<PAGE> 1
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
INCSTAR Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $.01 par value per share
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
16,505,457
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
$6.32 per share
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$106,016,814*
- --------------------------------------------------------------------------------
(5) Total fee paid:
$21,203
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials (original preliminary
materials submitted March 28, 1997).
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
* The filing fee was calculated as 1/50 of 1% of the aggregate proposed cash
payments to be made to securityholders, which is equal to the sum of (i)
product of $6.32 per share and the 16,505,457 shares to be converted into the
right to receive cash pursuant to the Merger plus (ii) $1,702,326, the
aggregate payment to be made in respect of the cancellation of outstanding
stock options.
<PAGE> 2
INCSTAR
[Science, Technology and Research Logo]
1990 INDUSTRIAL BOULEVARD
STILLWATER, MINNESOTA 55082
Dear Shareholder:
You are cordially invited to attend a Special Meeting of shareholders of
INCSTAR Corporation, a Minnesota corporation (the "Company"), to be held on
Thursday, June 26, 1997, at 9:00 a.m., local time, at the offices of Dorsey &
Whitney LLP, Pillsbury Center South, 220 South Sixth Street, Minneapolis,
Minnesota.
At the Special Meeting, you will be asked to consider and vote to approve
and adopt an Agreement and Plan of Merger, dated as of March 10, 1997 (the
"Merger Agreement"), providing for the merger (the "Merger") of ISTR Merger
Corporation ("Mergeco"), a Minnesota corporation, with and into the Company,
with the Company as the surviving corporation. Upon the consummation of the
Merger, each outstanding share of common stock, par value $.01 per share, of the
Company (the "Common Stock"), other than shares of Common Stock with respect to
which dissenters' rights have been properly exercised, will be converted into
the right to receive $6.32 in cash, without interest (the "Merger
Consideration"). As a result of the Merger, the Company will become a wholly
owned subsidiary of American Standard Medical Systems, Inc., a Delaware
corporation ("ASM"). ASM has been organized by and is a wholly owned subsidiary
of American Standard Inc., a Delaware corporation ("ASI").
A special committee (the "Special Committee") of the Company's three
independent directors, who are not members of management or employees of the
Company and are not affiliated with the Company's majority shareholder, Biofin
Holding International B.V. ("Biofin") or its affiliates, received ASI's proposal
with respect to the Merger and actively negotiated the terms of the Merger and
the Merger Agreement. In connection with such negotiations, the Special
Committee retained Cowen & Company ("Cowen") to act as its financial advisor.
Cowen has rendered its opinion to the Special Committee that, as of the date of
its opinion, and subject to the limits and qualifications therein, the
consideration to be received in the Merger by shareholders of the Company (other
than Biofin and its affiliates, as to which no opinion was rendered) is fair,
from a financial point of view, to such shareholders. The written opinion of
Cowen, dated March 10, 1997, is included in the enclosed Proxy Statement and
should be read carefully and in its entirety by shareholders. The Special
Committee has unanimously recommended to the Board of Directors that the Merger
Agreement be approved and adopted.
THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS OF THE COMPANY HAVE
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER. THE SPECIAL COMMITTEE HAS UNANIMOUSLY DETERMINED
THAT THE TERMS OF THE MERGER, INCLUDING THE MERGER CONSIDERATION, ARE FAIR TO,
AND IN THE BEST INTERESTS OF, THE COMPANY'S SHAREHOLDERS (OTHER THAN BIOFIN AND
ITS AFFILIATES) AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY
VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT. THE BOARD OF DIRECTORS HAS
UNANIMOUSLY DETERMINED THAT THE TERMS OF THE MERGER, INCLUDING THE MERGER
CONSIDERATION, ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY'S
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE MERGER AGREEMENT BE APPROVED
AND ADOPTED.
The enclosed Proxy Statement contains detailed information concerning the
Special Meeting, the Merger and the Company. Please give this information your
careful consideration.
Whether or not you plan to attend, it is important that your shares are
represented at the Special Meeting. Accordingly, you are requested to promptly
complete, sign and date the enclosed proxy and return it in the envelope
provided, which requires no postage if mailed in the United States.
PLEASE DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME. If the Merger is
consummated, you will be sent instructions regarding the procedures for
exchanging your existing stock certificates for a cash payment.
Thank you for your consideration.
Very truly yours,
John J. Booth
John J. Booth
President, Chief Executive Officer
and Acting Chairman of the Board
Minneapolis, Minnesota
May 30, 1997
<PAGE> 3
INCSTAR
[Science, Technology and Research Logo]
1990 INDUSTRIAL BOULEVARD
STILLWATER, MINNESOTA 55082
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 26, 1997
To the shareholders of INCSTAR Corporation:
Notice is hereby given that a special meeting of shareholders (the "Special
Meeting") of INCSTAR Corporation, a Minnesota corporation (the "Company"), will
be held on Thursday, June 26, 1997, at 9:00 a.m., local time, at the offices of
Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth Street,
Minneapolis, Minnesota, to consider and act upon:
1. A proposal to approve and adopt an Agreement and Plan of Merger,
dated as of March 10, 1997, providing for the merger (the "Merger") of ISTR
Merger Corporation ("Mergeco"), a Minnesota corporation and a wholly owned
subsidiary of American Standard Medical Systems, Inc., a Delaware
corporation ("ASM"), which is a wholly owned subsidiary of American
Standard Inc. ("ASI"), with and into the Company, with the Company as the
surviving corporation. Upon the consummation of the Merger, each
outstanding share of common stock, par value $.01 per share, of the Company
(the "Common Stock"), other than shares of Common Stock with respect to
which dissenters' rights have been properly exercised, will be converted
into the right to receive $6.32 in cash, without interest. As a result of
the Merger, the Company will become an indirect, wholly owned subsidiary of
ASI.
2. Such other business as may properly come before the Special Meeting
or any adjournment or adjournments thereof.
The Board of Directors of the Company has fixed the close of business on
May 9, 1997, as the record date for the determination of shareholders entitled
to notice of, and to vote at, the Special Meeting. Accordingly, holders of
record of shares of Common Stock at the close of business on such date will be
entitled to vote at the Special Meeting and any adjournment or adjournments
thereof.
A summary of certain provisions of Sections 302A.471 and 302A.473 of the
Minnesota Business Corporation Act (the "MCBA") pertaining to the rights of
dissenting shareholders if the Merger is consummated is included in the
accompanying Proxy Statement under the heading "Rights of Dissenting
Shareholders," and copies of Sections 302A.471 and 302A.473 of the MCBA are set
forth in Exhibit C to the attached Proxy Statement.
PLEASE EXECUTE, DATE AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ENVELOPE
PROVIDED, WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING.
By order of the Board of Directors
J. Andrew Herring
J. Andrew Herring
Secretary
Minneapolis, Minnesota
May 30, 1997
<PAGE> 4
INCSTAR
[Science, Technology and Research Logo]
1990 Industrial Boulevard
Stillwater, Minnesota 55082
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF SHAREHOLDERS
To Be Held on June 26, 1997
This Proxy Statement is furnished to shareholders of INCSTAR Corporation, a
Minnesota corporation ("INCSTAR" or the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board of
Directors") from the holders of shares of its outstanding common stock, par
value $.01 per share (the "Common Stock"), for use at the special meeting of
shareholders to be held on Thursday, June 26, 1997 at Dorsey & Whitney LLP,
Pillsbury Center South, 220 South Sixth Street, Minneapolis, Minnesota, at 9:00
a.m., local time, and at any adjournment or adjournments thereof (the "Special
Meeting"). The Board of Directors has fixed the close of business on May 9,
1997, as the record date (the "Record Date") for the determination of
shareholders entitled to notice of and to vote at the Special Meeting.
At the Special Meeting, the shareholders will consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of March
10, 1997 (the "Merger Agreement"), among American Standard Inc., a Delaware
corporation ("ASI"), American Standard Medical Systems, Inc., a Delaware
corporation and a wholly owned subsidiary of ASI ("ASM"), ISTR Merger
Corporation, a Minnesota corporation and a wholly owned subsidiary of ASM
("Mergeco"), and the Company. The Merger Agreement provides for the merger (the
"Merger") of Mergeco with and into the Company, with the Company as the
surviving corporation. Pursuant to the Merger Agreement, each share of Common
Stock issued and outstanding immediately prior to the time when the Merger
becomes effective (the "Effective Time"), other than shares of Common Stock with
respect to which dissenters' rights have been properly exercised (the
"Dissenting Shares"), will be converted into and become the right to receive
$6.32 per share in cash, without interest (the "Merger Consideration"). See "THE
MERGER AGREEMENT -- Consideration to be Received by Shareholders." As a result
of the Merger, the Company will become an indirect wholly owned subsidiary of
ASI.
THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS OF THE COMPANY HAVE
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER. THE SPECIAL COMMITTEE HAS UNANIMOUSLY DETERMINED
THAT THE TERMS OF THE MERGER, INCLUDING THE MERGER CONSIDERATION, ARE FAIR TO,
AND IN THE BEST INTERESTS OF, THE COMPANY'S SHAREHOLDERS (OTHER THAN BIOFIN AND
ITS AFFILIATES) AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY
VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT. THE BOARD OF DIRECTORS HAS
UNANIMOUSLY DETERMINED THAT THE TERMS OF THE MERGER, INCLUDING THE MERGER
CONSIDERATION, ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY'S
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE MERGER AGREEMENT BE APPROVED
AND ADOPTED.
This Proxy Statement is first being mailed to shareholders of the Company
on or about June 2, 1997.
The date of this Proxy Statement is May 30, 1997.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................... S-1
The Parties............................................... S-1
INCSTAR Corporation.................................... S-1
American Standard Inc. ................................ S-1
American Standard Medical Systems, Inc. ............... S-1
ISTR Merger Corporation................................ S-1
The Special Meeting....................................... S-1
Date; Time and Place of the Special Meeting............ S-1
Record Date and Shareholders Entitled to Vote.......... S-1
Purpose of the Special Meeting and Vote Required....... S-2
The Merger................................................ S-2
Effective Time of the Merger........................... S-2
Effect of the Merger................................... S-2
Conversion of Common Stock; Merger Consideration....... S-2
Background of the Merger............................... S-3
Recommendations of the Special Committee and the Board
of Directors.......................................... S-3
Opinion of Financial Advisor........................... S-4
Interests of Certain Persons in the Merger................ S-4
European Agreement..................................... S-4
Stock Options.......................................... S-5
Certain Agreements..................................... S-5
Indemnification........................................ S-5
The Merger Agreement...................................... S-5
Conditions to the Merger............................... S-5
No Solicitation........................................ S-5
Termination; Termination Fee and Expenses.............. S-6
Accounting Treatment...................................... S-6
Federal Income Tax Consequences........................... S-6
Rights of Dissenting Shareholders......................... S-6
THE SPECIAL MEETING......................................... 1
Date; Time; Place; Record Date and Purpose................ 1
Votes Required; Quorum.................................... 1
Proxies................................................... 1
THE MERGER.................................................. 2
Background of the Merger.................................. 2
Recommendations of the Special Committee and the Board of
Directors.............................................. 7
Opinion of Financial Advisor.............................. 9
Purpose and Structure of the Merger....................... 13
Source and Amount of Funds................................ 13
Effect of Merger.......................................... 13
Antitrust Matters......................................... 14
INTERESTS OF CERTAIN PERSONS IN THE MERGER.................. 14
European Agreement........................................ 14
Stock Options............................................. 15
Certain Agreements........................................ 15
Special Committee Compensation............................ 16
Indemnification........................................... 16
</TABLE>
i
<PAGE> 6
THE MERGER AGREEMENT........................................ 16
Effective Time............................................ 16
Consideration To Be Received by Shareholders.............. 17
Payment for Shares........................................ 17
Representations and Warranties of the Company............. 17
Representations and Warranties of ASI and Mergeco......... 18
Operations of the Company Prior to the Merger............. 18
No Solicitation........................................... 19
Transfer Taxes............................................ 19
Conditions to Consummation of the Merger.................. 20
Termination............................................... 20
Termination Fee and Expenses.............................. 21
ACCOUNTING TREATMENT OF THE MERGER.......................... 22
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER....... 22
Summary................................................... 23
RIGHTS OF DISSENTING SHAREHOLDERS........................... 24
INFORMATION CONCERNING THE COMPANY.......................... 27
Market Prices and Dividends............................... 27
Selected Financial Data................................... 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 29
Business.................................................. 32
Properties................................................ 38
Legal Proceedings......................................... 38
Management................................................ 39
Executive Compensation.................................... 41
Options................................................... 42
Security Ownership of Certain Beneficial Owners and
Management............................................. 43
INDEPENDENT ACCOUNTANTS..................................... 44
AVAILABLE INFORMATION....................................... 44
OTHER MATTERS............................................... 45
FINANCIAL STATEMENTS........................................ F-1
Index to Consolidated Financial Statements................ F-1
EXHIBIT A -- Agreement and Plan of Merger................... A-1
EXHIBIT B -- Opinion of Cowen & Company..................... B-1
EXHIBIT C -- Sections 302A.471 and 302A.473 of the Minnesota
Business Corporation Act -- Rights of
Dissenting Shareholders........................ C-1
ii
<PAGE> 7
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. This Summary does not purport to be complete and should
be read in conjunction with, and is qualified in its entirety by reference to,
the more detailed information and financial statements appearing elsewhere in
this Proxy Statement and the exhibits hereto. Shareholders are urged to read
this Proxy Statement, including such exhibits, in its entirety.
THE PARTIES
INCSTAR CORPORATION
The Company and its subsidiaries develop, manufacture, and market test kits
and related products used by major hospitals, clinical reference laboratories
and researchers involved in diagnosing and treating immunological conditions.
See "INFORMATION CONCERNING THE COMPANY -- Business." The Company's principal
executive offices are located at 1990 Industrial Boulevard, Stillwater,
Minnesota, 55082, and its telephone number is (612) 439-9710.
AMERICAN STANDARD INC.
ASI is a global manufacturer of high quality brand name products in three
major product groups: (i) air conditioning systems, (ii) bathroom and kitchen
fixtures and fittings and (iii) braking and control systems for medium-sized and
heavy trucks, buses, trailers and utility vehicles. ASI is a wholly owned
subsidiary of American Standard Companies Inc., a New York Stock Exchange listed
company. ASI's principal executive offices are located at One Centennial Avenue,
P.O. Box 6820, Piscataway, New Jersey 08855-6820, and its telephone number is
(908) 980-6000.
AMERICAN STANDARD MEDICAL SYSTEMS, INC.
ASM was formed by ASI in 1995 to pursue initiatives in the medical
diagnostics field and to hold the stock of certain of ASI's medical diagnostic
businesses, including Sienna Biotech International Inc., a wholly owned
subsidiary of ASI ("Sienna"). ASM's principal executive offices are located at
One Centennial Avenue, P.O. Box 6820, Piscataway, New Jersey 08855-6820, and its
telephone number is (908) 980-6000.
ISTR MERGER CORPORATION
Mergeco is a corporation recently organized by ASI for the purpose of
effecting the Merger. It has no material assets and has not engaged in any
material activities except in connection with the Merger and the transactions
contemplated thereby. Mergeco's principal executive offices are located at One
Centennial Avenue, P.O. Box 6820, Piscataway, New Jersey 08855-6820, and its
telephone number is (908) 980-6000.
THE SPECIAL MEETING
DATE; TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting of the shareholders of the Company will be held on
Thursday, June 26, 1997, at 9:00 a.m., local time, at the offices of Dorsey &
Whitney LLP, Pillsbury Center South, 220 South Sixth Street, Minneapolis,
Minnesota (the "Special Meeting").
RECORD DATE AND SHAREHOLDERS ENTITLED TO VOTE
The Board of Directors has fixed the close of business on May 9, 1997 as
the record date for the determination of shareholders entitled to notice of and
to vote at the Special Meeting and at any adjournment or adjournments thereof
(the "Record Date"). Each share of Common Stock issued and outstanding on the
Record Date entitles the holder thereof to one vote on each proposal presented
at the Special Meeting.
S-1
<PAGE> 8
PURPOSE OF THE SPECIAL MEETING AND VOTE REQUIRED
At the Special Meeting and at any adjournment or adjournments thereof,
shareholders of record will be asked to consider and vote upon a proposal to
approve and adopt the Merger Agreement, a copy of which is attached as Exhibit A
to this Proxy Statement. The Merger Agreement provides that Mergeco will be
merged with and into the Company, with the result that the Company, as the
surviving corporation (the "Surviving Corporation"), will become an indirect
wholly owned subsidiary of ASI.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock of the Company is required for approval and adoption of the
Merger Agreement. As of the Record Date, 16,505,457 shares of Common Stock were
issued and outstanding, of which 8,507,707 shares (approximately 52% of the
outstanding shares of Common Stock) were beneficially owned by Biofin Holding
International B.V. ("Biofin") and 244,047 shares (approximately 1.5% of the
outstanding shares of Common Stock) were beneficially owned by directors and
executive officers of the Company. Although neither Biofin nor such directors
and executive officers are under any contractual or other legal obligation to
vote their shares in favor of the approval and adoption of the Merger Agreement,
the Company has been advised that Biofin and the Company's directors and
executive officers intend to vote all of their shares in favor of the approval
and adoption of the Merger Agreement. In such event, subject to earlier
termination of the Merger Agreement (see "THE MERGER AGREEMENT -- Termination;
Termination Fees and Expenses"), the affirmative vote of such shares will be
sufficient for the approval and adoption of the Merger Agreement.
THE MERGER
EFFECTIVE TIME OF THE MERGER
The effective time of the Merger (the "Effective Time") will occur at the
date and time when properly executed Articles of Merger relating to the Merger
are duly filed with the Secretary of State of the State of Minnesota in
accordance with the laws of the State of Minnesota. The required filing is
expected to be made as soon as practicable after approval of the Merger
Agreement and the satisfaction or the waiver of all conditions to the Merger.
EFFECT OF THE MERGER
At the Effective Time, pursuant to the Merger Agreement, (i) Mergeco will
be merged with and into the Company, which will be the Surviving Corporation,
(ii) the Company will become an indirect, wholly owned subsidiary of ASI, and
(iii) each share of Common Stock issued and outstanding immediately prior to the
Effective Time, other than Dissenting Shares, will be converted into and become
the right to receive $6.32 per share in cash, without interest, such that the
holders of such shares will cease to have a continuing equity interest in the
Company and the Common Stock will cease to be publicly traded through the Nasdaq
National Market.
CONVERSION OF COMMON STOCK; MERGER CONSIDERATION
At the Effective Time, each outstanding share of Common Stock (other than
shares which continue to be Dissenting Shares immediately prior to the Effective
Time) will be converted into the right to receive $6.32 in cash, without
interest, (the "Merger Consideration"). The aggregate consideration to be paid
by ASI to the shareholders of the Company, assuming that there are no Dissenting
Shares, will be approximately $104.3 million. In addition, ASI will make an
aggregate payment of approximately $1.7 million in cancellation of all of the
outstanding stock options to purchase Common Stock. See "THE MERGER AGREEMENT --
Consideration to be Received by Shareholders" and "INTERESTS OF CERTAIN PERSONS
IN THE MERGER -- Stock Options." Promptly after the Effective Time, holders of
Common Stock certificates will be sent a transmittal letter to be used to
exchange their Common Stock certificates for cash. SHAREHOLDERS SHOULD NOT
RETURN ANY STOCK CERTIFICATES WITH THE FORM OF PROXY ACCOMPANYING THIS PROXY
STATEMENT. See "THE MERGER AGREEMENT -- Payment for Shares."
S-2
<PAGE> 9
BACKGROUND OF THE MERGER
Since 1989, a majority of the outstanding shares of Common Stock has been
held by Biofin or its affiliates. Biofin is a wholly owned subsidiary of Sorin
Biomedica S.p.A. ("Sorin"), which is a 75%-owned subsidiary of SNIA BPD, S.p.A.
("SNIA"), a company controlled by Fiat S.p.A. ("Fiat"). Five of the nine members
of the Board of Directors of the Company are employed by SNIA or its affiliates.
See "INFORMATION CONCERNING THE COMPANY -- Management" and "INTERESTS OF CERTAIN
PERSONS IN THE MERGER". The Company also maintains a business relationship with
SNIA and its affiliates.
In February 1996, ASI approached Fiat to enter into discussions with Fiat
to buy Sorin's European diagnostic division and related assets (the "European
Diagnostic Business"). On September 12, 1996, representatives of Sorin met with
representatives of ASI; during that meeting, the Sorin representatives, among
other things, requested that ASI consider the acquisition of the Company in its
entirety in a transaction that would result in payments to all of the Company's
shareholders in exchange for their shares. On October 22, 1996, Sorin and ASI
established a framework for their future discussions, which contemplated that
ASI would negotiate directly with the Company regarding a possible acquisition
of all of the Company by merger or otherwise. On October 23, 1996, one of the
SNIA affiliated directors informed members of the Board of Directors of SNIA's
discussions with ASI and of ASI's possible interest in a transaction involving
the acquisition of the Company in its entirety and requested the formation of a
special committee of the independent directors to consider the matter. In order
to address any possible conflict between the interests of Biofin and its
affiliates, and holders of Common Stock other than Biofin and its affiliates
(the "Minority Shareholders") and with the advice of its outside legal counsel,
the Board of Directors, with the unanimous concurrence of the SNIA affiliated
directors, formed a special committee (the "Special Committee") of three
directors who are neither officers or employees of the Company nor associated
with SNIA and its affiliates to evaluate any proposed transaction between the
Company and ASI and to negotiate the terms of such transaction on behalf of the
Company. In connection with its duties, the Special Committee retained Cowen &
Company ("Cowen") to act as its financial advisor and Dorsey & Whitney LLP to
act as its outside legal counsel. The Special Committee, with the advice of its
financial advisor and outside legal counsel, negotiated the terms of the Merger
Agreement including, among other things, the per share consideration to be paid
in the Merger. The Special Committee also reviewed the terms of the sale of the
European Diagnostics Business by reviewing drafts of agreements relating to the
sale of the European Diagnostics Business and questioning representatives of
Sorin and ASI with regard to the terms of such agreements in order to inform
itself of Sorin's interests in that transaction and to assure itself that the
terms of the sale of the European Diagnostic Business did not disadvantage the
Minority Shareholders. These discussions concluded on March 10, 1997, with the
execution of the Merger Agreement by ASI, ASM, Mergeco and the Company and the
execution of separate definitive documentation relating to ASI's acquisition of
the European Diagnostics Business. See "THE MERGER -- Background of the Merger."
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
The Special Committee has unanimously approved the Merger Agreement and the
transactions contemplated thereby, including the Merger, and has determined that
the terms of the Merger, including the Merger Consideration, are fair to, and in
the best interests of, the Minority Shareholders and has unanimously recommended
to the Board of Directors that the Merger Agreement be approved and adopted. In
determining to approve the Merger Agreement, the Special Committee considered a
number of factors, as more fully described under "THE MERGER -- Recommendations
of the Special Committee and the Board of Directors." The Board of Directors,
based primarily on the recommendation of the Special Committee, has unanimously
approved the Merger Agreement and the transactions contemplated thereby,
including the Merger, and has unanimously determined that the terms of the
Merger, including the Merger Consideration, are fair to, and in the best
interests of, the Company's shareholders. The Special Committee and Board of
Directors unanimously recommend that the Company's shareholders approve and
adopt the Merger Agreement.
S-3
<PAGE> 10
OPINION OF FINANCIAL ADVISOR
Cowen has delivered to the Special Committee its written opinion, dated
March 10, 1997, to the effect that, as of such date, subject to the limitations
and qualifications described therein, the Merger Consideration of $6.32 per
share in cash to be received by the Minority Shareholders pursuant to the Merger
Agreement is fair, from a financial point of view, to such shareholders. A copy
of the written opinion of Cowen is attached to this Proxy Statement as Exhibit
B. Shareholders of the Company are urged to read the opinion of Cowen in its
entirety. For a discussion of the factors considered and assumptions made by
Cowen in reaching its opinion, see "THE MERGER -- Opinion of Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
EUROPEAN AGREEMENT
The European Agreement provides for purchase of the European Diagnostic
Business by affiliates of ASI. Pursuant to the European Agreement, the purchase
price payable to Sorin for the European Diagnostics Business equals Lit. 280
billion, reduced by an amount equal to the sum of (i) the product of $0.57 and
the number of outstanding shares of Common Stock held by the Minority
Shareholders, (ii) the product of the Merger Consideration and the number of
shares of Common Stock held by Biofin, and (iii) the amount of Retained
Receivables (approximately Lit. 18 billion of accounts receivables to be
retained by Sorin under the European Agreement). Based on an exchange rate of
1.00 US Dollar to 1,681 Italian Lira (the exchange rate published in the May 28,
1997 edition of The Wall Street Journal), it is estimated that the foregoing
reduction will be Lit. 116 billion (i.e., (A) 7,663,204,117 ($0.57 x 7,997,750 x
Lit. 1,681) + (B) Lit. 90,385,198,551 ($6.32 x 8,507,707 x Lit. 1,681) + (C)
Lit. 18,000,000,000). If the Merger is consummated, pursuant to the Merger
Agreement, Biofin's shares of Common Stock will be converted into the right to
receive cash in an aggregate amount equal to the product of the Merger
Consideration and the number of shares of Common Stock held by Biofin. None of
the foregoing reductions or any other provision in the European Agreement will
reduce the Merger Consideration (of $6.32 per share, without interest) to be
received by any shareholder of the Company (including the Minority Shareholders)
under the Merger Agreement. The purchase price payable to Sorin for the European
Diagnostic Business is subject to downward or upward adjustment after the
closing of the European Agreement based on INCSTAR's net worth as reflected in
INCSTAR's balance sheet as of the closing date (except that the maximum upward
adjustment relating to INCSTAR's net worth cannot exceed the amount of the
reduction described in clause (i) above). In addition, the purchase price for
the European Diagnostic Business is subject to further downward or upward
adjustments based on the assets and liabilities of the European Diagnostic
Business as of the closing date.
The consummation of the transactions under the European Agreement is a
condition to the closing under the Merger Agreement. There can be no assurance
that the conditions to consummation of the transactions under the European
Agreement will be satisfied. Such conditions include, without limitation, the
obtaining of governmental authorizations and other governmental approvals and
third party contractual consents, the absence of a material adverse change in
the European Diagnostic Business and the representations and warranties of Sorin
contained in the European Agreement being true and correct in all material
respects as of such closing. The consummation of the transactions contemplated
by the Merger Agreement is also a condition to the closing under the European
Agreement, except that if the Merger Agreement is terminated by reason of the
approval by the Board of Directors or any authorized independent committee
thereof (including the Special Committee) of an Acquisition Proposal (as
defined), or if the Board of Directors or any authorized independent committee
thereof (including the Special Committee) shall not approve, or modify in any
manner adverse to ASI and its affiliates or withdraw its approval or
recommendation of the Merger, or if Biofin does not vote in favor of the Merger
Agreement, consummation of the Merger will not be a closing condition to the
European Agreement and the purchase price payable to Sorin for the European
Diagnostic Business shall be reduced by the product of the number of Biofin's
shares of Common Stock and $5.75, without the reduction referred to in clause
(i) of the preceding paragraph and without a purchase price adjustment relating
to the net worth of INCSTAR.
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STOCK OPTIONS
Pursuant to the Merger Agreement, immediately prior to the Effective Time,
each holder of an option to purchase shares of Common Stock granted under the
Company's Restated 1986 Stock Option Plan, whether or not then exercisable,
shall be entitled to receive for each share of Common Stock subject to such
option, in cancellation of such option, an amount in cash equal to the excess,
if any, of the Merger Consideration over the per share exercise price of such
option, without interest thereon and subject to all applicable tax withholding
requirements, and such option shall thereupon be canceled. All holders of
outstanding options have consented to the cancellation of their options in the
foregoing manner. As of the date of the Merger Agreement, the Company's
executive officers and directors held options to purchase, in the aggregate,
365,953 shares of Common Stock, upon the cancellation of which such executive
officers and directors will receive, in the aggregate, $999,026. See "INTERESTS
OF CERTAIN PERSONS IN THE MERGER -- Stock Options."
CERTAIN AGREEMENTS
In connection with the Merger, John J. Booth, President, Chief Executive
Officer and Acting Chairman of the Board of the Company, and Thomas P. Maun,
Vice President and Chief Financial Officer, and the Company will enter into
certain separation and consulting agreements. See "INTERESTS OF CERTAIN PERSONS
IN THE MERGER -- Certain Agreements." In connection with their service on the
Special Committee, the members of the Special Committee will receive certain
fees. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER -- Special Committee
Compensation."
INDEMNIFICATION
The Merger Agreement provides that the Surviving Corporation will provide
indemnification to the present and former officers, directors, employees and
committee members of the Company and its subsidiaries from and against, and pay
or reimburse such persons for, judgments, penalties, fines, settlements and
expenses, including attorneys fees and disbursements resulting from or arising
out of actions or omissions occurring at or prior to the Effective Time by such
persons in their respective capacities to the full extent permitted or required
under applicable law and to the extent permitted under the Company's Articles of
Incorporation and Bylaws in effect at the date of the Merger Agreement for a
period of six years. In addition, the directors and executive officers of the
Company will be provided with continuing directors' and officers' liability
insurance coverage following the Merger, subject to certain limitations. See
"INTERESTS OF CERTAIN PERSONS IN THE MERGER -- Indemnification."
THE MERGER AGREEMENT
CONDITIONS TO THE MERGER
The obligations of the Company, Mergeco, ASM and ASI to consummate the
Merger are subject to a number of conditions, including the approval of the
Merger Agreement by the shareholders of the Company, the expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, which waiting period was terminated effective April 4,
1997 by the Federal Trade Commission, and the satisfaction or waiver of all the
conditions set forth in the European Agreement and the simultaneous occurrence
of the closings under the Merger Agreement and the European Agreement. See "THE
MERGER AGREEMENT -- No Solicitation" and "Conditions to Consummation of the
Merger."
NO SOLICITATION
The Company has agreed not to (i) solicit, initiate or encourage or (ii)
enter into any discussions or negotiations with, or in any way continue any
discussions or negotiations commenced before the date of the Merger Agreement
with, or disclose directly or indirectly any information not customarily
disclosed concerning its business and properties to, or afford any access to its
properties, books and records to, any corporation, partnership or other person
or group in connection with any proposal that constitutes an
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"Acquisition Proposal" (as defined), subject, however, to the exceptions
provided for in the Merger Agreement, including responses to an Acquisition
Proposal made without solicitation, initiation or encouragement, if the Board of
Directors has concluded in good faith, based on the advice of outside counsel,
that action is required for the Board of Directors to comply with its fiduciary
duties under applicable law. See "THE MERGER AGREEMENT -- No Solicitation."
TERMINATION; TERMINATION FEE AND EXPENSES
The Merger Agreement contemplates termination by either ASI or the Company
in a number of circumstances, including termination by the Company following its
receipt of a Superior Proposal (as defined), the Board of Directors (or the
Special Committee), after consultation with and based upon the advice of outside
counsel, determines in good faith that it is necessary and in accordance with
its fiduciary duties, to modify or withdraw its approval or recommendation of
the Merger or Merger Agreement. See "THE MERGER AGREEMENT -- Termination;
Termination Fee and Expenses". The Merger Agreement further provides for the
payment by the Company to ASI of a $2.5 million termination fee (or
approximately $0.15 per share of Common Stock outstanding as of the Record Date)
(the "Termination Fee") (i) if the Board of Directors (or any independent
committee thereof, including, without limitation, the Special Committee) shall
have withdrawn or modified in a manner adverse to ASI, Mergeco or ASM its
approval or recommendation of the Merger or the Merger Agreement, or shall have
approved or recommended any Acquisition Proposal (as defined), other than the
Merger, or shall have resolved to do any of the foregoing, and ASI shall have
terminated the Merger Agreement, or (ii) if, following the receipt of a Superior
Proposal (as defined), the Board of Directors or any independent committee
thereof, including, without limitation, the Special Committee shall have taken,
or resolved to take, any of the actions specified in (i), and the Company shall
have terminated the Merger Agreement. In case the Merger Agreement is terminated
for any reason (other than a material breach by ASI of its representations,
warranties, covenants or other agreements contained in the Merger Agreement),
and a Third Party Acquisition (as defined) occurs during the twelve months
following such termination, then the Company shall pay the Termination Fee to
ASI (to the extent not previously paid), plus up to $1.5 million in documented
expenses. See "THE MERGER AGREEMENT -- Termination; Termination Fee and
Expenses."
