<PAGE>
As filed with the Securities and Exchange Commission on August 6, 1999
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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
( ) -
------------
(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
Preferred Stock Purchase Rights 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>
[Watts logo]
September , 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 September , 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,
Timothy P. Horne, Chairman
and Chief Executive Officer
<PAGE>
[Circor logo]
September , 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.
The CIRCOR common stock will trade on the New York Stock Exchange under the
symbol "CIR."
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,
David A. Bloss, Sr.
Chairman of the Board, Chief Executive Officer
and President
<PAGE>
[Circor logo]
INFORMATION STATEMENT
CIRCOR International, Inc.
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 September , 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 September , 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 ,
1999.
----------------
Before the distribution, we expect the New York Stock Exchange to approve
shares of CIRCOR common stock for listing under the symbol "CIR," subject to
official notice of issuance.
----------------
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 September , 1999, and we first mailed this
document
to CIRCOR shareholders on September , 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 September , 1999 (this date is sometimes
referred to as the "record date"). On October , 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 Corp., Atkomatic Valve Company, 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 owned of record on
September , 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 , 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 , 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 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.
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 on or about the distribution date of October , 1999. CIRCOR
expects, however, that "when-issued" trading for CIRCOR common stock will
develop before the distribution date.
"When-issued" trading means that you may trade CIRCOR common shares after
the record date but 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."
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.
(iii)
<PAGE>
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 September and October , 1999) will be accompanied by an
attached "due bill" representing CIRCOR common stock to be distributed in
the distribution.
Additionally, Watts expects that "ex-distribution" trading for Watts common
stock will 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?
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.
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.
(iv)
<PAGE>
Q: HOW WILL CIRCOR FINANCE ITS ACTIVITIES AFTER THE DISTRIBUTION?
A: Concurrent with the distribution, CIRCOR will enter into a $110 million
credit facility. Approximately $100 million of the available proceeds from
the credit facility, together with approximately $ million of cash from
Watts, will be used to pay down approximately $ million of debt assumed by
CIRCOR from Watts. Shortly after the distribution, CIRCOR also intends to
sell $75 million of senior unsecured notes to investors in a private
placement. The net proceeds from the notes offering will be used to pay down
outstanding debt under CIRCOR's 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: ( ) -
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 ( ) - .
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 September , 1999. Based on the
number of shares of Watts common stock
outstanding as of September , 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 13,222,027
shares of CIRCOR common stock to Watts
shareholders. After the distribution, CIRCOR will
have approximately 197 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 September , 1999.
Record Date September , 1999.
Distribution Date October , 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.
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 dated September , 1999. 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 [ ]
and Watts' June 30, 1999 total assets would have been [ ]. 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....................................... [ ]% 39% 38% 36% 37%
Watts revenues........................................ [ ]% 61% 62% 64% 63%
CIRCOR total assets................................... [ ]% 38% 34% 31% 31%
Watts total assets.................................... [ ]% 62% 66% 69% 69%
</TABLE>
(viii)
<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.
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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.
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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 33.9% of the outstanding common stock of CIRCOR. This percentage
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ownership does not give effect to the exercise of options to purchase 790,500
shares of common stock to be granted 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. 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 Certificate of Incorporation and 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."
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."
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
that CIRCOR believes are within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this document that are not
historical facts are identified as "forward-looking statements" for the
purpose of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. When used in this document, the words
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"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 in this document 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."
Watts will effect the distribution on or about October , 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
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transaction, which is September , 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 , 1999, Watts will distribute
approximately 13,222,027 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 , 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
shareholders. However, cash, if any, received by a Watts shareholder instead
of a fractional share of CIRCOR
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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 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. We also anticipate that a "when-
issued" trading market will develop in our common stock before the
distribution date.
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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 13,222,027 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 . 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. If there is a discrepancy between this
summary and the agreements, you should rely on the information in 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. Under the distribution agreement,
Watts will retain sole responsibility for all external debt for borrowed money
and other financings (including Watts' publicly held bonds) with the exception
of approximately $ outstanding under Watts' credit
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facility as well as certain capitalized lease obligations and other financings
related to 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,
including industrial butterfly valves and bronze ball valves. Watts will sell
these products under formula-based or market-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 a 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 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)
Short-term borrowings............................ $ 4,178 $ -- $ 4,178
<S> <C> <C> <C>
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
---------- ----------- --------
Net revenues.............................. $323,077 $ -- $323,077
<S> <C> <C> <C>
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......................... 9,141 578 (b) 9,719
Other.................................... (229) -- (229)
-------- ----- --------
INCOME BEFORE INCOME TAXES 20,971 (831) 20,140
Provision for income taxes................ 8,461 (332)(c) 8,129
-------- ----- --------
NET INCOME $ 12,510 $(499) $ 12,011
======== ===== ========
Net income per share--basic............... $ .90 (d)
========
Net income per share--diluted............. $ .90 (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
---------- ----------- --------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
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) To record interest expense on the funds assumed to be borrowed
under the CIRCOR credit facility and from the issuance of senior unsecured
notes. The borrowings are assumed to bear an annualized interest rate,
including amortization of related fees, of 8.1%, 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.
(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> <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 negotiating
with financial institutions for an unsecured $110.0 million credit facility
with a syndicate of banks led by ING Barings LLC. Approximately $100.0 million
of the proceeds available from the credit facility, together with
approximately $ million of cash from Watts, will be used to repay the
indebtedness assumed by CIRCOR under the Watts credit facility. Shortly after
the distribution, CIRCOR also intends to sell $75.0 million of senior
unsecured notes to investors
17
<PAGE>
in a private placement. The net proceeds from the notes offering will be used
to pay down outstanding debt under CIRCOR'S 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 29 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. Raw materials are readily
available and most can be supplied by a number of alternative vendors and
vendors assessed as not being capable of Year 2000 compliance have been
replaced. Risk assessments and contingency plans will be finalized during the
fall of 1999. Vendors and other third parties whose Year 2000 readiness is
questionable will be closely monitored and contingency plans will be invoked
when necessary.
In addition, 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
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.
18
<PAGE>
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.
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.
19
<PAGE>
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 $110.0 million unsecured
credit facility with a syndicate of banks led by ING Barings LLC, the
administrative agent for the credit facility. The credit facility will provide
that CIRCOR may borrow an aggregate principal amount of up to $110.0 million,
subject to the terms and conditions of the credit agreement. CIRCOR expects to
use approximately $100.0 million of the available funds, together with $ of
cash from Watts, to repay amounts assumed by CIRCOR under Watts' credit
facility, and the balance of the funds 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.
Shortly after the distribution, CIRCOR also intends to sell approximately
$75.0 million % senior unsecured notes to be sold through a private
placement with ING Barings LLC as placement agent. The net proceeds from the
notes offering will be used to pay down outstanding debt under CIRCOR'S credit
facility. 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.
20
<PAGE>
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 Corp., Atkomatic Valve
Company, 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.
21
<PAGE>
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
22
<PAGE>
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.
23
<PAGE>
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.
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.
24
<PAGE>
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>
25
<PAGE>
<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.
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<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.
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.
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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
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 Distribution Center Houston, Texas 58,000 Owned Warehouse
SSI Burlington, Ontario, Canada 25,000 Leased Manufacturing
Telford Valve Edmonton, Alberta, Canada 25,000 Leased Manufacturing
Contramatics 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.
Trademarks & Patents
Although we own certain patents and trademarks that we consider important,
we do not believe that our business and competitiveness as a whole depend on
any one or more patents or trademarks.
28
<PAGE>
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.
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 involved as third-party defendants in various civil product
liability actions pending in the U.S. District Court, Northern District of
29
<PAGE>
Ohio. The underlying claims have been filed by present or former employees of
various shipping companies for personal injuries allegedly received as a
result of exposure to asbestos. The shipping companies contend that they
installed in their vessels certain valves manufactured by Leslie Controls
and/or Spence Engineering which contained asbestos. Leslie Controls is also a
defendant in two similar matters pending in Superior Court of California, San
Francisco County. We have claimed rights to insurance coverage with respect to
these matters. Coverage has been disputed by certain of the carriers and,
therefore, recovery is questionable, a factor which we have considered in our
evaluation of these matters. We have established certain reserves which we
currently believe are adequate in light of the probable and estimable exposure
of pending and threatened litigation. Based on facts currently known to us, we
do not believe the outcome of these proceedings will have a material adverse
effect on our business, financial condition, or results of operations.
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>
Principal Occupation or
Name Employment for Past Five Years Age
---- ------------------------------ ---
<C> <S> <C>
David A. Bloss, Sr. Mr. Bloss was appointed Chairman, President and 49
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 President of Finance 61
for Cooper Industries, Inc. from to and
is now retired. Mr. Cross is also a director of
Magnetek, Inc.
David F. Dietz Mr. Dietz or his professional corporation has been 50
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 Executive Officer of 61
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 Chairman of Northmark Bank 57
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
Rick L. Needham Vice President, Operations 47
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.
Rick L. Needham joined CIRCOR in August 1999 as Vice President, Operations.
Mr. Needham served as President of Circle Seal Controls, Inc. from March 1994
until the distribution. Prior to that time, Mr. Needham spent five years with
Eaton Corporation, serving most recently as Business Unit Manager at the Valve
and Actuator Division.
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 five 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 -- -- 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 -- -- 10,000
Vice President, Operations
Rick L. Needham 1999 175,192 -- -- 10,000
Vice President, Operations
George M. Orza 1999 167,885 -- -- 10,000
Vice President, Operations
</TABLE>
- - --------
(1) Each of Messrs. Bloss, Trapani, Carlsen, Needham 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 $ on the date of grant of the
restricted stock units.
(4) Each of the named executive officers 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 , 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 , 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
terminate in accordance with their terms as a result of the termination of the
named executive officers' employment with Watts and the terminated Watts
options will not be converted into CIRCOR options. However, the named
executive officers will be granted CIRCOR options after the distribution under
the CIRCOR 1999 Stock Option and Incentive Plan.
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(6) 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
Rick L. Needham (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.
(6) Under the terms of the Watts 1989 Nonqualified Stock Option Plan, the
exercise price of options cannot be less than 50% of fair market value.
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 terminate in accordance with their terms as a result of the termination
of the named executive officers' employment with Watts, and the terminated
Watts options will not be converted into CIRCOR options. However, the named
executive officers will be granted CIRCOR options after the distribution under
the CIRCOR 1999 Stock Option and Incentive Plan.
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
Rick L. Needham......... 0 0 19,400 32,600 14,063 28,593
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 terminate in accordance with their terms as a result of the
termination of such individuals' employment with Watts, and the terminated
Watts options will not be converted into CIRCOR options. However, certain
employees of CIRCOR will be granted CIRCOR options after the distribution
under the CIRCOR 1999 Stock Option and Incentive Plan.
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 "cost" of each restricted stock unit and 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 2001. 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 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 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 shares of
common stock (subject to adjustment for stock splits and similar events) for
any one calendar year.
Summary of the 1999 Stock Plan
The following description of material terms of the 1999 Stock Plan is
intended to be a summary only. This summary is qualified in its entirety by
the full text 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 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 shares of common stock
(subject to adjustment for stock splits and similar events) for any one
calendar year.
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
and other key persons.
Other Option Terms. The Administrator has authority to determine the terms
of options granted under the 1999 Stock Plan. Generally, incentive options and
non-qualifying 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. 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 any 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 shares of common stock (subject to adjustment for stock
splits and similar events) for any one calendar year.
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 or
unvested 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 amended and restated 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 CIRCOR options 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, subject to certain exceptions, or ten years from
the date of grant.
Initial CIRCOR Option Grants
<TABLE>
<CAPTION>
Potential Realizable
Value of Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term (3)
----------------------------------------------- ----------------------
% of Total
Number Options Exercise
of Securities Granted to Or Base
Underlying Employees Price
Options In Fiscal ($/Sh) Expiration
Name Granted(#)(1)(2) Year (%) (3) Date 5% ($) 10% ($)
- - ---- ---------------- ---------- -------- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
David A. Bloss, Sr......
