................. 25,830 26,563 25,867 26,466
Net income................................ 3,706 3,134 2,493 3,177
Fiscal year ended June 30, 1998:
Net revenues.............................. $67,891 $67,624 $75,719 $77,735
Gross profit.............................. 22,805 23,274 25,267 23,311
Net income................................ 5,589 5,291 6,077 5,468
</TABLE>
F-18
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, on October 5,
1999.
CIRCOR International, Inc.
By:
/s/ Cosmo Trapani
-----------------------------------
Name: Cosmo Trapani
Title:Chief Financial Officer
Executive President &
Treasurer
II-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
CIRCOR International, Inc.
(in thousands)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------
Additions
------------------------------------------------------------------------------------
Charged to Other
Balance at Charged to Costs Accounts - Deductions Balance at End
Description Beginning of Period and Expenses Describe Describe (1) of Period
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30,
1999
Deducted from asset
account:
Allowance for
doubtful
accounts $2,092 $106 $1,259 (2) $508 $2,949
Year ended June 30,
1998
Deducted from asset
account:
Allowance for doubtful
accounts $1,709 $493 $208 (2) $318 $2,092
Year ended June 30,
1997
Deducted from asset
account:
Allowance for
doubtful
accounts $1,803 $455 -- $549 $1,709
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Balance acquired in connection with acquisition of SSI and Hoke, Inc. in
1999, and Telford Valve in 1998.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
*2.1 Distribution Agreement between Watts Industries, Inc. and CIRCOR
International, Inc.
**3.1 Form of amended and restated certificate of incorporation of CIRCOR
International, Inc.
**3.2 Form of amended and restated by-laws of CIRCOR International, Inc.
**4.1 Specimen stock certificate for shares of CIRCOR International, Inc.
common stock, par value $.01 per share.
**9.1 The Amended and Restated George B. Horne Voting Trust Agreement--1997
dated as of September 14, 1999.
**10.1 CIRCOR International, Inc. 1999 Stock Option and Incentive Plan.
**10.2 Form of Incentive Stock Option Agreement under the 1999 Stock Option
and Incentive Plan.
**10.3 Form of Non-Qualified Stock Option Agreement for Employees under the
1999 Stock Option and Incentive Plan (Five Year Graduated Vesting
Schedule).
**10.4 Form of Non-Qualified Stock Option Agreement for Employees under the
1999 Stock Option and Incentive Plan (Performance Accelerated Vesting
Schedule).
**10.5 Form of Non-Qualified Stock Option Agreement for Independent Directors
under the 1999 Stock Option and Incentive Plan.
**10.6 CIRCOR International, Inc. Management Stock Purchase Plan.
**10.7 Form of CIRCOR International, Inc. Supplemental Employee Retirement
Plan.
*10.8 Supply Agreement between Watts Industries, Inc. and CIRCOR
International, Inc.
*10.9 Trademark License Agreement between Watts Industries, Inc. and CIRCOR
International, Inc.
**10.10 Lease Agreement, dated as of February 14, 1999, between BY-PASS 85
Associates, LLC and CIRCOR International, Inc.
10.11 Trust Indenture from Village of Walden Industrial Development Agency
to The First National Bank of Boston, as Trustee, dated June 1, 1994
(incorporated by reference to Exhibit 10.14 of the Watts Industries,
Inc. Annual Report on Form 10-K filed with the Securities and Exchange
Commission on September 26, 1994 (File No. 0-14787).
10.12 Loan Agreement between Hillsborough County Industrial Development
Authority and Leslie Controls, Inc. dated July 1, 1994 (incorporated
by reference to Exhibit 10.15 of the Watts Industries, Inc. Annual
Report on Form 10-K filed with the Securities and Exchange Commission
on September 26, 1994 (File No. 0-14787).
10.13 Trust Indenture from Hillsborough County Industrial Development
Authority to The First National Bank of Boston, as Trustee, dated July
1, 1994 (incorporated by reference to Exhibit 10.17 of the Watts
Industries, Inc. Annual Report on Form 10-K filed with the Securities
and Exchange Commission on September 26, 1994 (File No. 0-14787).
**10.14 Form of Indemnification Agreement between CIRCOR and each of its
directors.
**10.15 Executive Employment Agreement between CIRCOR, Inc. and David A.
Bloss, Sr., dated as of September 16, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
**10.16 Executive Employment Agreement between CIRCOR, Inc. and Cosmo S.
Trapani, dated as of September 16, 1999.
*21.1 List of subsidiaries of CIRCOR International, Inc.
**27.1 Financial Data Schedule
</TABLE>
- --------
* Filed herewith
** Previously filed
<PAGE>
EXHIBIT 2.1
DISTRIBUTION AGREEMENT
DATED AS OF
OCTOBER 1, 1999
BY AND BETWEEN
WATTS INDUSTRIES, INC.
AND
CIRCOR INTERNATIONAL, INC.
<PAGE>
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT ("Agreement") dated as of October 1, 1999 by and
among Watts Industries, Inc., a Delaware corporation (together with its
successors and permitted assigns, "Watts"), CIRCOR International, Inc., a
Delaware corporation (together with its successors and permitted assigns,
"Circor") and the subsidiaries of Watts listed on the signature pages hereof.
RECITALS
A. The Board of Directors of Watts has determined that it is in the best
interest of Watts and the stockholders of Watts to spin off the Circor Business
(as defined herein) to the stockholders of Watts.
B. In order to spin off the Circor Business, Watts and its subsidiaries
will, pursuant to the Internal Reorganization (as defined below), transfer
certain operating assets of the Circor Business and the capital stock of the
subsidiaries of Watts engaged solely in the Circor Business.
C. After the completion of such transfers, Watts will distribute (the
"Distribution") to the holders of Watts Common Stock (as defined herein) all of
the outstanding shares of Circor Common Stock (as defined herein) at the rate of
one share of Circor Common Stock for every two shares of Watts Common Stock
outstanding as of the Record Date (as defined herein).
D. It is the intention of the parties that the Distribution will not be
taxable to the stockholders of Watts pursuant to Section 355 of the Code (as
defined herein).
E. The parties have determined that it is necessary and desirable to set
forth the principal transactions required to effect the Distribution and to set
forth other agreements that will govern certain matters following the
Distribution.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I - DEFINITIONS
Section 1.01. Definitions. As used herein, the following terms have the
-----------
following meanings:
"Action" means any claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, governmental or other regulatory or
administrative agency or commission or any other tribunal.
<PAGE>
"Adjustment" means a change in a Tax liability or Tax item made by the IRS
or other taxing authority.
"Affiliate" of any Person means a Person that controls, is controlled by,
or is under common control with such Person. As used herein, "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through
ownership of voting securities or other interests, by contract or otherwise.
"Ancillary Agreements" means all of the written agreements, instruments,
understandings, assignments and other arrangements entered into in connection
with the transactions contemplated hereby, including, without limitation, the
Supply Agreement and the Tradename License Agreement.
"Assets" means all properties, rights, contracts, leases and claims, of
every kind and description, wherever located, whether tangible or intangible,
and whether real, personal or mixed.
"Carryback Item" means any net operating loss, unused general business
credit or other Tax item that under the Code or other Domestic Income Tax law
can be used to reduce the Domestic Income Tax liability of a taxable period
preceding the taxable period in which such item is created.
"Carryback Period" means the taxable periods to which a Carryback Item can
be applied.
"Circor Assets" means all Assets that are (i) owned of record or held in
the name of a member of the Circor Group, or (ii) described on Schedule A-1
------------
attached hereto; provided, that rights to indemnification from third parties in
respect of Liabilities that are not Circor Liabilities, including without
limitation the rights described on Schedule A-2 attached hereto, shall not be
------------
Circor Assets but shall remain Assets of the Watts Group after the Distribution.
"Circor Balance Sheet" means the consolidated balance sheet of Circor as of
June 30, 1999 set forth in the Information Statement.
"Circor Business" means the business conducted by Circor and its
subsidiaries on the Distribution Date.
"Circor Bylaws" means the amended and restated Bylaws of Circor in the form
filed as an exhibit to the Form 10 at the time it becomes effective.
"Circor Certificate" means the restated certificate of incorporation of
Circor in the form filed as an exhibit to the Form 10 at the time it becomes
effective.
"Circor Common Stock" means the shares of common stock, $.01 par value, of
Circor.
2
<PAGE>
"Circor Group" means Circor and its subsidiaries, which as of the
Distribution Date are listed on Exhibit A.
---------
"Circor Liabilities" means (i) Liabilities of Circor under this Agreement
or any Ancillary Agreement, (ii) except as otherwise expressly provided in this
Agreement or any Ancillary Agreement, Liabilities incurred in connection with
the conduct or operation of the Circor Business or the ownership or use of the
Circor Assets, whether arising before, on or after the Distribution Date, and
(iii) except as otherwise expressly provided in this Agreement or any Ancillary
Agreement, Liabilities set forth on the Circor Balance Sheet as increased or
reduced in the operation of the Circor Business after June 30, 1999, in case of
each of (i), (ii) and (iii), including without limitation the Liabilities listed
on Schedule L-1 attached hereto.
------------
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Distribution" is defined in the recitals to this Agreement.
"Distribution Agent" means BankBoston, N.A., in its capacity as agent for
Watts in connection with the Distribution.
"Distribution Date" means October 18, 1999 or such other business day as of
which the Distribution shall be effective, as determined by the Board of
Directors of Watts.
"Disclosure Documents" means the Form 10 and the Information Statement.
"Domestic Income Tax" means any tax imposed under Subtitle A of the Code,
any state or local tax imposed on or measured by income, and any related state
or local franchise, excise or similar tax that has customarily been included in
any provision for income taxes on Watts' financial statements, together with any
related interest, penalties, additions to tax and related costs and expenses
(including but not limited to legal and accounting fees).
"Effective Realization" (and the correlative terms "Effectively Realized"
and "Effectively Realizes") means, with respect to a Tax Benefit, the first to
occur of (i) the receipt by the Watts Group or the Circor Group of cash from a
taxing authority reflecting such Tax Benefit or (ii) the application of such Tax
Benefit to reduce (A) the tax liability on a Return of the Watts Group or the
Circor Group, or (B) any other outstanding tax liability of the Watts Group or
the Circor Group.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Final Determination" means the final resolution of any Tax liability (
together with all related interest, penalties and additions to tax) for a
taxable period. A Final Determination shall result from the first to occur of:
(i) the expiration of 30 days after the execution by the taxpayers
3
<PAGE>
and the IRS of an IRS Form 870 or 870-AD (or any successor comparable form) or
the expiration of a comparable period with respect to any comparable agreement
or form under applicable law unless, within such period, the taxpayer (whether
Watts or Circor) gives notice to the other party of the taxpayer's intention to
attempt to recover all or part of any amount paid pursuant to the Waiver by
filing a timely claim for refund; (ii) a decision, judgment, decree or other
order of a court of competent jurisdiction with respect to any Tax liability
that has become final and is not subject to further judicial review by appeal or
otherwise; (iii) the execution of a closing agreement under Section 7121 of the
Code or the official acceptance by the IRS of an offer in compromise under
Section 7122 of the Code, or comparable agreements under applicable law; (iv)
the expiration of the time for filing a claim for refund or for instituting suit
in respect of a claim for refund disallowed in whole or part by the IRS; (v) any
other final disposition of a Tax liability by reason of the expiration of the
applicable statute(s) of limitations; or (vi) any other event that the parties
agree is a final and irrevocable determination of the Tax liability at issue.