ACCOUNTING TREATMENT
The Merger will be accounted for by ASI under the purchase method of
accounting. See "ACCOUNTING TREATMENT OF THE MERGER."
FEDERAL INCOME TAX CONSEQUENCES
The receipt of $6.32 per share in cash by holders of shares of Common Stock
in the Merger will be treated as a taxable transaction for federal income tax
purposes and may also be taxable under applicable foreign, state and local tax
laws. For federal income tax purposes, a shareholder of the Company will realize
taxable gain or loss per share as a result of the Merger measured by the
difference, if any, between the amount of cash received by such shareholder in
connection with the Merger (or cash received in connection with the exercise of
dissenters' rights) and such shareholder's aggregate adjusted tax basis in the
Common Stock at the Effective Time. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER."
RIGHTS OF DISSENTING SHAREHOLDERS
Under Minnesota law, holders of shares of Common Stock and (if the record
holder consents in a written submission to the Company at or before the time the
rights are asserted) beneficial owners have the right to dissent from the Merger
and obtain payment for the "fair value" of their shares of Common Stock. In
order to exercise such rights, a shareholder or beneficial owner must comply
with all of the procedural requirements of Sections 302A.471 and 302A.473 of the
Minnesota Business Corporation Act (the "MBCA"), a summary of which is provided
in "RIGHTS OF DISSENTING SHAREHOLDERS" and the full text of which is
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attached to this Proxy Statement as Exhibit C. If a dissenting shareholder or
beneficial owner and the Company cannot agree on the fair value of the Common
Stock, such fair value may be established by court determination. A court
determination of fair value, the result of which cannot be predicted, and which
may be less than or greater than the Merger Consideration, will be binding on
all shareholders or beneficial owners who properly exercised dissenters' rights
and did not agree with the Company as to the fair value of the shares.
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THE SPECIAL MEETING
DATE; TIME; PLACE; RECORD DATE AND PURPOSE
The Special Meeting of the shareholders of the Company (the "Special
Meeting") will be held on Thursday, June 26, 1997, at 9:00 a.m., local time, at
the offices of Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth
Street, Minneapolis, Minnesota. The Board of Directors has fixed the close of
business on May 9, 1997 as the record date for the determination of shareholders
entitled to notice of and to vote at the Special Meeting and at any adjournment
or adjournments thereof (the "Record Date").
At the Special Meeting and at any adjournment or adjournments thereof, the
shareholders of record on the Record Date will consider and vote upon a proposal
to approve and adopt the Merger Agreement, a copy of which is attached as
Exhibit A to this Proxy Statement. The Merger Agreement provides that at the
Effective Time, Mergeco will be merged with and into the Company, with the
result that the Company, as the surviving corporation (the "Surviving
Corporation"), will become an indirect wholly owned subsidiary of ASI. See "THE
MERGER -- Effect of the Merger."
VOTES REQUIRED; QUORUM
The affirmative vote of the holders of a majority of the shares of Common
Stock outstanding on the Record Date is required to approve and adopt the Merger
Agreement. Only shareholders of record at the close of business on the Record
Date are entitled to notice of and to vote at the Special Meeting or any and all
adjournments and postponements thereof. As of the Record Date, 16,505,457 shares
of Common Stock were issued and outstanding and entitled to vote at the Special
Meeting. Each share of Common Stock issued and outstanding on the Record Date
will entitle the holder thereof to one vote on each proposal presented at the
Special Meeting.
As of the Record Date, 16,505,457 shares of Common Stock were issued and
outstanding, of which 8,507,707 shares (approximately 52% of the outstanding
shares of Common Stock) were beneficially owned by Biofin and 244,047 shares
(approximately 1.5% of the outstanding shares of Common Stock) were beneficially
owned by directors and executive officers of the Company. See "INFORMATION
CONCERNING THE COMPANY -- Security Ownership of Certain Beneficial Owners and
Management." Although neither Biofin nor such directors and executive officers
are under any contractual or other legal obligation to vote their shares in
favor of the approval and adoption of the Merger Agreement, the Company has been
advised that Biofin and the Company's directors and executive officers intend to
vote all of their shares in favor of the approval and adoption of the Merger
Agreement. In such event, subject to earlier termination of the Merger Agreement
(see "THE MERGER AGREEMENT -- Termination; Termination Fees and Expenses"), the
affirmative vote of such shares will be sufficient for the approval and adoption
of the Merger Agreement.
The presence, in person or represented by proxy, of the holders of a
majority of the shares of Common Stock entitled to vote at the Special Meeting
is necessary to constitute a quorum at the Special Meeting. Shares of Common
Stock represented by proxy at the Special Meeting shall be included for purposes
of determining a quorum, without regard to whether the proxy is marked as
casting a vote or abstaining.
PROXIES
Proxies relating to shares held in the name of brokers for customers who
are the beneficial owners of such shares that are properly executed and returned
by brokers will be counted as shares present for purposes of determining the
presence of a quorum but will not be treated as shares having voted at the
Special Meeting to approve and adopt the Merger Agreement if the proxy indicates
that authority to vote is withheld from such broker by the beneficial owner of
such shares (a "broker non-vote"). Abstentions will be recorded as such by the
inspectors of election for the Special Meeting. In light of the treatment of
abstentions and broker non-votes and the fact that the affirmative vote required
to approve and adopt the Merger Agreement is a majority of the total number of
outstanding shares of Common Stock on the Record Date, abstentions and broker
non-votes (as well as any other failure to vote shares of Common Stock) will
have the same effect as votes against the approval and adoption of the Merger
Agreement.
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SHAREHOLDERS WHO FAIL TO PROPERLY EXECUTE AND RETURN A PROXY CARD AND
OTHERWISE FAIL TO VOTE THEIR SHARES OF COMMON STOCK IN PERSON AT THE SPECIAL
MEETING WILL IN EFFECT BE VOTING AGAINST THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
Shares of Common Stock which are represented by properly executed, dated
and returned proxies, unless such proxies shall have previously been properly
revoked, will be voted in accordance with the instructions indicated in such
proxies. If no contrary instructions are indicated, such shares will be voted
FOR authorization and adoption of the Merger Agreement and in the discretion of
the proxy holder as to any other matter which may properly come before the
Special Meeting. Any other matter which may properly come before the Special
Meeting at which a quorum is present for such purpose requires the affirmative
vote of at least a majority of the shares of Common Stock present, in person or
by proxy. A shareholder who has given a proxy may revoke it at any time prior to
its exercise at the Special Meeting by delivering a written notice of revocation
of the proxy being revoked, or by submission of a properly executed proxy
bearing a later date than the proxy being revoked, to the Secretary of the
Company at 1990 Industrial Boulevard, Stillwater, Minnesota 55082.
Expenses in connection with solicitation of proxies will be paid by the
Company. The Company has retained Georgeson & Co., Inc., a proxy soliciting
firm, to assist in the solicitation of proxies for a fee of approximately $7,500
plus customary expenses. Upon request, the Company will reimburse brokers,
dealers and banks, or their nominees, for reasonable expenses incurred in
forwarding copies of the proxy material to the beneficial owners of Common Stock
which such persons hold of record. Solicitation of proxies will be made
principally by mail. Proxies may also be solicited in person, or by telephone or
telegraph, by officers and regular employees of the Company.
THE MERGER
BACKGROUND OF THE MERGER
Since December 1989, approximately 52% of the outstanding shares of the
Common Stock has been beneficially owned by Biofin, or its affiliates. Biofin is
a subsidiary of Sorin, an Italian corporation, which is a subsidiary of SNIA, an
Italian corporation controlled by Fiat.
A majority of the members of the Board of Directors are affiliated with
SNIA or its affiliates. The Board of Directors has nine members: five members
have associations with SNIA or its affiliates; one member is an officer of the
Company; and three members are neither officers or employees of the Company nor
associated with SNIA or its affiliates. During the majority of the background
discussions, the Board of Directors consisted of ten members, one of whom,
Pierre M. Galletti, M.D., Ph.D., the Chairman of the Board of Directors,
Professor, Medical Science, Brown University and director of Sorin, died on
March 8, 1997.
Simultaneously with the acquisition by Biofin's affiliate of the Common
Stock in 1989, Sorin, Fiat and its affiliates and the Company entered into
various related party transactions which have a significant effect on the
Company's operations. The Company and Sorin are parties to distribution
agreements entered into in 1989, pursuant to which the Company has exclusive
distribution rights in the United States for certain designated products
manufactured by Sorin, and Sorin has exclusive distribution rights in Italy,
Spain, Portugal, France, Germany, Belgium and the Netherlands for certain
designated products manufactured by the Company. In 1996, approximately 18%
($7,965,000) of net sales of the Company ($44,304,000) represented sales to
Sorin of the Company's products. The Company's purchases of Sorin's products for
distribution totalled $2,272,000 in 1996. In addition to these distribution
agreements, in 1989, the Company and Sorin also entered into a technology
transfer agreement, pursuant to which certain developments which arise out of
products developed by Sorin, principally know-how, will be shared by the Company
and Sorin by technology transfers creating license rights. These agreements are
scheduled to expire in December 1997.
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In February 1996, representatives of Goldman, Sachs & Co. ("Goldman
Sachs"), financial advisor to ASI, approached Fiat to advise Fiat that ASI had
an interest in acquiring the European Diagnostic Business, which diagnostic
business is conducted through Sorin's subsidiary, Sorin Biomedica Diagnostics
S.p.A. Subsequently, discussions expanded with ASI to include both the European
Diagnostic Business and Biofin's majority interest in the Company. From March
through September 1996, additional meetings were held between ASI and its
representatives (including Goldman Sachs) and Fiat, SNIA, Sorin and their
advisors, during which the operations of the European Diagnostics Business and
the Company were further discussed and examined. On September 12, 1996,
representatives of Sorin met with representatives of ASI; during that meeting,
the Sorin representatives, among other things, requested that ASI consider the
acquisition of the Company in its entirety in a transaction that would result in
payments to all of the Company's shareholders in exchange for their shares. On
October 22, 1996, Sorin and ASI established a framework for their future
discussions, which contemplated that ASI would negotiate directly with the
Company regarding a possible acquisition of all of the Company by merger or
otherwise.
On October 23, 1996, John J. Booth, President, Chief Executive Officer and
a member of the Board of Directors, was informed by Ezio Garibaldi, Chief
Executive Officer of Sorin and a member of the Board of Directors, that
representatives of SNIA, Sorin and ASI were engaged in discussions regarding the
possible acquisition of the European Diagnostic Business and Biofin's equity
interest in the Company and that Sorin had requested that ASI consider the
acquisition of the Company in its entirety.
Mr. Booth, at the request of Mr. Garibaldi, informed each of D. Ross
Hamilton, George H. Dixon and Michael W. Steffes, M.D., Ph.D., three members of
the Board of Directors who are neither officers or employees of the Company nor
associated with SNIA and its affiliates, of the discussions among SNIA, Sorin
and ASI. Mr. Booth and these independent directors discussed the appropriate way
to respond to any transaction that might be proposed. (See "INFORMATION
CONCERNING THE COMPANY -- Management" for information regarding certain
relationships the directors of the Company have with SNIA and its affiliates.)
At a special meeting of the Board of Directors held on October 29, 1996,
two directors associated with Sorin, Dr. Galletti and Mr. Garibaldi, reported on
the discussions among SNIA, Sorin and ASI. Mr. Garibaldi explained that ASI had
initiated discussions with Fiat and SNIA regarding a possible acquisition by ASI
of the European Diagnostics Business and indicated that SNIA had expanded these
discussions to include a possible acquisition by ASI of Biofin's equity interest
in the Company. Mr. Garibaldi further indicated that ASI desired to conduct a
due diligence investigation of the Company in connection with such a possible
transaction. Mr. Garibaldi also reported that ASI had expressed a willingness to
explore alternative transactions with the Company, including the possible
acquisition of the entire Company. The Sorin-affiliated directors requested the
formation of a special committee made up of independent directors to evaluate
any transaction that might be proposed involving the Company and ASI.
Thereafter, Dorsey & Whitney LLP, the Company's legal counsel, advised the
Company on the desirability of forming a committee of independent directors to
address potential conflicts of interest between Biofin and the Company's
minority public shareholders. In consideration of those potential conflicts of
interest and the request of the SNIA-affiliated directors that an independent
committee be formed, the Board of Directors, including those directors
affiliated with SNIA, established a Special Committee, comprised of Mr.
Hamilton, Mr. Dixon and Dr. Steffes, and authorized the Special Committee to
consider and evaluate any proposal ASI might make with respect to the Company
and to protect the interests of the holders of shares of Common Stock (other
than Biofin and its affiliates) (the "Minority Shareholders") in the event ASI
proposed a transaction with the Company. In addition, the Special Committee was
granted the authority to, among other things, engage an investment banking firm
of its choice as a financial advisor to the Special Committee and retain outside
legal counsel of its choice, with such fees associated with the Special
Committee's financial advisor and legal counsel to be paid by the Company, make
recommendations to the Board of Directors with respect to any proposal regarding
the Company and negotiate on behalf of the Company the terms of an agreement
implementing any such proposal. The Board of Directors also authorized Mr. Booth
to act as liaison to the Special Committee and provide such assistance as the
Special Committee might request.
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Immediately following the Board of Directors' meeting on October 29, 1996,
the Special Committee met. At that meeting, the Special Committee selected
Dorsey & Whitney LLP as its counsel in connection with any possible transaction
with ASI and considered potential candidates for a financial advisor. Legal
counsel and the Special Committee reviewed the Special Committee's
responsibilities under Minnesota law and its fiduciary duties and duty of care
under these circumstances. The Special Committee also reviewed with counsel
various alternative responses the Special Committee could make to any proposal
from ASI. The Special Committee discussed the merits of a sale of the entire
Company as compared with a transaction in which ASI would become the majority
owner of the Company by an acquisition of Biofin's approximately 52% interest in
the Company. The Special Committee also considered what would be the effect on
the Company if Sorin sold its European Diagnostic Business to ASI but Biofin
retained its interest in the Company.
On October 30, 1996, Mr. Booth informed the Management Committee of the
Company, comprised of Fabio Lunghi, Executive Vice President and Chief Operating
Officer, Gerald L. Majewski, Ph.D., Vice President of Research and Development,
Thomas P. Maun, Vice President and Chief Financial Officer and George E.
Wellock, Vice President of Operations, of the discussions with ASI. They
discussed the effect the purchase by ASI of the European Diagnostics Business
could have on the operations of the Company. Specifically, they examined the
agreements to which the Company and Sorin are parties and the fact that such
agreements would expire at the end of 1997. They discussed the various possible
scenarios referenced above that could result from a possible Sorin transaction
with ASI. The Management Committee concluded that a Sorin transaction with ASI
without ASI also renewing the distribution agreements between Sorin and the
Company (scheduled to expire at the end of 1997) would result in (i) a loss of
the Company's distribution rights to Sorin products in the United States, (ii) a
loss of the Sorin distribution network to sell the Company's products in Italy,
Germany, France, Spain, Portugal, Belgium and the Netherlands and (iii) an
elimination of the Company's opportunity to commercialize future technology
developments by Sorin. The Management Committee also believed that establishing
a relationship with ASI as its new majority shareholder would have uncertain
implications for the Company. Mr. Booth subsequently reported the substance of
these discussions to the Special Committee.
On November 1, 1996, the Company delivered a letter to ASI stating that the
Board of Directors had unanimously authorized the commencement of preliminary
discussions with ASI, including the possibility of permitting an appropriate
"due diligence" examination of the Company. The Company and ASI signed a
Confidentiality Agreement on the same day. The Special Committee did not allow
ASI to begin diligence, pending engagement of a financial advisor and further
discussions with ASI to clarify its intentions.
The Special Committee held a meeting on November 19, 1996, during which
they interviewed four potential financial advisors. The Special Committee
selected Cowen & Company ("Cowen") the next day to act as its financial advisor
in connection with any possible transaction with ASI and Cowen then began its
review of the Company.
On November 20, 1996, the Special Committee held a meeting with Mr. Benson
I. Stein and Dr. Judith A. Britz of ASI. The parties discussed the potential
benefits of a transaction and alternative structures for a transaction were
proposed, including the possible approval by the Special Committee of a transfer
of Biofin's approximately 52% equity interest in the Company to ASI, whereby the
Minority Shareholders would maintain their equity participation in the Company,
or a possible sale of the entire Company to ASI. There was no discussion
regarding the price in the event of a possible sale of the Company at the
meeting. The Special Committee expressed its position that it would not allow
ASI to proceed with a diligence examination until it received a clearer
indication of ASI's intentions.
On December 4, 1996, Mr. Booth and Mr. Stein discussed the willingness of
ASI to provide an initial proposal for a transaction to the Special Committee by
December 11 or 12, 1996, if ASI were allowed to conduct certain preliminary due
diligence on the Company. Mr. Booth contacted members of the Special Committee,
who agreed to allow ASI to begin its diligence. Representatives of ASI, together
with representatives of Goldman Sachs, began their diligence review the next day
and conducted interviews with the Company's senior management and
representatives of Cowen on December 11, 1996. On the evening of
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December 11, 1996, the Special Committee met with Mr. Booth, representatives of
Cowen and counsel to hear a report regarding the management interviews with ASI
and Goldman Sachs.
On December 12, 1996, Goldman Sachs and Mr. Stein presented to Cowen and
Mr. Booth a proposal pursuant to which ASI would acquire the Company in its
entirety, in a transaction in which all holders of Common Stock would receive
$5.00 in cash for each of their shares. The Special Committee held a meeting the
same day. Mr. Booth and Cowen briefly discussed their meeting with Goldman Sachs
and Mr. Stein and reported ASI's $5.00 per share proposal to the Special
Committee. After discussion, the Special Committee concluded that ASI's proposal
was inadequate. This meeting was followed by a regularly scheduled Board of
Directors meeting and a second Special Committee meeting. At the Board meeting,
Mr. Hamilton informed the Board of Directors, on behalf of the Special
Committee, among other things, that the Special Committee had selected Cowen as
financial advisor, that ASI had conducted preliminary due diligence and that ASI
had made the proposal discussed above. Mr. Hamilton also reported that the
Special Committee concluded that ASI's proposal was inadequate based on the
Special Committee's knowledge of the Company and its views of the Company's
long-term value following discussions with Cowen. At its second meeting, the
Special Committee considered its response to ASI's proposal and instructed Cowen
to respond to Goldman Sachs that the Special Committee considered ASI's proposal
inadequate.
The Special Committee held a meeting on December 21, 1996 to discuss with
Cowen the status of negotiations. Cowen reported that there had not been any
substantial discussion between ASI's representatives and Cowen since December
12, 1996 and that the negotiations were not progressing. After hearing this
report, the Special Committee considered whether to make a counter-proposal to
ASI as a means to advance the discussions with ASI. The Special Committee
discussed three possible alternative transactions: (i) ASI could acquire the
European Diagnostic Business only, with Biofin retaining its equity interest in
the Company; (ii) ASI could acquire the European Diagnostic Business and
Biofin's approximately 52% equity interest in the Company or (iii) ASI could
acquire the European Diagnostic Business and the entire equity interest in the
Company (including Biofin's approximately 52% interest).
On December 26, 1996, the Special Committee held a telephone conference
with representatives of Cowen who indicated that they expected ASI to make a
revised proposal through Goldman Sachs. The Special Committee again considered
the possibility of making a counter-proposal to ASI in order to move the
negotiations forward. On December 27, 1996, after consulting with Cowen, the
Special Committee authorized the representative from Cowen to contact Goldman
Sachs with a request that ASI increase its initial proposal of $5.00 per share
to $7.50 per share. Based on the Special Committee's view of the Company's
long-term value, the Special Committee determined that $7.50 per share was the
appropriate starting point for negotiations with ASI in light of ASI's initial
proposal.
On December 30, 1996, Mr. Stein rejected the Special Committee's request
that ASI increase its initial proposal of $5.00 per share to $7.50 per share in
a telephone conversation with Mr. Booth. Mr. Stein indicated that ASI might
consider a possible alternative transaction in which ASI would purchase Biofin's
equity interest in the Company and agree to not merge with the Company for two
years following such purchase. ASI proposed that during this two-year period, it
would control the Company and it would have the right to buy shares of the
Common Stock on the open market. The following day, the Special Committee held a
telephone conference during which the Special Committee considered the terms
upon which it would consider approving the sale of Biofin's equity interest in
the Company to ASI. It continued these discussions on January 5, 1997, and on
January 6, 1997, the Special Committee provided ASI with a term sheet for
approval by the Special Committee of a purchase of Biofin's equity interest by
ASI. The term sheet provided that (i) ASI agree to a five-year standstill period
during which, among other things, it would not purchase or otherwise acquire
beneficial ownership of additional shares of Common Stock, subject to certain
conditions; (ii) ASI assume and renew for an additional seven years the existing
distribution and technology transfer agreements between the Company and Sorin;
(iii) the Company receive a license to use ASI's new technology developed by
Sienna and all derivative products therefrom and be granted exclusive
distribution rights in North America for products developed based on such
technology; (iv) the Company have the exclusive right, (except for ASI) to
develop assays using ASI's new technology; (v) the Board of Directors be
selected according to certain guidelines and (vi) the Company be operated as an
independent company.
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Mr. Hamilton, Mr. Booth and a representative from Cowen met with Mr. Stein
and a representative from Goldman Sachs on January 8, 1997. Mr. Stein indicated
that ASI would be willing to increase its initial proposal of $5.00 per share to
$5.50 per share for the entire Company. ASI, however, rejected the Special
Committee's terms for ASI to acquire Biofin's equity interest in the Company.
ASI expressed its position that it required a prompt resolution of the
negotiations with the Special Committee.
Following the January 8th meeting and discussion among the Special
Committee and representatives of ASI, Sorin, Goldman Sachs and Cowen, the
Special Committee suggested that ASI and Sorin consider ways in which they could
structure the sale of the European Diagnostic Business such that the Minority
Shareholders could receive a price per share in excess of $5.50.
On January 16, 1997, Mr. Stein, Goldman Sachs and the Special Committee had
a telephone conference in which ASI increased its proposal of $5.50 per share to
$6.25 per share to purchase the entire Company. ASI also indicated that its
proposal was conditioned on promptly entering into a Memorandum of Understanding
regarding the transaction, which would include a break-up fee to ASI. Following
this telephone conversation and discussions with Cowen, the Special Committee
authorized Cowen to contact Goldman Sachs and request that ASI increase its
proposal of $6.25 per share to $6.75 per share, which the Special Committee,
based on its view of the long-term value of the Company, believed was an
appropriate counter-proposal. Representatives of Cowen and Goldman Sachs had a
series of discussions regarding the price per share and the transaction.
ASI increased its proposal of $6.25 per share to $6.32 per share the
following day. Its proposal was subject to entering into a Memorandum of
Understanding which contemplated a merger of a subsidiary of ASI with and into
the Company, pursuant to which all outstanding shares of Common Stock would be
converted into the right to receive $6.32 per share in cash. The Company and ASI
began discussions regarding the Memorandum of Understanding on January 20, 1997,
which continued throughout the week. During this week, the Special Committee
consulted with its financial and legal advisors and advised them as to the
Special Committee's view of the terms of the Memorandum of Understanding.
On January 22, 1997, the Board of Directors and the Special Committee held
a joint meeting during which counsel outlined the terms set forth in the
Memorandum of Understanding and representatives from Cowen provided their
preliminary views regarding the price per share offered by ASI. Cowen did not
express an opinion on the fairness of the Merger Consideration to the Minority
Shareholders, believing that an opinion required analysis of final documentation
and other factors. Cowen, however, indicated preliminarily that, subject to the
terms to be provided in the final documentation and satisfactory completion of
its diligence procedures, the $6.32 price per share appeared to be within a
range that was sufficient, as of such date, for Cowen to issue its opinion to
the Special Committee that such price was fair, from a financial point of view,
to the Minority Shareholders. The Special Committee and the Board of Directors
authorized the execution and delivery of the Memorandum of Understanding which
contemplated a merger of a subsidiary of ASI with and into the Company, pursuant
to which all outstanding shares of Common Stock (other than Dissenting Shares)
would be converted into the right to receive $6.32 per share in cash. This
non-binding agreement in principle, which was executed on January 23, 1997
conditioned consummation of the contemplated merger on (i) the execution of
mutually satisfactory definitive documentation, (ii) the approval of the holders
of a majority of the issued and outstanding shares of Common Stock; (iii) the
simultaneous closing of the acquisition of the European Diagnostic Business by
affiliates of ASI, (iv) the approval of the definitive merger agreement prior to
the time of its execution and delivery by ASI's Board of Directors, the
Company's Board of Directors and the Special Committee, (v) the receipt of a
fairness opinion from Cowen, (vi) the receipt of all required regulatory
approvals and material third party consents and (vii) such other conditions
specified in the definitive merger agreement relating to the Merger. The
Memorandum of Understanding also contained a no solicitation clause prohibiting
the Company from soliciting, initiating and encouraging discussions with any
third party regarding any merger, consolidation or sale of all or a substantial
portion of the Company's assets (an "Acquisition Proposal"); provided that the
Board of Directors or the Special Committee could respond to such inquiries not
solicited or initiated by the Company or provide information to and enter
discussions with, such third parties to the extent that such action, based on
the advice of outside counsel, is required for the Board of Directors or the
Special Committee to comply with its fiduciary duties under applicable law. The
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Company agreed, pursuant to the no solicitation clause, to pay to ASI up to $2.0
million in respect of ASI's documented expenses incurred with its consideration
of the Merger, in the event the Board of Directors or the Special Committee
approved an Acquisition Proposal that is completed within 12 months after the
date of the Memorandum of Understanding. Following the signing of the Memorandum
of Understanding by both parties, ASI continued its due diligence. The Company
issued a press release which announced the signing of the Memorandum of
Understanding on January 24, 1997.
Pursuant to ASI's request, ASI's outside counsel prepared and distributed a
form of an initial draft of the Merger Agreement on January 20, 1997. Counsel to
the Special Committee, ASI and Sorin held numerous discussions in person or by
telephone to discuss the terms of the definitive Merger Agreement and to review
several drafts. The Special Committee also evaluated the terms of the sale of
the European Diagnostics Business by reviewing drafts of agreements relating to
its sale and evaluating information regarding the terms of such agreements
delivered by representatives of Sorin and ASI and analyzing such data to
understand the full interest of Sorin in the transaction and to assure itself
that the terms of the sale of the European Diagnostic Business did not
disadvantage the Minority Shareholders.
The Board of Directors, except one Sorin-affiliated director (including all
members of the Special Committee), met on March 5, 1997 to review the Merger
Agreement, to hear a report from counsel regarding the Merger Agreement and
discuss with Cowen the terms of the Merger Agreement.
The negotiations regarding the Merger Agreement were completed on March 10,
1997. The Special Committee held a meeting on the same day, at which all members
were present, and during which it reviewed the definitive Merger Agreement and
received Cowen's oral opinion, subsequently confirmed in writing as of such
date, that the Merger Consideration of $6.32 per share of Common Stock was fair,
from a financial point of view, to the Minority Shareholders as of such date.
The Special Committee unanimously resolved that they should recommend the Merger
Agreement to the Board of Directors for approval and adoption. The Board of
Directors held a meeting, at which all members were present, immediately after
the meeting of the Special Committee, during which the Board of Directors heard
the recommendation of the Special Committee regarding the Merger and the Merger
Agreement, including that Cowen had advised the Special Committee that, as of
that date, the Merger Consideration was fair to the Minority Shareholders from a
financial point of view, and unanimously approved the Merger and the Merger
Agreement. Representatives from ASI, ASM, Mergeco and the Company signed the
Merger Agreement on the same day.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
SPECIAL COMMITTEE. The Special Committee held numerous meetings to consider
the proposed merger transaction and individual members of the Special Committee
were individually updated from time to time on developments by Mr. Booth and
counsel through telephone contacts and by correspondence. From December 12,
1996, when it first was presented with a proposed price of $5.00 per share,
through January 17, 1997, when the final proposal of $6.32 per share was made,
the Special Committee was able to negotiate a substantial increase in the Merger
Consideration. Additionally, the Special Committee, from January 24, 1997 to
March 10, 1997, reviewed and negotiated the terms of the Merger Agreement in
order to satisfy itself that the terms and conditions of the Merger Agreement
are fair to and in the best interests of the Minority Shareholders. As a result
of these negotiations, the Special Committee obtained more favorable terms in
the Merger Agreement, including limitation of the circumstances under which
termination fees and expenses would be payable, modification and elimination of
certain closing conditions which could have reduced the likelihood of
consummating the Merger, limitation of the representations and warranties made
by the Company to ASI and the addition of certain agreements regarding employee
compensation and benefits.
THE SPECIAL COMMITTEE HAS UNANIMOUSLY DETERMINED THAT THE MERGER, INCLUDING
THE MERGER CONSIDERATION, IS FAIR TO, AND IN THE BEST INTERESTS OF, THE MINORITY
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS VOTE IN
FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
In reaching its determination that the Merger is fair to, and in the best
interests of, the Minority Shareholders and its recommendation that the Board of
Directors approve and adopt the Merger Agreement, the Special Committee
carefully considered the terms of the Merger, received the advice and assistance
of its
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<PAGE> 21
outside financial and legal advisors and the Company's management regarding the
fairness to the Minority Shareholders of the terms of the Merger Agreement and
evaluated management's view regarding the Company's business prospects under the
alternatives available to the Company. The Special Committee considered a number
of factors in its deliberations, including the following list of all material
factors:
(i) prevailing trading prices and share volume of the Common Stock
over the one-year period prior to the date of the Merger Agreement, and the
fact that the Merger Consideration of $6.32 per share was generally greater
than the trading prices in the one-year period before the public
announcement of the Merger Agreement and represents a premium of
approximately 43% to the last trade price before the public announcement of
the Memorandum of Understanding and a premium of approximately 40% to the
high trade price in the 30-day period before the public announcement of the
Memorandum of Understanding; in addition, 71% of the shares of Common Stock
traded in the one-year period before the public announcement of the
Memorandum of Understanding at prices of $5.00 per share or less and 99% of
the shares of Common Stock traded in the one-year period before the public
announcement of the Memorandum of Understanding traded at prices below the
Merger Consideration;
(ii) the fact that the Merger Consideration represented a premium over
the closing price of the Common Stock approximately four weeks prior to the
public announcement of the Memorandum of Understanding, which premium
compared favorably to like premiums paid in a number of healthcare industry
transactions identified by Cowen that involved the purchase by a majority
shareholder of the remaining equity interest in the subject company, and
was higher than the premiums paid in five of the seven sampled
transactions;
(iii) the fact that the Merger Consideration was within a range of per
share going concern values for the Company of $2.82 per share to $7.93 per
share produced by a discounted cash flow analysis presented by Cowen;
(iv) the fact that, although only a limited number of comparable
transactions had been identified, the Merger Consideration compared
favorably to selected financial ratios represented by those transactions;
(v) the opinion of Cowen that, as of the date of such opinion, the
Merger Consideration was fair, from a financial point of view, to the
Minority Shareholders;
(vi) the absence of any other inquiry with respect to the acquisition
of the Company after the public announcement of the Memorandum of
Understanding on January 24, 1997;
(vii) the likelihood that the market price for the Common Stock could
fall substantially below $6.32 per share in the event the proposal were to
be withdrawn;
(viii) the arm's-length negotiations of the Special Committee with
representatives of ASI, which resulted in an increase in the proposed price
from $5.00 per share to $6.32 per share, as well as in other terms for the
transaction which are more favorable to the Company;
(ix) the Special Committee's belief that Sorin intended to withdraw
from the in vitro medical diagnostics market and would likely complete the
sale of the European Diagnostic Business whether or not an agreement with
respect to the Company could be reached, the Special Committee's belief
that the Company would be required to change its business plan
substantially, with uncertain consequences, in the event of such sale of
the European Diagnostic Business, and the Special Committee's view of the
likelihood that the market price for the Common Stock would fall
substantially if Biofin sought to liquidate its majority interest in the
Company following the sale of the European Diagnostic Business;
(x) the lack of success by the Special Committee in negotiating a
satisfactory alternative transaction in which ASI would become the
Company's majority shareholder; and
(xi) the ownership by Biofin of approximately 52% of the outstanding
shares of Common Stock and the effects of such ownership on the
alternatives available to the Company.