Cosmo S. Trapani........
Alan R. Carlsen.........
Rick L. Needham.........
George M. Orza..........
Dewain K. Cross.........
David F. Dietz..........
Timothy P. Horne........
Daniel J. Murphy, III...
</TABLE>
- - --------
(1) All options will be granted as of October 1, 1999.
(2) Options generally continue to vest at the rate of 20% of the specific
grant per year 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. However, certain options, which are part of a one-
time grant of performance accelerated stock options, will have a seven-
year cliff vesting provision with a performance accelerator that triggers
earlier vesting if certain of our financial goals are met.
(3) The exercise price of all options initially granted will be the fair
market value of the CIRCOR common stock on the date of grant, which will
be the first reported closing price of the CIRCOR common stock on the NYSE
after the distribution. Accordingly, the potential realizable value of
assumed annual rates of stock price appreciation cannot be calculated
prior to the distribution.
40
<PAGE>
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.
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 the greatest of 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 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 1998). 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 under tier one is age 62.
Tier two benefits are provided under the supplemental plan to 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. The annual normal
retirement benefit payable under tier two is equal to (1) the pre-Tax Reform
Act formula of 45% of the participant's final average compensation less 50% of
the participant's Social Security benefit, the result prorated for years of
service less than 25, less (2) the pension plan formula described above, with
annual
41
<PAGE>
compensation in excess of $186,667 disregarded for the 1997, 1998 and 1999
plan years ($175,000 for plan years prior to 1997). For the 1999, 1998 and
1997 plan years, annual compensation in excess of $271,580, $267,330 and
$261,564 respectively is disregarded for all purposes under tier two of the
supplemental plan.
Tier three benefits are provided under the supplemental plan to individuals
not covered under tier one or tier two who will be affected by IRS limits on
compensation taken into consideration under the pension plan. The annual
normal retirement benefit payable under the tier is based on the pension plan
formula set forth above, with annual compensation in excess of $271,580 and
$267,330 disregarded for 1999 and 1998, respectively. Compensation recognized
under the supplemental plan is generally W-2 pay, including amounts deferred
under the CIRCOR Management Stock Purchase Plan and pursuant to Sections 401
and 125 of the Internal Revenue Code and excluding taxable fringe benefits,
subject to certain limitations.
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.
The following table illustrates total annual normal retirement benefits
(payable from both the pension plan and the supplemental plan and assuming
attainment of age 65 during 1999) for various levels of final average
compensation and years of benefit service under tier two of the supplemental
plan, prior to application of the Social Security offset, which is an integral
part of the benefits payable under the supplemental plan.
<TABLE>
<CAPTION>
Final Average Compensation
for Estimated total Annual Retirement Benefit
Five Highest Consecutive
Years (Pension Plan plus Supplemental Plan, Tier Two)
in Last 10 Years Based on Years of Service(1)
---------------- --------------------------------------------------
25 Years
10 Years 15 Years 20 Years Or More
----------- ----------- --------------------------
<S> <C> <C> <C> <C>
$ 100,000................... $ 18,000 $ 27,000 $ 36,000 $ 45,000
150,000................... 27,000 40,500 54,000 67,500
200,000................... 31,658 47,487 63,316 79,145
250,000................... 40,658 60,987 81,316 101,645
300,000................... 49,658 74,487 99,316 124,145
350,000................... 54,252 81,377 108,503 135,629
</TABLE>
- - --------
(1)The annual pension plan and supplement plan benefit is computed on the
basis of a straight life annuity.
Messrs. Bloss, Carlsen, Needham and Orza have 7, 5, 6 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
42
<PAGE>
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. Other employees are
eligible for tier two benefits. 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.
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 years
beginning on the distribution date. The agreement will be automatically
extended for an additional one-year term unless either we or Mr. Bloss elect
to terminate it by notice in writing at least 90 days prior to the
anniversary of the agreement or each anniversary thereafter. Mr. Bloss's base
salary is $ . 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 the sum of his average base salary and average incentive
compensation (as determined in accordance with the agreement) for the
remaining term of his agreement or months, whichever is longer, subject to
certain CIRCOR offsets. In addition, certain CIRCOR options held by Mr. Bloss
would become exercisable.
43
<PAGE>
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 an
amount equal to times his most recent base salary and bonus, all of his
stock options will become immediately exercisable, and we will pay health
insurance premiums for Mr. Bloss and his family for one year. In addition,
CIRCOR 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 $ . Pursuant to the
agreement, Mr. Trapani will serve as a Chief Financial Officer, Treasurer and
Secretary. The agreement has a term of two years and has substantially similar
provisions as Mr. Bloss's agreement, except that the severance payment is
equal to the sum of the average base salary and incentive compensation (as
determined in accordance with the agreement) payable for the remaining length
of the term or months, whichever is longer. 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 an amount equal to
times his most recent base salary and bonus, all of his stock options will
become immediately exercisable, and we will pay health insurance premiums for
Mr. Trapani and his family for one year. 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 % of the voting power of the outstanding Watts
common stock and approximately 33.8% 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 August 4,
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> <C>
Timothy P. Horne (4) 3,955,391 (5)(6) %
Frederic B. Horne (8) 1,538,156 -- 6.96%
George B. Horne (4)(7) 1,062,300 -- 8.03%
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. (11) 4,500
Dewain K. Cross 0 *
David F. Dietz 0 *
Daniel J. Murphy, III 2,200 *
Cosmo S. Trapani 0 *
Alan R. Carlsen 4,429 *
Rick L. Needham 0 *
George M. Orza 0 *
All executive officers and
directors as a group (9) persons 3,966,520
</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), 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 Ray 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, 163,870 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 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 trustees of the 1997 Voting Trust, then Walter J. Flowers and
Daniel J. Murphy, III shall thereupon become co-trustee 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 a trustee. 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 with the remaining two trustees, 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 pursuant to the provisions of 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 in the 1997 Voting Trust the original
depositor of which (or the trustee of the original deposit of which) is
46
<PAGE>
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 July 26, 1999 by Frederic B. Horne (for
purposes of this footnote, "Mr. Horne"). The equity and voting percentages
were calculated as of August 4, 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. Also
includes 617,920 shares held for the benefit of Peter Horne under a
revocable trust for which Mr. Horne serves as trustee.
(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.
As of August 4, 1999, Watts employees, through direct ownership or employee
benefit plans, owned approximately [ ]% of the outstanding Watts common stock.
CIRCOR estimates that, after giving effect to the distribution, CIRCOR
employees will beneficially own approximately [ ]% of the CIRCOR common stock.
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 13,222,027
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 the Chairman or 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 unless otherwise provided by law. In
addition, the By-laws set forth certain advance notice and
48
<PAGE>
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 80% in the
case of any proposed amendment to the provisions of the Certificate relating
to the composition of the Board 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 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
49
<PAGE>
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.
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 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 specified cash exercise price
per unit, 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 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 and the George B. Horne Voting Trust, and
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 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
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. 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.
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
50
<PAGE>
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. 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.
/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 , 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 five 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, Tax Sharing
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.
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 to and following the Distribution who retire after the
Distribution. Watts will transfer assets to the
F-14
<PAGE>
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.
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.
(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 Sales $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 Sales $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 Sales $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 sales 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 sales $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 sales $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 August 6, 1999.
CIRCOR International, Inc.
By: /s/ David A. Bloss, Sr.
-----------------------------------
Name: David A. Bloss, Sr.
Title:Chairman of the Board,
Chief Executive Officer and
President
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, dated as of , 1999, 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 George B. Horne Voting Trust Agreement--1997 dated as of August
26, 1997 and as amended October 30, 1997, July 31, 1998, August 31,
1998 and August , 1999.
10.1 Form of 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 Nonqualified Stock Option Agreement under the 1999 Stock
Option and Incentive Plan.
10.4 Form of CIRCOR International, Inc. Management Stock Purchase Plan.
10.5 Form of CIRCOR International, Inc. Retirement Plan for Salaried
Employees, effective as of , 1999.
10.6 Supply Agreement, dated as of , 1999, between Watts Industries,
Inc. and CIRCOR International, Inc.
10.7 Tradename License Agreement, dated as of , 1999, between Watts
Industries, Inc. and CIRCOR International, Inc.
10.8 Lease Agreement, dated as of , 1999, between TBC Realty and CIRCOR
International, Inc.
10.9 Lease Agreement, dated as of , 1999, between [Multi-Employer and
Property Trust] [CIRCOR International, Inc.]
10.10 Revolving Credit Facility, dated as of , 1999, between
and CIRCOR International, Inc.
10.11 Securities Purchase Agreement, dated , 1999, between
and CIRCOR International, Inc.
10.12 Letter of Credit, Reimbursement and Guaranty Agreement dated June 1,
1994 by and among [CIRCOR International, Inc.], Spence Engineering
Company, Inc. and First Union National Bank of North Carolina. (11),
Amendment No. 1(14), Amendment No. 2 dated October 1, 1996.(18)
10.13 Trust Indenture from Village of Walden Industrial Development Agency
to The First National Bank of Boston, as Trustee, dated June 1,
1994.(11)
10.14 Loan Agreement between Hillsborough County Industrial Development
Authority and Leslie Controls, Inc. dated July 1, 1994.(11)
10.15 Letter of Credit, Reimbursement and Guaranty Agreement dated July 1,
1994 by and among [CIRCOR International, Inc.], Leslie Controls, Inc.
and First Union National Bank of North Carolina(11), Amendment No. 1
(14), Amendment No. 2 dated October 1, 1996.(18)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.16 Trust Indenture from Hillsborough County Industrial Development
Authority to The First National Bank of Boston, as Trustee, dated July
1, 1994.(11)
10.17 Loan Agreement between The Rutherford County Industrial Facilities and
Pollution Control Financing Authority and Watts Regulator Company
dated September 1, 1994.(12)
10.18 Letter of Credit, Reimbursement and Guaranty Agreement dated September
1, 1994 by and among [CIRCOR International, Inc.], Watts Regulator
Company and The First Union National Bank of North Carolina(12),
Amendment No. 1(14), Amendment No. 2 dated October 1, 1996.(18)
10.19 Trust Indenture from The Rutherford County Industrial Facilities and
Pollution Control Financing Authority to The First National Bank of
Boston, as Trustee, dated September 1, 1994.(12)
*10.20 Form of Indemnification Agreement between CIRCOR and each of its
directors.
21.1 List of subsidiaries of CIRCOR International, Inc.
*27.1 Financial Data Schedule
</TABLE>
- - --------
* Filed herewith
<PAGE>
EXHIBIT 2.1
DISTRIBUTION AGREEMENT
DATED AS OF
AUGUST __, 1999
BY AND BETWEEN
WATTS INDUSTRIES, INC.
AND
CIRCOR INTERNATIONAL, INC.
<PAGE>
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT ("Agreement") dated as of August __, 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
Sec 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 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.
"Affiliated Group" means an affiliated group of corporations (within the
meaning of Code Section 1504(a)).
"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
Transition Services Agreement, 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 Affiliated Group" means the Affiliated Group which has Circor as
its common parent (within the meaning of Code Section 1504(a)) for the taxable
period in question.
"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.
"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.
2
<PAGE>
"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.
"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, (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, and (iv)
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 September 30, 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 and additions to tax.
"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 Affiliated Group or the Circor Affiliated
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 Affiliated Group or the Circor Affiliated Group, or (B) any other
outstanding tax liability of the Watts Affiliated Group or the Circor Affiliated
Group.
3
<PAGE>
"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 official IRS acceptance of a Waiver of
Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of
Overassessment on Federal Revenue 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 Affiliated
Group and the Circor Affiliated 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 August ___, 1999 regarding the federal income tax consequences of the
Distribution and the Internal Reorganization.
4
<PAGE>
"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 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
Affiliated 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, Spin-Off 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 and additions to tax.
5
<PAGE>
"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).
"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 or Spin-Off Tax
"Transition Services Agreement" means the Transition Services Agreement
entered into on or before the Distribution Date between Watts and Circor, as
amended from time to time.