"Form 10" means the registration statement on Form 10 filed by Circor with
the Commission to effect the registration of the Circor Common Stock pursuant to
the Exchange Act, as such registration statement may be amended from time to
time.
"Group" means the Watts Group or the Circor Group, as applicable.
"Information Statement" means the information statement contained in the
Form 10 and to be sent to each holder of Watts Common Stock in connection with
the Distribution.
"Intercompany Tax Payment" means any payment between the Watts Group and
the Circor Group required under Article VII of this Agreement.
"Internal Reorganization" means the transactions set forth in the Sequence
of Transactional Steps attached hereto as Exhibit B.
"IRS" means the Internal Revenue Service.
"Letter Ruling" means the private letter ruling received from the IRS and
dated September 13, 1999 regarding the federal income tax consequences of the
Distribution and the Internal Reorganization.
"Letter Ruling Request" means the request for the Letter Ruling submitted
to the IRS and dated January 28, 1999 and accompanying documents, together with
all supplements thereto and accompanying documents.
"Liabilities" means any and all claims, debts, liabilities and obligations,
absolute or contingent, matured or not matured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, including all costs
and expenses relating thereto, and including, without limitation, those debts,
liabilities and obligations arising under this Agreement, any law, rule,
regulation, action, order or consent decree of any governmental entity or any
award
4
<PAGE>
of any arbitrator of any kind, and those arising under any contract, commitment
or undertaking.
"Other Tax" means any Tax other than a Domestic Income Tax or Transaction
Tax.
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity and any governmental authority.
"Record Date" means the date designated by Watts' Board of Directors as the
record date for determining the stockholders of Watts entitled to receive the
Distribution.
"Return" means any Tax return, statement, report, form or election
(including, without limitation, estimated Tax returns and reports, extension
requests and forms, and information returns and reports) required to be filed
with any taxing authority, in each case as amended and finally adjusted.
"Securities Act" means the Securities Act of 1933, as amended.
"Spin-Off Tax" means any Domestic Income Tax incurred by the Watts Group or
the Circor Group as a result of the Distribution failing to qualify as a
transaction described in Code Section 355 or through the application of Code
Section 355(d) or (e).
"Supply Agreement" means the Supply Agreement entered into on or before the
Distribution Date between Watts and Circor, as amended from time to time.
"Tax" means any Domestic Income Tax or Transaction Tax, any tax imposed
under the Code, and any net income, alternative or add-on minimum, gross income,
gross receipts, sales, use, ad valorem, value added, transfer, franchise,
profits, license, withholding (as payor or recipient), payroll, employment,
excise, severance, stamp, capital stock, occupation, property, real property
gains, environmental, windfall, premium, custom, duty or other tax, recording
fee, governmental fee or other like assessment or charge of any kind whatsoever
imposed by any domestic or foreign jurisdiction, together with any related
interest, penalties, additions to tax and related costs and expenses (including
but not limited to legal and accounting fees).
"Tax Benefit" means any item of loss, deduction, amortization, credit,
exclusion from income or similar item that reduces a Tax liability and would
not, but for an Adjustment, be allowable.
"Tax Counsel" means an attorney, law firm, accountant, accounting firm or
other person with an expertise in Tax matters.
"Tax Proceeding" means any Tax audit, dispute or proceeding (whether
administrative or judicial).
5
<PAGE>
"Trademark License Agreement" means the Trademark License Agreement entered
into on or before the Distribution Date between Watts and Circor, as amended
from time to time.
"Tradenames" has the meaning set forth in Section 3.06.
"Transaction Tax" means any Tax incurred as a result of the transactions
provided for in this Agreement other than a Domestic Income Tax.
"Watts Assets" means all Assets that are owned of record or held in the
name of the Watts Group, excluding any Circor Assets.
"Watts Business" means the business now or formerly conducted by Watts and
its present and former subsidiaries, other than the Circor Business.
"Watts Common Stock" means, collectively, the class A common stock, $.01
par value and class B common stock, $.01 par value, of Watts.
"Watts Group" means Watts and its subsidiaries, excluding any member of the
Circor Group.
"Watts Liabilities" means (i) Liabilities of Watts under this Agreement or
any Ancillary Agreement and (ii) Liabilities, other than Circor Liabilities,
incurred in connection with the operation of the Watts Business, whether arising
before, on or after the Distribution Date, including without limitation the
Liabilities listed on Schedule L-2 attached hereto.
ARTICLE II - THE DISTRIBUTION
Section 2.01. Actions to be Taken Prior to the Distribution.
---------------------------------------------
Watts and Circor shall take the following actions before the Distribution
Date:
(a) Watts and Circor shall prepare, and Circor shall file with the
Commission, the Form 10, which shall include the Information Statement. The
Information Statement shall set forth appropriate disclosure concerning Circor,
the Distribution and any other appropriate matters. Watts and Circor shall use
all reasonable efforts to cause the Form 10 to become effective under the
Exchange Act. Watts shall mail the Information Statement to the holders of
Watts Common Stock as of the Record Date.
(b) Watts and Circor shall cooperate in preparing, filing with the
Commission under the Securities Act and causing to become effective as of the
Distribution Date any registration statements or amendments thereto that are
appropriate to reflect the establishment of or amendments to any employee
benefit plan of Circor.
6
<PAGE>
(c) Watts and Circor shall by means of a stock split or stock
distribution cause the number of outstanding shares of Circor Common Stock to be
equal to the number of shares to be distributed in the Distribution.
(d) Circor shall prepare, file and pursue an application to permit
listing of the Circor Common Stock on the New York Stock Exchange.
Section 2.02. Watts Board Action; Conditions Precedent to the
-----------------------------------------------
Distribution. Watts' Board of Directors shall, in its sole discretion,
- ------------
establish the Record Date and the Distribution Date and any appropriate
procedures in connection with the Distribution. In no event shall the
Distribution occur unless the following conditions shall have been satisfied or
waived by both Watts and Circor:
(a) the Internal Reorganization shall have been completed;
(b) Watts shall have received a private letter ruling from the
Internal Revenue Service, in form and substance satisfactory to Watts, that the
Distribution will not be taxable to the shareholders of Watts pursuant to
Section 355 of the Code;
(c) any necessary government approvals shall have been received and
be in full force and effect;
(d) the Form 10 shall have become and remain effective under the
Exchange Act;
(e) Circor's Board of Directors, as named in the Form 10, shall have
been elected, and the Circor Certificate and Circor Bylaws shall be in effect;
(f) Watts and Circor shall have entered into the Ancillary Agreements;
(g) the Circor Common Stock shall have been approved for listing on
the New York Stock Exchange, subject to official notice of distribution; and
(h) Circor shall have obtained debt financing in amounts and on terms
and conditions satisfactory to Circor.
Section 2.03. The Distribution. On or before the Distribution Date,
----------------
subject to satisfaction or waiver of the conditions set forth in this Agreement,
Watts shall deliver to the Distribution Agent a certificate or certificates
representing all of the then outstanding shares of Circor Common Stock held by
Watts, endorsed in blank, and shall instruct the Distribution Agent, except as
otherwise provided in Section 2.04, to distribute to each holder of record of
Watts Common Stock on the Record Date a certificate or certificates representing
one share of Circor Common Stock for each two shares of Watts Common Stock held
by such holder.
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Circor agrees to provide all share certificates and any information that the
Distribution Agent shall require in order to effect the Distribution.
Section 2.04. Fractional Shares. The Distribution Agent will not
-----------------
distribute any fractional share of Circor Common Stock to any holder. Watts
shall instruct the Distribution Agent to aggregate all such fractional shares
and sell them in an orderly manner after the Distribution Date in the open
market or otherwise (in each case at then prevailing trading prices) and, after
completion of such sales, distribute a pro rata portion of the proceeds from
such sales, based upon the average gross selling price of all such Circor Common
Stock, less a pro rata portion of the aggregate brokerage commissions payable in
connection with such sales and net any amount required to be withheld under
applicable law, to each holder of Watts Common Stock who would otherwise have
received a fractional share of Circor Common Stock.
ARTICLE III - INTERNAL REORGANIZATION; TRANSITION ARRANGEMENTS
Section 3.01. Internal Reorganization; Discharge of Liabilities.
-------------------------------------------------
(a) On the Distribution Date, Watts will effect and will cause its
subsidiaries to effect the Internal Reorganization. In connection therewith,
Watts shall execute and deliver, and shall cause its subsidiaries to execute and
deliver, such bills of sale, stock powers, certificates of title, assignments of
contracts and other instruments of transfer, conveyance and assignment as and to
the extent necessary to evidence the transfer, conveyance and assignment of all
of Watts' and its subsidiaries' right, title and interest in and to the Circor
Assets to the Circor Group, and the assumption by the Circor Group of all the
Circor Liabilities.
(b) Except as otherwise expressly provided herein or in any of the
Ancillary Agreements, on the Distribution Date, whether or not all Circor Assets
and Circor Liabilities shall have been legally transferred to and assumed by the
Circor Group, (i) all Circor Assets are intended to be and shall become
exclusively the Assets of the Circor Group, (ii) all Circor Liabilities are
intended to be and shall become exclusively the Liabilities of the Circor Group
and (iii) all other Assets and Liabilities of Watts and its subsidiaries are
intended to be and shall remain exclusively the Assets or Liabilities of the
Watts Group.
(c) Circor agrees that on and after the Distribution Date it will pay,
perform and discharge, or cause to be paid, performed or discharged, all of the
Circor Liabilities in accordance with their respective terms.
(d) Watts agrees that on and after the Distribution Date it will pay,
perform and discharge, or cause to be paid, performed and discharged, all of the
Watts Liabilities in accordance with their respective terms.
8
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(e) In the event that any transfer, assignment or conveyance of an
Asset required hereby is not effected on or before the Distribution Date, the
obligation to transfer such Asset shall continue past the Distribution Date and
shall be accomplished as soon thereafter as practicable.
(f) If any Circor Asset may not be transferred by reason of the
requirement to obtain the consent of any third party and such consent has not
been obtained by the Distribution Date, then such Circor Asset shall not be
transferred until such consent has been obtained, and Watts shall cause the
owner of such Circor Asset to use all reasonable efforts to provide to the
appropriate member of the Circor Group all the rights and benefits under such
Circor Asset and cause such owner to enforce such Circor Asset for the benefit
of the Circor Group. Both parties shall otherwise cooperate and use all
reasonable efforts to provide the economic and operational equivalent of an
assignment or transfer of the Circor Asset.
(g) From and after the Distribution Date, each party shall promptly
transfer or cause the members of its Group to promptly transfer to the other
party or the appropriate member of the other party's Group, from time to time,
any property received that is an Asset of the other party or a member of the
other party's Group. Without limiting the foregoing, funds received by a member
of one Group upon the payment of accounts receivable that belongs to a member of
the other Group shall be transferred to the other Group by wire transfer not
more than five (5) business days after receipt of such payment.
Section 3.02. Termination of Agreements.
-------------------------
(a) Except as set forth in Section 3.02(b), in furtherance of the
releases and other provisions of Section 4.01 hereof, Circor and each member of
the Circor Group, on the one hand, and Watts and each member of the Watts Group,
on the other hand, hereby terminate any and all agreements, arrangements,
commitments or understandings, whether or not in writing, between or among
Circor and/or any member of the Circor Group, on the one hand, and Watts and/or
any member of the Watts Group, on the other hand, effective as of the
Distribution Date. No such terminated agreement, arrangement, commitment or
understanding (including any provision thereof which purports to survive
termination) shall be of any further force or effect after the Distribution
Date. Each party shall, at the reasonable request of any other party, take, or
cause to be taken, such other actions as may be necessary to effect the
foregoing.