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The members of the Special Committee evaluated the factors described above
in the light of their knowledge of the business and operations of the Company,
and their business judgment and concluded that the Merger Consideration of $6.32
per share in cash to be received by the Company's shareholders in the Merger was
preferable to such holders retaining their current interests in the Company. In
reaching this conclusion, the Special Committee considered that as a result of
the Merger, the Company's existing shareholders will cease to have a continuing
interest in the Company as well as the factors discussed above. In view of the
wide variety of factors considered in connection with its consideration and
negotiation of the proposed transaction, the Special Committee did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determinations. The
Special Committee did not attempt to determine the liquidation value of the
Company.
BOARD OF DIRECTORS. The Board of Directors has determined that the terms of
the Merger, including the Merger Consideration, are fair to, and in the best
interests of, the Company's shareholders and unanimously recommends that the
shareholders vote in favor of the approval and adoption of the Merger Agreement.
The Board of Directors based this determination primarily on the recommendation
of the Special Committee. The Board of Directors also independently considered
all the material factors set forth above. The Board did not find it practicable
to, and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination.
OPINION OF FINANCIAL ADVISOR
Cowen has acted as financial advisor to the Special Committee in connection
with the Merger. Pursuant to an engagement letter dated November 27, 1996 (the
"Cowen Engagement Letter"), the Special Committee engaged Cowen to act as its
financial advisor in connection with a proposed transaction involving the
possible sale of the equity interest in the Company owned by the Minority
Shareholders. As part of this assignment, Cowen was asked to render an opinion
to the Special Committee as to the fairness, from a financial point of view, to
the Minority Shareholders of the consideration to be paid to such shareholders
in the Merger. The amount of such consideration was determined by negotiations
between the Special Committee and ASI, and not pursuant to recommendations of
Cowen.
On March 10, 1997, Cowen delivered its oral opinion to the Special
Committee (confirmed in writing as of the same date) to the effect that, as of
that date, the consideration to be received in the Merger by the Minority
Shareholders is fair, from a financial point of view, to such shareholders. THE
FULL TEXT OF THE WRITTEN OPINION OF COWEN, DATED MARCH 10, 1997, IS ATTACHED
HERETO AS EXHIBIT B. SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY
FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON
AND SCOPE OF THE REVIEW BY COWEN. THE SUMMARY OF THE WRITTEN OPINION OF COWEN
SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION. Cowen's analyses and opinion were prepared for
the Special Committee and are directed only to the fairness, from a financial
point of view, of the consideration to be received by the Minority Shareholders
in the Merger and do not constitute an opinion as to the merits of the
transaction contemplated by the Merger Agreement or a recommendation to any
holders of shares of Common Stock as to how to vote at the Special Meeting.
Cowen was selected by the Special Committee as its financial advisor, and
to render an opinion to the Special Committee, because Cowen is a nationally
recognized investment banking firm and because the principals of Cowen have
substantial experience in transactions similar to the Merger and are familiar
with the Company and its businesses. As part of its investment banking business,
Cowen is continually engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions and valuations for corporate and
other purposes.
In arriving at its opinion, Cowen: (a) reviewed the Company's combined and
consolidated financial statements for the fiscal years ended December 31, 1994
through December 31, 1996, certain publicly available filings with the
Securities and Exchange Commission and certain other relevant financial and
operating data of the Company; (b) reviewed the March 7, 1997 draft of the
Merger Agreement provided to Cowen by management of the Company; (c) held
meetings and discussions with management and senior personnel of the Company to
discuss the business, operations and future prospects of the Company;
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<PAGE> 23
(d) reviewed financial projections furnished to Cowen by the management of the
Company, including the capital structure, sales, operating income, net income
and other data of the Company which Cowen deemed relevant; (e) reviewed the
operating and financial performance of the Company over the last three fiscal
years and compared its results with the operating and financial performance of
certain other publicly traded companies which Cowen deemed relevant; (f)
reviewed the public market valuation and trading multiples of the Company, and
compared the Company's trading multiples to the trading multiples of certain
other publicly traded companies which Cowen deemed relevant; (g) reviewed the
historical prices and trading activity of the Common Stock from March 7, 1996 to
March 7, 1997 and compared the Company's stock price performance to the stock
price performance of certain other publicly traded companies which Cowen deemed
relevant over the same time period; (h) compared the financial terms of the
Merger with the financial terms of the acquisitions of certain other companies
which Cowen deemed relevant, including a comparison of the premiums paid in the
Merger with the premiums paid in those other acquisitions; and (i) conducted
such other studies, analyses, inquiries and investigations as it deemed
appropriate. Cowen was not requested to, and did not, solicit third party
indications of interest in acquiring all or substantially all of the stock or
assets of the Company or all or substantially all of the stock of the Company
held by the Minority Shareholders.
Cowen assumed, and relied upon the Company's management with respect to,
the accuracy and completeness of the financial and other information furnished
to it by the Company and its representatives, or that was otherwise reviewed by
it. In addition, with respect to the financial projections furnished to Cowen by
the management of the Company, Cowen assumed, with the consent of the Special
Committee, the attainability of the financial results therein and that they were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the Company's management as to the future financial performance
of the Company. Because such projections are inherently subject to uncertainty,
Cowen assumes no responsibility for their accuracy. Cowen did not assume any
responsibility for independent verification of any such information, including
financial information. Cowen did not make any independent valuation or appraisal
of any of the assets or liabilities of the Company, nor has Cowen been furnished
with any such valuations or appraisals. Cowen made no independent investigations
of any legal matters affecting the Company. Cowen assumed that there have been
no material changes in the assets, financial condition, results of operations,
business or prospects of the Company since the date of the last financial
statements made available to them. Cowen's opinion was necessarily based on
economic, market and other conditions existing on, and the information made
available to it as of, March 10, 1997. It should be understood that, although
developments on or subsequent to March 10, 1997 may affect its opinion, Cowen
does not have any obligation to update, revise or reaffirm its opinion.
The following is a summary of certain financial analyses performed by Cowen
to arrive at its opinion. Cowen performed certain procedures, including each of
the financial analyses described below, and reviewed with the management of the
Company the assumptions on which such analyses were based and other factors,
including the current and projected financial results of the Company. No
limitations were imposed by the Special Committee with respect to the
investigations made or procedures followed by Cowen in rendering its opinion.
Selected Transaction Analysis. Cowen reviewed the financial terms, to the
extent publicly available, of sixteen transactions involving the acquisition of
companies engaged primarily in the medical diagnostics business (collectively,
the "Selected Transactions") which were announced or completed since November,
1991. The Selected Transactions represent all acquisitions of companies
primarily engaged in the medical diagnostics business as listed by the
Securities Data Corporation and for which data was generally available to Cowen.
The Selected Transactions consisted of the following (listed as
acquiror/target): Abbott Laboratories/MediSense, Inc., Thermo Instrument
Systems/Fisons PLC Scientific Instruments Division, Fisher Scientific
International/Fisons Scientific Equipment, C.R. Bard, Inc./MedChem Products,
Inc., Advanced NMR Systems/Medical Diagnostics, Circon Corp./Cabot Medical
Corp., Bain Capital, Inc./Baxter International, Inc., Johnson & Johnson/Eastman
Kodak-Clinical Diagnostic Division, Corning Inc./Bioran Medical Laboratory,
MEDIQ, Inc./Kinetic Concepts, Inc.-Medical Services, Fresenius AG/Gull
Laboratories Inc., Advanced Technology Laboratories/Interspec, Inc., IVAX
Corporation/McGaw, Inc., Cabot Medical Corporation/Medical Engineering Corp.,
Diagnostic Products Corporation/Cirrus Diagnostics Inc. and Deknatel Management
& Investors/Pfizer Hospital Group-Deknatel.
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Cowen reviewed the total consideration paid for the acquired company in
each of the Selected Transactions, measured as the amount paid per share
multiplied by the number of shares outstanding, plus total debt and less cash
and equivalents (such debt, cash and cash equivalents based upon the last
publicly reported financial statements of the respective acquired companies
before the effective date of acquisition) (collectively, "Total Consideration")
as a multiple of last reported twelve month ("LTM") revenues, earnings before
interest, income taxes, depreciation and amortization ("EBITDA") and earnings
before interest expense and income taxes ("EBIT"). Cowen also examined the
multiples of equity value paid in the Selected Transactions to book value and
last twelve month earnings. In conducting its analysis, Cowen noted that the
Company's last twelve month revenues, EBITDA, EBIT, earnings and book value were
$44.3 million, $8.2 million, $5.3 million, $4.1 million and $33.1 million,
respectively.
Such analysis indicated that the Total Consideration paid in each of the
Selected Transactions ranged from 0.37x to 4.75x LTM revenues, with a median of
2.14x and a mean of 2.25x (excluding five of the Selected Transactions, for
which information was not available); from 6.1x to 23.1x LTM EBITDA, with a
median of 10.7x and a mean of 11.7x (excluding five of the Selected
Transactions, for which information was not available or where the target
company had a negative LTM EBITDA number); and from 6.5x to 35.1x LTM EBIT, with
a median of 17.9x and a mean of 18.4x (excluding seven of the Selected
Transactions, for which information was not available or where the target
company had a negative LTM EBIT number). The corresponding multiples for the
Company implied by the terms of the Merger are 2.34x, 12.6x and 19.4x,
respectively, each of which Cowen noted is greater than both the mean and median
of the Selected Transactions multiple.
Such analysis also indicated that the equity value paid in the Selected
Transactions ranged from 1.51x to 11.60x book value, with a median of 4.54x and
a mean of 5.52x (excluding five of the Selected Transactions, for which
information was not available or where the target company had a negative book
value); and from 6.9x to 49.6x LTM earnings, with a median of 27.5x and a mean
of 30.5x (excluding nine of the Selected Transactions, for which information was
not available, the target company had a negative earnings number or the multiple
was greater than 50.0x). The corresponding multiples of book value and last
twelve months earnings for the Company implied by the terms of the Merger are
3.18x and 25.6x, both of which Cowen noted are lower than the corresponding
median and mean but are within the respective ranges derived from the Selected
Transactions.
Remaining Interest Premium Paid Analysis. Cowen reviewed seven completed
healthcare industry transactions in which a majority shareholder purchased the
remaining equity interest in the subject company, announced between January 1,
1990 and March 7, 1997 (based on data provided by Securities Data Corporation
and The Wall Street Journal). Such transactions were comprised of the following
(listed as acquiror/target): Investor Group/Medical Management of America,
Investor Group/United Medical Corp., Investor Group/Forum Group Inc., National
Intergroup Inc./FoxMeyer Corp. (FoxMeyer Health), Genzyme Corp./IG Laboratories
Inc., COBE Laboratories (Gambro AB)/REN Corp.-USA (COBE Labs Inc.) and American
Home Products/Genetics Institute. With respect to these transactions, Cowen
analyzed the percentage premium of equity value paid above closing equity value
four weeks prior to the announcement of the transaction. The premiums paid for
such transactions ranged from 11.2% to 143.5%, with a median of 49.0%. The
corresponding premium implied by the terms of the Merger is 80.6%, which Cowen
noted is greater than the median.
Analysis of Certain Publicly Traded Companies. Cowen compared selected
historical operating and financial ratios for the Company to the corresponding
data and ratios of certain companies in the medical diagnostics industry whose
securities are publicly traded and which had market values for their equity
interests which provided meaningful multiples for comparison (collectively, the
"Selected Companies"). The Selected Companies were comprised of the following:
Abbott Laboratories, Becton Dickinson, Diagnostic Products Corp., IDEXX
Laboratories, Inc., Qiagen N.V., Cholestech Corp., Diametrics Medical, Inc.,
Affymetrix, Inc., Meridian Diagnostics, I-Stat Corporation, NeoPath, Inc., IGEN
Inc., Metra Biosystems, Ostex International, Inc., and Quidel. Such data and
ratios included the amount of the market capitalization plus total debt less
cash and cash equivalents (collectively, "Enterprise Value") of each Selected
Company as a
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multiple of LTM sales, EBITDA and EBIT, and the market capitalization of common
stock of each such Selected Company as a multiple of book value. Cowen also
examined the ratios of the current stock prices of each Selected Company to the
LTM earnings per share ("EPS") and estimated current calendar year EPS (as
estimated by First Call). In conducting its analysis, Cowen noted that the
Company's LTM sales, EBITDA, EBIT, EPS and book value were $44.3 million, $8.2
million, $5.3 million, $0.25 and $33.1 million, respectively. Cowen also noted
that the Company's estimated current calendar year (1997) EPS (as estimated by
management of the Company) was $0.31.
Such analysis indicated that the median Enterprise Value as a multiple of
LTM sales for the Selected Companies ranged from 2.46x to 54.39x, with a median
of 5.16x and a mean of 11.98x; from 12.7x to 66.8x LTM EBITDA, with a median of
14.8x and mean of 24.0x (excluding eight of the Selected Companies, for which
either the multiple was greater than 75.0x or the LTM EBITDA number was
negative); and from 15.3x to 38.1x LTM EBIT, with a median of 19.3x and a mean
of 23.3x (excluding nine of the Selected Companies, for which either the
multiple was greater than 75.0x or the LTM EBIT number was negative). The
analysis also indicated that the market capitalization of the Selected Companies
ranged from 1.2x to 11.3x book value, with a median of 4.6x and a mean of 5.1x.
The corresponding multiples for the Company implied by the terms of the Merger
are 2.34x, 12.6x, 19.4x and 3.2x, respectively, which Cowen noted are below the
corresponding medians and means (except with respect to the multiple of LTM
EBIT) but are generally within the respective ranges derived from the Selected
Companies.
The same analysis indicated that the values of the closing stock prices as
of March 7, 1997 for the Selected Companies as a multiple of LTM EPS ranged from
19.4x to 46.8x, with a median of 28.0x and a mean of 31.8x (excluding nine of
the Selected Companies, for which either the multiple was greater than 75.0x or
the LTM earnings number was negative); and as a multiple of estimated current
calendar year (1997) EPS ranged from 18.5x to 70.3x, with a median of 21.5x and
a mean of 22.6x (excluding eight of the Selected Companies, for which either the
multiple was greater than 75.0x or the 1997 estimated earnings number was
negative). Cowen noted that the corresponding multiples implied by the terms of
the Merger are 25.6x and 20.2x, respectively, which are lower than the
corresponding medians and means but are within the respective ranges derived
from the Selected Companies.
None of the companies or transactions used in the Selected Transaction, the
Remaining Interest Premium Paid or the Certain Publicly Traded Companies
Analyses is directly comparable to the Company or the Merger.
Discounted Future Free Cash Flow Analysis. Cowen performed a discounted
cash flow analysis of the Company by determining the discounted present value of
the projected after-tax free cash flows of the Company for the fiscal years
ended December 31, 1997 through December 31, 1999, and of the terminal value of
the Company at December 31, 1999, based upon base case projections supplied by
management of the Company. In performing this analysis, Cowen utilized, with the
consent of the Company's management, discount rates ranging from 15% to 20%.
Cowen determined the terminal value by applying perpetual growth rates (applied
to 1999 after-tax free cash flow as estimated by the Company's management)
ranging from 5.0% to 10.0%, as agreed with the Company management. Applying this
methodology to the Company management's base case projections, the equity value
of the Company ranged from $2.82 per share to $7.93 per share.
Historical Public Market Stock Price and Trading History. Cowen reviewed
the historical closing market prices and trading volumes of the Common Stock as
reported by the American Stock Exchange and the Nasdaq National Market for the
one-year period ending on March 7, 1997, the last trading day prior to the date
of its opinion. The one-year period was chosen based on Cowen's belief that this
period provided an appropriate historical perspective on the Company's stock
price. Cowen observed that during this period the Company's closing stock price
ranged between a low of $2.625 on November 4, 1996 and a high of $6.625 on June
3, 1996. Cowen also observed that for the period January 23, 1996 to January 23,
1997, approximately 98.7% of the Company's total traded volume traded below
$6.32.
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The summary set forth above does not purport to be a complete description
of the analyses performed by Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors
summarized above, Cowen believes, and has advised the Special Committee, that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all such analyses
and factors, could create an incomplete view of the process underlying its
opinion. In performing its analyses, Cowen made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of the Company. The analyses
performed by Cowen are not necessarily indicative of actual values or future
results or values, which may be significantly more or less favorable than
suggested by such analyses, and Cowen assumes no responsibility for their
accuracy. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses may
actually be sold.
Pursuant to the Cowen Engagement Letter, as compensation for Cowen's
services as financial advisor to the Special Committee in connection with the
Merger, the Company has paid Cowen a non-refundable retainer fee of $50,000. If
the Merger is consummated, the Cowen Engagement Letter provides for payment by
the Company to Cowen of a transaction fee (against which fee the retainer fee
will be credited) which is determined by a formula provided therein and is
estimated to be approximately $811,000 based on per share consideration of $6.32
and total weighted average shares and equivalents of 16,661,367. Additionally,
the Company has agreed to reimburse Cowen for its out-of-pocket expenses
(including the reasonable fees and expenses of its counsel not to exceed
$25,000) incurred or accrued during the period of, or in connection with,
Cowen's engagement. The Company has also agreed to indemnify Cowen against
certain liabilities, including liabilities under the federal securities laws,
relating to or arising out of services performed by Cowen as financial advisor
to the Special Committee in connection with the Merger, unless it is finally
judicially determined that such liabilities arose out of Cowen's gross
negligence or willful misconduct. The terms of the fee arrangement with Cowen,
which are customary in transactions of this nature, were negotiated at arm's
length between the Special Committee and Cowen, and the Special Committee was
aware of such arrangement, including the fact that a significant portion of the
aggregate fee payable to Cowen is contingent upon consummation of the Merger.
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the Merger is to enable ASI to acquire a 100% equity
interest in the Company. After the Merger is consummated, ASI will own, through
its wholly owned subsidiary, ASM, the entire equity interest in the Company. The
acquisition of the entire equity interest in the Company has been structured as
a cash merger in order to provide prompt and orderly transfer of ownership of
the Company from the current shareholders of the Company to ASI, and to provide
the shareholders of the Company with cash for all their shares. The Merger is a
taxable transaction. See "FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER."
SOURCE AND AMOUNT OF FUNDS
The aggregate cost to ASI of acquiring all of the outstanding shares of
Common Stock in the Merger and canceling the outstanding stock options will be
approximately $106 million. The funds to pay the Merger Consideration, stock
option cancellation fees and related fees and expenses will be provided from
ASI's available cash resources.
EFFECT OF THE MERGER
At the Effective Time, pursuant to the Merger Agreement, (1) Mergeco will
be merged with and into the Company, which will be the Surviving Corporation,
(2) the Company will become an indirect, wholly owned subsidiary of ASI and (3)
each share of Common Stock issued and outstanding immediately prior to the
Effective Time, other than Dissenting Shares, will be converted into and become
the right to receive $6.32 per
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<PAGE> 27
share in cash, without interest, such that the holders of such shares will cease
to have a continuing interest in the resulting entity and the Company's Common
Stock will cease to be publicly traded through the Nasdaq National Market.
ANTITRUST MATTERS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"),
as amended provides that the Merger may not be consummated until certain
information has been furnished to the Antitrust Division of the Department of
Justice and the Federal Trade Commission and certain waiting period requirements
have expired or been terminated. The Company and ASI made their respective
filings of the required information on March 26, 1997. The waiting period under
the HSR Act was terminated effective April 4, 1997 by the Federal Trade
Commission.
At any time, before or after consummation of the Merger, either the
Antitrust Division of the Department of Justice or the Federal Trade Commission
could take such action under the U.S. antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the Merger prior
to its consummation or seeking other equitable relief. Private parties and state
attorneys general may also bring legal action under antitrust laws under certain
circumstances. There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made or of the result if such a challenge is made
(see "THE MERGER AGREEMENT -- Conditions to the Merger").
INTERESTS OF CERTAIN PERSONS IN THE MERGER
EUROPEAN AGREEMENT
The Merger Agreement was signed concurrently with the signing of the
European Agreement. The European Agreement provides for purchase of the European
Diagnostic Business by affiliates of ASI. Pursuant to the European Agreement,
the purchase price payable to Sorin for the European Diagnostics Business equals
Lit. 280 billion, reduced by an amount equal to the sum of (i) the product of
$0.57 and the number of outstanding shares of Common Stock held by the Minority
Shareholders, (ii) the product of the Merger Consideration and the number of
shares of Common Stock held by Biofin, and (iii) the amount of Retained
Receivables (i.e., the approximately 18 billion Italian Lira of accounts
receivables of Sorin and its Italian and Spanish European Diagnostic Business
affiliates that were created prior to January 1, 1996 that are to be retained by
such selling entities under the European Agreement and that will not be sold to
ASI). Based on the exchange rate of 1.00 US Dollar to 1,681 Italian Lira (the
exchange rate published in the May 28, 1997 edition of The Wall Street Journal),
it is estimated that the foregoing reduction will be 116 billion Italian Lira
(i.e., (i) 7,663,204,117 ($0.57 X 7,997,750 X 1,681) + (ii) 90,385,198,551
($6.32 X 8,507,707 X 1,681) + (iii) Lit. 18,000,000,000). If the Merger is
consummated, pursuant to the Merger Agreement, Biofin's shares of Common Stock
will be converted into the right to receive cash in an aggregate amount equal to
the product of the Merger Consideration and the number of shares of Common Stock
held by Biofin. None of the foregoing reductions or any other provision in the
European Agreement will reduce the Merger Consideration (i.e., $6.32 per share,
without interest) to be received by any shareholder of the Company (including
the Minority Shareholders) for their shares of Common Stock. The purchase price
for the European Diagnostic Business is subject to downward or upward adjustment
after the closing of the European Agreement based on INCSTAR's net worth as
reflected in INCSTAR's balance sheet as of the closing date (except that the
maximum upward adjustment relating to INCSTAR's net worth cannot exceed the
amount of the reduction described in clause (i) above). In addition, the
purchase price for the European Diagnostic Business is subject to further
downward or upward adjustments based on the assets and liabilities of the
European Diagnostic Business as of the closing date.
The consummation of the transactions under the European Agreement is a
condition to the closing under the Merger Agreement. There can be no assurance
that the conditions to consummation of the transactions under the European
Agreement will be satisfied. Such conditions include, without limitation, the
obtaining of governmental authorizations and other governmental approvals and
third party contractual consents, the
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<PAGE> 28
absence of a material adverse change in the European Diagnostic Business and the
representations and warranties of Sorin contained in the European Agreement
being true and correct in all material respects as of such closing. The
consummation of the transactions contemplated by the Merger Agreement is also a
condition to the closing under the European Agreement, except that if the Merger
Agreement is terminated by reason of the approval by the Board of Directors or
any authorized independent committee thereof (including the Special Committee)
of an Acquisition Proposal, or if the Board of Directors or any authorized
independent committee thereof (including the Special Committee) shall not
approve, or modify in any manner adverse to ASI and its affiliates or withdraw
its approval or recommendation of the Merger, or if Biofin does not vote in
favor of the Merger Agreement, consummation of the Merger will not be a closing
condition to the European Agreement and the purchase price payable to Sorin for
the European Diagnostic Business shall be reduced by the product of the number
of Biofin's shares of Common Stock and $5.75, without the reduction referred to
in clause (i) of the preceding paragraph and without a purchase price adjustment
relating to the net worth of INCSTAR.
STOCK OPTIONS
Immediately prior to the Effective Time, each holder of an outstanding
option to purchase shares of Common Stock granted under the Company's Restated
1986 Stock Option Plan, whether or not then exercisable, shall be entitled to
receive for each share of Common Stock subject to such option, in cancellation
of such option, an amount in cash equal to the excess, if any, of the Merger
Consideration over the per share of Common Stock exercise price of such option
without interest thereon, subject to all applicable tax withholding
requirements. All holders of outstanding options have consented to the
cancellation of their outstanding options in the foregoing manner. As of the
date of the Merger Agreement, the Company's executive officers and directors
held options to purchase, in the aggregate, 365,953 shares of Common Stock, upon
the cancellation of which such executive officers and directors will receive, in
the aggregate, $999,026.
The following table presents, for each of the executive officers and
directors, the total number of shares of Common Stock underlying options,
whether or not exercisable at March 31, 1997, held by each such director or
officer and the aggregate dollar value to be received by such executive officer
or director upon the consummation of the Merger:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS
NAME OPTIONS AT MARCH 31, 1997 AT CONSUMMATION OF THE MERGER
---- ------------------------- -----------------------------
<S> <C> <C>
John J. Booth.................. 140,000 $399,175
Gerald L. Majewski............. 40,000 74,675
George E. Wellock.............. 50,000 74,325
Thomas P. Maun................. 34,900 107,031
Ennio Denti.................... 24,035 92,257
George H. Dixon................ 10,000 29,450
D. Ross Hamilton............... 17,018 58,013
Umberto Rosa................... 10,000 29,450
Michael W. Steffes............. 10,000 29,450
Carlo Vanoli................... 10,000 38,200
Ezio Garibaldi................. 10,000 38,200
Franco Fornasari............... 10,000 28,800
</TABLE>
CERTAIN AGREEMENTS
In connection with the Merger, Mr. Booth and the Company will enter into a
severance/separation agreement, pursuant to which Mr. Booth will receive (i) a
bonus of $100,000; (ii) a severance package of two
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<PAGE> 29
times current base salary; (iii) a six-month not-to-compete agreement and a
six-month consulting agreement at current base salary; (iv) continuation of
health and dental benefits for two years; (v) title, at no cost (without tax
gross up) to him to the leased vehicle which the Company is currently providing
him; and (vi) executive outplacement by a firm chosen by ASI.
In connection with the Merger, Mr. Maun and the Company will enter into a
severance/separation agreement, pursuant to which Mr. Maun will receive (i) a
bonus of $50,000; (ii) a severance package of one year's current base salary;
(iii) a three-month not-to-compete agreement and a three-month consulting
agreement at current base salary; (iv) continuation of health and dental
benefits for one year; (v) title, at no cost (without tax gross up) to him to
the leased vehicle which the Company is currently providing him; and (vi)
executive outplacement by a firm chosen by ASI.
SPECIAL COMMITTEE COMPENSATION
In connection with their services on the Special Committee, Mr. Hamilton,
as Chairman of the Special Committee, will be compensated for each month of
service on the Special Committee beginning November 1, 1996 in the amount of
$6,000 per month, and Mr. Dixon and Dr. Steffes will be compensated for the same
period in the amount of $5,000 per month, subject to a maximum of $24,000 in the
case of Mr. Hamilton and $20,000 in the case of Mr. Dixon and Dr. Steffes.
INDEMNIFICATION
For a period of six years after the Effective Time, the Surviving
Corporation will indemnify, defend and hold harmless the present and former
officers, directors, employees and committee members (the "Indemnified Parties")
of the Company and its subsidiaries from and against, and pay or reimburse the
Indemnified Parties for judgments, penalties, fines, settlements and expenses,
including attorneys fees and disbursements resulting from or arising out of
actions or omissions occurring at or prior to the Effective Time by the
Indemnified Parties in their respective capacities to the full extent permitted
or required under applicable law and to the extent permitted under the Company's
Articles of Incorporation and Bylaws in effect at the date of the Merger
Agreement, including provisions relating to advances of expenses incurred in the
defense of any proceeding; provided that in the event any claim or claims are
asserted or made within such six-year period, all rights to indemnification in
respect of each such claim shall continue until final disposition of such claim.
The Surviving Corporation shall also maintain in effect the current
policies of directors' and officers' liability insurance, which are maintained
by the Company, or the Surviving Corporation shall provide, subject to certain
limits, policies of at least the same coverage and amounts containing terms and
conditions which are no less advantageous in any material respects to the
Indemnified Parties for a period of six years.
THE MERGER AGREEMENT
THE DETAILED TERMS OF AND CONDITIONS TO THE MERGER ARE CONTAINED IN THE
MERGER AGREEMENT, WHICH IS INCLUDED IN FULL AS EXHIBIT A TO THIS PROXY
STATEMENT. THE FOLLOWING SUMMARY DESCRIPTION OF THE TERMS OF THE MERGER
AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
MERGER AGREEMENT.
EFFECTIVE TIME
If the Merger Agreement is adopted by the requisite vote of the Company's
shareholders, the Merger will be consummated and become effective at the date
and time when properly executed Articles of Merger (the "Articles of Merger")
relating to the Merger shall be filed with the Secretary of State of the State
of Minnesota in accordance with the Minnesota Business Corporation Act ("MBCA")
or at such other later date and time, if any, as Mergeco and the Company shall
agree and as shall be specified in the Articles of Merger (the "Effective
Time"). It is currently contemplated that the Effective Time will occur on or
about June 30, 1997. There can be no assurance that all conditions to the Merger
will be satisfied. See "-- Conditions to Consummation of the Merger."
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<PAGE> 30
CONSIDERATION TO BE RECEIVED BY SHAREHOLDERS
In connection with the Merger, each share of Common Stock outstanding
immediately prior to the Effective Time (other than Dissenting Shares) will be
converted into the right to receive $6.32 in cash, without interest. The
aggregate consideration to be paid by ASI to the Shareholders of the Company,
assuming there are no Dissenting Shares, will be $104,314,488. Dissenting Shares
will be converted to cash in the manner described under the caption "RIGHTS OF
DISSENTING SHAREHOLDERS."
PAYMENT FOR SHARES
American Stock Transfer & Trust Company (the "Exchange Agent") will act as
the exchange agent for payment of the Merger Consideration to the holders of the
Common Stock. Prior to the Effective Time, ASI will deposit, or will cause to be
deposited, in trust with the Exchange Agent for the benefit of the Company's
shareholders, cash in an aggregate amount equal to the product of (i) the number
of shares of Common Stock issued and outstanding immediately prior to the
Effective Time (other than any shares of Common Stock owned beneficially or of
record by ASI or Mergeco or any other subsidiary of ASI and other than shares of
Common Stock which continue to be Dissenting Shares immediately prior to the
Effective Time), pro-rated for fractional shares of Common Stock, if any, and
(ii) the Merger Consideration (such amount being hereinafter referred to as the
"Exchange Fund").
Instructions with regard to the surrender of certificates formerly
representing shares of Common Stock, together with the letter of transmittal to
be used for that purpose, will be mailed to shareholders as soon as practicable
after the Effective Time. As soon as practicable following receipt from the
shareholder of a duly executed letter of transmittal, together with certificates
formerly representing Common Stock and any other items specified by the letter
of transmittal, the Exchange Agent will pay such amount equal to the product of
the number of shares of Common Stock represented by such certificates remitted
by the shareholder (pro-rated for fractional shares of Common Stock, if any) and
the Merger Consideration, less any applicable withholding tax, to such
shareholder, by check or draft. Such certificates shall forthwith be canceled.
No transfer of shares of Common Stock will be made on the stock transfer
books of the Surviving Corporation after the Effective Time. If, after the
Effective Time, certificates representing such shares are presented to the
Surviving Corporation, such shares will be canceled and exchanged for cash in
the manner provided above, subject to applicable law in the case of Dissenting
Shares.
Any portion of the Merger Consideration remaining unclaimed by the
shareholders of the Company after December 31, 1997 shall be repaid to the
Surviving Corporation, upon demand, and any shareholders of the Company who have
not theretofore complied with the Merger Agreement shall thereafter be entitled
to the payment of the Merger Consideration only from the Surviving Corporation,
without any interest thereon, but shall have no greater rights against the
Surviving Corporation than may be accorded to general creditors of the Surviving
Corporation under relevant law.
The Surviving Corporation will pay all charges and expenses, including
those of the Exchange Agent, in connection with the exchange of cash for shares
of Common Stock, except that if payment with respect to the Common Stock is to
be made to a person other than the person in whose name the certificates
surrendered are registered, the person requesting the payment shall pay any
transfer or other taxes required by reason of the payment to a person other than
the registered holder of the certificates surrendered.