"Watts Affiliated Group" means the Affiliated Group which has Watts as its
common parent (within the meaning of Code Section 1504(a)) for the taxable
period in question.
"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, (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, and (iii) Liabilities listed on
Schedule L-2 attached hereto.
- - ------------
6
<PAGE>
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 contemplated by the Benefits Agreement.
(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;
7
<PAGE>
(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. 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, to each holder of Watts Common Stock who would
otherwise have received a fractional share of Circor Common Stock.
8
<PAGE>
ARTICLE III-INTERNAL REORGANIZATION; TRANSITION ARRANGEMENTS
Section 3.01. Internal Reorganization; Discharge of Liabilities.
-------------------------------------------------
(a) On or before 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 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.
(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.
9
<PAGE>
(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
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
10
<PAGE>
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 September 30, 1999 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 Intellectual Property Matters.
-------------------------------------
(a) Except as set forth in the Trademark License Agreement, 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
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.
11
<PAGE>
(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, and all Persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of any member of the Circor Group (in each case, in their respective
capacities as such), 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, and all Persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of any member of the Watts Group (in their capacities as such), and
their respective heirs, executors, administrators, 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, and all Persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of any member of the Watts Group (in their respective capacities as
such), 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, and all Persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of any member of the Circor Group (in each case, in their respective
capacities as such), and their respective heirs, executors, administrators,
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.
12
<PAGE>
(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.
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
13
<PAGE>
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 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.
14
<PAGE>
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 obligation sunder 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 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
15
<PAGE>
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 on or about September 1, 1999
Watts shall adopt a 401(k) plan with provisions substantially similar to those
of the Watts 401(k) Plan (the "Circor Group 401(k) 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 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 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 three tax-qualified retirement plans currently maintained by
Watts 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:
16
<PAGE>
(1) the total value of plan assets of the Watts Salaried Plan as
of the Distribution Date shall be determined;
(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 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 the [3-month Treasury bill rate]
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
17
<PAGE>
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;
(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 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
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<PAGE>
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 the [3-month Treasury bill rate] 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 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.
19
<PAGE>
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
Affiliated 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
Affiliated Group, and Circor shall be responsible for filing Returns for members
of the Circor Affiliated 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.
20
<PAGE>
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 Affiliated Group (and
any direct or indirect subsidiaries) and the Circor Affiliated Group (and any
direct or indirect subsidiaries) shall follow prior methods, practices and
procedures (except to the extent that departure from such methods, practices and
procedures would not materially adversely affect members of the other Affiliated
Group (or their direct or indirect subsidiaries) and Watts shall not
discriminate against members of the Circor Affiliated Group (or their direct or
indirect subsidiaries) in the preparation of Returns under Section 7.01(a) for
the period beginning July 1, 1999.
Section 7.03. Responsibility for Taxes Generally.
----------------------------------
(a) Domestic Income Taxes.
---------------------
(i) Except as otherwise provided herein, the Watts Affiliated Group
shall pay, and shall indemnify and hold harmless each member of the Circor
Affiliated Group (and each direct or indirect foreign subsidiary thereof) 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 Affiliated Group shall be
entitled to receive and retain all refunds of Income Taxes for which the Watts
Affiliated Group would have been responsible hereunder in the absence of the
refund.
(ii) Except as otherwise provided herein, the Circor Affiliated Group
shall pay, and shall indemnify and hold harmless each member of the Watts
Affiliated Group (and each direct or indirect foreign subsidiary thereof) from,
all Domestic Income Taxes with respect to which Circor is responsible for filing
a Return under Section 7.01(c), and the Circor Affiliated Group shall be
entitled to receive and retain all refunds of Income Taxes for which the Circor
Affiliated Group would have been responsible hereunder in the absence of the
refund.
(b) Other Taxes.
-----------
(i) Except as otherwise provided herein, the Watts Affiliated Group
shall pay, and shall indemnify and hold harmless each member of the Circor
Affiliated Group and each foreign subsidiary thereof from, all Other Taxes
attributable to a Watts Asset or the operation of the Watts Business, and the
Watts Affiliated Group shall be entitled to receive and retain all refunds of
Other Taxes for which the Watts Affiliated Group would have been responsible
hereunder in the absence of the refund.
(ii) Except as otherwise provided herein, the Circor Affiliated Group
shall pay, and shall indemnify and hold harmless each member of the Watts
Affiliated Group and each foreign subsidiary thereof from, all Other Taxes
attributable to a Circor Asset or the operation of the Circor Business, and the
Circor Affiliated Group shall be entitled to receive and
21
<PAGE>
retain all refunds of Other Taxes for which the Circor Affiliated Group would
have been responsible hereunder in the absence of the refund.
(iii) In no event shall the Circor Affiliated Group be required to
reimburse the Watts Affiliated Group for Other Taxes actually paid by the Watts
Affiliated Group prior to the Distribution Date.
(c) Transaction Taxes. Except as otherwise provided herein, the Watts
-----------------
Affiliated Group shall pay, and shall indemnify and hold harmless each member of
the Circor Affiliated Group (and each direct or indirect foreign subsidiary
thereof) from, all Transaction Taxes, and the Watts Affiliated Group shall be
entitled to receive and retain all refunds of Transaction Taxes for which the
Watts Affiliated Group would have been responsible hereunder in the absence of
the refund.
(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 Affiliated 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 Circor) 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 Affiliated 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 Watts) 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 Affiliated 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
Affiliated Group (and each direct or indirect foreign subsidiary thereof) 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 Circor (or any successor).
22
<PAGE>
(b) Watts Responsibility. Watts and any successor shall be
responsible for, and shall indemnify and hold harmless each member of the Circor
Affiliated Group (and each direct or indirect foreign subsidiary thereof) 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 Watts (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 either
with both parties or neither party, Watts shall be responsible for --% and
Circor shall be responsible for --% of any loss (including but not limited to
any increase in Domestic Income Taxes and reasonable expenses) directly or
indirectly caused by such Spin-Off Tax. Watts shall indemnify and hold harmless
each member of the Circor Affiliated Group (and each direct or indirect foreign
subsidiary thereof) from Watts' share of such loss, and Circor shall indemnify
and hold harmless each member of the Watts Affiliated Group (and each direct or
indirect foreign subsidiary thereof) from Circor's share of such loss.
(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 subsection
(e) of Section 355 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.
(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 subsection (e) of
Section 355 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.
(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
23
<PAGE>
& 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.
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. If the Tax
Indemnitor or the Tax Counsel conducting the contest advocates or fails to
protest before any taxing authority a position
24
<PAGE>
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 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 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 the 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
25
<PAGE>
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;
(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 Affiliated Group or the Circor Affiliated
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 Affiliated Group and each direct or indirect foreign
subsidiary thereof (and their officers and employees), and Circor agrees to
indemnify and hold harmless each member of the Watts Affiliated Group and each
direct or indirect foreign subsidiary thereof (and their officers and employees)
from any cost, fine, penalty or other expense of any kind attributable to the
negligence or misconduct of a member of the Watts Affiliated Group or the Circor
Affiliated Group, as the case may be, in supplying inaccurate or incomplete
information to a member of the other Affiliated Group.
Section 7.07. Sole Tax Sharing Agreement.
--------------------------
(a) All existing Tax sharing agreements or arrangements (if any),
written or unwritten, between the Watts Affiliated Group the Circor Affiliated
Group shall be or shall have been terminated as of the Distribution Date. On
and after the Distribution Date the Watts Affiliated Group and the Circor
Affiliated 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 Affiliated
Group and the Circor Affiliated Group.
(b) This Article VII does not address the Tax sharing arrangements, if
any, (i) among members of the Watts Affiliated Group or (ii) among members of
the Circor Affiliated Group.
26
<PAGE>
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 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
September 30, 1999, shall be canceled as of September 30, 1999 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
27
<PAGE>
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 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
28
<PAGE>
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).
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.
29
<PAGE>
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 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.
30
<PAGE>
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 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.
31
<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]
32
<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:
-------------------------------------
Timothy P. Horne
President and Chief Executive Officer
CIRCOR INTERNATIONAL, INC.
By:
-------------------------------------
David A. Bloss, Sr.
President and Chief Executive Officer
33
<PAGE>
EXHIBIT A
---------
Circor Group
34
<PAGE>
EXHIBIT B
---------
Sequence of Transactional Steps
See attached.
35
<PAGE>
Schedule 3.02(b)(ii)
--------------------
Agreements Surviving the Distribution
36
<PAGE>
Schedule A-1
------------
Circor Assets
37
<PAGE>
Schedule L-1
------------
Circor Liabilities
38
<PAGE>
Schedule L-2
------------
Watts Liabilities
39
<PAGE>
EXHIBIT 3.1
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CIRCOR INTERNATIONAL, INC.
CIRCOR International, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is CIRCOR International, Inc. The date of
the filing of its original Certificate of Incorporation (the "Original
Certificate") with the Secretary of State of the State of Delaware was July 1,
1999 under the name "CIRCOR International, Inc."
2. This Amended and Restated Certificate of Incorporation amends,
restates and integrates the provisions of the Original Certificate and (i) was
duly adopted by the Board of Directors in accordance with the provisions of
Section 245 of the Delaware General Corporation Law (the "DGCL"), (ii) was
declared by the Board of Directors to be advisable and in the best interests of
the Corporation and was directed by the Board of Directors to be submitted to
and be considered by the sole stockholder of the Corporation entitled to vote
thereon for approval by the affirmative vote of such stockholder in accordance
with Section 242 of the DGCL and (iii) was duly adopted by a consent in lieu of
a meeting of the holder of the Corporation's common stock, par value $.01 per
share (the "Common Stock") in accordance with the provisions of Sections 228 and
242 of the DGCL and the terms of the Original Certificate, such holder being the
sole stockholder of the Corporation's capital stock entitled to vote thereon.
3. The text of the Original Certificate is hereby amended and restated in
its entirety to provide as herein set forth in full.
ARTICLE I
---------
The name of the Corporation is CIRCOR International, Inc.
ARTICLE II
----------
The address of the Corporation's registered office in the State of Delaware
is c/o The Corporation Trust Company, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
<PAGE>
ARTICLE III
-----------
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the DGCL.
ARTICLE IV
----------
CAPITAL STOCK
-------------
The total number of shares of capital stock which the Corporation shall
have authority to issue is Thirty Million (30,000,000) shares, of which (a)
Twenty-nine Million (29,000,000) shares shall be common stock, par value $.01
per share (the "Common Stock"), and (b) One Million (1,000,000) shares shall
be undesignated preferred stock, par value $.01 per share (the "Undesignated
Preferred Stock").
Except as otherwise restricted by this Amended and Restated Certificate of
Incorporation, the Board of Directors may, at any time and from time to time, if
all of the shares of capital stock which the Corporation is authorized by this
Amended and Restated Certificate of Incorporation to issue have not been issued,
subscribed for, or otherwise committed to be issued, issue or take subscriptions
for additional shares of its capital stock up to the amount authorized in this
Amended and Restated Certificate of Incorporation.
Any and all such shares issued for which the full consideration has been
paid or delivered shall be fully paid shares of capital stock, and the holder of
such shares shall not be liable for any further call or assessment or any other
payment thereon.
The number of authorized shares of the class of Undesignated Preferred
Stock may from time to time be increased or decreased (but not below the number
of shares outstanding) by the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock entitled to vote, without a vote of the
holders of the Undesignated Preferred Stock (except as otherwise provided in any
certificate of designation of any series of Undesignated Preferred Stock).
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of stock
shall be determined in accordance with, or as set forth below in, this Article
IV.
A. COMMON STOCK
------------
Subject to all of the rights, powers and preferences of the Undesignated
Preferred Stock, and except as provided by law or in this Article IV (or in any
certificate of designation of any series of Undesignated Preferred Stock):
2
<PAGE>
(a) the holders of the Common Stock shall have the exclusive right to
vote for the election of directors and on all other matters requiring
stockholder action, each share being entitled to one vote;
(b) dividends may be declared and paid or set apart for payment upon
the Common Stock out of any assets or funds of the Corporation legally available
for the payment of dividends, but only when and as declared by the Board of
Directors or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock.