(b) The provisions of Section 3.02(a) shall not apply to any of the
following agreements, arrangements, commitments or understandings (or to any of
the provisions thereof): (i) this Agreement, the Ancillary Agreements and each
other agreement or instrument expressly contemplated by this Agreement or the
Ancillary Agreements to be entered into by any of the parties hereto or any of
the members of their respective Groups; (ii) any agreements, arrangements,
commitments or understandings listed or described on Schedule 3.02(b)(ii); and
(iii) any other agreements, arrangements, commitments or understandings that
9
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this Agreement or any Ancillary Agreement expressly contemplates will survive
the Distribution Date.
Section 3.03. Disclaimer of Representations and Warranties.
--------------------------------------------
(a) Each of Watts (on behalf of itself and each member of the Watts
Group) and Circor (on behalf of itself and each member of the Circor Group)
understands and agrees that, except as expressly set forth herein or in any
Ancillary Agreement, no party to this Agreement, any Ancillary Agreement or any
other agreement or document contemplated by this Agreement, any Ancillary
Agreement or otherwise, is representing or warranting in any way as to the
Assets, businesses or Liabilities transferred or assumed as contemplated hereby
or thereby, as to any consents or approvals required in connection therewith, as
to the value or freedom from any security interests of, or any other matter
concerning, any Assets of such party, or as to the absence of any defenses or
right of setoff or freedom from counterclaim with respect to any claim or other
Asset, including any accounts receivable, of any party, or as to the legal
sufficiency of any assignment, document or instrument delivered hereunder to
convey title to any Asset or thing of value upon the execution, delivery and
filing hereof or thereof. Except as may expressly be set forth herein or in any
Ancillary Agreement, all such Assets are being transferred on an "as is," "where
is" basis.
Section 3.04. Insurance.
---------
(a) Before the Distribution Date, Watts and Circor will cooperate in
obtaining insurance (or binders therefor) providing coverage to the Circor Group
on terms and conditions satisfactory to Circor.
(b) Watts will use all reasonable efforts to maintain directors' and
officers' liability insurance at substantially the level of Watts's current
directors' and officers' liability insurance policy with respect to the
directors and officers of Watts who will become directors and officers of Circor
as of the Distribution Date for acts as directors and officers of members of the
Watts Group during periods prior to the Distribution Date.
(c) Watts will pay or reimburse the Circor Group for the amount of any
deductible or self-insured retention maintained by Watts in respect of any loss
or damage to any Circor Assets in excess of normal intercompany deductibles
incurred on or before the Distribution Date that would be covered by insurance
maintained by Watts but for such deductible or self-insured retention. Circor
shall submit to Watts such evidence of the loss as Watts may reasonably require.
Section 3.05. Certain Property Matters. Except as set forth in the
------------------------
Trademark License Agreement:
(a) After the Distribution Date neither party shall, directly or
indirectly, use any name or any other trademark or tradename (collectively, the
"Tradenames") of the other
10
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party or its Group or any tradename or trademark likely to cause confusion with
the Tradenames of the other party or its Group.
(b) After the Distribution Date, each party shall have the right to
sell existing inventory and to use existing brochures, packaging, labeling,
containers, supplies, advertising materials, technical data sheets and any
similar materials bearing any Tradenames until the earlier of (i) one (1) year
after the Distribution Date and (ii) the date existing stocks are exhausted.
Each party shall comply with all applicable laws or regulations in any use of
packaging or labeling containing the Tradenames.
(c) Neither party shall be obligated to change the Tradenames on
finished goods in inventory and other materials in the hands of dealers,
distributors and customers at the time of expiration of a time period set forth
in (b) above.
(d) Each party agrees to use reasonable efforts to cease using the
Tradenames of the other party on buildings, cars, trucks and other fixed assets
as soon as possible but in any event within a period not to exceed one (1) year
after the Distribution Date.
ARTICLE IV - INDEMNIFICATION
Section 4.01. Release of Pre-closing Claims.
-----------------------------
(a) Except as provided in Section 4.01(c), effective as of the
Distribution Date, Circor does hereby, for itself and each other member of the
Circor Group, their respective Affiliates (other than any member of the Watts
Group), successors and assigns, release and forever discharge Watts, the members
of the Watts Group, their respective Affiliates (other than any member of the
Circor Group), successors and assigns, from any and all Liabilities whatsoever,
whether at law or in equity (including any right of contribution), whether
arising under any contract or agreement, by operation of law or otherwise,
existing or arising from any acts or events occurring or failing to occur or
alleged to have occurred or to have failed to occur or any conditions existing
or alleged to have existed on or before the Distribution Date, including in
connection with the transactions and all other activities to implement any of
the Internal Reorganization and the Distribution.
(b) Except as provided in Section 4.01(c), effective as of the
Distribution Date, Watts does hereby, for itself and each other member of the
Watts Group, their respective Affiliates (other than any member of the Circor
Group), successors and assigns, release and forever discharge Circor, the
respective members of the Circor Group, their respective Affiliates (other than
any member of the Watts Group), successors and assigns, from any and all
Liabilities whatsoever, whether at law or in equity (including any right of
contribution), whether arising under any contract or agreement, by operation of
law or otherwise, existing or arising from any acts or events occurring or
failing to occur or alleged to have occurred or to have failed to occur or any
conditions existing or alleged to have existed on or before the
11
<PAGE>
Distribution Date, including in connection with the transactions and all other
activities to implement any of the Internal Reorganization and the Distribution.
(c) Nothing contained in Section 4.01(a) or (b) shall impair any right
of any Person to enforce this Agreement, any Ancillary Agreement or any
agreements, arrangements, commitments or understandings that are specified in
Section 3.02(b) or the applicable Schedules thereto not to terminate as of the
Distribution Date, in each case in accordance with its terms. Nothing contained
in Section 4.01(a) or (b) shall release any member of the Circor Group or any
member of the Watts Group from the Circor Liabilities or the Watts Liabilities,
respectively.
(d) Circor shall not make, and shall not permit any member of the
Circor Group to make, any claim or demand, or commence any Action asserting any
claim or demand, including any claim of contribution or any indemnification,
against Watts or any member of the Watts Group, or any other Person released
pursuant to Section 4.01(a), with respect to any Liabilities released pursuant
to Section 4.01(a). Watts shall not, and shall not permit any member of the
Watts Group, to make any claim or demand, or commence any Action asserting any
claim or demand, including any claim of contribution or any indemnification,
against Circor or any member of the Circor Group, or any other Person released
pursuant to Section 4.01(b), with respect to any Liabilities released pursuant
to Section 4.01(b).
(e) It is the intent of each of Watts and Circor by virtue of the
provisions of this Section 4.01 to provide for a full and complete release and
discharge of all Liabilities existing or arising from all acts and events
occurring or failing to occur or alleged to have occurred or to have failed to
occur and all conditions existing or alleged to have existed on or before the
Distribution Date, between or among Circor or any member of the Circor Group, on
the one hand, and Watts or any member of the Watts Group, on the other hand
(including any contractual agreements or arrangements existing or alleged to
exist between or among any such members on or before the Distribution Date),
except as expressly set forth in Section 4.01(c). At any time, at the request
of any other party, each party shall cause each member of its respective Group
to execute and deliver releases reflecting the provisions hereof.
Section 4.02. Circor Indemnification of the Watts Group. On and after
-----------------------------------------
the Distribution Date, Circor shall indemnify, defend and hold harmless each
member of the Watts Group and each of their respective directors, officers,
employees and agents (the "Watts Indemnitees") from and against any and all
damage, loss, liability and expense (including, without limitation, reasonable
expenses of investigation and reasonable attorneys, fees and expenses in
connection with any and all Actions or threatened Actions) (collectively,
"Indemnifiable Losses") incurred or suffered by any of the Watts Indemnitees and
arising out of, or due to the failure of Circor or any member of the Circor
Group to pay, perform or otherwise discharge, any of the Circor Liabilities,
whether before or after the Distribution Date.
12
<PAGE>
Section 4.03. Watts Indemnification of the Circor Group. On and after
-----------------------------------------
the Distribution Date, Watts shall indemnify, defend and hold harmless each
member of the Circor Group and each of their respective directors, officers,
employees and agents (the "Circor Indemnitees") from and against any and all
Indemnifiable Losses incurred or suffered by any of the Circor Indemnitees and
arising out of, or due to the failure of Watts or any member of the Watts Group
to pay, perform or otherwise discharge, any of the Watts Liabilities, whether
before or after the Distribution Date.
Section 4.04. Insurance and Third Party Obligations. The parties intend
-------------------------------------
that any Liability subject to indemnification pursuant to this Article IV will
be net of insurance proceeds and tax benefits (if any) that actually reduce the
amount of the Liability. Accordingly, the amount which any Indemnifying Party is
required to pay to any Indemnified Party will be reduced by any insurance
proceeds theretofore actually recovered by or on behalf of the Indemnified Party
in reduction of the related Liability. If an Indemnified Party receives a
payment (an "Indemnity Payment") required by this Agreement from an Indemnifying
Party in respect of any Liability and subsequently receives insurance proceeds,
then the Indemnified Party will pay to the Indemnifying Party an amount equal to
the excess of the Indemnity Payment received over the amount of the Indemnity
Payment that would have been due if the insurance proceeds had been received or
realized before the Indemnity Payment was made. No insurer or any other third
party shall be (a) entitled to a benefit it would not be entitled to receive in
the absence of the foregoing indemnification provisions; (b) relieved of the
responsibility to pay any claims for which it is obligated or (c) entitled to
any subrogation rights with respect to any obligation hereunder. Nothing
contained in this Agreement shall obligate any member of any Group to seek to
collect or recover any insurance proceeds.
Section 4.05. Survival. The rights and obligations of each party under
--------
this Article IV shall survive the sale or other transfer by any party of any
Assets or businesses or the assignment by it of any Liabilities.
ARTICLE V - INDEMNIFICATION PROCEDURES
Section 5.01. Notice and Payment of Claims. If any Watts Indemnitee or
----------------------------
Circor Indemnitee (the "Indemnified Party") determines that it is or may be
entitled to indemnification by a party (the "Indemnifying Party") under Article
IV (other than in connection with any Action or claim subject to Section 6.02),
the Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. After the Indemnifying Party shall
have been notified of the amount for which the Indemnified Party seeks
indemnification, the Indemnifying Party shall, within thirty (30) days after
receipt of such notice, pay the Indemnified Party such amount in cash or other
immediately available funds (or reach agreement with the Indemnified Party as to
a mutually agreeable alternative payment schedule) unless the Indemnifying Party
objects to the claim for indemnification or the amount thereof. If the
Indemnifying Party
13
<PAGE>
objects to a claim for indemnification or the amount thereof or does not respond
to such claim within the same thirty (30) day period, the Indemnified Party may
exercise any and all of its rights under this Agreement and applicable law with
respect to such claim.
Section 5.02. Notice and Defense of Third-Party Claims.