SHAREHOLDERS OF THE COMPANY SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO
THE EXCHANGE AGENT WITHOUT A LETTER OF TRANSMITTAL, AND SHOULD NOT RETURN THEIR
STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company, in the Merger Agreement, has represented and warranted, among
other things, as to the following matters, subject to certain exceptions:
corporate existence and power, capitalization, corporate authorization, absence
of government filings except those specified in the Merger Agreement, lack of
conflicts with other agreements, compliance with laws, compliance with filing
requirements applicable to SEC reports,
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<PAGE> 31
financial statements, lack of undisclosed liabilities, preparation of this Proxy
Statement, employee benefit matters, absence of certain changes, absence of
litigation, taxes, environmental and occupational safety and health matters,
receipt of an opinion from Cowen, inapplicability of certain anti-takeover
provisions, intellectual property, licenses and permits, insurance, contracts,
shareholder vote, absence of finders and investment bankers fees (except for
those of Cowen), and real property and leases.
REPRESENTATIONS AND WARRANTIES OF ASI AND MERGECO
ASI and Mergeco, in the Merger Agreement, have represented and warranted,
among other things, as to the following matters, subject to certain exceptions:
corporate existence and power, corporate authorization, absence of government
filings except those specified in the Merger Agreement, information supplied by
them for inclusion in this Proxy Statement, financial ability to perform,
absence of finders and investment bankers fees (except for those of Goldman
Sachs), absence of litigation, and the inapplicability of certain anti-takeover
provisions.
OPERATIONS OF THE COMPANY PRIOR TO THE MERGER
The Company has agreed that, prior to the Effective Time, the business of
the Company and its subsidiaries will be conducted in accordance with certain
restrictions set forth in the Merger Agreement. Among other things, the Company
has agreed that each of the Company and its subsidiaries will conduct its
operations in all material respects according to its ordinary course of business
and will use reasonable efforts to preserve intact its business organization and
to maintain its relationships with suppliers, distributors, customers and others
having business relationships with it, and neither the Company nor its
subsidiaries will do any of the following without ASI's prior written consent:
(a) amend its Articles of Incorporation or Amended Bylaws; (b) authorize for
issuance, issue, sell, deliver or agree or commit to issue, sell or deliver any
shares of capital stock of any class or any securities convertible into shares
of capital stock of any class, or designate any class or series of shares of
capital stock of the Company from the undesignated shares of capital stock of
the Company; (c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution in respect of its
capital stock, or redeem or otherwise acquire any shares of its capital stock;
provided, however, that any of the Company's wholly owned subsidiaries may
declare, set aside or pay any dividend or other distribution with respect to
their capital stock; (d)(i) except for short-term borrowings incurred in the
ordinary course of business and prepayable at any time in accordance with their
terms without penalty, create, incur or assume any indebtedness for money
borrowed (including obligations in respect of capital leases); (ii) assume,
guarantee, endorse or otherwise become liable or responsible for the obligations
of any person other than any subsidiary of the Company or (iii) except for
customary loans or advances to employees or trade credit in the ordinary course
of business, make any loans, advances or capital contributions to, or
investments in, any person other than any of the subsidiaries of the Company;
(e) except in the ordinary course of business, sell, transfer, mortgage or
otherwise dispose of or encumber, any business, subsidiary, assets that are
material to the Company and its subsidiaries taken as a whole, or fixed assets
that individually have a value on the Company's books in excess of $25,000; (f)
settle or compromise any pending or threatened suit, action or claim in which
the amount involved is greater than $25,000 or which is material to the Company
and its subsidiaries as a whole or which relates to the transactions
contemplated in the Merger Agreement or modify, amend or terminate any of its
Material Contracts (as defined in the Merger Agreement) in any material respects
or waive, release or assign any material rights or claims; (g) make any material
tax election or make any material accounting charge or permit any insurance
policy naming it as a beneficiary or a loss payable payee to be canceled or
terminated without notice to ASI; (h) except for (A) certain increases in
salaries, bonuses and severance benefits; (B) salary and wage increases and
bonuses in the ordinary course of business and (C) salary and wage increases
that may be required by law, grant any material increase in the compensation
payable or to become payable to any of its officers or employees or establish,
adopt, enter into, make any new grants or awards under, be obligated to grant
any awards under, or amend, any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option or other equity, pension, retirement,
incentive or deferred compensation, employment, retention, termination,
severance, health, life or other welfare, fringe or other plan, agreement,
trust, fund, policy or arrangement for the benefit
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<PAGE> 32
of any current or former directors, officers or employees, or grant or pay any
benefit not required by any existing plan or arrangement; (i) change any of the
accounting principles used by it, unless required by GAAP; (j) acquire any
business or stock, merge or consolidate with any other person or sell, encumber
or otherwise transfer any business or material portion thereof; or (k) other
than in the ordinary course of business, enter into any Material Contracts; or
(l) agree to do any of the foregoing.
NO SOLICITATION
The Company has agreed that, from and after March 10, 1997 until the
earlier of the Effective Time or the termination of the Merger Agreement,
neither the Company nor any of its subsidiaries nor any of their respective
officers, directors, employees, agents or representatives will directly or
indirectly (i) solicit, initiate or encourage or (ii) enter into any discussions
or negotiations with, in any way continue any discussions or negotiations
commenced before March 10, 1997 with, or disclose directly or indirectly any
information not customarily disclosed concerning its business and properties to,
or afford any access to its properties, books and records to, any corporation,
partnership or other person or group in connection with any proposal that
constitutes an "Acquisition Proposal" (as defined below). Notwithstanding the
foregoing, the Company may, in response to an Acquisition Proposal made without
such solicitation, initiation or encouragement, to the extent the Board of
Directors shall have concluded in good faith based on advice of outside counsel
that any action is required for the Board of Directors to comply with its
applicable fiduciary duties under applicable law, following prior notice to ASI,
(i) provide any person with nonpublic information, pursuant to a confidentiality
agreement no more favorable to such person than the Confidentiality Agreement,
dated November 1, 1996, between the Company and ASI, (ii) participate in
negotiations regarding such Acquisition Proposal and (iii) through the Board of
Directors, may take and disclose any position with respect to such Acquisition
Proposal constituting a tender offer and make such other disclosures to the
Company's shareholders which, upon the advice of outside counsel, are required
by applicable law. An "Acquisition Proposal" is defined in the Merger Agreement
as any proposal regarding a sale of all or any part of the Company's capital
stock or a merger, consolidation or statutory share exchange involving the
Company or any subsidiary of the Company or sale or spin-off of all or a
substantial portion of the assets of the Company or any subsidiary which is
material to the Company and its subsidiaries taken as a whole, or a liquidation
or recapitalization of the Company, or any similar transaction.
If the Board of Directors, after consultation with and based upon the
advice of outside counsel, determines in good faith that it is necessary to do
so in order to comply with its fiduciary duties under applicable law, the Board
of Directors may (i) modify or amend its approval or recommendation of the
Merger Agreement or the Merger, (ii) approve or recommend any Superior Proposal
(as defined below) or (iii) following the termination of the Merger Agreement,
enter into an agreement with respect to a Superior Proposal; provided, however,
in case of clauses (ii) and (iii) only at a time after the second business day
after ASI's receipt of written notice from the Company advising ASI of the
Company's receipt of a Superior Proposal, specifying the material terms and
conditions of such Superior Proposal and identifying the person making such
Superior Proposal. For purposes of the Merger Agreement, a "Superior Proposal"
means a proposal to acquire, directly or indirectly, more than 50% of the shares
of Common Stock or all or any substantial portion of the consolidated assets of
the Company and its subsidiaries and otherwise on terms that the Board of
Directors determines in its good faith judgment (based on the advice of a
financial advisor of nationally recognized reputation) to be more favorable to
the Company's shareholders than the Merger.
TRANSFER TAXES
The Surviving Corporation will pay any transfer Taxes (as such term is
defined in the Merger Agreement) payable in connection with the Merger (other
than taxes related to the payment of Merger Consideration to payees other than
registered holders of the Common Stock) and will be responsible for the
preparation and filing of any required Tax Returns (as such term is defined in
the Merger Agreement) with respect to such Taxes.
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<PAGE> 33
CONDITIONS TO CONSUMMATION OF THE MERGER
The Merger will occur only if the Merger Agreement is approved and adopted
by the requisite vote of the holders of the Common Stock. Consummation of the
Merger also is subject to the satisfaction of certain other conditions specified
in the Merger Agreement, unless such conditions are waived (to the extent such
waiver is permissible). The failure of any such condition to be satisfied, if
not waived, would prevent consummation of the Merger.
The obligations of ASI, Mergeco and the Company to consummate the Merger
are subject to satisfaction of, among others, the following conditions, as of
the time of closing of the Merger (the "Closing"): (a) there shall not be in
effect any statute, rule or regulation enacted, promulgated or deemed applicable
by any governmental authority of competent jurisdiction that makes consummation
of the Merger illegal and there shall not be a temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger; (b) the Merger Agreement shall have been approved
and adopted by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock in accordance with the Articles of
Incorporation and Amended Bylaws of the Company and the MBCA; (c) each of ASI,
the Company and any other person required in connection with the Merger to file
a Pre-Merger Notification and Report Form under the HSR Act with the Federal
Trade Commission and the Antitrust Division shall have made such filing and the
applicable waiting period with respect to each such filing shall have expired or
been terminated; (d) the Merger Agreement shall not have been terminated in
accordance with its terms and (e) all of the conditions set forth in the
European Agreement, pertaining to ASI's acquisition of Sorin's European
Diagnostics Division shall have been satisfied or waived, and the Closing (as
such term is defined in the European Agreement) shall have occurred
simultaneously with the Effective Time.
The obligations of ASI and Mergeco to consummate the Merger are also
subject to satisfaction of the following additional conditions, as of the time
of Closing: (a) each of the representations and warranties of the Company
contained in the Merger Agreement shall be true and correct in all material
respects as of the Closing; (b) each and all of the covenants and agreements of
the Company to be performed and complied with pursuant to the Merger Agreement
prior to the Closing shall have been duly performed and complied with in all
material respects; (c) there shall not have occurred any event having a Material
Adverse Effect (as such term is defined in the Merger Agreement and with such
exceptions as are provided in the Merger Agreement); (d) Dissenting Shares shall
constitute not more than 10% of the shares of Common Stock issued and
outstanding immediately prior to the Effective Time and (e) certain government
authorizations shall have been received.
The obligations of the Company to consummate the Merger are also subject to
satisfaction of the following additional conditions, as of the time of Closing:
(a) each of the representations and warranties of ASI and Mergeco contained in
the Merger Agreement shall be true and correct in all material respects as of
the Closing and (b) each and all of the covenants and agreements of ASI and
Mergeco to be performed and complied with pursuant to the Merger Agreement prior
to the Closing shall have been duly performed and complied with in all material
respects.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the Merger Agreement by the Company's
shareholders, by action taken or authorized by the Board of Directors of the
terminating party:
(a) by mutual written consent of ASI and the Company;
(b) without action needing to be taken by either ASI or the Company,
upon termination of the European Agreement;
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<PAGE> 34
(c) by either ASI or the Company;
(i) generally, if the Merger is not consummated by August 1, 1997;
(ii) if the Company's shareholders do not approve the Merger;
(iii) generally, if any court or other governmental agency of
competent jurisdiction has issued a final and non-appealable order,
decree or ruling or has taken any other action permanently restraining,
enjoining, or otherwise prohibiting the Merger;
(d) by ASI, in the event of a material breach of or material failure
by the Company to perform any of its representations, warranties, covenants
or other agreements contained in the Merger Agreement, which cannot be or
has not been cured within 30 days of the giving of written notice to the
Company of such breach;
(e) by ASI, in the event of (i) a withdrawal or modification by the
Board of Directors, or an independent committee thereof (including, without
limitation, the Special Committee), in a manner adverse to ASI, Mergeco or
ASM of its approval or recommendation of the Merger or the Merger
Agreement; (ii) an approval or recommendation by the Board of Directors, or
an independent committee thereof (including, without limitation, the
Special Committee), of any Acquisition Proposal (other than the Merger) or
(iii) adoption of a resolution by the Board of Directors, or an independent
committee thereof, to take any of the foregoing actions;
(f) by the Company, in the event of a material breach of or material
failure by ASI, Mergeco or ASM to perform any of its representations,
warranties, covenants or other agreements contained in the Merger
Agreement, which cannot be or has not been cured within 30 days of the
giving of written notice to ASI of such breach; or
(g) by the Company, prior to the Effective Time and after the
Company's receipt of a Superior Proposal, in the event of (i) a withdrawal
or modification by the Board of Directors, or an independent committee
thereof (including, without limitation, the Special Committee), in a manner
adverse to ASI, Mergeco or ASM of its approval or recommendation of the
Merger or the Merger Agreement; (ii) a recommendation by the Board of
Directors, or an independent committee thereof (including, without
limitation, the Special Committee), of a Superior Proposal or (iii)
adoption of a resolution by the Board of Directors, or an independent
committee thereof (including, without limitation, the Special Committee),
to take any of the foregoing actions; provided that such termination will
not be effective until the Company has made payment to ASI of the Fee (as
defined below).
TERMINATION FEE AND EXPENSES
The Merger Agreement requires the Company to pay ASI a termination fee of
$2.5 million (the "Fee") if the Merger Agreement is terminated pursuant to
clauses (e) or (g) set forth above under "--Termination." In the event of a
termination of the Merger Agreement pursuant to any of the provisions described
above in "-- Termination," other than item (f), then, if a Third Party
Acquisition (as defined below) occurs within 12 months following the termination
date, the Company shall pay ASI the Fee (to the extent not previously paid) plus
all Expenses (as defined below) within five business days of the date such Third
Party Acquisition is concluded.
"Expenses" is defined in the Merger Agreement as all documented
out-of-pocket expenses and fees up to $1.5 million in the aggregate actually
incurred or paid by any of ASI, ASM or Mergeco or on behalf of ASI, ASM or
Mergeco in connection with the Merger including, without limitation, litigation
related thereto and the financing thereof, and actually incurred by banks,
investment banking firms, other financial institutions and other persons and
assumed by ASI, ASM and Mergeco in connection with the negotiation, preparation,
execution and performance of the Merger Agreement, the structuring and financing
of the Merger and any transactions contemplated thereby.
"Third Party Acquisition" is defined in the Merger Agreement as the
occurrence of any of the following events: (i) the acquisition of the Company by
merger, consolidation, statutory share exchange or other
21
<PAGE> 35
business combination transaction by any person other than ASI, Mergeco or any
affiliate thereof (a "Third Party"), in which transaction the holders of shares
of Common Stock are to receive a per share of Common Stock consideration equal
to, or in excess of, the Merger Consideration; (ii) the acquisition by any Third
Party of 50% or more (in book value or market value) of the total assets of the
Company and its subsidiaries, taken as a whole in a transaction or series of
transactions that indicates an enterprise value for the Company equal to or
greater than the product of the number of shares of Common Stock outstanding at
the Effective Time times the Merger Consideration; (iii) the acquisition by a
Third Party of 50% or more of the outstanding shares of Common Stock whether by
tender offer, exchange offer or otherwise for a per share of Common Stock price
equal to, or in excess of, the Merger Consideration; (iv) the adoption by the
Company of a plan of liquidation or dissolution or the declaration or payment of
an extraordinary dividend, the amount of which indicates an enterprise value for
the Company equal to or greater than the product of the number of shares
outstanding at the Effective Time multiplied by the Merger Consideration; or (v)
the repurchase by the Company or any of its subsidiaries of 50% or more of the
outstanding shares of Common Stock for a per share of Common Stock consideration
in excess of the Merger Consideration. In each case, appropriate adjustment
shall be made for any stock splits, reverse stock splits, stock dividends or
similar events affecting the number of shares of Common Stock outstanding,
effected after the date of the Merger Agreement. For purposes of clauses (iii)
and (v) hereof, such Third Party Acquisition shall have been deemed to have been
concluded upon the acceptance of shares of Common Stock for payment, exchange or
repurchase, for purposes of clause (i), such Third Party Acquisition shall be
deemed to have concluded at the effective time of such merger, consolidation or
other transaction, for purposes of clause (ii), such acquisition shall have been
deemed to have been concluded on its closing date, and for purposes of clause
(iv), such event shall have been deemed to have been concluded on the date such
plan of liquidation or dissolution is adopted, or the record date for payment of
such extraordinary dividend.
Except as provided above, all costs and expenses incurred in connection
with the Merger Agreement and the Merger and any transactions contemplated
thereby shall be paid by the party incurring such expenses, whether or not any
transaction is consummated. Expenses payable by the Company under the Merger
Agreement include all costs incurred or accrued in connection with the
collection of the Fee or Expenses to the extent they were not paid when due
together with interest on such unpaid Fee or Expenses.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for by ASI under the purchase method of
accounting, under which the total consideration paid in the Merger will be
allocated among the Surviving Corporation's consolidated assets and liabilities
based on the fair values of the assets acquired and liabilities assumed.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Under currently existing provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the Treasury Regulations promulgated thereunder,
applicable judicial decisions and administrative rulings, all of which are
subject to change, the federal income tax consequences described below are
expected to arise in connection with the Merger. Due to the complexity of the
Code, the following discussion is limited to the material federal income tax
aspects of the Merger for a Company shareholder who is a citizen or resident of
the United States and who, on the date of disposition of such holder's shares of
Common Stock, holds such shares as a capital asset. The general tax principles
discussed below are subject to retroactive changes that may result from
subsequent amendments to the Code. The following discussion does not address the
material federal income tax aspects of the Merger for Biofin, the holder of 52%
of the Company's Common Stock, or for any other Company shareholder who is not a
citizen or resident of the United States. The following discussion does not
address potential foreign, state, local and other tax consequences, nor does it
address taxpayers subject to special treatment under the federal income tax
laws, such as life insurance companies, tax-exempt organizations, S
corporations, trusts, and taxpayers subject to the alternative minimum tax. In
addition, the following discussion may not apply to Company shareholders who
acquired their shares upon the exercise of employee stock options or otherwise
as compensation. The Company has not requested either the
22
<PAGE> 36
Internal Revenue Service or counsel to rule or issue an opinion on the federal
income tax consequences of the Merger. ALL SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, FOREIGN, STATE, AND LOCAL TAX
CONSEQUENCES OF THE DISPOSITION OF THEIR SHARES IN THE MERGER.
For federal income tax purposes, the Merger will be treated as a taxable
sale or exchange of Common Stock for cash by each holder of the Company's Common
Stock (including any holder of shares who properly exercises dissenter's
rights). Accordingly, the federal income tax consequences to the Company's
shareholders will generally be as follows:
(i) Assuming that the shares of Common Stock exchanged by a Company
shareholder for cash in connection with the Merger are capital assets in
the hands of the shareholder at the Effective Time, such shareholder may
recognize a capital gain or loss by reason of the consummation of the
Merger.
(ii) The capital gain or loss, if any, will be long-term with respect
to shares of the Company's Common Stock held for more than twelve (12)
months as of the Effective Time and short-term with respect to such shares
held for twelve (12) months or less.
(iii) The amount of capital gain or loss to be recognized by each
shareholder will be measured by the difference between the amount of cash
received by such shareholder in connection with the Merger (or cash
received in connection with the exercise of dissenters' rights) and such
shareholder's aggregate adjusted tax basis in the Common Stock at the
Effective Time.
(iv) An individual's long-term capital gain is subject to federal
income tax at a maximum rate of 28%, while any capital loss can be offset
only against other capital gains plus $3,000 of other income in any tax
year ($1,500 in the case of a married individual filing a separate return).
(v) A corporation's long-term capital gain is subject to federal
income tax at a maximum rate of 35%, while any capital loss can be offset
only against other capital gains in any tax year.
Cash payments made pursuant to the Merger (including any cash paid to a
holder of shares who properly exercises dissenter's rights) will be reported to
the extent required by the Code to Company shareholders and the Internal Revenue
Service. Such amounts will ordinarily not be subject to withholding of U.S.
federal income tax. However, backup withholding of such tax at a rate of 31% may
apply to certain shareholders by reason of the events specified in Section 3406
of the Code and the Treasury Regulations promulgated thereunder, which include
failure of a shareholder to supply the Company or its agent with such
shareholder's taxpayer identification number. Accordingly, Company shareholders
(or other payees) will be asked to provide the shareholder's taxpayer
identification number (social security number in the case of an individual, or
employer identification number in the case of other shareholders of the Company)
on a Substitute Form W-9 which is to be included as part of the letter of
transmittal to be returned to the Exchange Agent and to certify that such number
is correct. Withholding may also apply to Company shareholders who are otherwise
exempt from such withholding, such as a foreign person, if such person fails to
properly document its status as an exempt recipient. Each shareholder of the
Company, and, if applicable, each other payee, should complete and sign the
Substitute Form W-9 to provide the information and certification necessary to
avoid backup withholding, unless an applicable exemption exists and is proved in
a manner satisfactory to the Exchange Agent.
SUMMARY
For federal income tax purposes, the Merger will be treated as a taxable
sale or exchange of Common Stock for cash by each holder of the Company's Common
Stock who is a citizen or resident of the United States (including any holder of
shares who properly exercises dissenter's rights). The amount of gain or loss to
be recognized by each shareholder will be measured by the difference between the
amount of cash received by such shareholder in connection with the Merger (or
cash received in connection with the exercise of dissenter's rights) and such
shareholder's aggregate adjusted tax basis in the Common Stock at the Effective
Time.
23
<PAGE> 37
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL
INFORMATION ONLY. EACH HOLDER OF SHARES OF COMMON STOCK IS URGED TO CONSULT HIS
OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH
SHAREHOLDER OF THE MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN,
STATE, LOCAL AND OTHER TAX LAWS).
RIGHTS OF DISSENTING SHAREHOLDERS
Sections 302A.471 and 302A.473 of the MBCA provide to each shareholder the
right to dissent from, and obtain payment for the "fair value" of such
shareholder's shares of Common Stock following the consummation of the Merger.
The following summary of the applicable provisions of Sections 302A.471 and
302A.473 of the MBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to such sections, the
full texts of which are attached as Exhibit C to this Proxy Statement. These
sections should be reviewed carefully by any holder who wishes to exercise
dissenters' rights or who wishes to preserve the right to do so, since failure
to comply with the procedures set forth herein will result in the loss of
dissenters' rights.
Under the MBCA, holders of shares of Common Stock will have the right, by
fully complying with applicable provisions of Sections 302A.471 and 302A.473, to
dissent with respect to the Merger and to receive from the Company payment in
cash of the "fair value" of their Common Stock after the Merger is completed.
The term "fair value" means the value of the shares of Common Stock immediately
before the Effective Time.
All references in Sections 302A.471 and 302A.473 and in this summary to a
"shareholder" are to the record holder of the Common Stock as to which rights
are asserted. A person having beneficial ownership of shares of Common Stock
that are held of record in the name of another person, such as a broker,
nominee, trustee or custodian, must act promptly to cause the record holder
properly to follow the steps summarized below and in a timely manner in order to
perfect whatever dissenters' rights the beneficial owner may have.
Shareholders of record who desire to exercise their dissenters' rights must
satisfy all of the following conditions. A written notice of intent to demand
fair value for the shares of Common Stock must be delivered to the executive
offices of the Company before the taking of the shareholder vote on the Merger.
This written demand must be in addition to and separate from any proxy or vote
against the Merger. Voting against, abstaining from voting or failing to vote on
the Merger will not constitute a notice of intent to demand fair value within
the meaning of the MBCA.
Shareholders electing to exercise their dissenters' rights under the MBCA
must not vote for adoption of the Merger. A shareholder's failure to vote
against the Merger will not constitute a waiver of dissenters' rights. However,
if a shareholder returns a signed proxy but does not specify a vote against
adoption of the Merger or direction to abstain, the proxy will be voted for
adoption of the Merger, which will have the effect of waiving that shareholder's
dissenters' rights.
A shareholder of the Company may not assert dissenters' rights as to less
than all of the Common Stock registered in such holder's name except where
certain shares are beneficially owned by another person but registered in such
holder's name. If a record owner, such as a broker, nominee, trustee or
custodian, wishes to dissent with respect to shares beneficially owned by
another person, such shareholder must dissent with respect to all of such shares
and must disclose the name and address of the beneficial owner on whose behalf
the dissent is made. A beneficial owner of shares of Common Stock who is not the
record owner may assert dissenters' rights as to shares held on such person's
behalf, provided that such beneficial owner submits a written consent of the
record owner to the Company at or before the time such rights are asserted.
A shareholder who elects to exercise dissenters' rights must send his or
her written demand, before the taking of the vote on the Merger, to Secretary,
INCSTAR Corporation, 1990 Industrial Boulevard, P.O. Box 285, Stillwater,
Minnesota 55082. The written demand should specify the shareholder's name and
mailing
24
<PAGE> 38
address, the number of shares of Common Stock owned and that the shareholder
intends to demand the fair value of his or her shares.
After approval of the Merger by the shareholders at the Special Meeting,
the Surviving Corporation will send a written notice to each shareholder who
filed a written demand for dissenters' rights and did not vote such
shareholder's shares of Common Stock in favor of the Merger. The notice will
contain the address to which the shareholder shall send a demand for payment and
deposit the stock certificates in order to obtain payment and the date by which
they must be received, a form to be used in connection therewith and other
related information.
In order to receive fair value for his or her shares, a dissenting
shareholder must, within 30 days after the date such notice was given by the
Surviving Corporation (for which purpose notice by the Surviving Corporation is
deemed to have been given under Minnesota law when deposited in the United
States mail), demand payment of fair value for his or her shares and deposit his
or her stock certificates with the Company at the address specified in such
notice. A dissenting shareholder will retain all rights as a shareholder until
the Effective Time. After a valid demand for payment and the related stock
certificates are received (if occurring within the 30 day time period), or after
the Effective Time, whichever is later, the Surviving Corporation will remit to
each dissenting shareholder who has complied with the statutory requirements the
amount the Surviving Corporation estimates to be the fair value of such
shareholder's Common Shares, with interest commencing five days after the
Effective Time at a rate prescribed by statute (which rate is currently 5% per
annum). The remittance will be accompanied by the Company's closing balance
sheet and statement of income for a fiscal year ending not more than 16 months
before the Effective Time, together with the latest available interim financial
data, an estimate of the fair value of the shareholder's shares and a brief
description of the method used to reach the estimate, a brief description of the
procedure to be followed in demanding supplemental payment and copies of
Sections 302A.471 and 302A.473.
If the dissenting shareholder believes that the amount remitted by the
Surviving Corporation is less than the fair value of such holder's shares, plus
interest, the shareholder may give written notice to the Surviving Corporation
of such holder's own estimate of the fair value of the shares, plus interest,
within 30 days after the mailing date of the remittance and demand payment of
the difference. Such notice must be given at the Company's executive offices at
the address set forth above. A shareholder who fails to give such written notice
within this time period is entitled only to the amount remitted by the Company.
Within 60 days after receipt of a demand for supplemental payment, the
Surviving Corporation must either pay the shareholder the amount demanded or
agreed to by such shareholder after discussion with the Surviving Corporation or
petition a court in Washington County, Minnesota for the determination of the
fair value of the shares, plus interest. The petition shall name as parties all
shareholders who have demanded supplemental payment and have not reached an
agreement with the Surviving Corporation. The court, after determining that the
shareholder or shareholders in question have complied with all statutory
requirements, may use any valuation method or combination of methods it deems
appropriate to use, whether or not used by the Company or the dissenting
shareholder, and may appoint appraisers to recommend the amount of the fair
value of the shares. The court's determination will be binding on all
shareholders of the Company who properly exercised dissenters' rights and did
not agree with the Surviving Corporation as to the fair value of the shares.
Dissenting shareholders are entitled to judgment for the amount by which the
court-determined fair value per share, plus interest, exceeds the amount per
share, plus interest, remitted to the shareholders by the Surviving Corporation.
The shareholder shall not be liable to the Surviving Corporation for any amounts
paid by the Surviving Corporation which exceed the fair value of the shares as
determined by the court, plus interest. The costs and expenses of such a
proceeding, including the expenses and compensation of any appraisers, will be
determined by the court and assessed against the Surviving Corporation, except
that the court may, in its discretion, assess part or all of those costs and
expenses against any shareholder whose action in demanding supplemental payment
is found to be arbitrary, vexatious or not in good faith. The court may award
fees and expenses to an attorney for the dissenting shareholders out of the
amount, if any, awarded to such shareholders. Fees and expenses of experts or
attorneys may also be assessed against any person who acted arbitrarily,
vexatiously or not in good faith in bringing the proceeding.
25
<PAGE> 39
The Company may withhold the remittance of the estimated fair value, plus
interest, for any shares owned by any person who was not a shareholder or who is
dissenting on behalf of a person who was not a beneficial owner on January 24,
1997, the date on which the Merger was first announced to the public (the
"Public Announcement Date"). The Surviving Corporation will forward to any such
dissenting shareholder who has complied with all requirements in exercising
dissenters' rights the notice and all other materials sent after shareholder
approval of the Merger to all shareholders who have properly exercised
dissenters' rights, together with a statement of the reason for withholding the
remittance and an offer to pay the dissenting shareholder the amount listed in
the materials if the shareholder agrees to accept that amount in full
satisfaction. The shareholder may decline this offer and demand payment by
following the same procedure as that described for demand of supplemental
payment by shareholders who owned their shares as of the Public Announcement
Date. Any shareholder who did not own shares on the Public Announcement Date and
who fails properly to demand supplemental payment will be entitled only to the
amount offered by the Company. Upon proper demand by any such shareholder, rules
and procedures applicable in connection with receipt by the Company of the
demand for supplemental payment given by a dissenting shareholder who owned
shares on the Public Announcement Date will also apply to any shareholder
properly giving a demand but who did not own shares of record or beneficially on
the Public Announcement Date, except that any such shareholder is not entitled
to receive any remittance from the Company until the fair value of the shares,
plus interest, has been determined pursuant to such rules and procedures.
Shareholders considering exercising dissenters' rights should bear in mind
that the fair value of their shares determined under Sections 302A.471 and
302A.473 could be more than, the same as or, in certain circumstances, less than
the consideration they would receive pursuant to the Merger Agreement if they do
not exercise dissenters' rights, and that the opinion of any investment banking
firm as to fairness, from a financial point of view, is not an opinion as to
fair value under such Sections.
Under Section 302A.471 of the MBCA, a shareholder of the Company has no
right at law or equity to set aside the adoption of the Merger Agreement or the
consummation of the Merger, except if such adoption or consummation is
fraudulent with respect to such shareholder or the Company.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER."
26
<PAGE> 40
INFORMATION CONCERNING THE COMPANY
MARKET PRICES AND DIVIDENDS
Market Price
The Company's Common Stock is currently traded on the Nasdaq National
Market under the symbol "ISTR." Prior to May 24, 1996, the Company's Common
Stock was traded on the American Stock Exchange. On January 23, 1997, the last
full trading day prior to the public announcement of the Memorandum of
Understanding, the closing price of the Common Stock was $4 27/64 per share. On
May 29, 1997, the last full trading day prior to the printing of this Proxy
Statement, the closing price of the Common Stock was $6 1/32 per share.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter............................................. $ 2 3/4 $ 1 1/2
Second Quarter............................................ 3 3/4 2 1/2
Third Quarter............................................. 5 5/16 2 7/8
Fourth Quarter............................................ 5 3 3/4
1996
First Quarter............................................. $ 6 1/4 $ 4
Second Quarter............................................ 6 3/4 4 1/4
Third Quarter............................................. 5 5/8 3 5/8
Fourth Quarter............................................ 4 7/8 2 5/8
1997
First Quarter............................................. $ 6 1/16 $ 3
Second Quarter
(through May 29, 1997).................................... 6 1/8 5 3/4
</TABLE>
Dividends
The Company did not pay cash dividends on its common stock during 1995 or
1996. The Board of Directors of the Company reviews its dividend policy from
time to time and determines any payment of dividends upon future earnings,
results of operations, capital requirements, the financial condition of the
Company and any other factors it may consider relevant.