B. UNDESIGNATED PREFERRED STOCK
----------------------------
1. Authority to Issue. The total number of shares of Undesignated
------------------
Preferred Stock which the corporation shall have the authority to issue is One
Million (1,000,000) shares. Subject to any limitations prescribed by law, the
Board of Directors or any authorized committee thereof is expressly authorized
to provide for the issuance of the shares of Undesignated Preferred Stock in one
or more series of such stock, and by filing a certificate pursuant to applicable
law of the State of Delaware, to establish or change from time to time the
number of shares to be included in each such 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 thereof.
2. Powers, Preferences, Rights, Qualifications, Limitations and
------------------------------------------------------------
Restrictions of Each Series of Undesignated Preferred Stock. The Board of
- - -----------------------------------------------------------
Directors or any authorized committee thereof shall have the right to determine
or fix one or more of the following with respect to each series of Undesignated
Preferred Stock to the fullest extent permitted by law:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating and other rights, if any, with respect to dividends;
(c) The voting rights and powers, full or limited, if any, of the
shares of such series;
3
<PAGE>
(d) Whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions on which, such
shares may be redeemed;
(e) The amount or amounts payable upon the shares of such series and
any preferences applicable thereto in the event of voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares of such series shall be entitled to the benefit
of a sinking or retirement fund to be applied to the purchase or redemption
of such shares, and if so entitled, the amount of such fund and the manner
of its application, including the price or prices at which such shares may
be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the conversion price or
prices, or the rate or rates of exchange, and the adjustments thereof, if
any, at which such conversion or exchange may be made, and any other terms
and conditions of such conversion or exchange;
(h) The consideration for which the shares of such series shall be
issued;
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of Undesignated
Preferred Stock (or series thereof) and whether such shares may be reissued
as shares of the same or any other class or series of stock; and
(j) Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as the Board of Directors or any
authorized committee thereof may deem advisable.
ARTICLE V
STOCKHOLDER ACTION
------------------
1. Action without Meeting. Except as otherwise provided herein, any
----------------------
action required or permitted to be taken by the stockholders of the Corporation
at any annual or special meeting of stockholders of the Corporation must be
effected at a duly called annual or special meeting of stockholders and may not
be taken or effected by a written consent of stockholders in lieu thereof.
4
<PAGE>
2. Special Meetings. Except as otherwise required by law and subject to
----------------
the rights, if any, of the holders of any series of Undesignated Preferred
Stock, special meetings of the stockholders of the corporation may be called
only by the Board of Directors pursuant to a resolution approved by the majority
of the Directors then in office.
ARTICLE VI
DIRECTORS
---------
1. General. The business and affairs of the Corporation shall be managed
-------
by or under the direction of the Board of Directors except as otherwise provided
herein or required by law.
2. Election of Directors. Election of Directors need not be by written
---------------------
ballot unless the By-laws of the Corporation shall so provide.
3. Terms of Directors. The number of Directors of the Corporation shall
------------------
be fixed solely by resolution duly adopted from time to time by the Board of
Directors. The Directors, other than those who may be elected by the holders of
any series of Undesignated Preferred Stock of the Corporation, shall be
classified, with respect to the term for which they severally hold office, into
three classes, as nearly equal in number as possible. The initial Class I
Directors of the Corporation shall be [______________] and [__________________];
the initial Class II Director of the Corporation shall be
[____________________]; and the initial Class III Directors of the Corporation
shall be [___________] and [______________]. The initial Class I Directors shall
serve for a term expiring at the annual meeting of stockholders to be held in
2000, the initial Class II Director shall serve for a term expiring at the
annual meeting of stockholders to be held in 2001, and the initial Class III
Directors shall serve for a term expiring at the annual meeting of stockholders
to be held in 2002. At each annual meeting of stockholders, the successor or
successors of the class of Directors whose term expires at that meeting shall be
elected by a plurality of the votes cast at such meeting and shall hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election. The Directors elected to each class shall
hold office until their successors are duly elected and qualified or until their
earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Amended and Restated Certificate of Incorporation, the
holders of any one or more series of Undesignated Preferred Stock shall have the
right, voting separately as a series or together with holders of other such
series, to elect Directors at an annual or special meeting of stockholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Amended and Restated
Certificate of Incorporation and any certificate of designations applicable
thereto, except that such Directors so elected shall not be divided into classes
pursuant to this Article VI.3.
5
<PAGE>
4. Vacancies. Subject to the rights, if any, of the holders of any
---------
series of Undesignated Preferred Stock to elect Directors and to fill vacancies
in the Board of Directors relating thereto, any and all vacancies in the Board
of Directors, however occurring, including, without limitation, by reason of an
increase in the size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
if less than a quorum of the Board of Directors. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors, when the number of Directors is
increased or decreased, the Board of Directors shall determine the class or
classes to which the increased or decreased number of Directors shall be
apportioned; provided, however, that no decrease in the number of Directors
shall shorten the term of any incumbent Director. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board of Directors until the vacancy is
filled.
5. Removal. Subject to the rights, if any, of any series of Undesignated
-------
Preferred Stock to elect Directors and to remove any Director whom the holders
of any such stock have the right to elect, any Director (including persons
elected by Directors to fill vacancies in the Board of Directors) may be removed
from office (i) only with cause and (ii) only by the affirmative vote of the
holders of two-thirds of the shares then entitled to vote at an election of
directors. At least 30 days prior to any meeting of stockholders at which it is
proposed that any Director be removed from office, written notice of such
proposed removal shall be sent to the Director whose removal will be considered
at the meeting.
ARTICLE VII
LIMITATION OF LIABILITY
-----------------------
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (a) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the Director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Amended and Restated Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
6
<PAGE>
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
--------------------
1. Amendment by Directors. Except as otherwise provided by law, the By-
----------------------
laws of the Corporation may be amended or repealed by the Board of Directors by
the affirmative vote of a majority of the Directors then in office.
2. Amendment by Stockholders. The By-laws of the Corporation may be
-------------------------
amended or repealed at any annual meeting of stockholders, or special meeting of
stockholders called for such purpose as provided in the By-laws, by the
affirmative vote of at least two-thirds of the shares present in person or
represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal by
holders of voting stock, voting together as a single class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
-----------------------------------------
The Corporation reserves the right to amend or repeal this Amended and
Restated Certificate of Incorporation in the manner now or hereafter prescribed
by statute and this Amended and Restated Certificate of Incorporation, and all
rights conferred upon stockholders herein are granted subject to this
reservation. No amendment or repeal of this Amended and Restated Certificate of
Incorporation shall be made unless the same is first approved by the Board of
Directors pursuant to a resolution adopted by the Board of Directors in
accordance with Section 242 of the DGCL, and, except as otherwise provided by
law, thereafter approved by the stockholders. Whenever any vote of the holders
of voting stock is required, and in addition to any other vote of holders of
voting stock that is required by this Amended and Restated Certificate of
Incorporation or by law, the affirmative vote of the majority of the outstanding
shares entitled to vote on such amendment or repeal, and the affirmative vote of
the majority of the outstanding shares of each class entitled to vote thereon as
a class, at a duly constituted meeting of stockholders called expressly for such
purpose shall be required to amend or repeal any provisions of this Amended and
Restated Certificate of Incorporation; provided, however, that the affirmative
vote of not less than two-thirds of the outstanding shares entitled to vote on
such amendment or repeal, and the affirmative vote of not less than two-thirds
of the
7
<PAGE>
outstanding shares of each class entitled to vote thereon as a class, shall be
required to amend or repeal any of the provisions of Article V, Article VI,
Article VII or Article IX of this Amended and Restated Certificate of
Incorporation.
[End of Text]
8
<PAGE>
THIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is executed as of
this ____ day of __________________________, 1999.
CIRCOR International, Inc.
By:
-----------------------
Name:
Title:
9
<PAGE>
EXHIBIT 3.2
FORM OF
AMENDED AND RESTATED
BY-LAWS
OF
CIRCOR INTERNATIONAL, INC.
(the "Corporation")
ARTICLE I
---------
Stockholders
------------
SECTION 1. Annual Meeting. The annual meeting of stockholders (any such
--------------
meeting being referred to in these By-laws as an "Annual Meeting") shall be held
at the hour, date and place within or without the United States which is fixed
by the majority of the Board of Directors, the Chairman of the Board, if one is
elected, or the President, which time, date and place may subsequently be
changed at any time by vote of the Board of Directors. If no Annual Meeting has
been held for a period of thirteen months after the Corporation's last Annual
Meeting, a meeting in lieu thereof may be held, and such meeting shall have, for
the purposes of these By-laws or otherwise, all the force and effect of an
Annual Meeting. Any and all references hereafter in these By-laws to an Annual
Meeting or Annual Meetings also shall be deemed to refer to any meeting(s) in
lieu thereof.
SECTION 2. Special Meetings. Except as otherwise required by law and
----------------
subject to the rights, if any, of the holders of any series of preferred stock,
special meetings of the stockholders of the Corporation may be called only by
the Board of Directors pursuant to a resolution approved by the affirmative vote
of a majority of the directors then in office.
SECTION 3. Notice of Stockholder Business and Nominations.
----------------------------------------------
(a) Annual Meetings of Stockholders.
-------------------------------
(1) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
stockholders may be made at an Annual Meeting (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a
stockholder of record at the time of giving of notice provided for in this
By-law, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this By-law.
<PAGE>
(2) For nominations or other business to be properly brought before an
Annual Meeting by a stockholder pursuant to clause (c) of paragraph (a)(1)
of this By-law, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must be
a proper matter for stockholder action. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the 90th
day nor earlier than the close of business on the 120th day prior to the
first anniversary of the preceding year's Annual Meeting; provided,
however, that in the event that the date of the Annual Meeting is more than
30 days before or more than 60 days after such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the
close of business on the 120th day prior to such Annual Meeting and not
later than the close of business on the later of the 90th day prior to such
Annual Meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. In no event shall
the public announcement of an adjournment of an Annual Meeting commence a
new time period for the giving of a stockholder's notice as described
above. Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an
election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving
as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of
the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such stockholder, as they
appear on the Corporation's books, and of such beneficial owner, and (ii)
the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this By-law to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all of the nominees
for director or specifying the size of the increased Board of Directors
made by the Corporation at least 100 days prior to the first anniversary of
the preceding year's Annual Meeting, a stockholder's notice required by
this By-law shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 10th day following
the day on which such public announcement is first made by the Corporation.
<PAGE>
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) by any stockholder of the Corporation who is a stockholder of
record at the time of giving of notice provided for in this By-law, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this By-law. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder's notice required by paragraph (a)(2) of
this By-law shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of business on the 120th
day prior to such special meeting and not later than the close of business on
the later of the 90th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
(c) General.
-------
(1) Only such persons who are nominated in accordance with the
procedures set forth in this By-law shall be eligible for election as and
to serve as directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in this By-law. If the Board of
Directors or a designated committee thereof determines that any stockholder
proposal or nomination was not made in a timely fashion in accordance with
the provisions of this By-law or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
By-law in any material respect, such proposal or nomination shall not be
presented for action at the Annual Meeting in question. If neither the
Board of Directors nor such committee makes a determination as to the
validity of any stockholder proposal or nomination in the manner set forth
above, the presiding officer of the Annual Meeting shall determine whether
the stockholder proposal or nomination was made in accordance with the
terms of this By-law. If the presiding officer determines that any
stockholder proposal or nomination was not made in a timely fashion in
accordance with the provisions of this By-law or that the information
provided in a stockholder's notice does not satisfy the information
requirements of this By-law in any material respect, such proposal or
nomination shall not be presented for action at the Annual Meeting in
question. If the Board of Directors, a designated committee thereof or the
presiding officer determines that a stockholder proposal or nomination was
made in accordance with the requirements of this By-law, the presiding
officer shall so declare at the Annual
<PAGE>
Meeting and ballots shall be provided for use at the meeting with respect
to such proposal or nomination.