----------------------------------------
(a) Promptly following the earlier of (i) receipt of notice of the
commencement by a third party of any Action against or otherwise involving any
Indemnified Party or (ii) receipt of information from a third party alleging the
existence of a claim against an Indemnified Party, in either case, with respect
to which indemnification may be sought pursuant to this Agreement (a "Third-
Party Claim"), the Indemnified Party shall give the Indemnifying Party written
notice thereof describing the Third-Party Claim in reasonable detail. The
failure of the Indemnified Party to give notice as provided in this Section 5.02
shall not relieve the Indemnifying Party of its obligations under this
Agreement, except to the extent that the Indemnifying Party is prejudiced by
such failure to give notice. Within thirty (30) days after receipt of such
notice (or sooner, if the nature of the Third-Party Claim so requires), the
Indemnifying Party may by giving written notice thereof to the Indemnified
Party, (a) acknowledge, as between the parties hereto, liability for and at its
option elect to assume the defense of such Third-Party Claim at its sole cost
and expense or (b) object to the claim of indemnification set forth in the
notice delivered by the Indemnified Party pursuant to the first sentence of this
Section 5.02; provided that if the Indemnifying Party does not within the same
thirty (30) day period give the Indemnified Party written notice objecting to
such claim and setting forth the grounds therefor, the Indemnifying Party shall
be deemed to have rejected any liability for such Third-Party Claim. Any
contest of a Third-Party Claim as to which the Indemnifying Party has elected to
assume the defense shall be conducted by attorneys employed by the Indemnifying
Party and reasonably satisfactory to the Indemnified Party; provided that the
Indemnified Party shall have the right to participate in such proceedings and to
be represented by attorneys of its own choosing at the Indemnified Party's sole
cost and expense.
If the Indemnifying Party assumes the defense of a Third-Party Claim, the
Indemnifying Party may settle or compromise the claim without the prior written
consent of the Indemnified Party; provided that the Indemnifying Party may not
agree to any such settlement pursuant to which any such remedy or relief, other
than monetary damages for which the Indemnifying Party shall be responsible
hereunder, shall be applied to or against the Indemnified Party, without the
prior written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. If the Indemnifying Party does not assume the defense of
a Third-Party Claim for which it has acknowledged liability for indemnification
under Article IV, the Indemnified Party may require the Indemnifying Party to
reimburse it on a current basis for its reasonable expenses of investigation,
reasonable attorney's fees and reasonable out-of-pocket expenses incurred in
defending against such Third-Party Claim and the Indemnifying Party shall be
bound by the result obtained with respect thereto by the Indemnified Party;
provided that the
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<PAGE>
Indemnifying Party shall not be liable for any settlement effected without its
consent, which consent shall not be unreasonably withheld. The Indemnifying
Party shall pay to the Indemnified Party in cash the amount for which the
Indemnified Party is entitled to be indemnified (if any) within fifteen (15)
days after the final resolution of such Third-Party Claim (whether by the final
nonappealable judgment of a court of competent jurisdiction or otherwise) or, in
the case of any Third-Party Claim as to which the Indemnifying Party has not
acknowledged liability, within fifteen (15) days after such Indemnifying Party's
objection has been resolved by settlement, compromise or the final nonappealable
judgment of a court of competent jurisdiction.
(b) In the event of payment by or on behalf of any Indemnifying Party
to any Indemnified Party in connection with any Third-Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place of such
Indemnified Party as to any events or circumstances in respect of which such
Indemnified Party may have any right, defense or claim relating to such Third-
Party Claim against any claimant or plaintiff asserting such Third-Party Claim
or against any other person. Such Indemnified Party shall cooperate with such
Indemnifying Party in a reasonable manner, and at the cost and expense of such
Indemnifying Party, in prosecuting any subrogated right, defense or claim.
ARTICLE VI - ALLOCATION OF PENSION PLAN ASSETS
Section 6.01. Establishment of Plans.
----------------------
(a) Circor shall establish the CIRCOR International, Inc. Retirement
Plan for Salaried Employees (the "Circor Salaried Plan") and the CIRCOR
International, Inc. Retirement Plan for Hourly Employees (the "Circor Hourly
Plan"), to be effective immediately following the Distribution. Participants in
the Watts Industries, Inc. Retirement Plan for Salaried Employees (the "Watts
Salaried Plan") who are employees of the Circor Group immediately after the
Distribution will become participants in the Circor Salaried Plan as of such
time, and participants in the Watts Industries, Inc. Hourly Pension Plan (the
"Watts Hourly Plan") who are employees of the Circor Group immediately after the
Distribution will become participants in the Circor Hourly Plan as of such time.
Eligible employees of the Circor Group after the Distribution shall become
participants in the Circor Salaried Plan or the Circor Hourly Plan, as
appropriate.
(b) Watts currently maintains the Watts Industries, Inc. 401(k)
Savings Plan (the "Watts 401(k) Plan"). Effective September 1, 1999, Watts
shall adopt a 401(k) plan with provisions substantially similar to those of the
Watts 401(k) Plan (the "Circor International, Inc. 401(k) Savings Plan") except
that participation in the Circor Group 401(k) Plan shall be limited to employees
of the Circor Group. Watts shall transfer the assets, forfeitures and
outstanding promissory notes of the Watts 401(k) Plan which are attributable to
participants who are or were, and beneficiaries of, employees of the Circor
Group, to the Circor Group 401(k) Plan on or about September 1, 1999. Beginning
with the effective date of the Circor Group 401(k) Plan until the Distribution,
all eligible employees of the Circor Group shall become participants in the
Circor Group 401(k) Plan. At the Distribution, Watts shall transfer
15
<PAGE>
sponsorship of the Circor Group 401(k) Plan to Circor. Eligible employees of the
Circor Group after the Distribution shall become participants in the Circor
401(k) Plan.
Section 6.02. Allocation of Assets and Liabilities. The assets and
------------------------------------
liabilities of the Watts Salaried Plan and the Watts Hourly Plan shall be
allocated between Watts and Circor as described herein:
(a) Watts Salaried Plan. The assets and liabilities of the Watts
-------------------
Salaried Plan shall be allocated between Watts and Circor, and the assets and
liabilities allocated to Circor shall be transferred to the Circor Salaried
Plan, based upon the following methodology:
(1) the total value of plan assets of the Watts Salaried Plan as
of the Distribution Date shall be determined by adding (i) the fair market value
of the assets of such plan as of the Distribution Date and (ii) the portion of
the minimum required contribution for the 1999 plan year for such plan which has
not yet been contributed to such plan by the Distribution Date;
(2) the plan termination liability (the "PTL") shall be determined
for the Watts Salaried Plan as of the Distribution Date ("Total Salaried Plan
PTL"). The PTL shall be the amount of benefits that would be provided as
benefits to participants in the Watts Salaried Plan pursuant to Section 4044 of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
the regulations thereunder if the plan terminated, using the assumptions used by
the Pension Benefit Guaranty Corporation as of the Distribution Date as required
by Treas. Reg. Section 1.414(l)-1(b)(5)(ii). The Total Salaried Plan PTL
determined for the Watts Salaried Plan shall be bifurcated into (1) the PTL of
the group of participants in the Watts Salaried Plan who will become employees
of the Circor Group immediately following the Distribution (the "Circor Salaried
Plan PTL"), and (2) the difference between the Total Salaried Plan PTL less the
Circor Salaried Plan PTL (the "Non-Circor Salaried Plan PTL");
(3) (i) If the total value of plan assets of the Watts Salaried
Plan is greater than or equal to the Total Salaried Plan PTL, a portion of such
assets shall be allocated to Circor by multiplying the total amount of such
assets by a fraction, the numerator of which is the Circor Salaried Plan PTL and
the denominator of which is the Total Salaried Plan PTL.
(ii) If the total value of plan assets of the Watts Salaried
Plan is less than the Total Salaried Plan PTL, the portion of plan assets which
shall be allocated to Watts and Circor shall be based on the priority categories
under Section 4044 of ERISA, as required by Treas. Reg. Section 1.414(l)-
1(b)(5)(ii).
(4) Within a reasonable time after the assets of the Watts
Salaried Plan have been allocated as set forth above, the amount of assets
allocated to Circor which shall be transferred in cash or in kind to the Circor
Salaried Plan on the Salaried Plan Transfer
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<PAGE>
Date (as defined herein) shall be equal to the sum of the amount allocated to
Circor as of the Distribution Date, plus a pro-rata amount of the investment
return earned by the Watts Salaried Plan from the Distribution Date to the most
recent monthly statement date prior to the Salaried Plan Transfer Date, plus
interest, at a rate equal to the average of the daily 3-month Treasury bill
rates which are published each business day in the Wall Street Journal for the
period of time beginning on the first business day after the most recent monthly
statement date and ending on the last business day before the Salaried Plan
Transfer Date, on such allocated assets from the most recent monthly statement
date to the Salaried Plan Transfer Date, less Salaried Plan Allocated Benefit
Payments (as defined herein) and Salaried Plan Allocated Expenses (as defined
herein) from the Distribution Date to the Salaried Plan Transfer Date.
For purposes hereof, the "Salaried Plan Transfer Date" shall be defined as
the date that plan assets from the Watts Salaried Plan are transferred to the
trust for the Circor Salaried Plan, which date shall occur as soon as reasonably
practicable following receipt by Circor of a favorable determination letter from
the Internal Revenue Service to the effect that the Circor Salaried Plan meets
the qualification requirements of Code Section 401(a) or an opinion from
Circor's legal counsel which is reasonably satisfactory to Watts to the effect
that the Circor Salaried Plan meets the qualification requirements of Code
Section 401(a). For purposes hereof, "Salaried Plan Allocated Benefit Payments"
shall be equal to any benefit payments made under the Watts Salaried Plan to or
in respect of any individual who was a participant in such plan as of the
Distribution, who is an employee of the Circor Group immediately following the
Distribution and who becomes eligible for benefit payments following the
Distribution but prior to the Salaried Plan Transfer Date. For purposes hereof,
"Salaried Plan Allocated Expenses" shall be equal to any administrative expenses
paid by the trust of the Watts Salaried Plan after the Distribution which are
attributable to the administration of the Watts Salaried Plan with respect to
participants in the Watts Salaried Plan as of the Distribution who are employees
of the Circor Group immediately following the Distribution, including, but not
limited to, PBGC premium payments, consulting fees or accounting fees.
Notwithstanding the foregoing, Watts shall pay any and all expenses associated
with the allocation and transfer of assets from the Watts Salaried Plan to the
Circor Salaried Plan.
(b) Watts Hourly Plan. The assets and liabilities of the Watts Hourly
-----------------
Plan shall be allocated between Watts and Circor, and the assets and liabilities
allocated to Circor shall be transferred to the Circor Hourly Plan, based upon
the following methodology:
(1) the total value of plan assets of the Watts Hourly Plan as of
the Distribution Date shall be determined by adding (i) the fair market value of
the assets of such plan as of the Distribution Date and (ii) the portion of the
minimum required contribution for the 1999 plan year for such plan which has not
yet been contributed to such plan by the Distribution Date;
(2) the plan termination liability (the "PTL") shall be
determined for the Watts Hourly Plan as of the Distribution Date ("Total Hourly
Plan PTL"). The PTL shall be the amount of benefits that would be provided as
benefits to participants in the Watts Hourly
17
<PAGE>
Plan pursuant to Section 4044 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the regulations thereunder if the plan
terminated, using the assumptions used by the Pension Benefit Guaranty
Corporation as of the Distribution Date as required by Treas. Reg. Section
1.414(l)-1(b)(5)(ii). The Total Hourly Plan PTL determined for the Watts Hourly
Plan shall be bifurcated into (1) the PTL of the group of participants in the
Watts Hourly Plan who will become employees of the Circor Group immediately
following the Distribution (the "Circor Hourly Plan PTL"), and (2) the
difference between the Total Hourly Plan PTL less the Circor Hourly Plan PTL
(the "Non-Circor Hourly Plan PTL");
(3) (i) If the total value of plan assets of the Watts Hourly
Plan is greater than or equal to the Total Hourly Plan PTL, a portion of such
assets shall be allocated to Circor by multiplying the total amount of such
assets by a fraction, the numerator of which is the Circor Hourly Plan PTL and
the denominator of which is the Total Hourly Plan PTL.