27
<PAGE> 41
SELECTED FINANCIAL DATA
Set forth below is selected consolidated historical financial information
of the Company derived from the unaudited consolidated financial statements of
the Company for the quarters ended April 4, 1997 and March 29, 1996 and the
audited consolidated financial statements of the Company for the fiscal years
ended December 31, 1996, 1995, 1994, 1993 and 1992. The operating results for
the fiscal quarter ended April 4, 1997 reflects all adjustments (consisting of
normal recurring accruals) necessary to present fairly the information contained
therein and are not necessarily indicative of the results for the full year.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED YEARS ENDED DECEMBER 31,
------------------------------ -----------------------------------------------
APRIL 4, 1997 MARCH 29, 1996 1996 1995 1994 1993 1992
------------- -------------- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OPERATIONS STATEMENT
INFORMATION
Domestic sales................... $ 5,174 $ 6,162 $22,017 $23,832 $21,282 $23,321 $24,712
International sales.............. 5,664 5,293 22,287 21,928 21,221 19,967 21,272
------- ------- ------- ------- ------- ------- -------
Net sales........................ 10,838 11,455 44,304 45,760 42,503 43,288 45,984
Cost of goods sold............... 5,616 5,539 21,599 23,271 22,039 23,007 22,052
Inventory valuation adjustment
(a)............................ -- -- -- -- 750 -- --
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 5,222 5,916 22,705 22,489 19,714 20,281 23,932
Operating expenses:
Selling, general and
administrative............... 3,353 3,295 13,206 12,592 12,853 12,761 13,621
Research and development....... 986 1,060 4,163 3,748 5,069 5,719 3,277
Unusual items (a).............. -- -- -- -- 5,750 750 --
------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 4,339 4,355 17,369 16,340 23,672 19,230 16,898
Operating income (loss).......... 883 1,561 5,336 6,149 (3,958) 1,051 7,034
Interest income (expense), net... 25 (7) 96 (348) (365) (472) (656)
Investment and other income
(expense)...................... 29 (24) (21) 33 11 (42) 73
------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 937 1,530 5,411 5,834 (4,312) 537 6,451
Provision for income taxes....... 216 372 1,299 1,571 193 284 1,577
------- ------- ------- ------- ------- ------- -------
NET INCOME (LOSS)................ $ 721 $ 1,158 $ 4,112 $ 4,263 $(4,505) $ 253 $ 4,874
======= ======= ======= ======= ======= ======= =======
NET INCOME (LOSS) PER SHARE...... $ 0.04 $ 0.07 $ 0.25 $ 0.26 $ (0.28) $ 0.02 $ 0.30
======= ======= ======= ======= ======= ======= =======
Weighted average shares and
equivalents.................... 16,724 16,633 16,661 16,492 16,322 16,433 16,338
======= ======= ======= ======= ======= ======= =======
</TABLE>
SUMMARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
AT APRIL 4, 1997 1996 1995 1994 1993 1992
---------------- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total assets................................ $43,100 $41,958 $38,761 $38,154 $43,426 $45,069
Working capital............................. 19,744 19,189 14,947 13,873 14,555 13,863
Long-term debt.............................. 3 -- 3 4,143 6,501 8,167
Shareholder's equity........................ 33,842 33,141 28,384 23,889 28,240 27,277
Book value per share........................ 2.02 1.99 1.72 1.46 1.73 1.69
</TABLE>
- -------------------------
(a) Relates to the write off of certain tangible and intangible costs, severance
and related costs and inventory write downs as discussed in Note 2 to the
Company's Consolidated Financial Statements set forth elsewhere in this
Proxy Statement.
28
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FISCAL QUARTERS ENDED APRIL 4, 1997 AND MARCH 29, 1996
Results of Operations
Sales for the quarter ended April 4, 1997 decreased 5% from $11,455,000 to
$10,838,000 compared to the same period a year earlier. The primary reason for
the decline is reduced sales of one of the Company's hepatitis assays. The
Company experienced an increase in demand for this product during the first
quarter of 1996 due to a competitor's kit becoming unavailable to the market
from June 1995 until March 1996. Sales of the Company's hepatitis assay totaled
$1.2 million during the first quarter of 1996 compared to $150,000 during the
first quarter of this year. Partially offsetting this decline was growth in the
Company's autoimmune, infectious disease and serum proteins product lines. These
increases more than offset the declines in the Company's RIA oncology and
routine endocrinology product lines due to the continued shift in the diagnostic
industry from isotopic, manual testing to non-isotopic, automated and
semi-automated testing. As these trends are expected to continue, the Company
continues to focus development efforts on automated and semi-automated tests
which are non-isotopic.
Domestic sales declined 16% to $5,174,000 for the quarter ending April 4,
1997 from $6,162,000 for the same period in the prior year, due primarily to the
decline in hepatitis assay sales discussed above. The Company experienced
favorable growth in certain product lines, which was partially offset by
declines in the Company's RIA oncology and routine endocrinology product
offerings.
International sales increased 7% to $5,664,000 for the quarter ended April
4, 1997 from $5,293,000 for the same period in the prior year. International
revenues continue to be favorably impacted in the infectious disease segment by
sales of the Company's second generation tests for Epstein Barr Virus. In
addition, sales were favorably impacted by increases in the Company's
autoimmune, bone and mineral and serum protein product lines. Sales were
negatively impacted by declines in the transplantation segment as this market
continues to shift away from manual, isotopic testing as discussed above.
Gross margins for the first quarter of 1997 were 48.2% of sales compared to
51.6% of sales for the same period in the prior year. This decline is due in
part to a change in the mix of sales, discussed above, compared to the same
period a year earlier as well as lower production volumes during the first
quarter of 1997 contributing to higher unit costs. The Company expects gross
margins to improve during the remainder of 1997, however, gross margins are
highly sensitive to product mix and volume changes due to the high fixed-cost
nature of the Company's products.
Selling, general and administrative ("SG&A") expenses increased to
$3,353,000, or 30.9% of sales, for the first quarter of 1997 from $3,295,000, or
28.8% of sales, for the same period in the prior year. This increase is
primarily due to costs of $253,000 related to the proposed merger with ASI,
discussed above. Exclusive of these amounts, SG&A expenses declined 6% from the
same period in the prior year.
Research and development ("R&D") expenditures decreased to $986,000, or
9.1% of sales, in the first quarter of 1997 from $1,060,000, or 9.3% of sales,
for the same period in the prior year. The Company expects R&D expenses as a
percentage of sales to increase slightly during the remainder of 1997.
Interest income net of expense was $25,000 for the first quarter of 1997
compared with $3,000 for the same period in the prior year, due to higher
average cash balances during the first quarter of 1997.
Income tax expense for the quarter was $216,000, or 23% of income before
taxes, compared with income tax expenses of $372,000, or 24% of income before
taxes, in the first quarter of 1996. The Company expects the effective tax rate
to remain at approximately 23% during the remainder of 1997.
Liquidity and Capital Resources
The Company's operating cash flow in the first quarter of 1997 was
$1,538,000 and $1,638,000 for the same period in the prior year. Free cash flow
(operating cash flow less investment activities) decreased to $831,000 for the
quarter ended April 4, 1997 from $997,000 in the comparable period of the prior
year. This
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<PAGE> 43
decrease is attributable to the decline in net income. Net working capital
increased to $19,744,000 at April 4, 1997 from $19,189,000 at December 31, 1996,
primarily due to the generation of cash.
At April 4, 1997, the Company's primary sources of liquidity are a $1
million revolving bank credit line secured by Company assets and a $4.0 million
unsecured credit line with Fiat Finance N.A., Inc. At April 4, 1997, the Company
had no outstanding borrowings under these credit lines. The Company believes
that its operating cash flow and existing credit lines will provide ample
sources of liquidity for all planned capital expenditures and research and
development activities. Capital spending for the remainder of 1997 is
anticipated to be approximately $3.2 million, primarily for a new demand flow
technology system, instrumentation and manufacturing improvements.
THREE YEARS ENDED DECEMBER 31, 1996
Results of Operations
Sales in 1996 were $44,304,000, a 3% decrease from $45,760,000 in 1995.
1995 and 1996 results included sales from a single test that resulted from a
competitor's product becoming unavailable to the market from June 1995 until
March 1996. In the absence of this development, 1995 and 1996 total sales would
have remained relatively unchanged. 1995 sales were 8% above 1994 sales of
$42,503,000. This increase was due primarily to sales from the Company's
hepatitis assays, as previously discussed, combined with sales from new products
introduced during 1995 and the latter part of 1994 in the Company's autoimmune
disease, bone and mineral metabolism and infectious disease market segments.
Increased sales were partially offset by declines in the Company's oncology and
endocrinology market segments due to the continued shift in the diagnostic
industry from isotopic, manual testing to non-isotopic, automated and
semi-automated testing.
Domestic sales decreased 8% from $23,832,000 to $22,017,000. As discussed
above, through February 1996, the Company experienced an increase in demand for
one of its hepatitis assays due to a competitor's kit becoming unavailable to
the market in June 1995. Since the competitor's re-entry during the first
quarter of 1996, the Company has experienced a decline of these product sales
from their levels during the second half of 1995. This opportunity resulted in
approximately $2.2 million and $2.9 million in sales during 1996 and 1995,
respectively. In addition, domestic sales have continued to be negatively
impacted by declines in the Company's oncology and endocrinology market
segments, as discussed above. Partially offsetting these declines were continued
increases in the autoimmune disease market segment, increases in the Company's
serum protein market segment and increases in the Company's Vitamin D assays,
which are part of the bone and mineral metabolism market segment. 1995 sales
increased 12% from $21,282,000 in 1994 due primarily to the increase in sales
from the hepatitis assay described above, as well as increases in the
autoimmunity segment offset with declines in the endocrinology and oncology
market segments.
1996 international sales increased 2% to $22,287,000 compared with 1995
sales of $21,928,000. 1995 sales increased 3% from 1994 sales of $21,221,000.
Sales were favorably impacted in 1996 and 1995 due primarily to the introduction
of second generation Epstein Barr Virus diagnostic kits during 1995. Sales were
negatively impacted in both years due to the continued declines in the routine
endocrinology and transplantation segments.
Gross margins were 51% of sales in 1996 compared with 49% of sales in 1995
and 46% in 1994. The decline in 1994 margins is attributable to the $750,000
charge for excess inventories as discussed in Note 2 of the Company's
consolidated financial statements contained elsewhere herein. Exclusive of the
inventory write down, gross margins were 48% of sales in 1994. Gross margins
have improved during the last two years due to improved product mix as well as
efficiencies derived from an operational restructuring. Notwithstanding this
improvement, the Company's margins continue to be highly sensitive to product
mix and volume changes.
The Company's ratio of selling, general and administrative expenses to
sales was 30% in 1996, 28% in 1995 and 30% in 1994. These expenses, as a
percentage of sales, are expected to remain relatively consistent with 1996.
Research and development expenses were $4,163,000 in 1996, compared with
$3,748,000 in 1995 and $5,069,000 in 1994. The increase in 1996 is primarily due
to increased emphasis on new product development,
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<PAGE> 44
including the establishment of scientific advisory panels for the Company's
autoimmune and bone and mineral metabolism segments. These panels are intended
to strengthen the Company's ties with the scientific community. The decrease in
1995 spending compared with 1994 levels is attributable to the discontinuance
during 1994 of the Fluorescence Polarization Immunoassay (FPIA) development
project as discussed in Note 2 of the Company's consolidated financial
statements contained elsewhere herein. Exclusive of FPIA, these expenses
represent 9%, 8% and 9% of sales in 1996, 1995 and 1994, respectively. Research
and development expenses are projected to increase slightly due to the Company's
increased emphasis on new development activities and increased scientific panel
activity.
Interest income net of expense was $96,000 in 1996 compared with interest
expense of $348,000 in 1995 and $365,000 in 1994. The interest income was
attributable to the elimination of all long term debt during 1995 and higher
average cash balances in 1996. 1995 expense includes interest on certain tax
obligations.
Income tax expense was 24% of income before taxes or $1,299,000, compared
with 27% or $1,571,000 in 1995 and $193,000 in 1994. The decline in the
effective tax rate is due to the recognition of certain deferred tax assets
during 1996. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers its projected future taxable income and tax planning strategies in
making this assessment. The tax expense in 1994 related primarily to book
reserves and liabilities not deductible for tax purposes until paid. The
effective rate is expected to remain relatively consistent with 1996.
Net income in 1996 was $4,112,000, or 25 cents per share, compared with a
net income of $4,263,000, or 26 cents per share, in 1995 and net loss of
$4,505,000, or 28 cents per share, in 1994. The 1994 loss results primarily from
three specific charges. A $750,000 charge was recorded for estimated obsolete
inventory. The Company annually reviews its inventory levels and calculates a
reserve for obsolescence. During 1994, an additional reserve was deemed
appropriate due to rising inventory levels in the Company's serum protein
product line in excess of expected future sales. A $2,450,000 charge was
recorded for the termination of certain distribution and supply agreements as
well as severance and other costs related to senior management changes. In
addition, during 1994 the Company discontinued the development of its
Fluorescence Polarization Immunoassay development project, resulting in a
$3,300,000 charge. The majority of this charge related to the write off of
tangible and intangible assets ($1,560,000), costs incurred to terminate
contracts with outside vendors and consultants ($797,000), as well as severance
and related costs for terminated employees ($943,000).
Liquidity and Capital Resources
The Company's free cash flow (operating cash flow less investment
activities) was $905,000 in 1996, compared to $5,190,000 in 1995 and $3,118,000
in 1994. This decrease is attributable to increased capital spending associated
with instrumentation, manufacturing improvements and computer upgrades as well
as spending associated with the purchase of intellectual property and purchased
technology. The Company's ratio of total debt to total capital was 16% in 1994.
Working capital increased to $19,189,000 at year-end 1996, from $14,947,000
at the end of 1995, resulting from increased cash levels and higher inventory
balances combined with lower accrued compensation due to timing of payroll
disbursements.
Capital expenditures for 1996 were $2,645,000, compared with $1,557,000 in
1995 and $923,000 in 1994. For 1997, capital expenditures are expected to be
approximately $3.8 million, primarily for a new enterprise resource planning
system, manufacturing improvements and instrumentation.
The Company's primary sources of liquidity are a $1 million revolving bank
credit line secured by Company assets and a $4.0 million unsecured credit line
with Fiat Finance N.A., Inc. (Fiat). At year-end, the Company had no outstanding
borrowings under these credit lines. The Company anticipates that the
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<PAGE> 45
generation of free cash flow and the resources available through Fiat will
provide sufficient sources of liquidity for planned capital and research and
development expenditures.
BUSINESS
General
The Company develops, manufactures, and markets test kits and related
products used by major hospitals, clinical reference laboratories and
researchers involved in diagnosing and treating immunological conditions. Since
December 1989, the Company has been majority-owned by Biofin, a subsidiary of
Sorin which is an Italian affiliate of Fiat. The Company was incorporated in
Minnesota in 1975 under the name of Immuno Nuclear Corporation. The Company's
principal executive offices are located at 1990 Industrial Boulevard,
Stillwater, Minnesota, 55082, and its telephone number is (612) 439-9710.
PRODUCTS
The Company currently markets, develops and manufactures individual test
reagents and test kits, using primarily radioimmunoassay ("RIA"), enzyme
immunoassay ("EIA"), immunoturbidimetric assay ("ITA") and immunofluorescent
assay ("IFA") technologies for clinical diagnostic and medical research
purposes. The Company also produces and markets histochemical antisera and
natural and synthetic peptides also used in clinical diagnostic and medical
research. The Company's product focus is on diagnostic tests for autoimmune,
infectious disease, endocrinology and bone and mineral metabolism product
segments, utilizing a variety of technologies. The immunodiagnostic market is
shifting away from manual testing to automated or semi-automated testing in an
effort to reduce laboratory costs involved in processing medical diagnostic
tests. As a result, the research and development activities of the Company are
mainly focused on developing non-isotopic tests that can be run on open
instrument systems that are either currently in the customers labs, or can be
placed there in a cost effective manner.
Diagnostic and Research Kits
The Company believes that it is one of the largest producers of RIA
products in the world. The total RIA market, however, has been significantly
decreasing in recent years due to two factors: (1) isotopic technologies such as
RIA are not easily convertible to automated instrument testing systems and (2)
disposal issues relative to radioactive materials. Current trends in the
immunodiagnostic market are to employ technologies such as EIA, which require
less labor to process test results. Consequently, the challenge facing the
Company is, and will continue to be, to develop products that are non-isotopic
and amiable to semi and fully automated assay systems. Although the current
trend in the domestic market, and to a lesser degree in the international
market, is away from manual, RIA testing, the Company feels that its' strengths
in RIA manufacturing and marketing will allow it to maintain or grow its share
of this declining market. The Company believes that in the near-term its RIA
products will provide it with the capital resources necessary to pursue new
research and development activities.
RIA test procedures are used to precisely measure the extremely low levels
of certain hormones, peptides and other substances present in the human body.
Antibodies are proteins produced by higher animals in response to some foreign
material, known as the "antigen," entering the blood or tissue. The antibody
protects the animal by binding to the antigen and helping other body mechanisms
destroy it. When human hormones and peptides are injected as antigens into a
laboratory animal, the animal develops antibodies to eliminate the antigens.
Serum containing these antibodies (antiserum) is taken from the laboratory
animals and processed into a binding reagent for the specific human hormone or
peptide. The reagent is then combined with other reagents in a test kit to
create an analytical system to measure the level of that human hormone or
peptide present in the specimen to be tested.
Precise amounts of antiserum, which act as the binder, are mixed with
radioactively-labeled (isotopic) tracer antigen and a lower concentration
unlabeled antigen. The tracer antigen and the unlabeled antigen compete for
binding locations on the antibody in the antiserum. The bound antigen is
measured by a radiation counter and the level of bound antigen is calculated.
The results of this controlled procedure are repeated for
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<PAGE> 46
several concentrations of known antigen and a standard curve is plotted. A fluid
specimen is then taken from a patient for testing and substituted for the
unlabeled antigen. The results of the competitive binding of the tracer antigen
and the antigen in the fluid specimen are compared with the standard curve, and
the precise quantity of hormone or peptide being measured is determined. The
sensitivity and accuracy of RIA tests depend primarily upon the quality of the
binding antisera and tracer antigen.
The Company currently markets approximately 80 RIA products, primarily used
in the analysis of endocrine, neuroendocrine, bone and mineral metabolism,
therapeutic drug monitoring and thyroid function. The majority of thyroid
function testing products are marketed under the Clinical Assays(TM) (product
line that the Company, together with Sorin, acquired in 1990 from Baxter
International Inc. (Baxter)). Each RIA kit contains the following: an antiserum
consisting of primary antibodies and, in most cases, a reagent used to
precipitate the primary antigen antibody complex; a radioactively-labeled
antigen to act as tracer; a non-radioactive or cold antigen to act as test
calibrators; and a protocol booklet that provides specific test instructions.
The tracers in the RIA kits have shelf lives of six to twelve weeks depending on
the product. The process of RIA testing requires the use of skilled labor in
diagnostic laboratories.
The Company markets approximately 55 EIA products primarily for infectious
disease and autoimmune disorders. The basic principles of EIA technology is very
similar to RIA in that a highly specific and sensitive reaction of an antigen
and antibody must take place. With EIA, the result is measured by color
development intensity rather than radioactivity. EIA technology uses standard
laboratory procedures and facilitates throughput of large testing volumes such
as those of a large reference laboratory. EIA product lines include the Epstein
Barr Virus ("EBV") and TheraTest products, as discussed below, and the ToRCH
group of tests (toxoplasmosis, rubella, cytomegalovirus and herpes).
The Company also markets approximately 20 products based on IFA technology
for infectious disease and autoimmune disorders. The kits based on IFA
technology are employed in sophisticated diagnostic laboratories for antibody
detection and semi-quantitation in infectious disease and autoimmune disorders.
Patient serum samples are incubated on microscope slides containing prepared
antigen substrate, for example, virus-infected mammalian cells. The antibody, if
present, will bind to the antigen. After a saline rinse, which removes unbound
serum, the microscope slide is reacted with a fluorescein conjugate that binds
to antigen-antibody complexes, which formed during initial incubation. Following
a saline rinse, the slides are viewed under a fluorescence microscope and
examined for fluorescent staining on the specific antigen sites.
Immunofluorescence kits provide prepared multi-sample slides, positive and
negative reference serum controls, fluorescein conjugate, buffered saline and
mounting medium as ready-to-use stabilized reagents. The Company's infectious
disease IFA assays include Toxoplasmosis, Cytomegalovirus, Herpes and a
confirmatory test for syphilis. The autoimmune product offerings incorporate a
broad range of kits and components intended for detection of antinuclear
antibodies and anti-native DNA antibodies (useful in systemic lupus
erythematosus testing), antimitochondrial antibody testing and antithyroid
antibodies intended for diagnosis of primary biliary cirrhosis and Grave's
disease, respectively.
In addition to the distribution of those products that the Company develops
and manufactures, the Company is the exclusive distributor in the United States
and Canada of certain of Sorin's hepatitis in vitro diagnostic products. Sorin
has developed RIA and EIA hepatitis tests that are used worldwide in the
diagnosis of Hepatitis A and Hepatitis B.
Serum Protein Measurement
The Company currently markets 23 ITA kits for the assessment of specific
human serum proteins. Sold under the trade name "SPQ Test System," the tests are
designed for use on common automated clinical chemistry analyzers. The ITA kits
are utilized on a large number of different automated analyzers. Consequently,
the development of new instrument-specific applications is required on an
ongoing basis. Each assay is based on the principle of immunoturbidimetric or
immunonephelometric measurement of antigen-antibody complexes. These
antigen-antibody complexes are formed when patient samples are combined with the
specific antibody of the test kit. As a part of the SPQ Test System, specific
human protein controls, patient sample diluents and specific antibodies are
provided as separate products. ITA technology offers the clinical
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laboratory the advantages of superior speed, precision and automation. Included
in the ITA product line are specific assays for Apolipoprotein A-1,
Apolipoprotein B and Lipoprotein(a), which are useful in cardiac risk
assessment. The remaining ITA assays in the SPQ Test System are used in the
assessment of immunological disorders, nutritional status, acute response and
kidney failure.
Antisera Products
The antisera product lines from the Company are used for the analysis of
human serum proteins present in the human serum. Common clinical laboratory
procedures using the antisera products include immunofixation electrophoresis,
immunoelectrophoresis and radial immunodiffusion methods. The techniques
utilized by the laboratory result in the determination of specific protein
levels and the assessment of specific protein components following the binding
of the antiserum to a specific serum protein. The presence of the serum protein
is determined by protein staining or through the use of fluorescent or enzyme
staining procedures.
Bulk and Custom Antisera Products
The bulk and custom antisera products produced by the Company are used by
major medical diagnostic instrumentation manufacturers worldwide in the
production of diagnostic test kits to be used on their instruments. The Company
offers an extensive line of antisera products to human serum proteins that are
monospecific, avid, and of high titer. Antisera products are produced as
nephelometric quality, standard antisera, IgG fractions and fluorescent or
enzyme conjugated preparations. The Company also produces calibrators to be used
as reference standards in conjunction with the various antisera products
offered.
Custom antisera from the Company's standard supply are also produced
according to specifications provided by customers. The Company also performs
custom immunization and development of specific antibodies upon customer
request.
Histochemical Antisera
Unlike RIA, ITA and EIA methods, which are used to analyze fluid samples
taken from the human body, histochemical antisera are utilized in an in vitro
procedure to determine the presence of hormones or peptides in body tissue. A
histochemical antiserum is used as a binding reagent for a specific hormone or
peptide. Once binding has occurred, the presence of the hormone or peptide is
determined by fluorescent or enzyme staining procedures performed on the tissue
specimen. The Company's histochemical products are used in clinical diagnoses
and medical research, frequently in conjunction with RIA, ITA or EIA
technologies.
RECENT DEVELOPMENTS
During the fourth quarter of 1996 the Company announced its receipt of Food
and Drug Administration ("FDA") approval for its second generation tests for the
detection of the infectious diseases, rubella, cytomegalovirus (CMV) and herpes
simplex. These products have been marketed in Europe for several years through
the Company's affiliate and have been widely accepted as the gold standard in
the industry, offering high sensitivity and ease of use.
Also during the fourth quarter of 1996, the Company received FDA approval
for its 25-OH-D RIA assay, the first test method on the market to be cleared by
the FDA for the detection of 25-Hydroxyvitamin D in the bloodstream. This
detection is becoming an increasingly important tool to determine levels of
vitamin D, which is necessary for the body's metabolism of calcium.
During the second quarter of 1995 the Company announced the completion of
the manufacturing transfer of its TheraTest(TM) (product line of diagnostic
assays) to its Stillwater facility. The Company acquired this FDA-cleared EIA
panel of autoimmune diagnostic assays in May 1994 from TheraTest Laboratories,
Inc. of Chicago. The TheraTest products are used as a confirmatory test for the
diagnosis of rheumatoid arthritis and other connective tissue diseases such as
systemic lupus erythematosus and scleroderma. The TheraTest
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products are also an extension of the Company's existing immunofluorescence
autoimmunity product line and complement the Company's EIA product offerings.
Also during the second quarter of 1995 the Company received approval from
the FDA for its second generation EBV diagnostic tests. EBV is the causative
agent of infectious mononucleosis, and can cause lymphomas, chronic fatigue
syndrome and a variety of other diseases in patients with a weakened immune
system. International market introduction of these tests began in the third
quarter of 1994.
The Company launched two autoimmune products in the international market
during the second quarter of 1995, a quantitative thyroid receptor
autoantibodies assay, which is used for the diagnosis of Graves disease and the
complement activation enzyme assay (CAE) which provides general information
about the immune system in disease states such as rheumatic and rare connective
tissue disorders as well as tissue injury. The Company received 510(k) clearance
from the FDA in the fourth quarter of 1995 for its CAE kit.
During the third quarter of 1995 the Company launched worldwide its second
generation Parathyroid Hormone-related Protein (PTHrP) assay. PTHrP is the agent
responsible for the condition of humoral hypercalcemia of malignancy. This is a
condition in which serum calcium is increased to potentially life threatening
levels. This assay provides customers with a superior product that has
significantly improved sensitivity and better definition of the protein under
investigation than the first generation product. This product is being
distributed as a "research use only" product in the US and is targeted to the
clinical research market. Internationally, the Company is pursuing registration
in several European countries as well as Japan.
During the third quarter of 1995, the Company experienced an increase in
demand for one of its hepatitis assays due to a competitor's kit becoming
unavailable to the market. This opportunity resulted in approximately $2.9
million in sales during 1995. The competitor re-entered the marketplace during
the first quarter of 1996. Sales of this assay were approximately $2.2 million
during 1996. While a portion of these sales has been maintained since the
competitor re-entered the market, the impact on future sales is uncertain at
this time.
During the fourth quarter of 1995 the Company received the approved
licensure from the FDA for the final two assays within the Hepatitis line which
gave the Company a complete panel of seven EIA approved/licensed assays used in
the diagnosis of hepatitis A and B infections.
MARKETING
The Company's medical products are sold to commercial and public health
laboratories, blood banks, research and teaching institutions and hospital
laboratories, which use the Company's kits to conduct tests ordered by
physicians. Increased frequency of use of the Company's kits will depend, in
part, upon the acceptance by practicing physicians of the need and desirability
for measuring certain therapeutic drug, hormone, peptide and serology levels in
the evaluation of diseases and body disorders.
In North America, the Company's principal market for its medical products
includes approximately 1,200 clinical reference laboratories and 2,500
hospitals, which have laboratories that perform immunodiagnostic testing. In the
United States and Canada, the Company utilizes a direct sales force, combined
with selected independent distributors, to market its products.
The Company also utilizes foreign distributors in conjunction with a
subsidiary in the United Kingdom to market its products abroad. Since 1989 Sorin
has been the distributor for many of the Company's products in Italy, Spain,
Portugal, Germany and the Benelux countries. As part of the 1990 acquisition
from Baxter, the Company manufactures and sells to Sorin the Clinical Assays
products for distribution in the above mentioned countries and France. Pursuant
to these arrangements, the Company recorded sales to Sorin of $7,965,000 for the
year ended December 31, 1996, which comprised 18% of total sales. Other
transactions entered into with Sorin and its subsidiaries are set forth in Note
6 of the Company's Consolidated Financial Statements contained elsewhere herein.
Other than Sorin, the Company is not dependent on any single customer for more
than 15% of its business.
The Company's international sales constitute 50% of sales for the year
ended December 31, 1996; 48% of sales for the year ended December 31, 1995 and
50% of sales for the year ended December 31, 1994.
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<PAGE> 49
Because of the limited shelf life of the Company's radioactive tracer, the
Company delivers products by international air freight to its foreign markets.
RESEARCH AND PRODUCT DEVELOPMENT
The ability of the Company to compete effectively in the marketplace will
depend upon the success of its efforts to improve existing products and to
develop new products, primarily non-isotopic and conducive to instrumentation,
that are useful to the medical diagnostic and research markets. The levels of
research and development expenditures by the Company during the periods shown
below were as follows:
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT NET SALES
------ ----------
<S> <C> <C>
Year ended December 31, 1996............................ $4,163,000 9.4%
Year ended December 31, 1995............................ $3,748,000 8.2%
Year ended December 31, 1994............................ $5,069,000 11.9%
</TABLE>
The reduction in research spending in 1995 from the level in 1994 resulted
primarily from the discontinuance of a development program discussed in Note 2
of the Consolidated Financial Statements contained elsewhere herein.
The Company has established scientific advisory panels for its autoimmune
and bone and mineral metabolism product lines. In addition, the Company intends
to establish a third scientific panel in its infectious disease segment. These
panels are overseen by a scientific advisory board. Prior to his death in March
1997, the scientific advisory board was led by Dr. Pierre M. Galletti, the
Company's former Chairman of the Board. Also, Dr. Michael Steffes, a director of
the Company, is a member of the Scientific Advisory Board. These panels are
intended to enhance and strengthen the Company's ties with the scientific
community.
MANUFACTURING
The Company manufactures its immunoassay kits and serum protein products in
two locations within the United States. It maintains manufacturing and
administration activities in its principal facility in Stillwater, Minnesota,
which consists of 120,000 square feet. Additionally, the Company is vertically
integrated into the production of bulk antisera and maintains a USDA licensed
animal facility on 116 acres in Windham, Maine (the Serum Proteins segment of
the Company's business). Management believes that it will have adequate
capability to meet its anticipated manufacturing needs in all current product
lines for the foreseeable future.
The steps involved in manufacturing the Company's immunoassay and serum
protein kits include the following: (i) the isolation and production of
antigens; (ii) the development and production of antibodies; (iii) the design
and development of the required reagent system; (iv) the iodination or
conjugation of precursors; (v) the manufacture and packaging of the components
in the kit format; and (vi) ongoing quality control to meet all regulatory
requirements.
As a result of strategic alliances and acquisitions over the past several
years, the Company has an extensive line of immunoassay and serum protein assays
that are manufactured in a cost effective manner in a quality environment. The
Company's products and kits consist of the components necessary to perform
specific assays in consistent and reproducible fashion. Antisera are a critical
component in the products which are manufactured using RIA, ITA, EIA and IFA
technologies and the Company insures the quality of this raw material from its
source in its Serum Protein segment of the business. In addition to these
antiserums, the components of the immunoassay kits include specialized chemical
reagents, reference standards and performance data required to properly
calibrate test results. Raw materials used in these components meet design
specifications. The Company is not dependent on any particular supplier for
ongoing operations. Some raw materials critical in the production of the
Company's products have extensive lead times for supply. Lack of supply of
critical raw materials would have a materially adverse affect on the Company.
For this reason the Company continually strives to maintain multiple sources for
its most critical raw materials.
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<PAGE> 50
The Company maintains quality controls for the assurance of accurate and
reliable test kits and to meet FDA good manufacturing practices ("GMP"). The
Company also complies with procedures mandated by the Nuclear Regulatory
Commission ("NRC") for the use and disposal of radioactive materials.
COMPETITION
Historically the Company has developed and marketed diagnostic and research
products serving specialized markets not adequately served by its largest
competitors. Included here are the fields of endocrinology, bone and mineral
metabolism and therapeutic drug monitoring. However, as a result of the
Company's acquisition of the Clinical Assay product lines from Baxter and
relationship with Sorin, the Company now competes with a number of the larger
immunodiagnostic companies offering similar lines of RIA and EIA products.
The Company's major competition, outside the specialty product area,
includes Abbott Diagnostics, Diagnostic Products Corporation, Hybritech,
Ares-Serono, and CIBA Corning Diagnostic Corporation. The principle elements of
competition for the Company are based upon providing quality, consistent and
reliable products and services. Price is only a factor for those tests in the
larger, more competitive markets. The Company intends to maintain its
competitive differentiation in the market by selecting new and innovative
technology approaches to both the routine and specialty market analyses. Also,
the Company intends to develop and maintain quality customer relationships with
health care professionals.