(2) For purposes of this By-law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission (including, without limitation, a Form 8-K) pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-law, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-law. Nothing in this By-law shall be deemed
to affect any rights of (i) stockholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act or (ii) the holders of any series of preferred stock to elect
directors under specified circumstances.
SECTION 4. Matters to be Considered at Special Meetings. Only those
--------------------------------------------
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.
SECTION 5. Notice of Meetings; Adjournments. A written notice of each
--------------------------------
Annual Meeting stating the hour, date and place of such Annual Meeting shall be
given by the Secretary or an Assistant Secretary (or other person authorized by
these By-laws or by law) not less than 10 days nor more than 60 days before the
Annual Meeting, to each stockholder entitled to vote thereat and to each
stockholder who, by law or under the Amended and Restated Certificate of
Incorporation of the Corporation (as the same may hereafter be amended and/or
restated, the "Certificate") or under these By-laws, is entitled to such notice,
by delivering such notice to him or by mailing it, postage prepaid, addressed to
such stockholder at the address of such stockholder as it appears on the
Corporation's stock transfer books. Such notice shall be deemed to be given
when hand delivered to such address or deposited in the mail so addressed, with
postage prepaid.
Notice of all special meetings of stockholders shall be given in the same
manner as provided for Annual Meetings, except that the written notice of all
special meetings shall state the purpose or purposes for which the meeting has
been called.
Notice of an Annual Meeting or special meeting of stockholders need not be
given to a stockholder if a written waiver of notice is signed before or after
such meeting by such stockholder or if such stockholder attends such meeting,
unless such attendance was for the express purpose of objecting at the beginning
of the meeting to the transaction of any business because the meeting was not
lawfully called or convened. Neither the business to be transacted
<PAGE>
at, nor the purpose of, any Annual Meeting or special meeting of stockholders
need be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously scheduled
Annual Meeting or special meeting of stockholders and any record date with
respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 3 of this
Article I of these By-laws or otherwise. In no event shall the public
announcement of an adjournment, postponement or rescheduling of any previously
scheduled meeting of stockholders commence a new time period for the giving of a
stockholder's notice under Section 3 of this Article I of these By-laws.
When any meeting is convened, the presiding officer may adjourn the meeting
if (a) no quorum is present for the transaction of business, (b) the Board of
Directors determines that adjournment is necessary or appropriate to enable the
stockholders to consider fully information which the Board of Directors
determines has not been made sufficiently or timely available to stockholders,
or (c) the presiding officer determines that adjournment is otherwise in the
best interests of the Corporation. When any Annual Meeting or special meeting
of stockholders is adjourned to another hour, date or place, notice need not be
given of the adjourned meeting other than an announcement at the meeting at
which the adjournment is taken of the hour, date and place to which the meeting
is adjourned; provided, however, that if the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote thereat and each stockholder who, by law or under the
Certificate or these By-laws, is entitled to such notice.
SECTION 6. Quorum. A majority of the shares entitled to vote, present in
------
person or represented by proxy, shall constitute a quorum at any meeting of
stockholders. If less than a quorum is present at a meeting, the holders of
voting stock representing a majority of the voting power present at the meeting
or the presiding officer may adjourn the meeting from time to time, and the
meeting may be held as adjourned without further notice, except as provided in
Section 5 of this Article I. At such adjourned meeting at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally noticed. The stockholders present at a duly constituted
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
SECTION 7. Voting and Proxies. Stockholders shall have one vote for each
------------------
share of stock entitled to vote owned by them of record according to the books
of the Corporation, unless otherwise provided by law or by the Certificate.
Stockholders may vote either in person or by written proxy, but no proxy shall
be voted or acted upon after three years from its date, unless the proxy
provides for a longer period. Proxies shall be filed with the Secretary of the
meeting before being voted. Except as otherwise limited therein or as otherwise
provided by law, proxies shall entitle the persons authorized thereby to vote at
any adjournment of such
<PAGE>
meeting, but they shall not be valid after final adjournment of such meeting. A
proxy with respect to stock held in the name of two or more persons shall be
valid if executed by or on behalf of any one of them unless at or prior to the
exercise of the proxy the Corporation receives a specific written notice to the
contrary from any one of them.
SECTION 8. Action at Meeting. When a quorum is present at any meeting,
-----------------
any matter before any meeting of stockholders shall be decided by a majority of
the votes properly cast on such matter other than an election to office, except
where a larger vote is required by law, by the Certificate or by these By-laws.
Any election of directors by stockholders shall be determined by a plurality of
the votes properly cast on the election of directors, except where a larger vote
is required by law, by the Certificate or by these By-laws. The Corporation
shall not directly or indirectly vote any shares of its own stock; provided,
however, that the Corporation may vote shares which it holds in a fiduciary
capacity to the extent permitted by law.
SECTION 9. Stockholder Lists. The Secretary or an Assistant Secretary (or
-----------------
the Corporation's transfer agent or other person authorized by these By-laws or
by law) shall prepare and make, at least 10 days before every Annual Meeting or
special meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the hour, date and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 10. Presiding Officer. The Chairman of the Board, if one is
-----------------
elected, or if not elected or in his or her absence, the President, shall
preside at all Annual Meetings or special meetings of stockholders and shall
have the power, among other things, to adjourn such meeting at any time and from
time to time, subject to Sections 5 and 6 of this Article I. The order of
business and all other matters of procedure at any meeting of the stockholders
shall be determined by the presiding officer.
SECTION 11. Voting Procedures and Inspectors of Elections. The
---------------------------------------------
Corporation shall, in advance of any meeting of stockholders, appoint one or
more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at
a meeting of stockholders, the presiding officer shall appoint one or more
inspectors to act at the meeting. Any inspector may, but need not, be an
officer, employee or agent of the Corporation. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict
<PAGE>
impartiality and according to the best of his or her ability. The inspectors
shall perform such duties as are required by the General Corporation Law of the
State of Delaware, as amended from time to time (the "DGCL"), including the
counting of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors. The presiding officer may review all determinations made by the
inspectors, and in so doing the presiding officer shall be entitled to exercise
his or her sole judgment and discretion and he or she shall not be bound by any
determinations made by the inspectors. All determinations by the inspectors and,
if applicable, the presiding officer, shall be subject to further review by any
court of competent jurisdiction.
ARTICLE II
----------
Directors
---------
SECTION 1. Powers. The business and affairs of the Corporation shall be
------
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate or required by law.
SECTION 2. Number and Terms. The number of directors of the Corporation
----------------
shall be fixed solely by resolution duly adopted from time to time by the Board
of Directors. The directors shall hold office as provided in the Certificate.
SECTION 3. Qualification. No director need be a stockholder of the
-------------
Corporation.
SECTION 4. Vacancies. Subject to the rights, if any, of the holders of
---------
any series of preferred stock to elect directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a director, shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office, even
if less than a quorum of the Board of Directors. Any director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
preferred stock to elect directors, when the number of directors is increased or
decreased, the Board of Directors shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned; provided,
however, that no decrease in the number of directors shall shorten the term of
any incumbent director. In the event of a vacancy in the Board of Directors,
the remaining directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
<PAGE>
SECTION 5. Removal. Directors may be removed from office in the manner
-------
provided in the Certificate.
SECTION 6. Resignation. A director may resign at any time by giving
-----------
written notice to the Chairman of the Board, if one is elected, the President or
the Secretary. A resignation shall be effective upon receipt, unless the
resignation otherwise provides.
SECTION 7. Regular Meetings. The regular annual meeting of the Board of
----------------
Directors shall be held, without notice other than this Section 7, on the same
date and at the same place as the Annual Meeting following the close of such
meeting of stockholders. Other regular meetings of the Board of Directors may
be held at such hour, date and place as the Board of Directors may by resolution
from time to time determine without notice other than such resolution.
SECTION 8. Special Meetings. Special meetings of the Board of Directors
----------------
may be called, orally or in writing, by or at the request of a majority of the
directors, the Chairman of the Board, if one is elected, or the President. The
person calling any such special meeting of the Board of Directors may fix the
hour, date and place thereof.
SECTION 9. Notice of Meetings. Notice of the hour, date and place of all
------------------
special meetings of the Board of Directors shall be given to each director by
the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated by the Chairman of
the Board, if one is elected, or the President. Notice of any special meeting
of the Board of Directors shall be given to each director in person, by
telephone, or by facsimile, telex, telecopy, telegram, or other written form of
electronic communication, sent to his or her business or home address, at least
24 hours in advance of the meeting, or by written notice mailed to his or her
business or home address, at least 48 hours in advance of the meeting. Such
notice shall be deemed to be delivered when hand delivered to such address, read
to such director by telephone, deposited in the mail so addressed, with postage
thereon prepaid if mailed, dispatched or transmitted if faxed, telexed or
telecopied, or when delivered to the telegraph company if sent by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any
notice of the hour, date or place of any meeting adjourned for less than 30 days
or of the business to be transacted thereat, other than an announcement at the
meeting at which such adjournment is taken of the hour, date and place to which
the meeting is adjourned.
A written waiver of notice signed before or after a meeting by a director
and filed with the records of the meeting shall be deemed to be equivalent to
notice of the meeting. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except
<PAGE>
where a director attends a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because such meeting
is not lawfully called or convened. Except as otherwise required by law, by the
Certificate or by these By-laws, neither the business to be transacted at, nor
the purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
SECTION 10. Quorum. At any meeting of the Board of Directors, a majority
------
of the total number of directors then in office shall constitute a quorum for
the transaction of business, but if less than a quorum is present at a meeting,
a majority of the directors present may adjourn the meeting from time to time,
and the meeting may be held as adjourned without further notice, except as
provided in Section 9 of this Article II. Any business which might have been
transacted at the meeting as originally noticed may be transacted at such
adjourned meeting at which a quorum is present.
SECTION 11. Action at Meeting. At any meeting of the Board of Directors
-----------------
at which a quorum is present, a majority of the directors present may take any
action on behalf of the Board of Directors, unless otherwise required by law, by
the Certificate or by these By-laws.
SECTION 12. Action by Consent. Any action required or permitted to be
-----------------
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
SECTION 13. Manner of Participation. Directors may participate in
-----------------------
meetings of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-laws.
SECTION 14. Committees. The Board of Directors, by vote of a majority of
----------
the directors then in office, may elect from its number one or more committees,
including, without limitation, an Executive Committee, a Compensation Committee,
a Stock Option Committee and an Audit Committee, and may delegate thereto some
or all of its powers except those which by law, by the Certificate or by these
By-laws may not be delegated. Except as the Board of Directors may otherwise
determine, any such committee may make rules for the conduct of its business,
but unless otherwise provided by the Board of Directors or in such rules, its
business shall be conducted so far as possible in the same manner as is provided
by these By-laws for the Board of Directors. All members of such committees
shall hold such offices at the pleasure of the Board of Directors. The Board of
Directors may abolish any such committee at any time. Any committee to which
the Board of Directors delegates any of its powers or duties shall keep records
of its meetings and shall report its action to the Board of Directors.
<PAGE>
SECTION 15. Compensation of Directors. Directors shall receive such
-------------------------
compensation for their services as shall be determined by a majority of the
Board of Directors provided that directors who are serving the Corporation as
employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as directors of the
Corporation.
ARTICLE III
-----------
Officers
--------
SECTION 1. Enumeration. The officers of the Corporation shall consist of
-----------
a President, a Treasurer, a Secretary and such other officers, including,
without limitation, a Chairman of the Board of Directors, a Chief Executive
Officer and one or more Vice Presidents (including Executive Vice Presidents or
Senior Vice Presidents), Assistant Vice Presidents, Assistant Treasurers and
Assistant Secretaries, as the Board of Directors may determine.
SECTION 2. Election. At the regular annual meeting of the Board following
--------
the Annual Meeting, the Board of Directors shall elect the President, the
Treasurer and the Secretary. Other officers may be elected by the Board of
Directors at such regular annual meeting of the Board of Directors or at any
other regular or special meeting.