(ii) If the total value of plan assets of the Watts Hourly
Plan is less than the Total Hourly Plan PTL, the portion of plan assets which
shall be allocated to Watts and Circor shall be based on the priority categories
under Section 4044 of ERISA, as required by Treas. Reg. Section 1.414(l)-
1(b)(5)(ii).
(4) Within a reasonable time after the assets of the Watts Hourly
Plan have been allocated as set forth above, the amount of assets allocated to
Circor which shall be transferred in cash or in kind to the Circor Hourly Plan
on the Hourly Plan Transfer Date (as defined herein) shall be equal to the sum
of the amount allocated to Circor as of the Distribution Date, plus a pro-rata
amount of the investment return earned by the Watts Hourly Plan from the
Distribution Date to the most recent monthly statement date prior to the Hourly
Plan Transfer Date, plus interest, at a rate equal to the average of the daily
3-month Treasury bill rates which are published each business day in the Wall
Street Journal for the period of time beginning on the first business day after
the most recent monthly statement date and ending on the last business day
before the Hourly Plan Transfer Date, on such allocated assets from the most
recent monthly statement date to the Hourly Plan Transfer Date, less Hourly Plan
Allocated Benefit Payments (as defined herein) and Hourly Plan Allocated
Expenses (as defined herein) from the Distribution Date to the Hourly Plan
Transfer Date.
For purposes hereof, the "Hourly Plan Transfer Date" shall be defined as
the date that plan assets from the Watts Hourly Plan are transferred to the
trust for the Circor Hourly Plan, which date shall occur as soon as reasonably
practicable following receipt by Circor of a favorable determination letter from
the Internal Revenue Service to the effect that the Circor Hourly Plan meets the
qualification requirements of Code Section 401(a) or an opinion from Circor's
legal counsel which is reasonably satisfactory to Watts to the effect that the
Circor Hourly Plan meets the qualification requirements of Code Section 401(a).
For purposes hereof, "Hourly Plan Allocated Benefit Payments" shall be equal to
any benefit payments made under the Watts Hourly Plan to or in respect of any
individual who was a participant in such plan as of the Distribution, who is an
employee of the Circor Group immediately following the Distribution and who
becomes eligible for benefit payments following the
18
<PAGE>
Distribution but prior to the Hourly Plan Transfer Date. For purposes hereof,
"Hourly Plan Allocated Expenses" shall be equal to any administrative expenses
paid by the trust of the Watts Hourly Plan after the Distribution which are
attributable to the administration of the Watts Hourly Plan with respect to
participants in the Watts Hourly Plan as of the Distribution who are employees
of the Circor Group immediately following the Distribution, including, but not
limited to, PBGC premium payments, consulting fees or accounting fees.
Notwithstanding the foregoing, Watts shall pay any and all expenses associated
with the allocation and transfer of assets from the Watts Hourly Plan to the
Circor Hourly Plan.
Section 6.03. Reporting Requirements. Watts and Circor shall each
----------------------
reasonably cooperate with the other party with respect to any required Internal
Revenue Service, Department of Labor or Pension Benefit Guaranty Corporation
reporting for the transfer of assets described herein.
ARTICLE VII - TAX MATTERS
Section 7.01. Returns and Tax Proceedings.
---------------------------
(a) Domestic Income Taxes. With respect to Domestic Income Taxes,
---------------------
Watts shall be responsible for filing Returns for members of the Watts Group and
members of the Circor Group for taxable periods beginning before the
Distribution Date.
(b) Other Taxes. With respect to Other Taxes, responsibility for
-----------
filing a Return shall fall on the party that under Section 7.03(b) is
responsible for paying the Other Tax to which the Return relates.
(c) Post-Distribution Periods. With respect to Domestic Income Taxes
-------------------------
for taxable periods other than taxable periods beginning before the Distribution
Date, Watts shall be responsible for filing Returns for members of the Watts
Group, and Circor shall be responsible for filing Returns for members of the
Circor Group.
(d) Transaction Taxes. Watts shall be responsible for filing Returns
-----------------
relating to Transaction Taxes.
(e) Tax Proceedings. Except as provided in Section 7.06(a), the party
---------------
responsible for filing a Return under this Section 7.01 shall have full control
over any Tax Proceeding regarding matters subject to such Return.
Section 7.02. Tax Return Positions. Watts and Circor agree that, except
--------------------
as otherwise provided herein, the transactions contemplated in this Agreement
shall be treated by Watts and Circor on all Returns in a manner which conforms
to the representations, undertakings and statements made in the Letter Ruling
Request. In their preparation and filing of Returns, both the Watts Group and
the Circor Group shall follow prior methods, practices and procedures
19
<PAGE>
(except to the extent that departure from such methods, practices and procedures
would not materially adversely affect members of the other Group and Watts shall
not discriminate against members of the Circor Group in the preparation of
Returns under Section 7.01(a).
Section 7.03. Responsibility for Taxes Generally.
----------------------------------
(a) Domestic Income Taxes.
---------------------
(i) Except as otherwise provided herein, the Watts Group shall
pay, and shall indemnify and hold harmless each member of the Circor Group from,
all Domestic Income Taxes with respect to which Watts is responsible for filing
a Return under Section 7.01(a) and (c), and the Watts Group shall be entitled to
receive and retain all refunds of Income Taxes for which the Watts Group would
have been responsible hereunder in the absence of the refund.
(ii) Except as otherwise provided herein, the Circor Group shall
pay, and shall indemnify and hold harmless each member of the Watts Group from,
all Domestic Income Taxes with respect to which Circor is responsible for filing
a Return under Section 7.01(c), and the Circor Group shall be entitled to
receive and retain all refunds of Income Taxes for which the Circor Group would
have been responsible hereunder in the absence of the refund.
(b) Other Taxes.
-----------
(i) Except as otherwise provided herein, the Watts Group shall
pay, and shall indemnify and hold harmless each member of the Circor Group from,
all Other Taxes attributable to a Watts Asset or the operation of the Watts
Business, and the Watts Group shall be entitled to receive and retain all
refunds of Other Taxes for which the Watts Group would have been responsible
hereunder in the absence of the refund.
(ii) Except as otherwise provided herein, the Circor Group shall
pay, and shall indemnify and hold harmless each member of the Watts Group from,
all Other Taxes attributable to a Circor Asset or the operation of the Circor
Business, and the Circor Group shall be entitled to receive and retain all
refunds of Other Taxes for which the Circor Group would have been responsible
hereunder in the absence of the refund.
(iii) In no event shall the Circor Group be required to
reimburse the Watts Group for Other Taxes actually paid by the Watts Group prior
to the Distribution Date.
(c) Transaction Taxes. Except as otherwise provided herein, the Watts
-----------------
Group shall pay, and shall indemnify and hold harmless each member of the Circor
Group from, all Transaction Taxes, and the Watts Group shall be entitled to
receive and retain all refunds of Transaction Taxes for which the Watts Group
would have been responsible hereunder in the absence of the refund.
20
<PAGE>
(d) Tax Benefits.
------------
(i) If an Adjustment to any Return filed by Watts under Section
7.01(a) or (c) results in a Tax Benefit to the Circor Group, Circor shall pay
Watts an amount equal to the cash value of such Tax Benefit (net of any
concomitant increase in any Tax liability incurred by the Circor Group) as and
to the extent that such Tax Benefit is Effectively Realized.
(ii) If an Adjustment to any Return filed by Circor under Section
7.01(c) results in a Tax Benefit to the Watts Group, Watts shall pay Circor an
amount equal to the cash value of such Tax Benefit (net of any concomitant
increase in any Tax liability incurred by the Watts Group) as and to the extent
that such Tax Benefit is Effectively Realized.
(e) Carrybacks. If the Carryback Period of a Circor Carryback Item
----------
includes a taxable period subject to a Return filed by Watts under Section
7.01(a), Circor shall elect (under Code Section 172(b)(3) and (f)(6) and any
other applicable Code provision and, to the extent feasible, any similar
provision of applicable state or local Income Tax law) to relinquish such
Carryback Period unless the parties agree otherwise.
(f) Allocation. Neither Watts nor Circor shall make the election
----------
available under Regulations Section 1.1502-76(b)(2)(ii)(D) to ratably allocate
items of members of the Circor Group unless the parties agree otherwise.
Section 7.04. Responsibility for Spin-Off Tax; Covenants.
------------------------------------------
(a) Circor Responsibility. Circor and any successor shall be
---------------------
responsible for, and shall indemnify and hold harmless each member of the Watts
Group from, any loss (including but not limited to any increase in Domestic
Income Taxes and reasonable expenses) directly or indirectly caused by a Spin-
Off Tax that is attributable to any action or omission of any members of the
Circor Group (or any successor).
(b) Watts Responsibility. Watts and any successor shall be
--------------------
responsible for, and shall indemnify and hold harmless each member of the Circor
Group from, any loss (including but not limited to any increase in Domestic
Income Taxes and reasonable expenses) directly or indirectly caused by a Spin-
Off Tax that is attributable to any action or omission of any member of the
Watts Group (or any successor).
(c) Shared Responsibility. If a Spin-Off Tax is incurred and
---------------------
responsibility for such Spin-Off Tax under Section 7.04(a) and (b) rests with
both Groups, then the liability for such Spin-Off Tax shall be apportioned
between the Groups in accordance with their relative responsibilities. If a
Spin-Off Tax is incurred and responsibility for such Spin-Off Tax under Section
7.04(a) and (b) rests with neither Group, then the liability for such Spin-Off
Tax shall be apportioned between the Groups in a fair and equitable manner.
21
<PAGE>
(d) Circor Covenants. Circor covenants and agrees to:
----------------
(i) engage in a public offering of a significant amount of Circor
stock within one year of the Distribution Date in a manner consistent with the
Letter Ruling and the Letter Ruling Request;
(ii) not participate in any merger, reorganization, acquisition,
equity restructuring or other transaction that results in one or more persons
acquiring in Circor a 50% or greater interest, within the meaning of Section
355(e) of the Code, within two years of the Distribution Date; and
(iii) not undertake any action (or inaction) that is
inconsistent with any undertaking, representation or statement made in the
Letter Ruling Request or set forth in the Letter Ruling.
(e) Watts Covenants. Watts covenants and agrees to:
---------------
(i) not participate in any merger, reorganization, acquisition,
equity restructuring or other transaction that results in one or more persons
acquiring in Watts a 50% or greater interest, within the meaning of Section
355(e) of the Code, within two years of the Distribution Date; and
(ii) not undertake any action (or inaction) that is inconsistent
with any undertaking, representation or statement made in the Letter Ruling
Request or set forth in the Letter Ruling.
(f) Exceptions. Notwithstanding the foregoing, Watts or Circor may
----------
act or fail to act in a way that is contrary to the covenants in Section 7.04(d)
and (e) if prior to such action (or inaction) Watts or Circor, as the case may
be, (i) promptly notifies the other party that it intends to pursue such action
(or inaction), and (ii) obtains an opinion from Goodwin, Procter & Hoar llp (or
other mutually acceptable Tax Counsel) or a ruling from the IRS to the effect
that such action (or inaction) will not result in a Spin-Off Tax.