GOVERNMENT REGULATION
Under the Medical Device Amendments of 1976, the Company is required to
file an annual registration statement with the FDA and to provide updated device
listings. The Company is also required to submit a pre-market notification
submission to the FDA for each new diagnostic product. This submission may be
either a 510(k), a premarket approval application, or a product license
application, unless the product is being distributed for research or
investigational use only. The FDA also imposes rules with respect to GMP. The
Company believes it is in compliance with FDA regulations. The Company also
complies with foreign government regulations, specifically for Japan, France,
Germany, Canada, England and other countries where required. These requirements
include adherence to GMP, device listings, premarket notifications or product
licenses where applicable. Additionally, the Company is in the process of
certifying its Quality Assurance system to ISO 9000 standards and hopes to
complete the registration process under this standard by the end of 1997.
Because the Company uses radioactive isotopes in the manufacture of some of
its products, it is required to maintain licenses authorizing the possession,
use and distribution of radioactive material. The licenses were renewed in 1993
and will expire by their terms in 1998. To maintain the licenses, the Company is
required to keep certain records and to demonstrate continued compliance with
NRC regulations and the conditions of its radioactive licenses. Although not
expected, loss of these licenses would have a materially adverse affect on the
Company.
The Company believes it is in compliance with all federal, state and local
regulations regarding the discharge of material into the environment.
Additionally, the cost to maintain licenses and meet environmental and safety
requirements is not material to the Company's Consolidated Financial Statements
and the Company does not expect any material financial commitment in the
near-term.
FOREIGN AND DOMESTIC OPERATIONS AND INTERNATIONAL SALES
Company information with respect to foreign and domestic operations and
international sales is set forth in Note 12 to the Company's Consolidated
Financial Statements contained elsewhere herein.
PATENTS
The Company has been issued patents covering (i) the method and radioactive
tracers used for the immunoassay of C-terminal parathyroid hormone, (ii)
bioassay for parathyroid hormone and (iii) usage of
37
<PAGE> 51
iodinated or fluorescent forms of cyclosporin in immunoassay kits. These patents
expire on July 26, 1999, January 17, 2000 and April 1, 2002, respectively.
The Company does not believe that patent protection will be a material
factor for its current product line offering, because of the Company's
proprietary know-how regarding the production and development of its product
lines. Going forward, the Company has filed patent applications for several new
product development programs and has also negotiated exclusive licenses to
patent applications filed by outside product development collaborators. Certain
other companies may have been issued or applied for patents with respect to
products or technology manufactured by, or of interest to the Company.
Management is unable at this time to determine the impact, if any, which any
such patents may have on the Company.
LICENSES AND TRADEMARKS
The Company holds certain licenses for technology, intellectual property
and distribution rights. The Company also holds certain registered trademarks
such as CYCLO-Trac(R), N-tact(R) and PTH-MM(R) as well as several other
non-registered trademarks. The terms of these licenses and trademarks vary. The
Company does not believe that any of these licenses or trademarks is material to
its business or operations.
EMPLOYEES
As of December 31, 1996 the Company had 282 employees, including part-time
employees.
PROPERTIES
The Company presently owns three adjacent concrete buildings totaling
approximately 120,000 square feet located on a 14 acre site in Stillwater,
Minnesota, which is part of the metropolitan area of Minneapolis-St. Paul. One
building houses all manufacturing operations. A second building houses a
research laboratory. The third building houses the Company's executive offices.
The Company believes this capacity to be adequate for present and future needs.
The Company owns a farm operation of 116 acres and related buildings in Windham,
Maine, which houses laboratory animals.
LEGAL PROCEEDINGS
The Company is engaged in ordinary routine litigation incident to its
business, which management believes will not have an adverse effect upon its
operations or consolidated financial position.
38
<PAGE> 52
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John J. Booth...................... 42 President, Chief Executive Officer,
Director and Acting Chairman of the
Board
Thomas P. Maun..................... 43 Vice President and Chief Financial
Officer
Fabio Lunghi....................... 54 Executive Vice President and Chief
Operating Officer
Stephen P. Gouze................... 47 Vice President of Sales and
Marketing
Gerald L. Majewski, Ph.D........... 49 Vice President of Research and
Development
George E. Wellock.................. 49 Vice President of Manufacturing
Ennio Denti........................ 64 Director
George H. Dixon.................... 76 Director
Franco Fornasari................... 46 Director
Ezio Garibaldi..................... 59 Director
D. Ross Hamilton................... 59 Director
Umberto Rosa....................... 63 Director
Michael W. Steffes, M.D., Ph.D..... 53 Director
Carlo Vanoli....................... 47 Director
</TABLE>
John J. Booth was appointed Acting Chairman of the Board on March 8, 1997,
following the death of Pierre M. Galletti, M.D., Ph.D., who had been the
Chairman of the Board of the Company since March 1995. Mr. Booth has been
President, Chief Executive Officer, and a director of the Company since
September 1994, Senior Vice President and Chief Financial Officer from May 1992
to September 1994, and Vice President of Finance and Administration from 1989 to
1992. Mr. Booth was Vice President, Controller and Secretary of Clinical
Sciences, Inc. ("CSI") prior to joining the Company in 1989.
Thomas P. Maun has been Vice President and Chief Financial Officer of the
Company since September, 1994 and Director of Finance since January, 1990. Mr.
Maun joined the Company in 1987 as Corporate Controller.
Fabio Lunghi has been Executive Vice President and Chief Operating Officer
of the Company since September, 1994. Prior to joining the Company, from 1986 to
1994, Mr. Lunghi was Vice President and General Manager of the
radiopharmaceutical business unit at Sorin.
Stephen P. Gouze has been Vice President of Sales and Marketing of the
Company since February 1997. From October 1994 to February 1997, Mr. Gouze was
Vice President of Sales and Marketing at PATHCOR, Inc., a Pathologist Practice
Management Company. Prior to joining PATHCOR, Mr. Gouze held a number of sales
and marketing positions, with Sanofi Pasteur's Diagnostics Division, most
recently as Director of Marketing.
Gerald L. Majewski, Ph.D. has been Vice President of Research and
Development since October 1992. Prior to joining the Company, from 1983 to 1992,
Dr. Majewski held a variety of positions at Fisher Scientific/Instrumentation
Laboratory, most recently as Director of Research and Development, Reagents
Development from 1989 to 1992.
George E. Wellock has been Vice President of Manufacturing of the Company
since March 1991. From June 1988 to March 1991, Mr. Wellock served as Vice
President of Operations of Baxter Dade in Cambridge, Massachusetts, a subsidiary
of Baxter International. From June 1984 to June 1988, he served as Manufacturing
Manager for Travenol Genentech Diagnostics and Baxter Dade.
Ennio Denti has been a director since December 1989. Mr. Denti was Chairman
of the Company from December 1989 to September 1994. Mr. Denti is Chairman of
the Board of SNIARICERCHE S.p.A., a
39
<PAGE> 53
research and development company affiliated with SNIA. Mr. Denti was General
Manager of Sorin from 1990 to 1992. From 1981 to 1990, he was Vice President of
External Affairs of Sorin. Mr. Denti is also a director of Conbiotec S.p.A., an
affiliate of Sorin involved in research and development activities relating to
medical diagnostics. Prior to December 1989, Mr. Denti was Chairman of the Board
of CSI.
George H. Dixon has been a director since February 1987. Prior to his
retirement in November 1985, Mr. Dixon held various management positions with
First Bank System, Inc., including Chairman and Chief Executive Officer from
November 1983 to November 1985.
Franco Fornasari has been a director since May 1995. Mr. Fornasari is
Executive Vice President of Fiat U.S.A., Inc. He was Vice President for
International Trade at Fiat from 1990 to 1995 and has served as Secretary
General of the International Advisory Board of Fiat since March 1994. From 1985
to 1990, Mr. Fornasari held a variety of positions with the World Bank
organization.
Ezio Garibaldi has been a director since September 1994. Mr. Garibaldi has
been President and Chief Executive Officer of Sorin since 1990.
D. Ross Hamilton has been a director since December 1989. Mr. Hamilton was
a director of CSI. He is President and a director of Hamilton Research Inc., a
financial consulting firm. Mr. Hamilton is also Chairman of the Board of Altris
Software, Inc., an electronic document management company. He is also a director
of Luther Medical Products, Inc., a medical device company.
Umberto Rosa has been a director since December 1989. Professor Rosa has
been the Chief Executive Officer of SNIA since 1990. Prior to that he was Chief
Executive Officer and General Manager of Sorin. Professor Rosa is also President
of Biofin, a wholly owned subsidiary of Sorin, and Executive Vice President of
Technobiomedica S.p.A., a biotechnology research holding company. He is also a
member of the Board of Directors of Tecnogen S.p.A., a biotechnology research
company, and President of SNIA Fibre S.p.A., a nylon fibers manufacturer.
Michael W. Steffes, M.D., Ph.D. has been a director since September 1984.
Dr. Steffes served as the Director of Clinical Laboratories at the University of
Minnesota Hospital from October 1984 to July 1992 and has been a Professor in
the Department of Laboratory Medicine and Pathology at the University of
Minnesota since 1981.
Carlo Vanoli has been a director since September 1994. Mr. Vanoli has been
Vice President of Corporate Development of SNIA since 1994. From 1992 to 1994,
he served as President and Chief Executive Officer of Sorin Biomedical, Inc., in
Irvine, California, and, from 1987 to 1992, he served as Strategic Planning
Manager of merger and acquisition activities for SNIA.
40
<PAGE> 54
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company and the four highest paid executive officers of the
Company whose salary and other compensation earned in 1996 exceeded $100,000:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES ---------------
------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- ---- ------ ----- ---------- ---------------
<S> <C> <C> <C> <C> <C>
John J. Booth(2)..................... 1996 $251,900 0 0 4,500
President and Chief 1995 226,600 116,900 0 4,500
Executive Officer 1994 166,800 0 50,000 4,500
Fabio Lunghi(3)...................... 1996 197,700 0 0 0
Executive Vice President 1995 187,000 77,200 0 0
and Chief Operating Officer 1994 -- -- -- --
Gerald L. Majewski................... 1996 160,300 0 0 4,500
Vice President of Research 1995 153,000 63,100 0 4,500
and Development 1994 147,900 0 0 4,500
George E. Wellock.................... 1996 141,600 0 0 4,500
Vice President of 1995 137,700 56,800 0 4,100
Operations 1994 133,400 0 0 4,400
Thomas P. Maun(4).................... 1996 111,500 0 0 4,100
Vice President and Chief 1995 100,000 41,300 0 3,000
Financial Officer 1994 76,100 0 27,000 2,400
</TABLE>
- -------------------------
(1) Includes Company contributions under a Salary Savings Plan qualified under
Section 401(k) of the Internal Revenue Code of 1986, as amended. In 1996,
Company contributions equaled 50% of the first 6% of compensation (or the
allowable IRS limit, if less) contributed by the employee.
(2) Mr. Booth began serving as the Company's Chief Executive Officer in
September 1994; prior to that, he served as its Senior Vice President and
Chief Financial Officer.
(3) Mr. Lunghi was named Executive Vice President and Chief Operating Officer of
the Company in September 1994.
(4) Mr. Maun was named Vice President and Chief Financial Officer in September
1994; prior to that, he served as the Company's Director of Finance.
41
<PAGE> 55
OPTIONS
Option Grants in 1996
No options were granted to the executive officers named in the Summary
Compensation Table during fiscal year 1996.
Aggregated Option Exercises in 1996 and 1996 Year-End Option Values
The following table presents, for each of the executive officers named in
the Summary Compensation Table, the number of shares of Common Stock purchased
upon exercise of options during fiscal year 1996, the aggregate dollar value
realized upon such exercise based on the market price of the Common Stock on the
dates of exercise, and the number and value of stock options held as of December
31, 1996:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1996 AT DECEMBER 31, 1996
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Booth................ 0 $0 123,333 16,667 $86,041 $20,834
Fabio Lunghi................. 0 0 0 0 0 0
Gerald L. Majewski........... 0 0 40,000 0 9,375 0
George E. Wellock............ 0 0 50,000 0 9,375 0
Thomas P. Maun............... 0 0 25,567 9,333 22,834 11,166
</TABLE>
Employment Agreements
The Company has a written employment agreement with Mr. Booth, the initial
term of which expired in December 1993 and which provides for automatic one year
extensions unless one of the parties gives notice at least 30 days prior to the
expiration date that the agreement will terminate at the end of the current
extension. The employment agreement includes provisions with respect to base
salary level, annual cost of living increases, annual bonus and termination of
employment. The employment agreement also provides that one year of Mr. Booth's
base salary shall be paid to him in the event the Company terminates his
employment without cause.
Retirement Arrangements
The Company has a retirement arrangement with Mr. Booth which is generally
intended to provide continued compensation to an individual or his respective
beneficiaries upon the later of (1) an individual's retirement from the Company
after attainment of 60 years of age, (2) his attainment of 60 years of age
following termination of employment or (3) his death during the term of
employment (each one a "triggering event"). Subject to vesting requirements (the
annual benefit amounts vest at the rate of 10% per year of employment), the
retirement agreement provides for the payment to the individuals or their
beneficiaries of annual benefits for a period of 15 years following the
occurrence of a triggering event. The amount of the benefit is adjusted annually
to reflect changes in the cost of living. The annual benefit amount at December
31, 1996 for Mr. Booth was $62,800.
The Company maintains an executive income continuation plan for the benefit
of Dr. Majewski, Mr. Wellock and Mr. Maun. The plan provides payments for 15
years to such officers or their respective beneficiaries upon the later of (1)
an officer's retirement from the Company after attainment of 60 years of age,
(2) his attainment of 60 years of age following termination of employment or (3)
his death during the term of employment. The annual retirement payment is the
product of an annual benefit rate set by the Board of Directors (in 1996)
multiplied by the number of years of employment, up to a maximum of 15 years,
and as adjusted to reflect cost of living changes during the payment period. An
officer's rights under the plan are fully vested after 10 years of employment.
As of December 31, 1996, the estimated annual retirement payment amounts were as
follows: Dr. Majewski, $13,800; Mr. Wellock, $28,300 and Mr. Maun, $7,500.
42
<PAGE> 56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished as of March 21, 1997, to indicate
beneficial ownership of the Common Stock of the Company by (i) shares
beneficially owned by directors and executive officers as a group, except as
otherwise indicated, the persons listed have sole voting and investment power
over such shares, (ii) shares beneficially owned by each of the Company's
directors (including shares subject to stock options that will become
exercisable as a result of the Merger), and (iii) each person who is known by
the Company to be the beneficial owner of more than 5% of the outstanding shares
(other than Biofin). For information concerning the security ownership of
Biofin, see "-- Principal Shareholders."
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2)(3) OUTSTANDING SHARES
------------------------ ------------------ ------------------
<S> <C> <C>
D. Ross Hamilton (4)........................................ 198,461 1.2%
130 East End Avenue
New York, NY 10028
John J. Booth+.............................................. 172,738 *
George Wellock+............................................. 56,000 *
Gerald L. Majewski, Ph.D.+.................................. 40,000 *
Ennio Denti................................................. 24,035 *
SNIARICHERCHE
VIA Borgonuovo, 14
20100 Milano
Italy
Thomas P. Maun+............................................. 37,127 *
Michael W. Steffes, M.D., Ph.D.............................. 19,900 *
1583 Fulham Street
St. Paul, MN 55108
George A. Dixon............................................. 15,000 *
121 Washington Avenue South, #617
Minneapolis, MN 55401
Umberto Rosa................................................ 10,000 *
SNIA BPD S.p.A.
VIA Borgonuovo, 14
20100 Milano
Italy
Fabio Lunghi+............................................... 6,000 *
Franco Fornasari............................................ 10,000 *
FIAT USA
375 Park Avenue
New York, NY 10152
Ezio Garibaldi.............................................. 10,000 *
Sorin Biomedica S.p.A.
Via Crescentino
13040 Saluggia (VC)
Italy
</TABLE>
43
<PAGE> 57
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2)(3) OUTSTANDING SHARES
------------------------ ------------------ ------------------
<S> <C> <C>
Carlo Vanoli................................................ 10,000 *
SNIA BPD S.p.A.
VIA Borgonuovo, 14
20121 Milano
Italy
All directors and executive officers as a group (13
persons).................................................. 609,261 3.7
</TABLE>
- -------------------------
* Less than 1%
+ INCSTAR Corporation, P.O. Box 285, Stillwater, MN 55082.
(1) Includes the following shares held by wives or children: Mr. Hamilton,
27,108 shares; Mr. Booth, 2,385 shares; Mr. Maun, 1,727 shares; Dr. Steffes,
3,600 shares.
(2) Includes the following shares that could be acquired within 60 days upon
exercise of outstanding options: Mr. Hamilton, 17,018 shares; Mr. Booth,
123,333 shares; Mr. Wellock, 50,000 shares; Dr. Majewski, 40,000 shares; Dr.
Denti, 24,035 shares; Mr. Maun, 25,567 shares; Dr. Steffes, 10,000 shares;
Mr. Dixon, 10,000 shares; Prof. Rosa, 10,000 shares; Mr. Fornasari, 3,333
shares; Mr. Garibaldi, 6,667 shares; Mr. Vanoli, 6,667 shares and all
directors and executive officers as a group, 326,620 shares.
(3) Includes the following shares subject to stock options that will be
cancelled as a result of the Merger: Mr. Booth, 16,667 shares; Mr. Maun,
9,333 shares; Mr. Garibaldi, 3,333 shares; Mr. Vanoli, 3,333 shares and Mr.
Fornasari, 6,667 shares.
(4) Includes 51,000 shares held by R & C Partners, a partnership of which Mr.
Hamilton is a general partner and 7,500 shares held by Leeds Security, Inc.,
a corporation of which Mr. Hamilton is principal owner.
Principal Shareholders
As of March 21, 1997, Biofin held 8,507,707 shares of Common Stock which
consists of approximately 52% of the outstanding shares of Common Stock, which
excludes 730,720 shares that could be acquired within 60 days upon exercise of
outstanding warrants and 105,404 shares that could be acquired within 60 days
upon exercise of outstanding options, which Biofin has agreed not to exercise
pursuant to the European Agreement.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements and schedule of the Company and
subsidiaries as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, are included herein in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
and upon the authority of said firm as experts in accounting and auditing.
A representative of KPMG Peat Marwick LLP will be present at the Special
Meeting to answer questions by shareholders and will have the opportunity to
make a statement if so desired.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission ("SEC"). Such reports, proxy statements, and
other information can be inspected and copies made at the Public Reference Room
of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at the SEC's
regional offices at Seven World Trade Center, Thirteenth Floor, New York, New
York 10048, Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and on the SEC's Website address, www.sec.gov. Copies of
such material can also be obtained from the Public Reference Section of the SEC
at its Washington address at prescribed rates.
44
<PAGE> 58
OTHER MATTERS
The Board of Directors does not presently know of any matters to be
presented for consideration at the Special Meeting other than matters described
in the Notice of Special Meeting mailed together with this Proxy Statement, but
if other matters are presented, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment. The proxy confers discretionary authority to vote only with respect to
matters that the Board of Directors did not know, within a reasonable time
before the mailing of their material, were to be presented at the Special
Meeting. If the Merger is for any reason not consummated, then, in accordance
with regulations issued by the SEC, shareholder proposals intended for
presentation at the Company's 1998 annual meeting of shareholders must be
received by the Secretary of the Company no later than January 1, 1998, if such
proposals are to be considered for inclusion in the Company's proxy statement.
Proposals should be mailed via certified mail and addressed to the Company's
Secretary, INCSTAR Corporation, 1990 Industrial Boulevard, Stillwater, Minnesota
55082.
By Order of the Board of Directors,
J. Andrew Herring
J. Andrew Herring
Secretary
45
<PAGE> 59
INCSTAR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-2
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994................ F-3
Consolidated Balance Sheets at December 31, 1996 and
1995.................................................. F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994................ F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994.......... F-6
Quarterly Results for the years ended December 31, 1996
and 1995 (Unaudited).................................. F-7
Notes to Consolidated Financial Statements............. F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income for the quarters
ended April 4, 1997 and March 29, 1996................ F-19
Consolidated Balance Sheets at April 4, 1997 and
December 31, 1996..................................... F-20
Consolidated Statements of Cash Flows for the quarters
ended April 4, 1997 and March 29, 1996................ F-21
Notes to Consolidated Financial Statements............. F-22
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF INCSTAR CORPORATION:
We have audited the consolidated balance sheets of INCSTAR Corporation as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of INCSTAR
Corporation as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 24, 1997
F-2
<PAGE> 61
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales............................................... $44,304,000 $45,760,000 $42,503,000
Cost of goods sold...................................... 21,599,000 23,271,000 22,039,000
Inventory valuation adjustment.......................... -- -- 750,000
----------- ----------- -----------
Gross profit..................................... 22,705,000 22,489,000 19,714,000
Operating expenses:
Selling, general and administrative................... 13,206,000 12,592,000 12,853,000
Research and development.............................. 4,163,000 3,748,000 5,069,000
Unusual items......................................... -- -- 5,750,000
----------- ----------- -----------
Total operating expenses......................... 17,369,000 16,340,000 23,672,000
----------- ----------- -----------
Operating income (loss).......................... 5,336,000 6,149,000 (3,958,000)
Interest income (expense), net.......................... 96,000 (348,000) (365,000)
Investment and other income (expense)................... (21,000) 33,000 11,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 5,411,000 5,834,000 (4,312,000)
Provision for income taxes.............................. 1,299,000 1,571,000 193,000
----------- ----------- -----------
NET INCOME (LOSS)................................ $ 4,112,000 $ 4,263,000 $(4,505,000)
=========== =========== ===========
INCOME (LOSS) PER SHARE:
Net income (loss) per share............................. $0.25 $0.26 $(0.28)
=========== =========== ===========
Weighted average shares and equivalents................. 16,661,367 16,491,501 16,322,301
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 62
INCSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,554,000 $ 460,000
Restricted cash........................................... 250,000 251,000
Accounts receivable, net of allowance for doubtful
accounts of $190,000 and $107,000, respectively........ 7,573,000 7,575,000
Other receivables......................................... 413,000 24,000
Inventories............................................... 14,302,000 13,445,000
Other current assets...................................... 629,000 294,000
----------- -----------
TOTAL CURRENT ASSETS................................. 24,721,000 22,049,000
PROPERTY AND EQUIPMENT:
Land and land improvements................................ 1,573,000 1,573,000
Buildings and improvements................................ 13,531,000 13,252,000
Equipment and furniture................................... 19,993,000 18,170,000
Construction in progress.................................. 41,000 6,000
----------- -----------
35,138,000 33,001,000
Less accumulated depreciation and amortization............ (20,032,000) (18,387,000)
----------- -----------
15,106,000 14,614,000
INTANGIBLE ASSETS, NET...................................... 791,000 1,105,000
OTHER ASSETS................................................ 1,340,000 993,000
----------- -----------
$41,958,000 $38,761,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 3,000 $ 76,000
Accounts payable.......................................... 1,819,000 1,914,000
Accrued compensation...................................... 898,000 1,972,000
Accrued expenses.......................................... 2,448,000 2,928,000
Income taxes payable...................................... 364,000 212,000
----------- -----------
TOTAL CURRENT LIABILITIES............................ 5,532,000 7,102,000
LONG-TERM DEBT.............................................. -- 3,000
OTHER NON-CURRENT LIABILITIES............................... 3,285,000 3,272,000
SHAREHOLDERS' EQUITY:
Undesignated stock, authorized 5,000,000 shares............. -- --
Common stock, par value $.01, authorized 25,000,000 shares;
issued and outstanding 16,505,457 and 16,363,477 shares,
respectively.............................................. 165,000 164,000
Additional paid-in capital.................................. 18,531,000 17,940,000
Foreign currency translation adjustment..................... (98,000) (151,000)
Retained earnings........................................... 14,543,000 10,431,000
----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................... 33,141,000 28,384,000
----------- -----------
$41,958,000 $38,761,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 63
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................... $ 4,112,000 $ 4,263,000 $(4,505,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for deferred taxes..................... (555,000) -- --
Provision (payments) for unusual items and
inventory valuation adjustment................. (590,000) (1,060,000) 5,371,000
Provision for retirement plans...................... 261,000 272,000 529,000
Depreciation and amortization....................... 2,882,000 2,910,000 3,395,000
Changes in operating assets and liabilities:
Accounts receivable.............................. 2,000 (816,000) 39,000
Other receivables................................ (389,000) 95,000 (29,000)
Inventories...................................... (857,000) (1,077,000) 194,000
Other current assets............................. (77,000) 212,000 (21,000)
Accounts payable................................. (95,000) 254,000 (229,000)
Accrued compensation............................. (1,074,000) 554,000 (108,000)
Accrued expenses................................. (105,000) 975,000 90,000
Income taxes payable............................. 481,000 320,000 (56,000)
Other, net....................................... 53,000 (33,000) 35,000
----------- ----------- -----------
Net cash provided by operating activities...... 4,049,000 6,869,000 4,705,000
----------- ----------- -----------
INVESTING ACTIVITIES:
Additions to property and equipment, net............ (2,645,000) (1,557,000) (923,000)
Payments for product distribution rights............ -- -- (599,000)
Payments for intellectual property and purchased
technology....................................... (407,000) (86,000) --
Increase in other assets............................ (92,000) (36,000) (65,000)
----------- ----------- -----------
Net cash used in investing activities.......... (3,144,000) (1,679,000) (1,587,000)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net repayments under lines of credit................ -- -- (422,000)
Net decrease in cash overdraft...................... -- (602,000) (512,000)
(Increase) decrease in restricted cash.............. 1,000 -- (11,000)
Payments on long-term debt.......................... (76,000) (4,342,000) (2,364,000)
Issuance of common stock to employees............... 264,000 61,000 119,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. 189,000 (4,883,000) (3,190,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 1,094,000 307,000 (72,000)
Cash and cash equivalents at beginning of year...... 460,000 153,000 225,000
----------- ----------- -----------
Cash and cash equivalents at end of year............ $ 1,554,000 $ 460,000 $ 153,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 64
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
----------------------- ADDITIONAL CURRENCY
NUMBER OF PAID-IN TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS
--------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... $16,281,057 $163,000 $17,557,000 $ (153,000) $10,673,000
=========== ======== =========== ============= ===========
Common stock issued under
employee stock purchase plan
and upon exercise of stock
options....................... 41,464 -- 119,000 -- --
Translation adjustments......... -- -- -- 35,000 --
Net loss........................ -- -- -- -- (4,505,000)
----------- -------- ----------- ------------- -----------
Balance at December 31, 1994.... $16,322,521 $163,000 $17,676,000 $ (118,000) $ 6,168,000
=========== ======== =========== ============= ===========
Common stock issued under
employee stock purchase plan
and upon exercise of stock
options....................... 40,956 1,000 61,000 -- --
Translation adjustments......... -- -- -- (33,000) --
Compensation expense on
executive stock options....... -- -- 203,000 -- --
Net income...................... -- -- -- -- 4,263,000
----------- -------- ----------- ------------- -----------
Balance at December 31, 1995.... $16,363,477 $164,000 $17,940,000 $ (151,000) $10,431,000
=========== ======== =========== ============= ===========
Common stock issued under
employee stock purchase plan
and upon exercise of stock
options....................... 97,873 1,000 199,000 -- --
Issuance of shares to Biofin.... 44,107 -- 64,000 -- --
Translation adjustments......... -- -- -- 53,000 --
Compensation expense on
executive stock options....... -- -- 328,000 -- --
Net income...................... -- -- -- -- 4,112,000
----------- -------- ----------- ------------- -----------
Balance at December 31, 1996.... $16,505,457 $165,000 $18,531,000 $ (98,000) $14,543,000
=========== ======== =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 65
INCSTAR CORPORATION
QUARTERLY RESULTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET SALES GROSS PROFIT
- ----------------------------------------------- ---------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------ ----------------
QUARTER 1996 1995 QUARTER 1996 1995
------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
First...................... $11,455 $11,117 First...................... $5,916 $5,130
Second..................... 11,355 11,041 Second..................... 5,679 5,319
Third...................... 10,604 11,664 Third...................... 5,479 5,873
Fourth..................... 10,890 11,938 Fourth..................... 5,631 6,167
</TABLE>
<TABLE>
<CAPTION>
NET INCOME NET INCOME PER SHARE
- ----------------------------------------------- ---------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------ ----------------
QUARTER 1996 1995 QUARTER 1996 1995
------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
First...................... $ 1,158 $ 799 First...................... $ 0.07 $ 0.05
Second..................... 1,119 827 Second..................... 0.07 0.05
Third...................... 986 1,092 Third...................... 0.06 0.07
Fourth..................... 849 1,545 Fourth..................... 0.05 0.09
</TABLE>
F-7
<PAGE> 66
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is a medical immunodiagnostics company focused on the
development, production and worldwide marketing of reagents, particularly for
bone/mineral metabolism, endocrinology, infectious and autoimmune diseases. The
Company predominantly markets these products in North America, Europe and Asia.
Since 1989, the Company has been majority-owned by Biofin, a subsidiary of
Sorin Biomedica Diagnostics S.p.A. which is an Italian affiliate of Fiat.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Atlantic Antibodies, Inc.,
INCSTAR Ltd. and Immuno Nuclear Export Ltd. All material inter-company accounts
and transactions have been eliminated in consolidation. Certain amounts for
periods prior to the year ended December 31, 1996 have been reclassified to
conform with the current classifications.
CASH EQUIVALENTS
Cash equivalents consist primarily of investments in money market accounts
with current maturities.
RESTRICTED CASH
Through December 31, 1995 the Company maintained a self-insured workers
compensation insurance plan. Pursuant to the plan, the Company holds a
certificate of deposit with current maturity as a compensating balance with a
bank. These funds are restricted to assure future credit availability for the
potential self insured aggregate limits under the plan. The funds are required
to be on deposit with a bank under Minnesota state regulations and are expected
to be released in the fourth quarter of 1997. As of January 1, 1996, the Company
is no longer self-insured.
INVENTORIES
Inventories are valued at the lower of average cost, which approximates the
first-in, first-out (FIFO) method, or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are carried at amounts that approximate estimated
fair value.
PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, is
reported at cost less accumulated depreciation and amortization. Maintenance and
repairs are charged to expense as incurred. The Company computes depreciation
and amortization using the straight-line method based on estimated useful lives
of three to seven years for equipment and furniture and seven to thirty years
for buildings and improvements.
INTANGIBLE ASSETS
Intangible asset includes patents, trademarks, intellectual property and
purchased technology, goodwill and product distribution rights. Patents and
trademarks are amortized using the straight-line method over a five-year period.
Goodwill, which represents the cost in excess of the fair value of net assets
acquired, is amortized using the straight-line method over a ten-year period.
Intellectual property and purchased technology is amortized using the straight
line method over the properties estimated useful lives which range from seven to
ten years. Product distribution rights are amortized using the straight line
method over the life
F-8
<PAGE> 67
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the agreement or the estimated product life, whichever is shorter. The
carrying value of intangible assets is regularly reviewed by the Company, and a
loss is recognized when the net realizable value falls below the unamortized
cost.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard (SFAS) No. 109. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
INCOME (LOSS) PER SHARE
Income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock and common stock equivalents,
consisting of stock options and warrants, outstanding during the period. For all
periods presented, fully diluted and primary income or loss per share are the
same. For 1994, the effects of stock options and warrants were excluded from the
computation of weighted average shares outstanding because their effects were
antidilutive.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated at rates of
exchange in effect at period end. Statement of operations amounts are translated
at the average rate of exchange for the period. Gains and losses resulting from
translation are accumulated in a separate component of shareholders' equity.
Foreign currency transaction gains and losses, which are not material, are
included in the consolidated statements of operations.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 (APB No.
25), Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. The Company has adopted the
disclosure requirements under SFAS No. 123, Accounting and Disclosure of
Stock-Based Compensation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
F-9
<PAGE> 68
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- UNUSUAL ITEMS AND INVENTORY VALUATION ADJUSTMENTS
The Company annually reviews its inventory levels and calculates an
estimate for obsolete inventory. During 1994, the Company reviewed future sales
projections compared with inventory levels on hand in its serum protein product
line. It was deemed appropriate to write down this inventory by $750,000 in
response to rising inventory levels. Consequently in December, 1994 the Company
recorded a $750,000 charge related to the write down of excess inventories.