SECTION 3. Qualification. No officer need be a stockholder or a director.
-------------
Any person may occupy more than one office of the Corporation at any time. Any
officer may be required by the Board of Directors to give bond for the faithful
performance of his or her duties in such amount and with such sureties as the
Board of Directors may determine.
SECTION 4. Tenure. Except as otherwise provided by the Certificate or by
------
these By-laws, each of the officers of the Corporation shall hold office until
the regular annual meeting of the Board of Directors following the next Annual
Meeting and until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
SECTION 5. Resignation. Any officer may resign by delivering his or her
-----------
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
SECTION 6. Removal. Except as otherwise provided by law, the Board of
-------
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the directors then in office.
<PAGE>
SECTION 7. Absence or Disability. In the event of the absence or
---------------------
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
SECTION 8. Vacancies. Any vacancy in any office may be filled for the
---------
unexpired portion of the term by the Board of Directors.
SECTION 9. President. The President shall, subject to the direction of
---------
the Board of Directors, have general supervision and control of the
Corporation's business. If there is no Chairman of the Board or if he or she is
absent, the President shall preside, when present, at all meetings of
stockholders and of the Board of Directors. The President shall have such other
powers and perform such other duties as the Board of Directors may from time to
time designate.
SECTION 10. Chairman of the Board. The Chairman of the Board, if one is
---------------------
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
SECTION 11. Chief Executive Officer. The Chief Executive Officer, if one
-----------------------
is elected, shall have such powers and shall perform such duties as the Board of
Directors may from time to time designate.
SECTION 12. Vice Presidents and Assistant Vice Presidents. Any Vice
---------------------------------------------
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
SECTION 13. Treasurer and Assistant Treasurers. The Treasurer shall,
----------------------------------
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have
such other duties and powers as may be designated from time to time by the Board
of Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 14. Secretary and Assistant Secretaries. The Secretary shall
-----------------------------------
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose.
In his or her absence from any such meeting, a temporary secretary chosen at the
meeting shall record the proceedings thereof.
<PAGE>
The Secretary shall have charge of the stock ledger (which may, however, be kept
by any transfer or other agent of the Corporation). The Secretary shall have
custody of the seal of the Corporation, and the Secretary, or an Assistant
Secretary, shall have authority to affix it to any instrument requiring it, and,
when so affixed, the seal may be attested by his or her signature or that of an
Assistant Secretary. The Secretary shall have such other duties and powers as
may be designated from time to time by the Board of Directors or the Chief
Executive Officer. In the absence of the Secretary, any Assistant Secretary may
perform his or her duties and responsibilities.
Any Assistant Secretary shall have such powers and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 15. Other Powers and Duties. Subject to these By-laws and to such
-----------------------
limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.
ARTICLE IV
----------
Capital Stock
-------------
SECTION 1. Certificates of Stock. Each stockholder shall be entitled to a
---------------------
certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board of Directors, the President or a Vice
President and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary. The Corporation seal and the signatures by the
Corporation's officers, the transfer agent or the registrar may be facsimiles.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the time of its issue. Every
certificate for shares of stock which are subject to any restriction on transfer
and every certificate issued when the Corporation is authorized to issue more
than one class or series of stock shall contain such legend with respect thereto
as is required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and unless
---------
otherwise provided by the Board of Directors, shares of stock may be transferred
only on the books of the Corporation by the surrender to the Corporation or its
transfer agent of the certificate theretofore properly endorsed or accompanied
by a written assignment or power of attorney properly executed, with transfer
stamps (if necessary) affixed, and with such proof of the authenticity of
signature as the Corporation or its transfer agent may reasonably require.
<PAGE>
SECTION 3. Record Holders. Except as may otherwise be required by law, by
--------------
the Certificate or by these By-laws, the Corporation shall be entitled to treat
the record holder of stock as shown on its books as the owner of such stock for
all purposes, including the payment of dividends and the right to vote with
respect thereto, regardless of any transfer, pledge or other disposition of such
stock, until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the Corporation of his
or her post office address and any changes thereto.
SECTION 4. Record Date. In order that the Corporation may determine
-----------
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date: (a) in the case of determination of stockholders entitled to vote at any
meeting of stockholders, shall, unless otherwise required by law, not be more
than sixty (60) nor less than ten (10) days before the date of such meeting and
(b) in the case of any other action, shall not be more than sixty (60) days
prior to such other action. If no record date is fixed: (i) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day immediately preceding
the day on which notice is given, or, if notice is waived, at the close of
business on the day immediately preceding the day on which the meeting is held
and (ii) the record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
SECTION 5. Replacement of Certificates. In case of the alleged loss,
---------------------------
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
---------
Indemnification
---------------
SECTION 1. Definitions. For purposes of this Article:
-----------
(a) "Director" means any person who serves or has served the Corporation as
a director on the Board of Directors of the Corporation.
<PAGE>
(b) "Officer" means any person who serves or has served the Corporation as
an officer appointed by the Board of Directors of the Corporation;
(c) "Non-Officer Employee" means any person who serves or has served as an
employee of the Corporation, but who is not or was not a Director or Officer;
(d) "Proceeding" means any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, inquiry, investigation,
administrative hearing or other proceeding, whether civil, criminal,
administrative, arbitrative or investigative;
(e) "Expenses" means all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of expert witnesses, private investigators and
professional advisors (including, without limitation, accountants and investment
bankers), travel expenses, duplicating costs, printing and binding costs, costs
of preparation of demonstrative evidence and other courtroom presentation aids
and devices, costs incurred in connection with document review, organization,
imaging and computerization, telephone charges, postage, delivery service fees,
and all other disbursements, costs or expenses of the type customarily incurred
in connection with prosecuting, defending, preparing to prosecute or defend,
investigating, being or preparing to be a witness in, settling or otherwise
participating in, a Proceeding;
(f) "Corporate Status" describes the status of a person who (i) in the case
of a Director, is or was a director of the Corporation and is or was acting in
such capacity, (ii) in the case of an Officer, is or was an officer, employee or
agent of the Corporation or is or was a director, officer, employee or agent of
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise which such Officer is or was serving at the request of the
Corporation, and (iii) in the case of a Non-Officer Employee, is or was an
employee of the Corporation or is or was a director, officer, employee or agent
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such Non-Officer Employee is or was serving at
the request of the Corporation. For purposes of subsection (ii) of this Section
1(f), an officer or director of the Company who is serving as a director,
partner, trustee, officer, employee or agent of a Subsidiary shall be deemed to
be serving at the request of the Company;
(g) "Disinterested Director" means, with respect to each Proceeding in
respect of which indemnification is sought hereunder, a Director of the
Corporation who is not and was not a party to such Proceeding; and
(h) "Subsidiary" shall mean any corporation, partnership, limited liability
company, joint venture, trust or other entity of which the Corporation owns
(either directly or through or together with another Subsidiary of the
Corporation) either (i) a general partner, managing member or other similar
interest or (ii) (A) 50% or more of the voting power of the voting capital
equity interests of such corporation, partnership, limited liability company,
joint venture or other entity, or (B) 50% or more of the outstanding voting
capital stock or other
<PAGE>
voting equity interests of such corporation, partnership, limited liability
company, joint venture or other entity.
SECTION 2. Indemnification of Directors and Officers. Subject to the
-----------------------------------------
operation of Section 4 of this Article V of these By-laws, each Director and
Officer shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the DGCL, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment) against any and
all Expenses, judgments, penalties, fines and amounts reasonably paid in
settlement that are incurred by such Director or Officer or on such Director's
or Officer's behalf in connection with any threatened, pending or completed
Proceeding or any claim, issue or matter therein, which such Director or Officer
is, or is threatened to be made, a party to or participant in by reason of such
Director's or Officer's Corporate Status, if such Director or Officer acted in
good faith and in a manner such Director or Officer reasonably believed to be in
or not opposed to the best interests of the Corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The rights of indemnification provided by this Section 2 shall
continue as to a Director or Officer after he or she has ceased to be a Director
or Officer and shall inure to the benefit of his or her heirs, executors,
administrators and personal representatives. Notwithstanding the foregoing, the
Corporation shall indemnify any Director or Officer seeking indemnification in
connection with a Proceeding initiated by such Director or Officer only if such
Proceeding was authorized by the Board of Directors of the Corporation, unless
such Proceeding was brought to enforce an Officer or Director's rights to
Indemnification under these By-laws.
SECTION 3. Indemnification of Non-Officer Employees. Subject to the
----------------------------------------
operation of Section 4 of this Article V of these By-laws, each Non-Officer
Employee may, in the discretion of the Board of Directors of the Corporation, be
indemnified by the Corporation to the fullest extent authorized by the DGCL, as
the same exists or may hereafter be amended, against any or all Expenses,
judgments, penalties, fines and amounts reasonably paid in settlement that are
incurred by such Non-Officer Employee or on such Non-Officer Employee's behalf
in connection with any threatened, pending or completed Proceeding, or any
claim, issue or matter therein, which such Non-Officer Employee is, or is
threatened to be made, a party to or participant in by reason of such Non-
Officer Employee's Corporate Status, if such Non-Officer Employee acted in good
faith and in a manner such Non-Officer Employee reasonably believed to be in or
not opposed to the best interests of the Corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The rights of indemnification provided by this Section 3 shall exist
as to a Non-Officer Employee after he or she has ceased to be a Non-Officer
Employee and shall inure to the benefit of his or her heirs, personal
representatives, executors and administrators. Notwithstanding the foregoing,
the Corporation may indemnify any Non-Officer Employee seeking indemnification
in connection with a Proceeding initiated by such Non-Officer
<PAGE>
Employee only if such Proceeding was authorized by the Board of Directors of the
Corporation.
SECTION 4. Good Faith. Unless ordered by a court, no indemnification
----------
shall be provided pursuant to this Article V to a Director, to an Officer or to
a Non-Officer Employee unless a determination shall have been made that such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Corporation and, with respect to
any criminal Proceeding, such person had no reasonable cause to believe his or
her conduct was unlawful. Such determination shall be made by (a) a majority
vote of the Disinterested Directors, even though less than a quorum of the Board
of Directors, (b) a committee comprised of Disinterested Directors, such
committee having been designated by a majority vote of the Disinterested
Directors (even though less than a quorum), (c) if there are no such
Disinterested Directors, or if a majority of Disinterested Directors so directs,
by independent legal counsel in a written opinion, or (d) by the stockholders of
the Corporation.
SECTION 5. Advancement of Expenses to Directors Prior to Final
---------------------------------------------------
Disposition. The Corporation shall advance all Expenses incurred by or on behalf
- - -----------
of any Director in connection with any Proceeding in which such Director is
involved by reason of such Director's Corporate Status within 10 days after the
receipt by the Corporation of a written statement from such Director requesting
such advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by such Director and shall be preceded or
accompanied by an undertaking by or on behalf of such Director to repay any
Expenses so advanced if it shall ultimately be determined that such Director is
not entitled to be indemnified against such Expenses.
SECTION 6. Advancement of Expenses to Officers and Non-Officer Employees
-------------------------------------------------------------
Prior to Final Disposition.
- - --------------------------
(a) Advancement to Officers. The Corporation may, at the discretion of the
-----------------------
Board of Directors of the Corporation, advance any or all Expenses incurred by
or on behalf of any Officer in connection with any Proceeding in which such is
involved by reason of such Officer's Corporate Status upon the receipt by the
Corporation of a statement or statements from such Officer requesting such
advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by such Officer and shall be preceded or
accompanied by an undertaking by or on behalf of such to repay any Expenses so
advanced if it shall ultimately be determined that such Officer is not entitled
to be indemnified against such Expenses.