Section 7.05. Payments.
--------
(a) Interest. Any Intercompany Tax Payment that is not paid when due
--------
under Section 7.03(d) (or, where Section 7.03(d) is inapplicable, under Article
X) shall bear interest as provided in Article X.
(b) Reporting. Watts and Circor agree that all Intercompany Tax
---------
Payments shall be reported for U.S. federal income tax purposes as non-
deductible and non-taxable.
22
<PAGE>
Section 7.06. Cooperation and Exchange of Information.
---------------------------------------
(a) Tax Proceedings.
---------------
(i) Notice. If during the course of a Tax Proceeding under the
------
control of one party (whether Watts or Circor, and whether such control is
pursuant to Section 7.01(e) or pursuant to applicable Tax law) (the "Tax
Indemnitee") any taxing authority proposes or indicates an intention to propose
an Adjustment which would result, if confirmed by a Final Determination, in a
loss against which the other party (the "Tax Indemnitor") may be required to
indemnify the Tax Indemnitee pursuant to this Article VII, the Tax Indemnitee
shall promptly notify the Tax Indemnitor thereof in writing. Such notice shall
include sufficient information with respect to the issues as to which indemnity
may be sought to enable the Tax Indemnitor to determine whether to request the
Tax Indemnitee to contest the Adjustment.
(ii) Contest Rights and Conditions. If the Tax Indemnitor
-----------------------------
requests in writing within 20 days of the receipt of the notification referred
to in Section 7.06(a)(i) that the Tax Indemnitee contest the Adjustment, the Tax
Indemnitee shall contest the Adjustment; provided that in no event shall the Tax
Indemnitee be required to contest any Adjustment unless coincident with the Tax
Indemnitor's request (A) the Tax Indemnitee shall have received (I) a written
acknowledgment from the Tax Indemnitor of its obligation to indemnify the Tax
Indemnitee in the event it does not prevail in contesting such Adjustment and
(II) an opinion from mutually acceptable Tax Counsel to the effect that a
reasonable basis exists for contesting such Adjustment; and (B) if such contest
is to be conducted in a manner requiring payment of a proposed tax deficiency,
the Tax Indemnitor shall have advanced to the Tax Indemnitee, on an interest-
free basis, an amount sufficient to make payment of the amount attributable to
the contested Adjustment, together with any required interest, penalties and
additions to tax. If any funds are advanced by the Tax Indemnitor in connection
with any Tax Proceeding, any refund received to the extent fairly attributable
to such advance shall be returned to the Tax Indemnitor, together with any
interest thereon paid by the relevant taxing authority, promptly upon the Tax
Indemnitee's receipt of such funds. If the Tax Indemnitor shall have requested
the Tax Indemnitee to contest an Adjustment and complied with each of the terms
and conditions set forth above, such Adjustment shall be contested, at the
direction of the Indemnitor, by mutually acceptable Tax Counsel, at the Tax
Indemnitor's sole cost and expense; provided that the Tax Indemnitee shall have
the right to participate in such contest and to be represented by Tax Counsel of
its own choosing at the Tax Indemnitee's sole cost and expense. If the Tax
Indemnitor or the Tax Counsel conducting the contest under the direction of the
Tax Indemnitor advocates or fails to protest before any taxing authority a
position which would result in a material tax detriment to the Tax Indemnitee
not subject to indemnification hereunder, the Tax Indemnitee may replace such
Tax Counsel with Tax Counsel of its own selection (but at the Tax Indemnitee's
sole cost and expense) and any tax detriment suffered by the Tax Indemnitee
attributable to such position shall be an amount for which the Tax Indemnitee is
entitled to indemnification hereunder.
(iii) Settlement; Release of Indemnification. If the Tax
--------------------------------------
Indemnitor shall have requested the Tax Indemnitee to contest an Adjustment and
complied with each of
23
<PAGE>
the terms and conditions set forth above, the Tax Indemnitee shall not settle or
compromise any Adjustment for which indemnity is sought hereunder without the
consent of the Tax Indemnitor unless it simultaneously releases the Tax
Indemnitor from its obligations to indemnify the Tax Indemnitee with respect to
the issues so settled or compromised. If the Tax Indemnitor shall fail to
request the Tax Indemnitee to contest any Adjustment or shall fail to comply
with the terms and conditions entitling it to make such request as set forth in
Section 7.06(a)(ii), the Tax Indemnitee may in its sole discretion elect to
contest (or not contest) such Adjustment with Tax Counsel selected by it, and
may at any time settle or compromise the matter without the consent of the Tax
Indemnitor and without releasing its rights to indemnity from the Tax
Indemnitor.
(iv) Joint Responsibility. If for the reasons described in
--------------------
Section 7.04(c) a Spin-Off Tax is incurred or is proposed by the IRS (or other
taxing authority), the notice provisions in Section 7.06(a)(i) hereof shall
apply, and notwithstanding any other provision of this Article VII Watts shall
have control over any Tax Proceeding relating to such Spin-Off Tax, including
without limitation the choice of Tax Counsel to represent it; provided, however,
that Watts shall keep Circor informed of such Tax Proceeding and shall consult
with Circor regarding the material issues raised; and further provided that (A)
any choice of forum, (B) any decision to appeal, and (C) any settlement relating
to the Spin-Off Tax shall be subject to Circor's approval, which shall not be
unreasonably withheld.
(b) Cooperation. Without limiting Section 7.06(a) hereof, Watts and
-----------
Circor agree to cooperate fully with each other in connection with all matters
subject to this Agreement. Such cooperation includes but is not limited to:
(i) making personnel and records available within 10 days (or such
other period as may be reasonable under the circumstances) after a request for
such personnel or records is made by the other party;
(ii) retaining all records which may contain information or
provide evidence relevant to any taxable period until such time as a Final
Determination occurs with respect to such taxable period; provided, however,
that such records need not be retained longer than 15 years after the end of the
latest taxable period to which they relate and such records do not relate to an
ongoing contest;
(iii) executing, acknowledging and delivering any instrument
or document (including protective refund claims) that may be necessary or
helpful in connection with (A) any Return that the other party has the authority
to prepare and file under this Agreement, (B) any refund or Tax Benefit to which
the other party may be entitled, (C) any Tax Proceeding or other litigation,
investigation or action that the other party has authority to control under this
Agreement or which may effect any obligation or Tax liability of the other party
under this Agreement, or (D) the carrying out of any obligation of the other
party under this Agreement;
24
<PAGE>
(iv) using best efforts to obtain any documentation from any
governmental authority or other third party that may be necessary or helpful in
connection with the foregoing; and
(v) keeping the other party fully informed with respect to any
material developments relating to any matter subject to this Agreement.
(c) Failure to Cooperate. If Watts or Circor, as the case may be,
--------------------
fails to provide any information requested pursuant to Section 7.06(b)(i), then
the requesting party shall have the right to engage a public accountant of its
choice to gather such information. Watts and Circor agree to permit such public
accountant full access to all appropriate records or other information in the
possession of any member of the Watts Group or the Circor Group, as the case may
be, during reasonable business hours, and to reimburse or pay directly all costs
and expenses in connection with the engagement of such public accountant.
(d) Indemnity. Watts agrees to indemnify and hold harmless each
---------
member of the Circor Group (and their officers and employees), and Circor agrees
to indemnify and hold harmless each member of the Watts Group (and their
officers and employees) from any Tax and or any related cost, fine, penalty or
other expense of any kind attributable to the negligence or misconduct of a
member of the Watts Group or the Circor Group, as the case may be, in supplying
inaccurate or incomplete information to a member of the other Group.
Section 7.07. Sole Tax Sharing Agreement.
--------------------------
(a) All existing Tax sharing agreements or arrangements (if any),
written or unwritten, between the Watts Group the Circor Group shall be or shall
have been terminated as of the Distribution Date. On and after the Distribution
Date the Watts Group and the Circor Group shall have no rights or liabilities
(including, without limitation, any rights and liabilities that accrued prior to
the Distribution Date) under such terminated agreements and arrangements, and
this Article VII shall constitute the sole Tax sharing agreement between the
Watts Group and the Circor Group.
(b) This Article VII does not address the Tax sharing arrangements, if
any, (i) among members of the Watts Group or (ii) among members of the Circor
Group.
Section 7.08. Overlap with Other Provisions. If both (i) the provisions
-----------------------------
of this Article VII and (ii) other provisions of this Agreement are by their
terms applicable, then the provisions of this Article VII shall govern.
ARTICLE VIII - ACCOUNTING MATTERS
Section 8.01. Allocation of Prepaid Items and Reserves. All prepaid
----------------------------------------
items and reserves that have been maintained by Watts on a consolidated basis
but that relate in part to
25
<PAGE>
assets or liabilities of the Circor Group shall be allocated between Watts and
Circor in such reasonable manner as they shall mutually agree.
Section 8.02. Accounting Treatment of Assets Transferred and Liabilities
----------------------------------------------------------
Assumed. All transfers of Assets of the Watts Group to the Circor Group pursuant
- -------
to this Agreement shall constitute contributions by Watts to the capital of
Circor. All transfers of Assets of the Circor Group to the Watts Group, and the
assumption by the Circor Group of Liabilities of the Watts Group, net of Assets
received, shall be treated as a distribution by Circor to Watts.
Section 8.03. Intercompany Accounts. All intercompany accounts between
---------------------
members of the Watts Group and members of the Circor Group existing as of 11:59
p.m. on the day before the Distribution Date, shall be canceled as of such time
and netted into equity in accordance with Section 8.02 above.
ARTICLE IX - INFORMATION
Section 9.01. Provision of Corporate Records. Watts and Circor shall
------------------------------
each arrange as soon as practicable following the Distribution Date for the
delivery to the other of existing corporate documents (e.g. minute books, stock
registers, stock certificates, documents of title, contracts, etc.) in its
possession relating to the other or its business and affairs.
Section 9.02. Access to Information. From and after the Distribution
---------------------
Date, Watts and Circor shall each afford the other and its accountants, counsel
and other designated representatives reasonable access (including using
reasonable efforts to give access to persons or firms possessing information)
and duplicating rights during normal business hours to all records, books,
contacts, instruments, computer data and other data and information in its
possession relating to the business and affairs of the other (other than data
and information subject to an attorney/client or other privilege), insofar as
such access is reasonably required by the other including, without limitation,
for audit, accounting and litigation purposes.
Section 9.03. Litigation Cooperation. Watts and Circor shall each use
----------------------
reasonable efforts to make available to the other, upon written request, its
officers, directors, employees and agents as witnesses to the extent that such
persons may reasonably be required in connection with any legal, administrative
or other proceedings arising out of the business of the other prior to the
Distribution Date in which the requesting party may from time to time be
involved.
Section 9.04. Reimbursement. Watts and Circor, each providing
-------------
information or witnesses under Sections 9.01, 9.02 or 9.03 to the other, shall
be entitled to receive from the recipient, upon the presentation of invoices
therefor, payment for all out-of-pocket costs and expenses as may be reasonably
incurred in providing such information or witnesses.
Section 9.05. Retention of Records. Except as otherwise required by law
--------------------
or agreed to in writing, each party shall, and shall cause the members of its
Group to, retain all
26
<PAGE>
information relating to the other's business in accordance with the Watts
Industries, Inc. record retention policy and with past practice. Notwithstanding
the foregoing, either party may destroy or otherwise dispose of any information
at any time in accordance with the corporate record retention policy maintained
by such party with respect to its own records.