In addition, the Company recorded a $2,450,000 unusual charge related to
the termination of certain distribution and supply agreements ($540,000) as well
as severance and other costs related to senior management changes ($1,910,000).
The amount remaining to be paid at December 31, 1996, exclusive of amounts
included in noncurrent liabilities (Note 9, Executive Retirement Plans) is
$10,000, which is included in accrued expenses in the accompanying consolidated
balance sheet.
In May, 1994 the Company discontinued the development of certain purchased
technology acquired in 1992 from Robert Dowben Associates, a diagnostic research
company, and incurred a one-time pre-tax charge of $3,300,000. The majority of
this charge related to the write off of tangible and intangible assets
($1,560,000), costs incurred to terminate contracts with outside vendors and
consultants ($797,000), as well as severance and related costs for terminated
employees ($943,000). None of these amounts remain to be paid on December 31,
1996.
NOTE 3 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Raw materials..................................... $ 2,458,000 $ 2,281,000
Work in progress.................................. 9,515,000 9,421,000
Finished goods.................................... 2,329,000 1,743,000
----------- -----------
$14,302,000 $13,445,000
=========== ===========
</TABLE>
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Patents........................................... $ 717,000 $ 717,000
Trademarks........................................ 17,000 17,000
Goodwill.......................................... 619,000 619,000
Intellectual property and purchased technology.... 1,141,000 734,000
Product distribution rights....................... 2,700,000 2,700,000
----------- -----------
5,194,000 4,787,000
Less accumulated amortization..................... (4,403,000) (3,682,000)
----------- -----------
$ 791,000 $ 1,105,000
=========== ===========
</TABLE>
F-10
<PAGE> 69
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LINE OF CREDIT, LEASE AND ROYALTY COMMITMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Capitalized lease obligations, 8.0% due through 1996.... -- 72,000
Other................................................... 3,000 7,000
------- --------
3,000 79,000
Less current portion.................................... (3,000) (76,000)
------- --------
Total long-term debt.................................... $ -- $ 3,000
======= ========
</TABLE>
The Company has a revolving line of credit from a bank which provides for
maximum borrowings of $1,000,000 through January 31, 1998, is secured by
accounts receivable, and has an interest rate based on the prime interest rate
or LIBOR plus 2.50%. In addition, the Company has a $4,000,000 revolving line of
credit with Fiat Finance N.A., Inc. which expires on October 1, 1997.
At December 31, 1996 and 1995, property and equipment includes capital
lease costs of $288,000 and $842,000, respectively, and accumulated amortization
of $288,000 and $773,000, respectively. Lease amortization included in
depreciation was $40,000 for the year ended December 31, 1996 and $158,000 for
the year ended December 31, 1995.
The Company leases certain manufacturing and other equipment in connection
with its normal operations. Rent expense under these operating leases was
$226,000, $295,000 and $238,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Future minimum lease payments for all noncancelable
operating leases having a remaining term in excess of one year are as follows:
1997 -- $173,000; 1998 -- $116,000; 1999 -- 44,000; 2000 -- $5,000.
The Company is obligated to make royalty payments under several
distribution and licensing agreements. The majority of these agreements call for
payments based on a percentage of sales and contain no minimum royalty clause.
Royalty expense under these agreements was $1,563,000 in 1996, $1,715,000 in
1995 and $1,099,000 in 1994.
NOTE 6 -- RELATED PARTY TRANSACTIONS
As part of the ongoing operations of the Company, various transactions were
entered into during 1996, 1995 and 1994 with its affiliates, Sorin, an affiliate
of the Fiat group and Fiat Finance N.A., Inc. The following tables summarize
transactions and related balances:
OPERATING STATEMENT DATA:
<TABLE>
<CAPTION>
SORIN FIAT FINANCE N.A., INC.
-------------------------------------- ------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Product sales................. $7,965,000 $7,625,000 $6,903,000 $ -- $ -- $ --
Product purchases............. 2,272,000 1,807,000 1,248,000 -- -- --
Royalty expense............... 432,000 582,000 176,000 -- -- --
Interest expense.............. -- -- -- 6,000 170,000 312,000
</TABLE>
F-11
<PAGE> 70
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
Assets
Trade receivables......................................... $2,442,000 $1,965,000
Other receivables......................................... 59,000 6,000
Liabilities
Accounts payable.......................................... $ 353,000 $ 675,000
Accrued royalty........................................... 798,000 480,000
</TABLE>
NOTE 7 -- INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, FEDERAL STATE FOREIGN TOTAL
- ----------------------- ------- ----- ------- -----
<S> <C> <C> <C> <C>
1996
Current...................................... $1,644,000 $212,000 $ (2,000) $1,854,000
Deferred..................................... (491,000) (64,000) -- (555,000)
---------- -------- -------- ----------
Provision for Income Taxes................... $1,153,000 $148,000 $ (2,000) $1,299,000
========== ======== ======== ==========
1995
Current...................................... $1,505,000 $ 89,000 $(23,000) $1,571,000
Deferred..................................... -- -- -- --
---------- -------- -------- ----------
Provision for Income Taxes................... $1,505,000 $ 89,000 $(23,000) $1,571,000
========== ======== ======== ==========
1994
Current...................................... $ 123,000 $ 34,000 $ 36,000 $ 193,000
Deferred..................................... -- -- -- --
---------- -------- -------- ----------
Provision for Income Taxes................... $ 123,000 $ 34,000 $ 36,000 $ 193,000
========== ======== ======== ==========
</TABLE>
The provision for income taxes differs from the statutory federal tax rate of
34% applied to income (loss) before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal tax calculated at the statutory rate.......... $1,840,000 $1,984,000 $(1,466,000)
Change in the valuation allowance for deferred
taxes............................................... (914,000) (532,000) 1,872,000
Exempt income attributable to foreign sales........... (266,000) (333,000) (288,000)
State taxes, net of federal benefit................... 98,000 59,000 22,000
Compensation expense on executive stock options....... 328,000 203,000 --
Other, net............................................ 213,000 190,000 53,000
---------- ---------- -----------
Provision for income taxes............................ $1,299,000 $1,571,000 $ 193,000
========== ========== ===========
</TABLE>
F-12
<PAGE> 71
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful
accounts............................................... $ 56,000 $ 29,000
Accrued vacation pay...................................... 33,000 27,000
Inventories, reserves and additional costs inventoried for
tax purposes........................................... 637,000 728,000
Patents, due to different book and tax lives.............. 24,000 27,000
Retirement plans.......................................... 1,117,000 1,066,000
Tax credits............................................... 60,000 492,000
Accrual not currently deductible.......................... 265,000 --
Severance and related costs not currently deductible...... -- 189,000
Other..................................................... 35,000 26,000
----------- -----------
Gross deferred tax assets................................. 2,227,000 2,584,000
Valuation allowance....................................... (1,639,000) (2,553,000)
----------- -----------
Net deferred tax asset............................... $ 588,000 $ 31,000
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation and capitalized interest.................. $ 44,000 $ 41,000
Other..................................................... 4,000 5,000
----------- -----------
Deferred tax liability............................... $ 48,000 $ 46,000
----------- -----------
Total net deferred tax asset (liability).................... $ 540,000 $ (15,000)
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 and
1995 was $1,639,000 and $2,553,000, respectively. The net change in the
valuation allowance for the year ended December 31, 1996 was a decrease of
$914,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers its projected future taxable income and tax planning strategies in
making this assessment.
NOTE 8 -- EMPLOYEE SAVINGS RETIREMENT AND VALUE SHARING PLAN
The Company adopted a Salary Savings Plan under Section 401(k) of the
Internal Revenue Code, effective November 1, 1985. Participants make pre-tax
contributions of up to 15% of their wages subject to an annual limit of $9,500.
The Company is required to match 50% of that portion of the participant's
pre-tax contribution which does not exceed 6% of the participant's compensation.
The Company contributed $270,000 for the year ended December 31, 1996, $262,000
for the year ended December 31, 1995, and $273,000 for the year ended December
31, 1994.
In 1994 the Company changed its profit sharing plan to a non-contributory
value sharing plan. Cash payments to all eligible employees are based on the
improvement in economic value as well as a targeted performance factor for
economic value added. The Company incurred no expense for the year ended
December 31, 1996, $984,000 expense for the year ended December 31, 1995 and no
expense for the year ended December 31, 1994.
F-13
<PAGE> 72
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EXECUTIVE RETIREMENT PLANS
The Company has individual retirement agreements with certain current and
prior executive officers which are intended to provide continued compensation to
such individuals or their respective beneficiaries upon the later of their
retirement from the Company after attainment of sixty years of age (fifty-five
years of age for one plan participant), or attainment of sixty years of age
(fifty-five years of age for one plan participant) following termination of
employment, or upon death during the term of employment (the "triggering
events"). Subject to vesting requirements, the retirement agreements provide for
the payment to these individuals or their respective beneficiaries, of annual
benefits for a period of fifteen years following the occurrence of a triggering
event. The amount of annual benefits is adjusted annually to reflect changes in
the cost of living. The annual benefit amounts vest at the rate of 10% per year.
Additionally, the Company maintains an executive income continuation plan
for the benefit of executive officers not covered under the agreements discussed
above. The plan provides payments for fifteen years to such officers or their
respective beneficiaries upon the later of an officer's retirement from the
Company after attainment of sixty years of age or attainment of sixty years of
age following termination of employment, or upon death during the term of
employment. The annual retirement payment is the product of an annual benefit
rate set by the Board of Directors ($3,333 for 1996) multiplied by the number of
years of employment, up to a maximum of fifteen years, and as adjusted to
reflect the cost of living changes during the payment period. An officer's
rights under the plan are fully vested after ten years of employment or upon
change in the controlling interest of the Company.
The Company accounts for all retirement agreements under APB 12, wherein
the present value of the future benefits are accrued over the working lives of
the individuals utilizing a 7% discount factor.
In connection with the individual agreements and the income continuation
plan, included in other noncurrent liabilities at December 31, 1996 and 1995 is
$3,285,000 and $3,136,000, respectively, representing the present value of the
future benefits. Also, included in Accrued expenses at December 31, 1996 and
December 31, 1995 is $145,000 and $31,000, respectively, representing the
current portion of this liability. The Company intends to fund this obligation
through life insurance contracts on the individual executives. Included in Other
assets at December 31, 1996 and 1995 is $1,020,000 and $934,000, respectively,
of cash surrender value in connection with these policies.
NOTE 10 -- EMPLOYEE STOCK PURCHASE AND OPTION PLAN
Under the Company's stock option plans, officers, directors, consultants
and key employees may be granted options to purchase the Company's common stock
at no less than 100% of the market price on the date the option is granted.
Options generally become exercisable over two to four years and have terms of
five or ten years.
F-14
<PAGE> 73
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity in the Company's various option plans is summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
SHARES WEIGHTED
RESERVED AVERAGE
FOR GRANT SHARES OPTION PRICE
--------- ------ ------------
<S> <C> <C> <C>
Balance December 31, 1993................................... 337,168 842,175 $3.88
-------- -------- -----
Exercised................................................. -- (1,500) 1.79
Canceled.................................................. 136,000 (136,000) 4.05
Granted................................................... (119,000) 119,000 2.60
-------- -------- -----
Balance December 31, 1994................................... 354,168 823,675 $3.68
-------- -------- -----
Exercised outside the plan................................ (1,000) 1.44
Canceled.................................................. 206,000 (206,000) 3.40
Canceled outside the plan................................. (14,035) 1.85
Granted................................................... (103,000) 103,000 2.95
-------- -------- -----
Balance December 31, 1995................................... 457,168 705,640 $3.66
-------- -------- -----
Exercised................................................. -- (48,000) 2.50
Canceled.................................................. 30,000 (30,000) 3.30
Granted................................................... (42,000) 42,000 4.39
-------- -------- -----
Balance December 31, 1996................................... 445,168 669,640 $3.81
======== ======== =====
</TABLE>
As of December 31, 1996 options for 538,140 shares were exercisable at
prices ranging from $1.44 to $8.25 per share.
At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $1.44 through $8.25 and
6.12 years, respectively.
The Company also had an Employee Stock Purchase Plan. This plan enabled
eligible employees to purchase the Company's Common Stock at the lower of 85% of
the fair market value on the first or the last day of each plan year. The number
of shares reserved for sale under this plan was 300,000, of which all shares
have been sold. The Company does not intend to issue more shares under this
plan.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has adopted the disclosure-only provisions. Had
compensation cost for the Company's stock option grants and employee stock
purchase plan been determined consistent with SFAS 123, the Company's net income
and earnings per share would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net income (in 000s)........................... As reported $4,112 $4,263
Pro forma 4,032 4,209
Earnings per share............................. As reported $ 0.25 $ 0.26
Pro forma 0.24 0.26
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as compensation expense applicable to awards made
prior to 1995 are not considered.
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated present value at grant date
using a Black-Scholes option-pricing model with the following weighted average
assumptions for 1996 and 1995: dividend yield of 0%; expected weighted average
volatility of
F-15
<PAGE> 74
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
63.7%; a weighted average risk free interest rate of 5.9% and an expected
holding period of 9.3 years. The weighted average values of the options granted
are $3.40 and $1.98 for 1996 and 1995, respectively.
NOTE 11 -- SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest........................... $ 17,000 $ 192,000 $369,000
Income taxes, net.................. 1,295,000 1,151,000 242,000
</TABLE>
F-16
<PAGE> 75
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- GEOGRAPHIC SEGMENT DATA
Comparative geographical data for the Company's operations is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SALES
United States......................................... $22,017,000 $23,832,000 $21,282,000
Italy................................................. 3,404,000 3,385,000 2,781,000
England............................................... 2,661,000 2,646,000 2,578,000
Germany............................................... 2,225,000 2,175,000 1,997,000
France................................................ 1,773,000 1,813,000 1,830,000
Belgium............................................... 1,160,000 1,246,000 1,082,000
Spain................................................. 822,000 822,000 823,000
Other Europe.......................................... 1,779,000 1,431,000 1,387,000
----------- ----------- -----------
Total Europe..................................... 13,824,000 13,518,000 12,478,000
Japan................................................. 3,578,000 3,838,000 4,106,000
Korea................................................. 811,000 678,000 501,000
Other Asia............................................ 633,000 432,000 683,000
----------- ----------- -----------
Total Asia....................................... 5,022,000 4,948,000 5,290,000
Canada................................................ 1,575,000 1,844,000 1,852,000
Other Foreign......................................... 1,866,000 1,618,000 1,601,000
----------- ----------- -----------
Total............................................ $44,304,000 $45,760,000 $42,503,000
=========== =========== ===========
OPERATING INCOME
United States......................................... $ 2,305,000 $ 3,052,000 $ 877,000
Italy................................................. (214,000) (60,000) (72,000)
England............................................... (65,000) (92,000) (78,000)
Germany............................................... 459,000 421,000 275,000
France................................................ 443,000 394,000 287,000
Belgium............................................... 209,000 203,000 (1,000)
Spain................................................. 122,000 150,000 110,000
Other Europe.......................................... 407,000 207,000 118,000
----------- ----------- -----------
Total Europe..................................... 1,361,000 1,223,000 639,000
Japan................................................. 718,000 921,000 51,000
Korea................................................. 117,000 135,000 60,000
Other Asia............................................ 68,000 20,000 179,000
----------- ----------- -----------
Total Asia....................................... 903,000 1,076,000 290,000
Canada................................................ 407,000 653,000 639,000
Other Foreign......................................... 360,000 145,000 97,000
----------- ----------- -----------
Total............................................ $ 5,336,000 $ 6,149,000 $ 2,542,000
Unusual items......................................... -- -- (5,750,000)
Inventory valuation adjustment........................ -- -- (750,000)
Other income (expenses), net.......................... 75,000 (315,000) (354,000)
----------- ----------- -----------
Income (loss) before income taxes................ $ 5,411,000 $ 5,834,000 $(4,312,000)
=========== =========== ===========
TOTAL ASSETS
United States......................................... $41,021,000 $38,059,000 $37,272,000
Europe................................................ 937,000 702,000 882,000
----------- ----------- -----------
Total............................................ $41,958,000 $38,761,000 $38,154,000
=========== =========== ===========
</TABLE>
F-17
<PAGE> 76
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- WARRANTS AND STOCK PURCHASE RIGHTS
The Company has issued to Biofin a warrant to purchase up to 730,720 shares
of Common Stock at the prevailing market price and has granted Biofin the right
to purchase additional Common Stock at a price identical to any new issuances.
These agreements enable Biofin to maintain a minimum 51% ownership in the
Company.
NOTE 14 -- SUBSEQUENT EVENT
On January 24, 1997, the Company announced that it has signed a Memorandum
of Understanding (the "Memorandum") with ASI, a subsidiary of American Standard
Companies Inc., which contemplates acquisition of the Company by a subsidiary of
ASI. Pursuant to the Memorandum, each share of the Company's Common Stock would
be converted into the right to receive $6.32 in cash, and the Company would
become a wholly-owned subsidiary of ASI. Under the merger proposal, the Company
would become part of a newly formed Medical Systems Group within ASI.
The Memorandum of Understanding has been approved by a Special Committee of
independent directors of the Company and the Boards of Directors of the Company
and ASI.
The proposed merger is subject to negotiation and execution of mutually
satisfactory definitive documentation, receipt by the Special Committee and the
board of directors of the Company of a fairness opinion, approval of the
definitive merger agreement by the Special Committee and the boards of directors
of the Company and ASI, approval of the merger by the holders of a majority of
the issued and outstanding shares of the Company's Common Stock, and receipt of
all required regulatory approvals and material third party consents.
The Merger Agreement further provides for the payment by the Company to ASI
of a $2.5 million termination fee if the Company terminates the Merger, as
defined in the Merger Agreement.
The Company also announced that Biofin, the majority shareholder of the
Company, has informed the Company that Sorin has entered into a Memorandum of
Understanding with ASI regarding the proposed sale of Sorin's European
Diagnostics Division to ASI. The Memorandum of Understanding between ASI and the
Company contemplates that the simultaneous closing of the Sorin sale of its
European Diagnostics Division will be a condition to the proposed merger.
F-18
<PAGE> 77
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------
APRIL 4, 1997 MARCH 29, 1996
------------- --------------
<S> <C> <C>
Net sales................................................... $10,838,000 $11,455,000
Cost of goods sold.......................................... 5,616,000 5,539,000
----------- -----------
Gross profit.............................................. 5,222,000 5,916,000
Operating expenses:
Selling, general and administration....................... 3,353,000 3,295,000
Research and development.................................. 986,000 1,060,000
----------- -----------
Total operating expenses............................... 4,339,000 4,355,000
----------- -----------
Operating income....................................... 883,000 1,561,000
Interest income (expenses), net............................. 25,000 (7,000)
Investment and other income (expense)....................... 29,000 (24,000)
----------- -----------
INCOME BEFORE INCOME TAXES................................ 937,000 1,530,000
Provision for income taxes.................................. 216,000 372,000
----------- -----------
NET INCOME................................................ $ 721,000 $ 1,158,000
=========== ===========
INCOME PER SHARE
Net income per share................................... $ 0.04 $ 0.07
=========== ===========
Weighted average shares and equivalents..................... 16,724,121 16,633,365
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-19
<PAGE> 78
INCSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 4, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalent.................................. $ 2,385,000 $ 1,554,000
Restricted cash........................................... 250,000 250,000
Accounts receivable, net of allowance for doubtful
accounts of $171,000 and $190,000, respectively........ 7,823,000 7,573,000
Other receivables......................................... 467,000 413,000
Inventories............................................... 14,200,000 14,302,000
Other current assets...................................... 576,000 629,000
------------ ------------
TOTAL CURRENT ASSETS................................... 25,701,000 24,721,000
PROPERTY AND EQUIPMENT:
Land and land improvements................................ 1,578,000 1,573,000
Building improvements..................................... 13,512,000 13,531,000
Equipment and furniture................................... 19,873,000 19,993,000
Construction in progress.................................. 145,000 41,000
------------ ------------
35,108,000 35,138,000
Less accumulated depreciation............................. (20,039,000) (20,032,000)
------------ ------------
15,069,000 15,106,000
INTANGIBLE ASSETS, NET...................................... 862,000 791,000
OTHER ASSETS................................................ 1,468,000 1,340,000
------------ ------------
$ 43,100,000 $ 41,958,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 3,000 $ 3,000
Accounts payable.......................................... 1,994,000 1,819,000
Accrued compensation...................................... 1,016,000 898,000
Accrued expenses.......................................... 2,284,000 2,448,000
Income taxes payable...................................... 660,000 364,000
------------ ------------
TOTAL CURRENT LIABILITIES.............................. 5,957,000 5,532,000
OTHER NON-CURRENT LIABILITIES............................... 3,301,000 3,285,000
SHAREHOLDERS' EQUITY:
Undesigned stock, unauthorized 5,000,000 shares
Common stock, par value $.01, authorized
25,000,000 shares; issued and outstanding 16,505,457
shares................................................. 165,000 165,000
Additional paid-in capital................................ 18,531,000 18,531,000
Foreign currency translation adjustment................... (118,000) (98,000)
Retained earnings......................................... 15,264,000 14,543,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY............................. 33,842,000 33,141,000
------------ ------------
$ 43,100,000 $ 41,958,000
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-20
<PAGE> 79
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------
APRIL 4, 1997 MARCH 29, 1996
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 721,000 $1,158,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 603,000 716,000
Payment for unusual items.............................. (24,000) (186,000)
Provision for retirement plans......................... 60,000 73,000
Provision for deferred income taxes.................... (105,000) (114,000)
Changes in operating assets and liabilities
Accounts receivable.................................. (250,000) 16,000
Other receivables.................................... (54,000) 20,000
Inventories.......................................... 102,000 (260,000)
Other current assets................................. 100,000 (149,000)
Accounts payable..................................... 175,000 217,000
Accrued compensation................................. 118,000 (771,000)
Accrued expenses..................................... (184,000) 497,000
Income tax payable................................... 296,000 424,000
Other, net........................................... (20,000) (3,000)
---------- ----------
Net cash provided by operating activities............ 1,538,000 1,638,000
---------- ----------
INVESTING ACTIVITIES:
Additions to property and equipment, net.................. (506,000) (456,000)
Payments for intellectual property and purchased
technology............................................. (129,000) (135,000)
Increase in other assets.................................. (72,000) (50,000)
---------- ----------
Net cash used in investing activities.................. (707,000) (641,000)
---------- ----------
FINANCING ACTIVITIES:
Decrease in restricted cash............................... -- 1,000
Payments on long-term debt................................ -- (36,000)
Issuance of common stock.................................. -- 179,000
---------- ----------
Net cash provided by financing activities.............. -- 144,000
---------- ----------
Net increase in cash and cash equivalents.............. 831,000 1,141,000
Cash and cash equivalents at beginning of period.......... 1,554,000 460,000
---------- ----------
Cash and cash equivalents at end of period................ $2,385,000 $1,601,000
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-21
<PAGE> 80
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated balance sheet as of April 4, 1997 and the related
consolidated statements of income and cash flows for the quarters ended April 4,
1997 and March 29, 1996 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted only of normal recurring items. The
consolidated statements and notes should be read in conjunction with the
consolidated financial statements and notes included in the Company's 1996 Form
10K.
NOTE 2 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 4, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Raw materials..................................... $ 2,366,000 $ 2,458,000
Work in progress.................................. 9,529,000 9,515,000
Finished goods.................................... 2,305,000 2,329,000
----------- -----------
$14,200,000 $14,302,000
=========== ===========
</TABLE>
NOTE 3 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 4, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Patents........................................... $ 717,000 $ 717,000
Trademarks........................................ 17,000 17,000
Goodwill.......................................... 619,000 619,000
Intellectual property and purchased technology.... 1,270,000 1,141,000
Product distribution rights....................... 2,700,000 2,700,000
----------- -----------
5,323,000 5,194,000
Less accumulated amortization..................... (4,461,000) (4,403,000)
----------- -----------
$ 862,000 $ 791,000
=========== ===========
</TABLE>
NOTE 4 -- UNUSUAL ITEMS AND INVENTORY VALUATION ADJUSTMENTS
In December, 1994 the Company recorded a $750,000 charge related to the
write down of excess inventories and a $2,450,000 unusual charge related to the
termination of certain distribution and supply agreements ($540,000) as well as
severance and other costs related to senior management changes ($1,910,000). The
amount remaining to be paid at April 4, 1997, exclusive of amounts included in
Other non-current liabilities (Note 6, Executive Retirement Plans) is $35,000,
which is included in Accrued expenses in the accompanying consolidated balance
sheet.
F-22
<PAGE> 81
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LINE OF CREDIT, LEASE AND ROYALTY COMMITMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 4, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Other................................................. $ 3,000 $ 3,000
------- -------
3,000 3,000
Less current portion................................ (3,000) (3,000)
------- -------
Total long-term debt................................ $ -- $ --
======= =======
</TABLE>
The Company has a revolving line of credit from a bank which provides for
maximum borrowings of $1,000,000 through February 28, 1998, is secured by
accounts receivable, and has an interest rate based on the prime interest rate
or LIBOR plus 2.5%. In addition, the Company has a $4,000,000 revolving line of
credit with Fiat Finance N.A., Inc. which expires October 1, 1997.
The Company is obligated to make royalty payments under several
distribution and licensing agreements. The majority of these agreements call for
payments based on a percentage of sales and contain no minimum royalty clause.
Royalty expense under these agreements was $318,000 and $497,000 for the
quarters ended April 4, 1997 and March 29, 1996, respectively.
NOTE 6 -- EXECUTIVE RETIREMENT PLANS
The Company has individual retirement agreements with certain executive
officers which are intended to provide continued compensation to such officers
or their respective beneficiaries upon retirement from the Company. The benefits
and terms under these arrangements vary depending upon the officer's position
within the Company. In connection with these plans, included in Other
non-current liabilities at April 4, 1997 and December 31, 1996 are $3,301,000
and $3,285,000, respectively, representing the present value of the future
liability. Also, included in Accrued expenses at April 4, 1997 and December 31,
1996 are $189,000 and $145,000, respectively, representing the current portion
of this liability. The Company intends to fund this obligation through the
purchase of life insurance contracts on the individual executives. Included in
Other assets at April 4, 1997 and December 31, 1996 are $1,093,000 and
$1,020,000, respectively, representing the cash surrender value of these
policies.
NOTE 7 -- INCOME TAXES
Upon the exercise of certain officer stock options during the year ended
December 31, 1996, the Company was entitled to a compensation deduction
allowable for income tax purposes. No compensation expense was required for
financial reporting purposes because the option price on the original grant date
equaled the then fair market value of the shares. Upon realization of the
benefit relating to the compensation deduction for tax purposes, the benefit is
credited to additional paid in capital. The Company recognized a credit of
$61,000 to Additional paid in capital relating to these stock options for the
quarter ended March 29, 1996.
F-23
<PAGE> 82
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- RELATED PARTY TRANSACTIONS
As part of the ongoing operations of the Company, various transactions were
entered into with its affiliates, Sorin Biomedica Diagnostics S.p.A. ("Sorin").
The following tables summarize these transactions and related balances.
<TABLE>
<CAPTION>
SORIN
-----------------------
QUARTER ENDED
-----------------------
APRIL 4, MARCH 29,
1997 1996
-------- ---------
<S> <C> <C>
Product sales......................................... $2,034,000 $1,947,000
Product purchases..................................... 573,000 279,000
Royalty expenses...................................... 43,000 203,000
Interest expense...................................... -- --
</TABLE>
<TABLE>
<CAPTION>
APRIL 4, MARCH 29,
1997 1996
-------- ---------
<S> <C> <C>
Assets
Trade accounts receivables.......................... $2,526,000 $2,442,000
Other receivables................................... 22,000 59,000
Liabilities
Accounts payable.................................... $ 652,000 $ 353,000
Accrued royalty..................................... 820,000 798,000
</TABLE>
NOTE 9 -- SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------
APRIL 4, MARCH 29,
1997 1996
-------- ---------
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.............................................. $ -- $ 6,000
Income taxes, net..................................... 23,000 56,000
</TABLE>
NOTE 10 -- PENDING MERGER
On March 10, 1997, the Company announced that it has signed a definitive
agreement with American Standard Inc., a wholly owned subsidiary of American
Standard Companies, Inc. (NYSE: ASD), for the acquisition of INCSTAR in a
one-step cash merger pursuant to which holders of INCSTAR Common Stock would
receive $6.32 per share in cash. The parties had previously announced a
memorandum of understanding on January 24, 1997, regarding the merger. The
merger, which has been approved by a Special Committee of Independent directors
and the board of directors of INCSTAR, required approval by a majority
shareholder vote, satisfaction of customary closing conditions and receipt of
regulatory approvals. The merger is also subject to the completion by American
Standard of its agreement to acquire the European medical diagnostics business
of Sorin Biomedica S.p.A., which is the parent of BioFin Holding International,
B.V. (BFHI), the majority shareholder of INCSTAR. Included in the first quarter
results are $253,000 of expenses associated with this transaction.
The Merger Agreement further provides for the payment by the Company to ASI
of a $2.5 million termination fee if the Company terminates the merger as
defined in this Agreement, which was filed as part of the Company's Form 10K for
the year ended December 31, 1996.
F-24
<PAGE> 83
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
AMONG
AMERICAN STANDARD INC.
AMERICAN STANDARD MEDICAL SYSTEMS, INC.