(b) Advancement to Non-Officer Employees. The Corporation may, at the
------------------------------------
discretion of the Board of Directors or of any Officer who is authorized to act
on behalf of the Corporation, advance any or all Expenses incurred by or on
behalf of any Non-Officer Employee in connection with any Proceeding in which
such Non-Officer Employee is involved
<PAGE>
by reason of such Non-Officer Employee's Corporate Status upon the receipt by
the Corporation of a statement or statements from such Non-Officer Employee
requesting such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements shall
reasonably evidence the Expenses incurred by such Non-Officer Employee and shall
be preceded or accompanied by an undertaking by or on behalf of such Non-Officer
Employee to repay any Expenses so advanced if it shall ultimately be determined
that such Non-Officer Employee is not entitled to be indemnified against such
Expenses.
SECTION 7. Contractual Nature of Rights. The foregoing provisions of this
----------------------------
Article V shall be deemed to be a contract between the Corporation and each
Director and Officer entitled to the benefits hereof at any time while this
Article V is in effect, and any repeal or modification thereof shall not affect
any rights or obligations then existing with respect to any state of facts then
or theretofore existing or any Proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts. If a claim for
indemnification or advancement of Expenses hereunder by a Director or Officer is
not paid in full by the Corporation within (a) 60 days after receipt by the
Corporation's of a written claim for indemnification, or (b) in the case of a
Director, 10 days after receipt by the Corporation of documentation of Expenses
and the required undertaking, such Director or Officer may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim, and if successful in whole or in part, such Director or Officer shall
also be entitled to be paid the expenses of prosecuting such claim. The failure
of the Corporation (including its Board of Directors or any committee thereof,
independent legal counsel, or stockholders) to make a determination concerning
the permissibility of such indemnification or, in the case of a Director,
advancement of Expenses, under this Article V shall not be a defense to the
action and shall not create a presumption that such indemnification or
advancement is not permissible.
SECTION 8. Non-Exclusivity of Rights. The rights to indemnification and
-------------------------
advancement of Expenses set forth in this Article V shall not be exclusive of
any other right which any Director, Officer, or Non-Officer Employee may have or
hereafter acquire under any statute, provision of the Certificate or these
Bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise.
SECTION 9. Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any Director, Officer or Non-Officer Employee
against any liability of any character asserted against or incurred by the
Corporation or any such Director, Officer or Non-Officer Employee, or arising
out of any such person's Corporate Status, whether or not the Corporation would
have the power to indemnify such person against such liability under the DGCL or
the provisions of this Article V.
<PAGE>
ARTICLE VI
----------
Miscellaneous Provisions
------------------------
SECTION 1. Fiscal Year. Except as otherwise determined by the Board of
-----------
Directors, the fiscal year of the Corporation shall end on the last day of
December of each year.
SECTION 2. Seal. The Board of Directors shall have power to adopt and
----
alter the seal of the Corporation.
SECTION 3. Execution of Instruments. All deeds, leases, transfers,
------------------------
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the President or the Treasurer or any other officer, employee or agent
of the Corporation as the Board of Directors or Executive Committee may
authorize.
SECTION 4. Voting of Securities. Unless the Board of Directors otherwise
--------------------
provides, the Chairman of the Board, if one is elected, the President or the
Treasurer may waive notice of and act on behalf of this Corporation, or appoint
another person or persons to act as proxy or attorney in fact for this
Corporation with or without discretionary power and/or power of substitution, at
any meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this Corporation.
SECTION 5. Resident Agent. The Board of Directors may appoint a resident
--------------
agent upon whom legal process may be served in any action or proceeding against
the Corporation.
SECTION 6. Corporate Records. The original or attested copies of the
-----------------
Certificate, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock transfer books, which
shall contain the names of all stockholders, their record addresses and the
amount of stock held by each, may be kept outside the State of Delaware and
shall be kept at the principal office of the Corporation, at the office of its
counsel or at an office of its transfer agent or at such other place or places
as may be designated from time to time by the Board of Directors.
SECTION 7. Amendment of By-laws.
--------------------
(a) Amendment by Directors. Except as provided otherwise by law, these
----------------------
By-laws may be amended or repealed by the Board of Directors by the affirmative
vote of a majority of the directors then in office.
(b) Amendment by Stockholders. These By-laws may be amended or repealed
-------------------------
at any Annual Meeting, or special meeting of stockholders called for such
purpose, by the
<PAGE>
affirmative vote of at least two-thirds of the shares present in person or
represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal,
voting together as a single class.
Adopted ________ ___, 199_ and effective as of ________ ___, 199_.
<PAGE>
EXHIBIT 10.20
FORM OF
-------
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement is made as of this _____ day of ______________, 1999
("Agreement"), by and between CIRCOR International, Inc., a Delaware corporation
(the "Company," which term shall include, where appropriate, any Entity (as
hereinafter defined) controlled directly or indirectly by the Company) and
____________________ ("Indemnitee").
WHEREAS, it is essential to the Company that it be able to retain and
attract as directors the most capable persons available;
WHEREAS, increased corporate litigation has subjected directors to
litigation risks and expenses, and the limitations on the availability of
directors and officers liability insurance have made it increasingly difficult
for the Company to attract and retain such persons;
WHEREAS, the Company's Amended and Restated By-laws require it to indemnify
its directors to the fullest extent permitted by law and permit it to make other
indemnification arrangements and agreements;
WHEREAS, the Company desires to provide Indemnitee with specific
contractual assurance of Indemnitee's rights to full indemnification against
litigation risks and expenses (regardless of, among other things, any amendment
to or revocation of any such By-laws or any change in the ownership of the
Company or the composition of its Board of Directors); and
WHEREAS, Indemnitee is relying upon the rights afforded under this
Agreement in continuing in Indemnitee's position as a director of the Company.
NOW, THEREFORE, in consideration of the promises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
1. Definitions.
-----------
(a) "Corporate Status" describes the status of a person who is serving
----------------
or has served (i) as a director of the Company, (ii) in any capacity with
respect to any employee benefit plan of the Company, or (iii) as a director,
partner, trustee, officer, employee or agent of any other Entity at the request
of the Company. For purposes of subsection (iii) of this Section 1(a), an
officer or director of the Company who is serving or has served as a director,
partner, trustee, officer, employee or agent of a Subsidiary shall be deemed to
be serving at the request of the Company.
(b) "Entity" shall mean any corporation, partnership, limited
------
liability company, joint venture, trust, foundation, association, organization
or other legal entity.
<PAGE>
(c) "Expenses" shall mean all fees, costs and expenses incurred in
--------
connection with any Proceeding (as defined below), including, without
limitation, attorneys' fees, disbursements and retainers (including, without
limitation, any such fees, disbursements and retainers incurred by Indemnitee
pursuant to Sections 10 and 11(c) of this Agreement), fees and disbursements of
expert witnesses, private investigators and professional advisors (including,
without limitation, accountants and investment bankers), court costs, transcript
costs, fees of experts, travel expenses, duplicating, printing and binding
costs, telephone and fax transmission charges, postage, delivery services,
secretarial services, and other disbursements and expenses.
(d) "Indemnifiable Expenses," "Indemnifiable Liabilities" and
---------------------- -------------------------
"Indemnifiable Amounts" shall have the meanings ascribed to those terms in
- - ----------------------
Section 3(a) below.
(e) "Liabilities" shall mean judgments, damages, liabilities, losses,
-----------
penalties, excise taxes, fines and amounts paid in settlement.
(f) "Proceeding" shall mean any threatened, pending or completed
----------
claim, action, suit, arbitration, alternate dispute resolution process,
investigation, administrative hearing, appeal, or any other proceeding, whether
civil, criminal, administrative, arbitrative or investigative, whether formal or
informal, including a proceeding initiated by Indemnitee pursuant to Section 10
of this Agreement to enforce Indemnitee's rights hereunder.
(g) "Subsidiary" shall mean any corporation, partnership, limited
----------
liability company, joint venture, trust or other Entity of which the Company
owns (either directly or through or together with another Subsidiary of the
Company) either (i) a general partner, managing member or other similar interest
or (ii) (A) 50% or more of the voting power of the voting capital equity
interests of such corporation, partnership, limited liability company, joint
venture or other Entity, or (B) 50% or more of the outstanding voting capital
stock or other voting equity interests of such corporation, partnership, limited
liability company, joint venture or other Entity.
2. Services of Indemnitee. In consideration of the Company's covenants
----------------------
and commitments hereunder, Indemnitee agrees to serve or continue to serve as a
director of the Company. However, this Agreement shall not impose any
obligation on Indemnitee or the Company to continue Indemnitee's service to the
Company beyond any period otherwise required by law or by other agreements or
commitments of the parties, if any.
3. Agreement to Indemnify. The Company agrees to indemnify Indemnitee as
----------------------
follows:
(a) Subject to the exceptions contained in Section 4(a) below, if
Indemnitee was or is a party or is threatened to be made a party to any
Proceeding (other than an action by or in the right of the Company) by reason of
Indemnitee's Corporate Status, Indemnitee shall
2
<PAGE>
be indemnified by the Company against all Expenses and Liabilities incurred or
paid by Indemnitee in connection with such Proceeding (referred to herein as
"Indemnifiable Expenses" and "Indemnifiable Liabilities," respectively, and
collectively as "Indemnifiable Amounts").
(b) Subject to the exceptions contained in Section 4(b) below, if
Indemnitee was or is a party or is threatened to be made a party to any
Proceeding by or in the right of the Company to procure a judgment in its favor
by reason of Indemnitee's Corporate Status, Indemnitee shall be indemnified by
the Company against all Indemnifiable Expenses.
4. Exceptions to Indemnification. Indemnitee shall be entitled to
-----------------------------
indemnification under Sections 3(a) and 3(b) above in all circumstances other
than the following:
(a) If indemnification is requested under Section 3(a) and it has been
adjudicated finally by a court of competent jurisdiction that, in connection
with the subject of the Proceeding out of which the claim for indemnification
has arisen, Indemnitee failed to act (i) in good faith and (ii) in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, Indemnitee
had reasonable cause to believe that Indemnitee's conduct was unlawful,
Indemnitee shall not be entitled to payment of Indemnifiable Amounts hereunder.
(b) If indemnification is requested under Section 3(b) and
(i) it has been adjudicated finally by a court of competent
jurisdiction that, in connection with the subject of the Proceeding out of which
the claim for indemnification has arisen, Indemnitee failed to act (A) in good
faith and (B) in a manner Indemnitee reasonably believed to be in or not opposed
to the best interests of the Company, Indemnitee shall not be entitled to
payment of Indemnifiable Expenses hereunder; or
(ii) it has been adjudicated finally by a court of competent
jurisdiction that Indemnitee is liable to the Company with respect to any claim,
issue or matter involved in the Proceeding out of which the claim for
indemnification has arisen, including, without limitation, a claim that
Indemnitee received an improper personal benefit, no Indemnifiable Expenses
shall be paid with respect to such claim, issue or matter unless the Court of
Chancery or another court in which such Proceeding was brought shall determine
upon application that, despite the adjudication of liability, but in view of all
the circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for such Indemnifiable Expenses which such court shall deem proper.
5. Procedure for Payment of Indemnifiable Amounts. Indemnitee shall
----------------------------------------------
submit to the Company a written request specifying the Indemnifiable Amounts for
which Indemnitee seeks payment under Section 3 of this Agreement and the basis
for the claim. The Company shall pay such Indemnifiable Amounts to Indemnitee
within twenty (20) calendar days of receipt of the request. At the request of
the Company, Indemnitee shall furnish such
3
<PAGE>
documentation and information as are reasonably available to Indemnitee and
necessary to establish that Indemnitee is entitled to indemnification hereunder.
6. Indemnification for Expenses of a Party Who is Wholly or Partly
---------------------------------------------------------------
Successful. Notwithstanding any other provision of this Agreement, and without
- - ----------
limiting any such provision, to the extent that Indemnitee is, by reason of
Indemnitee's Corporate Status, a party to and is successful, on the merits or
otherwise, in any Proceeding, Indemnitee shall be indemnified against all
Expenses reasonably incurred by Indemnitee or on Indemnitee's behalf in
connection therewith. If Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses reasonably incurred by Indemnitee or on
Indemnitee's behalf in connection with each successfully resolved claim, issue
or matter. For purposes of this Agreement, the termination of any claim, issue
or matter in such a Proceeding by dismissal, with or without prejudice, shall be
deemed to be a successful result as to such claim, issue or matter.