Section 9.06. Confidentiality.
---------------
(a) Each party shall, and shall cause each member of its Group to,
hold and cause its directors, officers, employees, agents, consultants and
advisors to hold, in strict confidence, all information concerning the other
party (except to the extent that such information can be shown to have been (i)
in the public domain through no fault of such party or any of its directors,
officers, employees, agents, consultants or advisors, or (ii) later lawfully
acquired on a non-confidential basis from other sources by the party to which it
was furnished), and neither party shall release or disclose such information to
any other person, except its auditors, attorneys, financial advisors, bankers
and other consultants and advisors, who shall be advised of and agree in writing
to comply with the provisions of this Section 9.06. Each party shall be deemed
to have satisfied its obligation to hold confidential information concerning or
supplied by the other party if it exercises the same care as it takes to
preserve confidentiality for its own similar information.
(b) In the event that any party or any member of its Group either (i)
determines on the advice of its counsel that it is required to disclose any
information pursuant to applicable law or (ii) receives any demand under lawful
process or from any governmental authority to disclose or provide information of
any other party (or any member of any other party's Group) that is subject to
the confidentiality provisions hereof, such party shall notify the other party
prior to disclosing or providing such information and shall cooperate at the
expense of the requesting party in seeking any reasonable protective
arrangements requested by such other party. Subject to the foregoing, the
person that received such request may thereafter disclose or provide information
to the extent required by such law (as so advised by counsel) or by lawful
process or such governmental authority.
ARTICLE X - INTEREST ON PAYMENTS
Except as otherwise expressly provided in this Agreement, all payments by
one party to the other under this Agreement or any Ancillary Agreement shall be
paid, by wire transfer of immediately available funds to an account in the
United States designated by the recipient, within [thirty (30)] days after
receipt of an invoice or other written request for payment setting forth the
specific amount due and a description of the basis therefor in reasonable
detail. Any amount remaining unpaid beyond its due date, including disputed
amounts that are ultimately determined to be payable, shall bear interest at a
floating rate of interest equal to the prime commercial lending rate publicly
announced by BankBoston, N.A. or any successor thereto at its principal office
(or any alternative rate substituted therefor by such bank).
27
<PAGE>
ARTICLE XI - MISCELLANEOUS
Section 11.01. Expenses. Except as specifically provided in this
--------
Agreement or any Ancillary Agreement, all costs and expenses incurred in
connection with the preparation, execution, delivery and implementation of this
Agreement and the Ancillary Agreements and with the consummation of the
transactions contemplated by this Agreement (including transfer taxes and the
fees and expenses of the Distribution Agent and of all counsel, accountants and
financial and other advisors) shall be paid by Watts. Without limiting the
foregoing, Watts shall pay the legal, filing, accounting, printing and other
expenses in connection with the preparation, printing and filing of the Form 10.
Section 11.02. Notices. All notices and communications under this
-------
Agreement shall be in writing and any communication or delivery hereunder shall
be deemed to have been duly given addressed as follows (i) one business day
after deposit with a recognized overnight mail carrier, (ii) upon receipt of a
confirmation by the sender, in the case of a facsimile, or (iii) if sent by
certified U.S. Mail, three (3) days after being deposited:
If to Watts, to: Watts Industries, Inc.
815 Chestnut Street
North Andover, MA 01845-6098
Facsimile: (978) 794-1848
Attention: General Counsel
If to Circor, to: CIRCOR International, Inc.
35 Corporate Drive
Burlington, MA 01803
Attention: Corporate Secretary
Either party may, by written notice so delivered to the other party, change the
address to which delivery of any notice shall thereafter be made.
Section 11.03. Amendment and Waiver. This Agreement may not be altered
--------------------
or amended, nor may rights hereunder be waived, except by an instrument in
writing executed by the party or parties to be charged with such amendment or
waiver. No waiver of any terms, provision or condition of or failure to exercise
or delay in exercising any rights or remedies under this Agreement, in any one
or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, provision, condition, right or remedy or as
a waiver of any other term, provision or condition of this Agreement.
Section 11.04. Entire Agreement. This Agreement, together with the
----------------
Ancillary Agreements, constitutes the entire understanding of the parties hereto
with respect to the subject matter hereof, superseding all negotiations, prior
discussions and prior agreements and understandings relating to such subject
matter. To the extent that the provisions of this
28
<PAGE>
Agreement are inconsistent with the provisions of any Ancillary Agreement, the
provisions of such Ancillary Agreement shall prevail.
Section 11.05. Assignment. Neither of the parties hereto may assign its
----------
rights or delegate any of its duties under this Agreement without the prior
written consent of the other party. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns. Nothing contained in this Agreement, express
or implied, is intended to confer any benefits, rights or remedies upon any
person or entity other than members of the Watts Group and the Circor Group and
the Watts Indemnitees and Circor Indemnitees under Articles IV and V hereof.
Section 11.06. Further Assurances and Consents. In addition to the
-------------------------------
actions specifically provided for elsewhere in this Agreement, each of the
parties hereto will use its reasonable efforts to (i) execute and deliver such
further instruments and documents and take such other actions as any other party
may reasonably request in order to effectuate the purposes of this Agreement and
to carry out the terms hereof and (ii) take, or cause to be taken, all actions,
and to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement; provided that no party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to any
third party from whom such consents, approvals and amendments are requested or
to take any action or omit to take any action if the taking of or the omission
to take such action would be unreasonably burdensome to the party or its Group
or the business thereof.
Section 11.07. Severability. The provisions of this Agreement are
------------
severable and should any provision hereof be void, voidable or unenforceable
under any applicable law, such provision shall not affect or invalidate any
other provision of this Agreement, which shall continue to govern the relative
rights and duties of the parties as though such void, voidable or unenforceable
provision were not a part hereof.
Section 11.08. Governing Law. This Agreement shall be construed in
-------------
accordance with, and governed by, the laws of The Commonwealth of Massachusetts,
without regard to the conflicts of law rules of such commonwealth.
Section 11.09. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original instrument, but all
of which together shall constitute but one and the same Agreement.
Section 11.10. Survival of Covenants. Except as expressly set forth in
---------------------
any Ancillary Agreement, the covenants, representations and warranties contained
in this Agreement and
29
<PAGE>
each Ancillary Agreement, and liability for the breach of any obligations
contained herein, shall survive the Distribution and shall remain in full force
and effect.
Section 11.11. Disputes.
--------
(a) Resolution of any and all disputes arising from or in connection
with this Agreement, whether based on contract, tort, statute or otherwise,
including, but not limited to, disputes in connection with claims by third
parties (collectively, "Disputes"), shall be subject to the provisions of this
Section 11.11; provided, however, that nothing contained herein shall preclude
either party from seeking or obtaining equitable or other judicial relief
(including without limitation injunctive relief) to enforce the provisions
hereof or to preserve the status quo pending resolution of Disputes hereunder.
(b) Either party may give the other party written notice of any
Dispute not resolved in the normal course of business. The parties shall
thereupon attempt in good faith to resolve any Dispute promptly by negotiation
between executives who have authority to settle the controversy and who are at a
higher level of management than the persons with direct responsibility for
administration of this Agreement. Within twenty (20) days after delivery of the
notice, the receiving party shall submit to the other a written response. The
notice and the response shall include a statement of such party's position and a
summary of arguments supporting that position and the name and title of the
executive who will represent that party and of any other person who will
accompany such executive. Within forty-five (45) days after delivery of the
first notice, the executives of both parties shall meet at a mutually acceptable
time and place, and thereafter as often as they reasonably deem necessary, to
attempt to resolve the Dispute. All reasonable requests for information made by
one party to the other will be honored.
(c) If the Dispute has not been resolved by negotiation within sixty
(60) days of the first party's notice, or if the parties failed to meet within
forty-five (45) days, the parties shall endeavor to settle the Dispute by
mediation under the mediation rules of the Center for Public Resources (the
"CPR") with the mediator to be appointed by the CPR from its National CPR Panel.
(d) If the Dispute has not been resolved within 180 days after
delivery of the first notice under Section 11.11(b), then the Dispute shall be
finally settled by binding arbitration conducted expeditiously in accordance
with the Center for Public Resources Rules for Nonadministered Arbitration of
Business Disputes (the "CPR Arbitration Rules"). The Center for Public
Resources shall appoint a neutral advisor from its National CPR Panel. The
arbitration shall be governed by the United States Arbitration Act, 9 U.S.C.
(S)(S)1-16, and judgment upon the award rendered by the arbitrators may be
entered by any court having jurisdiction thereof. The place of arbitration
shall be Boston, Massachusetts.
30
<PAGE>
Such proceedings shall be administered by the neutral advisor in accordance
with the CPR Arbitration Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(i) mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(ii) no other discovery;
(iii) hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place on one or two days at a maximum; and
(iv) decision to be rendered not more than ten (10) days following
such hearings.
Notwithstanding anything to the contrary contained herein, the provisions
of this Section 11.11 shall not apply with respect to any equitable remedies to
which any party may be entitled.
[END OF TEXT]
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
WATTS INDUSTRIES, INC.
By: /s/ Timothy P. Horne
--------------------------------------
Timothy P. Horne
President and Chief Executive Officer
CIRCOR INTERNATIONAL, INC.
By: /s/ David A. Bloss, Sr.
--------------------------------------
David A. Bloss, Sr.
President and Chief Executive Officer
<PAGE>
EXHIBIT A
---------
Circor Group
Circle Seal Controls, Inc.
Circle Seal Corporation
CIRCOR IP Holding Corp.
CIRCOR, Inc.
De Martin Srl
Go Regulator, Inc.
Hoke, Inc.
IOG Canada
KF Industries, Inc.
KF Sales Corp.
Leslie Controls, Inc.
Pibiviesse SpA
SSI Equipment, Inc.
Spence Engineering Co., Inc.
Suzhou Watts Joint Venture (SWVC)
<PAGE>
EXHIBIT B
---------
Sequence of Transactional Steps
See attached.
<PAGE>
Schedule 3.02(b)(ii)
--------------------
Agreements Surviving the Distribution
None.
<PAGE>
Schedule A-1
------------
Circor Assets
<PAGE>
Schedule A-2
------------
Assets Retained by Watts
<PAGE>
Schedule L-1
------------
Circor Liabilities
<PAGE>
Schedule L-2
------------
Watts Liabilities
<PAGE>
EXHIBIT 10.8
SUPPLY AGREEMENT
This SUPPLY AGREEMENT is made and entered into as of October 1, 1999 by and
between Watts Industries, Inc., a Delaware corporation ("Watts") and CIRCOR
International, Inc., a Delaware corporation ("Circor").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to a Distribution Agreement dated as of October 1, 1999,
by and between Circor and Watts (the "Distribution Agreement"), Watts will spin
off to its stockholders all of the Common Stock of Circor (the "Distribution");
and
WHEREAS, following the Distribution, Circor will operate all of the
industrial, oil and gas product lines previously operated by Watts; and
WHEREAS, in connection with the Distribution, and in accordance with the
Internal Revenue Service Private Letter Ruling, dated September 13, 1999,
delivered to Watts, Watts has agreed to supply certain of its products to Circor
for a limited period of time;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. TERM
The term of this Agreement shall commence on the date hereof and shall
end on the earlier of (i) the written consent of the parties or (ii) the first
anniversary of the date of the Distribution.