7. Effect of Certain Resolutions. Neither the settlement or termination
-----------------------------
of any Proceeding nor the failure of the Company to award indemnification or to
determine that indemnification is payable shall create an adverse presumption
that Indemnitee is not entitled to indemnification hereunder. In addition, the
termination of any proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent shall not create a presumption
that Indemnitee did not act in good faith and in a manner which Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal action or proceeding, had reasonable cause to
believe that Indemnitee's action was unlawful.
8. Agreement to Advance Expenses; Conditions. The Company shall pay to
-----------------------------------------
Indemnitee all Indemnifiable Expenses incurred by Indemnitee in connection with
any Proceeding, including a Proceeding by or in the right of the Company, in
advance of the final disposition of such Proceeding. To the extent required by
Delaware law, Indemnitee hereby undertakes to repay the amount of Indemnifiable
Expenses paid to Indemnitee if it is finally determined by a court of competent
jurisdiction that Indemnitee is not entitled under this Agreement to
indemnification with respect to such Expenses. This undertaking is an unlimited
general obligation of Indemnitee.
9. Procedure for Advance Payment of Expenses. Indemnitee shall submit to
-----------------------------------------
the Company a written request specifying the Indemnifiable Expenses for which
Indemnitee seeks an advancement under Section 8 of this Agreement, together with
documentation evidencing that Indemnitee has incurred such Indemnifiable
Expenses. Payment of Indemnifiable Expenses under Section 8 shall be made no
later than twenty (20) calendar days after the Company's receipt of such
request.
4
<PAGE>
10. Remedies of Indemnitee.
----------------------
(a) Right to Petition Court. In the event that Indemnitee makes a
-----------------------
request for payment of Indemnifiable Amounts under Sections 3 and 5 above or a
request for an advancement of Indemnifiable Expenses under Sections 8 and 9
above and the Company fails to make such payment or advancement in a timely
manner pursuant to the terms of this Agreement, Indemnitee may petition the
Court of Chancery to enforce the Company's obligations under this Agreement.
(b) Burden of Proof. In any judicial proceeding brought under Section
---------------
10(a) above, the Company shall have the burden of proving that Indemnitee is not
entitled to payment of Indemnifiable Amounts hereunder.
(c) Expenses. The Company agrees to reimburse Indemnitee in full for
--------
any Expenses incurred by Indemnitee in connection with investigating, preparing
for, litigating, defending or settling any action brought by Indemnitee under
Section 10(a) above, or in connection with any claim or counterclaim brought by
the Company in connection therewith.
(d) Validity of Agreement. The Company shall be precluded from
---------------------
asserting in any Proceeding, including, without limitation, an action under
Section 10(a) above, that the provisions of this Agreement are not valid,
binding and enforceable or that there is insufficient consideration for this
Agreement and shall stipulate in court that the Company is bound by all the
provisions of this Agreement.
(e) Failure to Act Not a Defense. The failure of the Company
----------------------------
(including its Board of Directors or any committee thereof, independent legal
counsel or stockholders) to make a determination concerning the permissibility
of the payment of Indemnifiable Amounts or the advancement of Indemnifiable
Expenses under this Agreement shall not be a defense in any action brought under
Section 10(a) above, and shall not create a presumption that such payment or
advancement is not permissible.
11. Defense of the Underlying Proceeding.
------------------------------------
(a) Notice by Indemnitee. Indemnitee agrees to notify the Company
--------------------
promptly upon being served with any summons, citation, subpoena, complaint,
indictment, information, or other document relating to any Proceeding which may
result in the payment of Indemnifiable Amounts or the advancement of
Indemnifiable Expenses hereunder; provided, however, that the failure to give
-------- -------
any such notice shall not disqualify Indemnitee from the right to receive
payments of Indemnifiable Amounts or advancements of Indemnifiable Expenses
unless the Company's ability to defend in such Proceeding is materially and
adversely prejudiced thereby.
(b) Defense by Company. Subject to the provisions of the last
------------------
sentence of this Section 11(b) and of Section 11(c) below, the Company shall
have the right to defend Indemnitee in any Proceeding which may give rise to the
payment of Indemnifiable Amounts
5
<PAGE>
hereunder; provided, however that the Company shall notify Indemnitee of any
-------- -------
such decision to defend within ten (10) days of receipt of notice of any such
Proceeding under Section 11(a) above. The Company shall not, without the prior
written consent of Indemnitee, consent to the entry of any judgment against
Indemnitee or enter into any settlement or compromise which (i) includes an
admission of fault of Indemnitee or (ii) does not include, as an unconditional
term thereof, the full release of Indemnitee from all liability in respect of
such Proceeding, which release shall be in form and substance reasonably
satisfactory to Indemnitee. This Section 11(b) shall not apply to a Proceeding
brought by Indemnitee under Section 10(a) above or pursuant to Section 19 below.
(c) Indemnitee's Right to Counsel. Notwithstanding the provisions of
-----------------------------
Section 11(b) above, if in a Proceeding to which Indemnitee is a party by reason
of Indemnitee's Corporate Status, Indemnitee reasonably concludes that it may
have separate defenses or counterclaims to assert with respect to any issue
which may not be consistent with the position of other defendants in such
Proceeding, or if the Company fails to assume the defense of such proceeding in
a timely manner, Indemnitee shall be entitled to be represented by separate
legal counsel of Indemnitee's choice at the expense of the Company. In
addition, if the Company fails to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes any action
to declare this Agreement void or unenforceable, or institutes any action, suit
or proceeding to deny or to recover from Indemnitee the benefits intended to be
provided to Indemnitee hereunder, Indemnitee shall have the right to retain
counsel of Indemnitee's choice, at the expense of the Company, to represent
Indemnitee in connection with any such matter.
12. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to Indemnitee as follows:
(a) Authority. The Company has all necessary power and authority to
---------
enter into, and be bound by the terms of, this Agreement, and the execution,
delivery and performance of the undertakings contemplated by this Agreement have
been duly authorized by the Company.
(b) Enforceability. This Agreement, when executed and delivered by
--------------
the Company in accordance with the provisions hereof, shall be a legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the enforcement of creditors' rights generally.
6
<PAGE>
13. Insurance. The Company shall, from time to time, make the good faith
---------
determination whether or not it is practicable for the Company to obtain and
maintain a policy or policies of insurance with a reputable insurance company
providing Indemnitee with coverage for losses from wrongful acts, and to ensure
the Company's performance of its indemnification obligations under this
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all policies of director and officer liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's officers and directors. Notwithstanding the foregoing,
the Company shall have no obligation to obtain or maintain such insurance if the
Company determines in good faith that such insurance is not reasonably
available, if the premium costs for such insurance are disproportionate to the
amount of coverage provided, or if the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit. The Company
shall promptly notify Indemnitee of any good faith determination not to provide
such coverage.
14. Contract Rights Not Exclusive. The rights to payment of Indemnifiable
-----------------------------
Amounts and advancement of Indemnifiable Expenses provided by this Agreement
shall be in addition to, but not exclusive of, any other rights which Indemnitee
may have at any time under applicable law, the Company's By-laws or Certificate
of Incorporation, or any other agreement, vote of stockholders or directors (or
a committee of directors), or otherwise, both as to action in Indemnitee's
official capacity and as to action in any other capacity as a result of
Indemnitee's serving as a director of the Company.
15. Successors. This Agreement shall be (a) binding upon all successors
----------
and assigns of the Company (including any transferee of all or a substantial
portion of the business, stock and/or assets of the Company and any direct or
indirect successor by merger or consolidation or otherwise by operation of law)
and (b) binding on and shall inure to the benefit of the heirs, personal
representatives, executors and administrators of Indemnitee. This Agreement
shall continue for the benefit of Indemnitee and such heirs, personal
representatives, executors and administrators after Indemnitee has ceased to
have Corporate Status.
16. Subrogation. In the event of any payment of Indemnifiable Amounts
-----------
under this Agreement, the Company shall be subrogated to the extent of such
payment to all of the rights of contribution or recovery of Indemnitee against
other persons, and Indemnitee shall take, at the request of the Company, all
reasonable action necessary to secure such rights, including the execution of
such documents as are necessary to enable the Company to bring suit to enforce
such rights.
17. Change in Law. To the extent that a change in Delaware law (whether
-------------
by statute or judicial decision) shall permit broader indemnification or
advancement of expenses than is provided under the terms of the By-laws of the
Company and this Agreement,
7
<PAGE>
Indemnitee shall be entitled to such broader indemnification and advancements,
and this Agreement shall be deemed to be amended to such extent.
18. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement, or any clause thereof,
shall be determined by a court of competent jurisdiction to be illegal, invalid
or unenforceable, in whole or in part, such provision or clause shall be limited
or modified in its application to the minimum extent necessary to make such
provision or clause valid, legal and enforceable, and the remaining provisions
and clauses of this Agreement shall remain fully enforceable and binding on the
parties.
19. Indemnitee as Plaintiff. Except as provided in Section 10(c) of this
-----------------------
Agreement and in the next sentence, Indemnitee shall not be entitled to payment
of Indemnifiable Amounts or advancement of Indemnifiable Expenses with respect
to any Proceeding brought by Indemnitee against the Company, any Entity which it
controls, any director or officer thereof, or any third party, unless such
Company has consented to the initiation of such Proceeding. This Section shall
not apply to counterclaims or affirmative defenses asserted by Indemnitee in an
action brought against Indemnitee.
20. Modifications and Waiver. Except as provided in Section 17 above with
------------------------
respect to changes in Delaware law which broaden the right of Indemnitee to be
indemnified by the Company, no supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by each of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions of this Agreement (whether or
not similar), nor shall such waiver constitute a continuing waiver.
21. General Notices. All notices, requests, demands and other
---------------
communications hereunder shall be in writing and shall be deemed to have been
duly given (a) when delivered by hand, (b) when transmitted by facsimile and
receipt is acknowledged, or (c) if mailed by certified or registered mail with
postage prepaid, on the third business day after the date on which it is so
mailed:
(i) If to Indemnitee, to:
___________________________
___________________________
___________________________
___________________________
8
<PAGE>
(ii) If to the Company, to:
CIRCOR International, Inc.
35 Corporate Drive
Burlington, Massachusetts 01803
Facsimile: (___) ___-____
or to such other address as may have been furnished in the same manner by any
party to the others.
22. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced under the laws of Delaware without giving effect to the provisions
thereof relating to conflicts of law.
23. Consent to Jurisdiction. The Company hereby irrevocably and
-----------------------
unconditionally consents to the jurisdiction of the courts of the State of
Delaware and the United States District Court for the District of Delaware. The
Company hereby irrevocably and unconditionally waives any objection to the
laying of venue of any Proceeding arising out of or relating to this Agreement
in the courts of the State of Delaware or the United States District Court for
the District of Delaware, and hereby irrevocably and unconditionally waives and
agrees not to plead or claim that any such Proceeding brought in any such court
has been brought in an inconvenient forum.
[Remainder of Page Intentionally Left Blank]
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
CIRCOR INTERNATIONAL, INC.
By:_______________________________
Name:
Title:
INDEMNITEE:
__________________________________
[Insert Name of Indemnitee]
10
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<PAGE>
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<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1998 JUN-01-1997
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 6,714 6,241
<SECURITIES> 0 0
<RECEIVABLES> 49,857 53,565
<ALLOWANCES> 2,949 2,092
<INVENTORY> 108,910 89,788
<CURRENT-ASSETS> 184,217 157,847
<PP&E> 76,682 55,982
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 362,370 256,914
<CURRENT-LIABILITIES> 58,149 57,003
<BONDS> 12,540 12,265
0 0
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<CGS> 218,351 194,312
<TOTAL-COSTS> 218,351 194,312
<OTHER-EXPENSES> (562) (733)
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<INTEREST-EXPENSE> 9,141 3,898
<INCOME-PRETAX> 20,971 35,026
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<INCOME-CONTINUING> 12,510 12,510
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