2. SUPPLY; PRICING; PAYMENT TERMS
Subject to the terms and conditions provided below, Watts shall
manufacture, supply and sell to Circor, and Circor shall purchase from Watts,
the products specified on Exhibit A attached hereto at the prices specified
---------
therein, in such quantities as Circor may from time to time request. Delivery
of and payment for all products hereunder shall be made in accordance with
Watts' standard practice as in effect from time to time.
3. MISCELLANEOUS
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties. Waivers and consents with respect
to this
<PAGE>
Agreement shall be in writing and each shall be effective only in the specific
instance and for the specific purpose for which it is given.
(b) This Agreement shall bind and inure to the benefit of the parties
and their respective successors and permitted assigns. Rights and obligations
arising from this Agreement shall not be assignable by either party without the
prior written consent of the other party; provided, however, that either party
may, without the consent of the other, assign its rights and obligations
hereunder to any direct or indirect wholly-owned subsidiary of such party.
(c) This Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which, when taken together, shall
constitute one and the same instrument.
(d) This Agreement shall be governed by the laws of the Commonwealth
of Massachusetts (with the exception of the provisions relating to conflict of
laws).
[END OF TEXT]
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Supply Agreement
as of the day and year first written above.
WATTS INDUSTRIES, INC. CIRCOR INTERNATIONAL, INC.
By: /s/ Timothy P. Horne By: /s/ David A. Bloss, Sr.
----------------------------------- -------------------------------
Timothy P. Horne David A. Bloss, Sr.
Chairman and Chief Executive Officer President and
Chief Executive Officer
<PAGE>
EXHIBIT A
---------
Watts Supplied Products
-----------------------
<PAGE>
EXHIBIT 10.9
TRADEMARK LICENSE AGREEMENT
AGREEMENT, dated as of October 1, 1999, between Watts Industries, Inc., a
Delaware corporation ("Watts"), and CIRCOR International, Inc., a Delaware
corporation ("Circor").
WHEREAS, pursuant to a Distribution Agreement dated as of October 1, 1999,
by and between Circor and Watts (the "Distribution Agreement"), Watts will
distribute to its shareholders all of the Common Stock of Circor (the
"Distribution"); and
WHEREAS, following the Distribution, Circor will operate all of the
industrial, oil and gas product lines previously operated by Watts (the
"Business"); and
WHEREAS, following the Distribution, Circor will own, directly or
indirectly, all of the outstanding capital stock of KF Industries, Inc.; and
WHEREAS, in connection with the Distribution, and in accordance with the
Internal Revenue Service Private Letter Ruling, dated September 13, 1999,
delivered to Watts, Watts has agreed to license use of its trademark and trade
name "Watts" to Circor for a limited period of time;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Grant of License. Watts hereby grants to Circor a non-exclusive,
----------------
worldwide right and license (the "License") to use the trademark and trade name
"Watts" (the "Trademark") in the Business, and to sublicense the Trademark to
its wholly-owned subsidiaries, all on the terms and conditions set forth herein.
Nothing in this Agreement is intended to permit Circor to use the Trademark for
any other purpose.
2. Term; Effects of Termination.
----------------------------
2.1 Term. The term of this Agreement (the "Term") shall commence on
----
the date hereof and shall terminate upon the earlier of (i) the mutual agreement
of Watts and Circor, or (ii) the first anniversary of the date of the
Distribution.
2.2 Right to Terminate. Watts may terminate this Agreement, on prior
------------------
written notice to Circor, in the event that: (i) Circor is in default of the
terms of this Agreement and such default continues for more than thirty (30)
days after written notice thereof to Circor; or (ii) Circor files a petition in
bankruptcy or is adjudicated a bankrupt or insolvent, or makes an assignment for
the benefit of creditors, or an arrangement pursuant to any bankruptcy law, or
if Circor discontinues or dissolves its business or if a receiver is appointed
for Circor or for Circor's business and such receiver is not discharged within
30 days.
<PAGE>
2.3 Effect of Termination. Upon termination or expiration of this
---------------------
Agreement: (i) Circor shall cease and desist from use in any manner of the
Trademark; and (ii) Circor shall execute and deliver to Watts any documents
reasonably requested by Watts to confirm Watts' ownership of the Trademark and
the termination of this Agreement.
3. Restrictions on Use.
-------------------
3.1 Quality, Use, Compliance with Laws. Circor shall use the
----------------------------------
Trademark only in a manner and form: (i) designed to maintain the high quality
of the Trademark; (ii) consistent with the use of the Trademark by Watts; (iii)
that protects Watts' ownership interest therein; and (iv) that complies will all
applicable federal, state, local and foreign laws, rules and regulations,
including, without limitation, all applicable trademark laws, rules and
regulations.
3.2 Quality Control. Watts shall have the right to monitor and
---------------
inspect the facilities and goods on which the Trademark is applied for the
purpose of protecting and maintaining the standards of quality established by
Watts. If Watts at any time finds that Circor's use of the Trademark is not
consistent with standards of quality acceptable to Watts, Watts may notify
Circor in writing of such deficiencies, and if Circor fails to correct such
deficiencies within thirty (30) days after receipt of such notice, Watts may, at
its election, terminate this Agreement effective immediately. Circor shall
cause to appear on all materials on or in connection with which the Trademark is
used such reasonable legends, markings and notices as Watts may reasonably
request.
3.3 Use In Conjunction with KF. Circor shall use the Trademark only
--------------------------
in conjunction with the "KF" trademarks and trade names and only in such a
manner that "KF" immediately precedes the Trademark.
3.4 Benefit. Circor expressly acknowledges that its use of the
-------
Trademark hereunder inures to the benefit of Watts and shall not confer on
Circor any proprietary rights to the Trademark, which shall at all times remain
with Watts and its assignees.
3.5 Ownership of Trademark. Watts expressly reserves the sole and
----------------------
exclusive ownership of the Trademark and all rights relating thereto. Circor
hereby acknowledges that Watts is the sole and exclusive owner of the Trademark
and agrees not to challenge at any time, directly or indirectly, the rights of
Watts thereto or the validity or distinctiveness thereof. Use of the Trademark
by Circor under this Agreement shall inure to the benefit of Licensor.
3.6 Protection of Trademark. Nothing in this Agreement is intended
-----------------------
to nor shall it limit or impair Watts' rights, during or after the Term, to
protect the Trademark from infringement by any person or party, including
without limitation, Circor. During and after the Term Watts may, but shall not
be obligated to, take such action as it deems necessary or appropriate to
prevent or stop such infringement. Circor shall promptly notify Watts in writing
of any infringement or suspected infringement involving the Trademark.
2
<PAGE>
3.7 No Impairment. Nothing in this Agreement is intended to nor
-------------
shall it limit or impair Watts' rights, during or after the Term, to use or
otherwise license the Trademark in any manner whatsoever.
4. Infringement; Limitation of Liability.
-------------------------------------
4.1 Maintenance of Trademark. Circor shall use its best efforts not
------------------------
to do or permit to be done any act calculated or likely to prejudice, affect,
impair or destroy the title and interest of Watts in and to the Trademark. If
Circor knows that any person, firm or corporation is infringing the Trademark,
Circor will promptly notify Watts and cooperate fully with Watts in the defense
and protection of the Trademark, provided that Circor will not be required to
make any payments to Watts for costs incurred by Watts in the defense and
protection of the Trademark. Watts reserves the right to prosecute or defend,
at its own expense, all suits involving the Trademark and the protection
thereof.
4.2 Limitation of Liability. WATTS MAKES NO REPRESENTATION OR
-----------------------
WARRANTY WHATSOEVER, WHETHER EXPRESS OR IMPLIED, WITH RESPECT TO THE TRADEMARK.
WATTS HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
ANY PARTICULAR PURPOSE. IN NO EVENT SHALL WATTS BE LIABLE TO Circor HEREUNDER
FOR ANY DIRECT OR INDIRECT, SPECIAL, CONSEQUENTIAL, PUNITIVE OR INCIDENTAL
DAMAGES.
5. Injunctive Relief. Circor acknowledges that money damages would not
-----------------
adequately compensate Watts in the event of a breach by Circor of its
obligations hereunder, and that injunctive relief would be essential for Watts
to adequately protect itself hereunder. Accordingly, Circor agrees that, in
addition to any other remedies available to Watts at law or in equity, Watts
shall be entitled to injunctive relief in the event Circor is in breach of any
covenant or agreement contained herein.
6. Miscellaneous.
-------------
6.1 Governing Law. This Agreement shall be construed in accordance
-------------
with, and governed by, the laws of the Commonwealth of Massachusetts, without
regard to the conflicts of law rules of such Commonwealth.
6.2 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between the parties hereto with respect to the subject matter hereof and is
intended to supersede all prior negotiations, understandings and agreements. No
provision of this Agreement may be waived or amended, except by a writing signed
by Watts and Circor.
6.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and together which shall
constitute one and the same instrument.
3
<PAGE>
6.4 Waiver. The failure of any party to exercise any right or remedy
------
provided for herein shall not be deemed a waiver of any right or remedy
hereunder.
6.5 Severability. If any provision of this Agreement is determined by
------------
a court of competent jurisdiction to be invalid or otherwise unenforceable, such
determination shall not affect the validity or enforceability of any remaining
provisions of this Agreement. If any provision of this Agreement is invalid
under any applicable statute or rule of law, it shall be enforced to the maximum
extent possible so as to effect the intent of the parties, and the remainder of
this Agreement shall continue in full force and effect.
6.6 Notices. All notices or other communications required or
-------
permitted to be given by either party to the other party hereunder shall be
given in the manner and to the addresses specified in the Distribution
Agreement.
6.7 Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of each of the parties hereto and their respective successors and
assigns, provided that Circor may not assign any of its rights hereunder without
the prior written consent of Watts.
6.8 Section Headings. The section headings used herein are for the
----------------
convenience of the parties only, are not substantive and shall not be used to
interpret or construe any of the provisions contained herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
WATTS INDUSTRIES, INC. CIRCOR INTERNATIONAL, INC.
By /s/ Timothy P. Horne By /s/ David A. Bloss, Sr.
------------------------ --------------------------
Timothy P. Horne David A. Bloss, Sr.
Chairman and Chief President and Chief
Executive Officer Executive Officer
4
<PAGE>
EXHIBIT 21.1
------------
SUBSIDIARIES OF THE REGISTRANT AS OF THE DISTRIBUTION DATE
I. Subsidiaries of CIRCOR International, Inc:
1. Spence Engineering Co., Inc., a Delaware Corporation
2. KF Sales Corp., a Delaware Corporation
3. Leslie Controls, Inc., a New Jersey Corporation
4. Circle Seal Controls, Inc., a Delaware Corporation
5. KF Industries, Inc., an Oklahoma Corporation
6. CIRCOR, Inc., a Massachusetts Corporation
II. Subsidiaries of Circle Seal Controls, Inc.:
1. CIRCOR IP Holding Co., a Delaware Corporation
2. Circle Seal Corporation, a Delaware Corporation
3. Suzhou Watts Valve Co., Ltd. (JV), a Chinese Joint Venture
4. Hoke, Inc., a New York Corporation
5. Go Regulator, Inc., a California Corporation
III. Subsidiaries of KF Industries, Inc.:
1. Pibiviesse SpA, an Italian Company
2. IOG Canada Inc., a Canadian Corporation
IV. Subsidiaries of Pibiviesse SpA:
1. De Martin Srl, an Italian Company
V. Subsidiaries of IOG Canada, Inc.:
1. SSI Equipment Inc., a Canadian Corporation