ISTR MERGER CORPORATION
AND
INCSTAR CORPORATION
DATED AS OF MARCH 10, 1997
<PAGE> 84
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
(NOT PART OF THE AGREEMENT)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
RECITALS................................................................. 1
ARTICLE I THE MERGER.................................................. 1
1.1 The Merger.................................................. 1
1.2 Articles of Incorporation................................... 1
1.3 By-Laws..................................................... 2
1.4 Directors and Officers...................................... 2
1.5 Effective Time.............................................. 2
ARTICLE II CONVERSION OF SHARES........................................ 2
2.1 Company Common Stock........................................ 2
2.2 Dissenting Shares........................................... 2
2.3 Mergeco Common Stock........................................ 3
2.4 Exchange of Shares.......................................... 3
2.5 Employee Stock Options...................................... 4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 5
3.1 Organization................................................ 5
3.2 Capitalization.............................................. 5
3.3 Authorization of this Agreement; Recommendation of Merger... 6
3.4 Consents and Approvals...................................... 6
3.5 No Conflicts................................................ 6
3.6 Compliance.................................................. 7
3.7 SEC Reports; Financial Statements; No Undisclosed
Liabilities................................................. 7
3.8 Proxy Statement............................................. 7
3.9 Employee Agreements and Plans............................... 8
3.10 Absence of Certain Changes.................................. 10
3.11 Litigation.................................................. 11
3.12 Taxes....................................................... 11
3.13 Environmental and Occupational Safety and Health Matters.... 12
3.14 Opinion of Financial Advisor................................ 13
3.15 Certain Anti-takeover Provisions Not Applicable............. 13
3.16 Intellectual Property....................................... 14
3.17 Licenses and Permits........................................ 14
3.18 Insurance................................................... 15
3.19 Contracts................................................... 15
3.20 Vote Required............................................... 15
3.21 Finders and Investment Bankers.............................. 15
3.22 Real Property and Leases.................................... 15
3.23 No Other Representations and Warranties..................... 16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGECO........ 16
4.1 Organization................................................ 16
4.2 Authorization of this Agreement............................. 17
4.3 Consents and Approvals; No Violations....................... 17
4.4 Proxy Statement............................................. 17
4.5 Financial Ability to Perform................................ 17
4.6 Finders and Investment Bankers.............................. 18
</TABLE>
A-i
<PAGE> 85
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
4.7 Litigation.................................................. 18
4.8 Certain Anti-takeover Provisions Not Applicable............. 18
4.9 No Other Representations and Warranties..................... 18
ARTICLE V COVENANTS................................................... 18
5.1 Conduct of the Business of the Company...................... 18
5.2 Access to Information....................................... 19
5.3 Shareholder Approval........................................ 19
5.4 All Reasonable Efforts...................................... 20
5.5 Consents.................................................... 20
5.6 Public Announcements........................................ 20
5.7 Consent of Holdings......................................... 20
5.8 No Solicitation............................................. 20
5.9 Indemnification............................................. 21
5.10 Transfer Taxes.............................................. 22
5.11 Anti-takeover Statutes...................................... 22
5.12 Notification of Certain Matters............................. 22
5.13 Certain Resignations........................................ 23
5.14 Employee Matters............................................ 23
5.15 Extinguishment of Credit Line............................... 23
ARTICLE VI CLOSING CONDITIONS.......................................... 23
6.1 Conditions to the Obligations of Parent, Mergeco and the
Company..................................................... 23
6.2 Conditions to the Obligations of Parent and Mergeco......... 24
6.3 Conditions to the Obligations of the Company................ 24
ARTICLE VII CLOSING..................................................... 25
7.1 Time and Place.............................................. 25
7.2 Filing at the Closing....................................... 25
ARTICLE
VIII TERMINATION AND ABANDONMENT................................. 25
8.1 Termination................................................. 25
8.2 Procedure and Effect of Termination......................... 26
8.3 Fees and Expenses........................................... 26
ARTICLE IX MISCELLANEOUS............................................... 27
9.1 Amendment and Modification.................................. 27
9.2 Waiver of Compliance; Consents.............................. 27
9.3 Survival of Warranties...................................... 28
9.4 Notices..................................................... 28
9.5 Assignment; Parties in Interest............................. 28
9.6 Specific Performance........................................ 29
9.7 Governing Law............................................... 29
9.8 Counterparts................................................ 29
9.9 Interpretation.............................................. 29
9.10 Entire Agreement............................................ 29
EXHIBIT A Articles of Incorporation of ISTR Merger Corporation........ A-1
EXHIBIT B Options Under Stock Option Plan............................. B-1
EXHIBIT C Material Contracts.......................................... C-1
</TABLE>
A-ii
<PAGE> 86
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger, dated as of March 10, 1997 (this
"Agreement"), among American Standard Inc., a Delaware corporation ("Parent"),
American Standard Medical Systems, Inc., a Delaware corporation that is a
wholly-owned subsidiary of Parent ("Holdings"), ISTR Merger Corporation, a
Minnesota corporation that is a wholly-owned subsidiary of Holdings ("Mergeco"),
and INCSTAR Corporation, a Minnesota corporation (the "Company") (the Company
and Mergeco being sometimes hereinafter referred to as the "Constituent
Corporations");
WHEREAS, the Boards of Directors of Parent, Holdings, Mergeco and the
Company deem the merger of the Constituent Corporations advisable and in the
best interests of their respective corporations, and such Boards of Directors
have approved the merger (the "Merger") of Mergeco with and into the Company,
with the Company as the surviving corporation, upon the terms and subject to the
conditions set forth herein;
WHEREAS, the respective Boards of Directors of Parent, Holdings, Mergeco
and the Company have, by resolutions, approved the execution and delivery of
this Agreement providing for the Merger;
WHEREAS, the respective Boards of Directors of the Company and Mergeco have
directed that this Agreement be submitted to their respective shareholders for
approval as provided for by the Minnesota Business Corporation Act (the "MBCA");
WHEREAS, Holdings, as the sole shareholder of Mergeco, has, by resolution,
approved this Agreement and the Merger as provided for by the MBCA; and
WHEREAS, Parent, Mergeco and the Company desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and for
the purpose of prescribing the terms and conditions of the Merger, the manner
and basis of converting certain shares of stock of the Company and setting forth
such other provisions as are deemed necessary and desirable, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. (i) Upon the terms and subject to the satisfaction or
waiver, if permissible, of the conditions set forth in Article VI hereof, at the
Effective Time, as defined in Section 1.5, the parties hereto shall cause
Mergeco to be merged with and into the Company, and the Company shall be the
surviving corporation in the Merger (hereinafter sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Minnesota. At the Effective Time, the separate existence of Mergeco
shall cease.
(b) The Merger shall have the effects set forth in Section 302A.641 of
the MBCA. Without limiting the generality of the foregoing, and subject
thereto, the Surviving Corporation shall retain the name of the Company and
shall possess all the rights, privileges, immunities, powers and franchises
of Mergeco and the Company and shall by operation of law become liable for
all the debts, obligations, liabilities and duties of the Company and
Mergeco.
1.2 Articles of Incorporation. At the Effective Time, the Articles of
Incorporation of Mergeco (in the form attached hereto as Exhibit A) shall become
the Articles of Incorporation of the Surviving Corporation, by virtue of the
Merger and this Agreement and without any further action by the Constituent
Corporations, until, subject to Section 5.9(a) hereof, thereafter amended in
accordance with the provisions thereof and as provided by law, provided that
effective at the Effective Time, Article I of such Articles of Incorporation
shall be amended, by virtue of the Merger and this Agreement and without any
further action by the Constituent Corporations, so that the name of the
Surviving Corporation shall be "INCSTAR Corporation."
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1.3 By-Laws. At the Effective Time, the By-Laws of Mergeco shall become the
By-Laws of the Surviving Corporation until, subject to Section 5.9(a) hereof,
thereafter amended, altered or repealed as provided therein and by law.
1.4 Directors and Officers. The directors of Mergeco and the officers of
the Company immediately prior to the Effective Time shall be the directors and
officers, respectively, of the Surviving Corporation, each to hold office in
accordance with the Articles of Incorporation and By-Laws of the Surviving
Corporation.
1.5 Effective Time. The Merger shall become effective at the date and time
when properly executed Articles of Merger (the "Articles of Merger") relating to
the Merger shall be filed with the Secretary of State of the State of Minnesota
in accordance with the MBCA or at such other later date and time, if any, as
Mergeco and the Company shall agree and as shall be specified in the Articles of
Merger. The date and time when the Merger shall become effective is herein
referred to as the "Effective Time."
ARTICLE II
CONVERSION OF SHARES
2.1 Company Common Stock. The manner and basis of converting the Shares (as
hereinafter defined) shall be as follows:
(a) At the Effective Time, each share of Common Stock, par value $.01
per share, of the Company (a "Share" and, collectively, the "Shares")
issued and outstanding immediately prior to the Effective Time (except for
Shares then owned beneficially or of record by Parent or Mergeco or any
other subsidiary of Parent and except for Dissenting Shares (as defined in
Section 2.2)), shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive $6.32
(the "Merger Consideration") in cash payable to the holder thereof
(pro-rated for fractional Shares, if any), without interest thereon, upon
surrender of the certificate representing such Share.
(b) At the Effective Time, each Share issued and outstanding
immediately prior to the Effective Time which is then owned beneficially or
of record by Parent or Mergeco or any other subsidiary of Parent shall, by
virtue of the Merger and without any action on the part of the holder
thereof, be canceled and cease to exist, and no payment shall be made with
respect thereto.
(c) At the Effective Time, the holders of certificates representing
Shares shall cease to have any rights as shareholders of the Company,
except such rights, if any, as they may have pursuant to the MBCA
(including the rights of holders or beneficial owners of Dissenting Shares
pursuant to Sections 302A.471 and 302A.473 of the MBCA), and, except as
aforesaid, their sole right shall be the right to receive the Merger
Consideration for each Share represented by a certificate as aforesaid.
2.2 Dissenting Shares. To the extent required by the MBCA, Shares that are
issued and outstanding immediately prior to the Effective Time and that are held
or beneficially owned by holders or beneficial owners of such Shares who have
properly exercised and preserved and protected dissenters' rights with respect
thereto in accordance with Sections 302A.471 and 302A.473 of the MBCA
("Dissenting Shares") will not be converted into the right to receive the Merger
Consideration, and holders or beneficial owners of such Dissenting Shares will
be entitled to receive payment of the fair value of such Dissenting Shares in
cash in accordance with the provisions of such Section 302A.473 unless and until
such holders or beneficial owners fail to perfect or effectively withdraw or
lose their rights to payment under Section 302A.473 of the MBCA. If, after the
Effective Time, any such holder or beneficial owner fails to perfect or
effectively withdraws or loses such right, such Dissenting Shares will thereupon
be treated as if they had been converted into, at the Effective Time, the right
to receive the Merger Consideration per Share, without interest. The Company
will give Parent prompt written notice of any notice of intent to demand payment
of the fair value of Shares under Section 302A.473 of the MBCA received by the
Company and of any withdrawal of any such notice of intent and, prior to the
Effective Time, Parent and Mergeco will have the right to direct all
negotiations and proceedings with respect to such demands. Prior to the
Effective Time, the Company will not, except with the
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prior written consent of Parent and Mergeco, negotiate, make any payments with
respect to, or settle or offer to settle, any such demands.
2.3 Mergeco Common Stock. The manner and basis of converting the shares of
Mergeco shall be as follows: At the Effective Time, each share of common stock,
par value $.01 per share ("Mergeco Common Stock"), of Mergeco issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into one fully paid and non-assessable share of common stock, par value $.01 per
share ("Surviving Corporation Common Stock"), of the Surviving Corporation, and
shall constitute the only issued and outstanding shares of capital stock of the
Surviving Corporation immediately following the Merger. From and after the
Effective Time, each outstanding certificate theretofore representing shares of
Mergeco Common Stock shall be deemed for all purposes to evidence ownership of
and to represent the same number of shares of Surviving Corporation Common
Stock.
2.4 Exchange of Shares. (i) Prior to the Effective Time, Parent shall
deposit, or shall cause to be deposited, in trust with The Chase Manhattan Bank
or any other bank or trust company with offices in New York or Minneapolis
designated by Parent and reasonably acceptable to the Company having capital,
surplus and undivided profits of at least $100,000,000 (the "Exchange Agent"),
for the benefit of the holders of Shares, cash in an aggregate amount equal to
the product of (i) the number of Shares issued and outstanding immediately prior
to the Effective Time (other than any such Shares owned beneficially or of
record by Parent or Mergeco or any other subsidiary of Parent and other than
Shares which continue to be Dissenting Shares immediately prior to the Effective
Time), pro-rated for fractional Shares, if any, and (ii) the Merger
Consideration (such amount being hereinafter referred to as the "Exchange
Fund"). The Exchange Agent shall, pursuant to irrevocable instructions, make the
payments provided for in Section 2.1.
(a) of this Agreement out of the Exchange Fund, subject to the
requirements of the remainder of this Section 2.4. The Exchange Agent shall
invest the Exchange Fund as Parent directs, in direct obligations of the
United States of America, obligations for which the full faith and credit
of the United States of America is pledged to provide for the payment of
all principal and interest, commercial paper obligations receiving the
highest rating from either Moody's Investors Services, Inc. or Standard &
Poor's Corporation, or certificates of deposit, bank repurchase agreements
or banker's acceptances of commercial banks with capital exceeding
$100,000,000 or in money market funds which are invested solely in the
permitted investments set forth above (collectively, the "Permitted
Investments"); provided, however, that the maturities of Permitted
Investments shall be such as to permit the Exchange Agent to make prompt
payment to former holders of the Shares entitled thereto as contemplated by
this Section 2.4. The Exchange Fund shall not be used for any other purpose
except as provided in this Agreement. Notwithstanding anything to the
contrary set forth in this Agreement, the Exchange Agent shall be permitted
and required, upon the request of Parent, to remit from time to time to
Parent all interest or other income derived from the investments
constituting the Exchange Fund. The Surviving Corporation shall cause the
Exchange Fund to be promptly replenished to the extent of any losses
incurred as a result of the Permitted Investments. If for any reason
(including losses) the Exchange Fund is inadequate to pay the amounts to
which holders of Shares shall be entitled under Section 2.1 and this
Section 2.4, the Surviving Corporation shall in any event be liable for
payment thereof.
(b) As soon as practical after the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail to each record holder
(other than Parent, Mergeco or any other subsidiary of Parent and other
than with respect to Dissenting Shares unless and until they cease to be
Dissenting Shares) as of the Effective Time of an outstanding certificate
or certificates which immediately prior to the Effective Time represented
Shares (the "Certificates") a form letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent) and instructions for use in effecting the surrender of
the Certificates for payment therefor. Upon, and only upon, surrender to
the Exchange Agent of a Certificate, together with such letter of
transmittal duly executed, and any other items specified in such letter of
transmittal as may be reasonably requested by the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange
therefor payment by check or draft in an amount equal to the product of the
number of Shares represented by such Certificate (pro-rated for
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fractional Shares, if any) and the Merger Consideration, less any
applicable withholding tax, and such Certificate shall forthwith be
canceled. No interest shall be paid or accrued on the amount payable upon
the surrender of the Certificates. If payment is to be made to a person
other than the person in whose name the Certificate surrendered is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such payment shall pay any transfer
or other taxes required by reason of the payment to a person other than the
registered holder of the Certificate surrendered or establish to the
satisfaction of the Exchange Agent and the Surviving Corporation that such
tax has been paid or is not applicable. Until surrendered in accordance
with the provisions of this Section 2.4, each Certificate (other than
Certificates representing Shares owned beneficially or of record by Parent,
Mergeco or any other subsidiary of Parent and other than Certificates
representing Dissenting Shares in respect of which dissenters' rights are
perfected and have not been lost or withdrawn) shall represent for all
purposes only the right to receive the Merger Consideration in cash
multiplied by the number of Shares evidenced by such Certificate, without
any interest thereon.
(c) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the holder
claiming such Certificate to have been lost, stolen or destroyed, the
amount to which such holder would have been entitled under Section 2.4(b)
hereof but for failure to deliver such Certificate to the Exchange Agent
shall nevertheless be paid to such holder, provided that the Surviving
Corporation may, in its sole discretion and as a condition precedent to
such payment, require such holder to give the Surviving Corporation a bond
in such sum as it may reasonably direct as indemnity against any claim that
may be had against the Surviving Corporation with respect to the
Certificate alleged to have been lost, stolen or destroyed.
(d) After the Effective Time there shall be no transfers on the stock
transfer books of the Surviving Corporation of the Shares which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation,
they shall be canceled and exchanged for cash as provided in this Article
II, subject to applicable law in the case of Dissenting Shares.
(e) Any portion of the Exchange Fund which remains unclaimed by the
shareholders of the Company after December 31, 1997 (including any interest
received with respect thereto, to the extent not previously remitted to
Parent as contemplated by Section 2.4(a)) shall be repaid to the Surviving
Corporation, upon demand. Any shareholders of the Company who have not
theretofore complied with Section 2.4(b) shall thereafter be entitled to
the payment of the Merger Consideration only from the Surviving
Corporation, without any interest thereon, but shall have no greater rights
against the Surviving Corporation than may be accorded to general creditors
of the Surviving Corporation under relevant law.
(f) The Surviving Corporation shall pay all charges and expenses,
including those of the Exchange Agent, in connection with the exchange of
cash for Shares.
2.5 Employee Stock Options. Exhibit B to this Agreement sets forth a true
and complete list of all options to purchase Shares (collectively, the
"Options") issued pursuant to the Company's Restated 1986 Stock Option Plan (as
amended, the "Stock Option Plan"), setting forth (i) the identity of each Option
holder, (ii) the number of Options held, (iii) the exercise price of each
Option, and (iv) the aggregate number of Shares subject to Options. Immediately
prior to the Effective Time, each holder of an outstanding Option to purchase
Shares granted under the Stock Option Plan (including, without limitation,
Options granted to non-employee directors of the Company and members of the
Company's Scientific Advisory Board/Panel), whether or not then exercisable,
shall be entitled to receive for each Share subject to such Option, in
cancellation of such Option, an amount in cash equal to the excess, if any, of
the Merger Consideration over the per Share exercise price of such Option
without interest thereon, subject to all applicable tax withholding
requirements, and such Option shall thereupon be canceled.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Mergeco as follows:
3.1 Organization. The Company and each of its subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
corporate authority to own, lease and operate its properties and to conduct its
business as now being conducted, except where the failure to be so organized,
existing and in good standing or to have such power and authority would not,
individually or in the aggregate, have a material adverse effect on the business
or condition (financial or otherwise), properties or assets of the Company and
its subsidiaries taken as a whole (a "Material Adverse Effect"). Each of the
Company and its subsidiaries is duly qualified or licensed and in good standing
to do business in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified or licensed
and in good standing would not, individually or in the aggregate, have a
Material Adverse Effect. Section 3.1 of the Company's disclosure schedule, dated
the date hereof and delivered to Parent (the "Disclosure Schedule") sets forth a
true and complete list of the Company's subsidiaries, listing, for each
subsidiary, (i) its name, (ii) its jurisdiction of incorporation, (iii) the
names and titles of its directors and executive officers and (iv) the number and
percentage of shares of such subsidiary's capital stock owned of record by the
Company or another subsidiary of the Company, and except as and to the extent
set forth in Section 3.1 of the Disclosure Schedule, the Company owns, of record
or beneficially, directly or indirectly, all of the issued and outstanding
capital stock of each of its subsidiaries, free and clear of all liens, pledges,
security interests, claims or other encumbrances. Except for capital stock of
the subsidiaries listed in Section 3.1 of the Disclosure Schedule, the Company
owns no equity securities of any entity. The Company has heretofore delivered to
Parent accurate and complete copies of the Articles of Incorporation and the
Amended By-Laws (or equivalent organizational documents) of the Company and each
of its subsidiaries, as currently in effect.
3.2 Capitalization. The authorized capital stock of the Company consists of
30,000,000 shares, (i) 25,000,000 of which are designated as Common Stock, of
which, on the date hereof, there were 16,505,486 Shares issued and outstanding,
1,200,000 Shares reserved for issuance under the Stock Option Plan and 730,720
Shares subject to issuance upon exercise of a like number of warrants evidenced
by a Warrant Certificate dated as of December 13, 1989 (the "Warrants"), and
(ii) 5,000,000 of which are divisible into such classes and series, with such
designations, voting rights and other rights and preferences as the Board of
Directors of the Company (the "Board of Directors") may from time to time
determine (consistent with paragraphs (a) and (b) of Article VII of the
Company's Articles of Incorporation), of which, on the date hereof, there are no
shares issued or outstanding, and no shares have been designated by the Board of
Directors as to classes or series. The Company has not acquired, redeemed or
repurchased any Shares or other shares of capital stock of the Company that have
been pledged by the Company as security for future payment of all or part of the
purchase price for such Shares or other shares of capital stock. All issued and
outstanding Shares are duly authorized, validly issued, fully paid and
nonassessable and have no preemptive rights (other than preemptive rights
created pursuant to the Purchase Rights Agreement, dated as of December 13, 1989
(the "Purchase Rights Agreement"), between the Company and Biofin Holding
International B.V. ("Biofin")). Except for (i) the Warrants, (ii) Options
granted pursuant to the Stock Option Plan to acquire not more than 669,640
Shares, as set forth on Exhibit B hereto, and (iii) preemptive rights created
pursuant to the Purchase Rights Agreement, there are not now, and at the
Effective Time there will not be, any existing options, warrants, calls,
subscriptions, preemptive rights or other rights or other agreements or
commitments whatsoever obligating the Company or any of its subsidiaries to
issue, transfer, deliver or sell or cause to be issued, transferred, delivered
or sold any additional shares of capital stock of the Company (including,
without limitation, the Shares) or any of its subsidiaries, or to acquire,
redeem or repurchase any shares of capital stock of the Company or any of its
subsidiaries, or obligating the Company or any of its subsidiaries to grant,
extend or enter into any such agreement or commitment. Each holder of Options
granted pursuant to the Stock Option Plan has consented to the cancellation of
all of such holder's Options in the manner provided in Section 2.5 hereof. No
holder of an outstanding Option has the right to exercise said Option in the
event the
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Merger is consummated. The holder of the Warrants has consented to the
cancellation of the Warrants at the Effective Time without payment of additional
consideration, and the Company and the other party or parties to the Purchase
Rights Agreement have agreed that the Purchase Rights Agreement will be
terminated at the Effective Time (without payment of additional consideration to
such party or parties).
3.3 Authorization of this Agreement; Recommendation of Merger. (a) The
Company has all requisite corporate power and corporate authority to execute and
deliver this Agreement and, subject to approval by the holders of the Shares, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized and approved by the Board of Directors and,
except for the approval of this Agreement by the shareholders of the Company
holding a majority of the outstanding Shares, no other corporate proceedings on
the part of the Company are necessary to authorize this Agreement or consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and, subject only to approval hereof by
holders of the Shares, and assuming the accuracy of the representations and
warranties set forth in Section 4.2 hereof, this Agreement constitutes a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms.
(b) The Board of Directors (at a meeting duly called and held at which
a quorum was present), based upon the unanimous recommendation of a
committee (the "Special Committee") comprised solely of all of the
Company's disinterested directors (as such term is defined in Section
302A.673 of the MBCA), has unanimously determined that the Merger is
advisable and in the best interests of the Company and has unanimously
resolved to recommend approval of the Merger and adoption of this Agreement
by the holders of the Shares.
3.4 Consents and Approvals. Except for (i) compliance with any applicable
requirements of the Exchange Act, (ii) compliance with any applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (together, the "HSR Act"),
(iii) the filing and recordation of the Articles of Merger with the Minnesota
Secretary of State and, if applicable, filings required by the laws of other
states in which the Company is qualified to do business, (iv) filings under the
securities or blue sky laws or takeover laws of the various states (other than
Minnesota), (v) the listing requirements of the National Association of
Securities Dealers ("NASD") and the Nasdaq National Market, (vi) filings in
connection with any applicable transfer or other taxes in any applicable
jurisdiction, and (vii) the other filings, permits, authorizations, consents and
approvals listed on Section 3.4 of the Disclosure Schedule, no filing with, and
no permit, authorization, consent or approval of, any public body or other
governmental authority is necessary for the consummation by the Company of the
transactions contemplated by this Agreement, the failure of which to make or
obtain would be reasonably likely to have a Material Adverse Effect or a
material adverse effect on the ability of the Company to consummate the Merger
or the other transactions contemplated hereby.
3.5 No Conflicts. (a) Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby nor compliance by
the Company with any of the provisions hereof will (i) conflict with or result
in any violation of any provision of the Articles of Incorporation or Amended
By-Laws of the Company, or the certificate of incorporation or by-laws (or
equivalent instruments) of any of its subsidiaries, (ii) except as set forth in
Section 3.5(a) of the Disclosure Schedule, result in a violation or breach of,
or constitute a default (or give rise to any right of termination, cancellation
or acceleration) under, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any of its subsidiaries is a party or by which any of
them or any of their properties or assets is bound or (iii) assuming the truth
of the representations and warranties of Parent and Mergeco contained herein and
their compliance in all material respects with all agreements contained herein
and assuming the due making or obtaining of all filings, permits,
authorizations, consents and approvals referred to in Sections 3.4 and 4.3
hereof, violate any statute, rule, regulation, order, injunction, writ or decree
of any public body or other governmental authority by which the Company or any
of its subsidiaries or any of their respective assets or properties is bound,
excluding from the foregoing clauses (ii) and (iii) violations, breaches or
defaults, or rights of termination, cancellation or acceleration, which, either
individually or in the
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aggregate, are not reasonably likely to have a Material Adverse Effect or a
material adverse effect on the Company's ability to consummate the Merger or the
other transactions contemplated hereby.
(b) None of the written contracts, agreements and other instruments
listed in Schedule 3.5(b) of the Disclosure Schedule (collectively, the
"Main Contracts") contains any "change in control" or similar provisions
that would require consent by (or give rise to any right of termination,
cancellation or acceleration by) any third party to any Main Contract as a
result of the consummation of the Merger or the other transactions
contemplated hereby.
3.6 Compliance. Except as set forth in Section 3.6 of the Disclosure
Schedule, neither the Company nor any of its subsidiaries is in conflict with,
or in default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its subsidiaries or by which its or
any of their respective properties are bound or subject or (ii) any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or its or any of
their respective properties are bound or subject, except for any such conflicts,
defaults or violations which would not, individually or in the aggregate,
reasonably be expected to either have a Material Adverse Effect or delay
materially or prevent the consummation of the Merger or the other transactions
contemplated hereby.
3.7 SEC Reports; Financial Statements; No Undisclosed Liabilities. ((1) The
Company has timely filed all forms, reports and documents with the Securities
and Exchange Commission ("SEC") required to be filed by it since January 1, 1994
pursuant to the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "Securities Act") and the Exchange Act
and the rules and regulations promulgated thereunder (collectively, the "SEC
Reports"), all of which have complied, at the time filed, in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act, as applicable, and the rules and regulations promulgated thereunder. None
of such SEC Reports, at the time filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) The consolidated balance sheets and the related consolidated
statements of operations, consolidated cash flows and consolidated
shareholders' equity (including the notes thereto) of the Company and its
subsidiaries contained or incorporated by reference in the SEC Reports
comply in all material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto,
and present fairly the consolidated financial position of the Company and
its subsidiaries as of their respective dates, and the consolidated results
of their operations and their cash flows for the periods presented therein,
in conformity with United States generally accepted accounting principles
("GAAP") applied on a consistent basis, (i) except as otherwise noted
therein, (ii) subject in the case of unaudited financial statements to
normal year-end audit adjustments, (iii) except that the unaudited
financial statements do not contain all of the footnote disclosures
required by GAAP and (iv) except as may otherwise be permitted by Form
10-Q.
(c) Except to the extent reflected or reserved against on the
Company's audited consolidated balance sheet as of December 31, 1996,
previously delivered to Parent (the "Balance Sheet"), neither the Company
nor any of its subsidiaries had, as of the date of such Balance Sheet, any
liabilities, debt or obligations (whether absolute, accrued, contingent or
otherwise) of any nature that would be required as of such date to have
been included on a balance sheet, or in the notes thereto, prepared in
accordance with GAAP. Except as disclosed in Section 3.7(c) of the
Disclosure Schedule, since the date of the Balance Sheet, neither the
Company nor any of its subsidiaries has incurred any liabilities, debts or
obligations (whether absolute, accrued, contingent or otherwise) of any
nature that would be required to be included on a balance sheet, or in the
notes thereto, prepared in accordance with GAAP, except for liabilities,
debts or obligations incurred in the ordinary course of business.
3.8 Proxy Statement. No proxy materials distributed by the Company to its
shareholders and/or filed with the SEC in connection with the Merger, including
any amendments or supplements thereto (collectively, the "Proxy Statement")
will, at the time the Proxy Statement is mailed, contain any untrue statement of
a
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material fact, or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or, at the time of the
meeting of shareholders to which the Proxy Statement, as then amended or
supplemented, relates or at the Effective Time omit to state any material fact
necessary to correct any statement which has become false or misleading in any
earlier communication with respect to the solicitation of any proxy for such
meeting; except that no representation is made by the Company with respect to
statements made or incorporated by reference into the Proxy Statement based on
information furnished in writing to the Company by Parent, Holdings or Mergeco
specifically for use in the Proxy Statement. The Proxy Statement will comply as
to form in all material respects with the requirements of the Exchange Act and
the rules and regulations thereunder.
3.9 Employee Agreements and Plans. (a) Except as set forth in Section 3.9
(a) of the Disclosure Schedule, with respect to any employee or former employee
of the Company, neither the Company nor any ERISA Affiliate presently maintains,
contributes to or has any liability under:
(i) any bonus, incentive compensation, profit sharing, retirement,
pension, group insurance, death benefit, health, cafeteria, flexible
benefit, medical expense reimbursement, dependent care, stock option, stock
purchase, stock appreciation rights, savings, deferred compensation,
consulting, severance pay or termination pay, vacation pay, life insurance,
welfare or other employee benefit or fringe benefit plan, program or
arrangement; or
(ii) any plan, program or arrangement which is an "employee pension
benefit plan" as such term is defined in Section 3(2) of ERISA, or an
"employee welfare benefit plan" as defined in Section 3(1) of ERISA.
Each plan, program and arrangement set forth in Section 3.9 (a) of the
Disclosure Schedule is herein referred to as an "Employee Benefit Plan." For
purposes of this Agreement, the term "ERISA Affiliate" shall mean any person (as
defined in Section 3(9) of ERISA) that together with the Company (or any person
whose liabilities the Company has assumed or is otherwise subject to) would be
treated as a single employer under Section 4001(b) of ERISA, or would be
aggregated with the Company under Sections 414(b), (c), (m) or (o) of the Code.
Within the last twenty-four months neither the Company nor any ERISA Affiliate
has entered into any formal plan or commitment, or has communicated to any
current or former employee any intention, whether legally binding or not, to
create any additional material Benefit Plan.
(b) A favorable determination letter has been received from the
Internal Revenue Service with respect to each Employee Benefit Plan which
is intended to comply with the provisions of Section 401(a) of the Code.
Each such Employee Benefit Plan complies in form and in operation in all
material respects with the requirements of the Code and meets the
requirements of a "qualified plan" under Section 401(a) of the Code. In
addition, amendments have been made to each such Employee Benefit Plan
evidencing substantial compliance with the Tax Reform Act of 1986, as
amended. Each Employee Benefit Plan subject to Sections 401(k) and 401(m)
of the Code satisfies the average deferral percentage test and the average
contribution percentage test under Sections 401(k) and 401(m) of the Code
for the applicable plan year preceding the plan year in which the Closing
Date occurs. No event has occurred and no condition exists which could
reasonably be expected to result in the revocation of any previously-issued
determination letter or the denial of any determination letter application.
(c) Except as set forth in Section 3.9 (c) of the Disclosure Schedule,
with respect to each Employee Benefit Plan which is subject to Title I of
ERISA, neither the Company nor any ERISA Affiliate has failed to comply in
any material respect with any of the applicable reporting, disclosure or
other requirements of ERISA and the Code and there has been no "prohibited
transaction" as described in Section 4975 of the Code or Section 406 of
ERISA.
(d) Neither the Company nor any ERISA Affiliate, nor any of their
respective directors, officers, employees or any other "fiduciary," as such
term is defined in Section 3(21) of ERISA, has any material liability for
failure to comply with ERISA or the Code for any action or failure to act
in connection with the administration or investment of any of the Employee
Benefit Plans. No event has occurred with respect to which the Company or
any ERISA Affiliate could be liable for a civil penalty or other liability
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under Section 502(c) or Section 502(l) of ERISA, except for liabilities
which would not, individually or in the aggregate, have a Material Adverse
Effect.
(e) No Employee Benefit Plan is subject to Section 412 of the Code or
Section 302 of ERISA. If contributions with respect to each Employee
Benefit Plan are intended to be tax-deductible, all reasonable actions
required to be taken to make such contributions tax-deductible have been
taken. Further, all applicable contributions and premium payments for all
periods ending prior to the Closing Date (including periods from the first
day of the then current plan year to the Closing Date) shall be or have
been made prior to the Closing Date in accordance with past practice,
except for contributions and premium payments not due prior to the Closing
Date (for which appropriate reserves have been taken). No Employee Benefit
Plan is subject to Title IV of ERISA. Neither the Company nor any ERISA
Affiliate has terminated any employee pension benefit plan subject to Title
IV of ERISA within the past eight years. Except as set forth in Section 3.9
(e) of the Disclosure Schedule, no Employee Benefit Plan has any unfunded
liability. The financial records of each Employee Benefit Plan have been
kept in accordance with GAAP.
(f) Neither the Company nor any ERISA Affiliate has any liability
(including current or potential withdrawal liability) with respect to any
"multiemployer plan" as such term is defined in Section 3(37) of ERISA,
other than the obligation to make periodic contributions with respect to
those Employees covered by any such plan.
(g) There is no pending or threatened legal action, claim, proceeding
or investigation against or involving any Employee Benefit Plan and, to the
knowledge of Company and each ERISA Affiliate, there is no basis for, and
the Company has no knowledge of any facts which could give rise to, any
such condition, legal action, claim, proceeding or investigation, other
than routine claims for benefits and other claims, none of which routine
and other claims would, individually or in the aggregate, have a Material
Adverse Effect. Any bonding required with respect to any Employee Benefit
Plan in accordance with applicable provisions of ERISA has been obtained
and is in full force and effect.
(h) Except as set forth in Section 3.9 (h) of the Disclosure Schedule,
with respect to any employee or former employee of the Company, neither the
Company nor any ERISA Affiliate presently maintains, contributes to or has
any liability under any funded or unfunded medical, health or life
insurance plan or arrangement for terminated employees or retirees except
as required by the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended. Neither the Company nor any ERISA Affiliate maintains or
contributes to a trust, organization or association described in any of
Sections 501(c)(9), 501(c)(17) or 501(c)(20) of the Code.
(i) Except as set forth in Section 3.9 (i) of the Disclosure Schedule,
(i) Neither the Company nor any ERISA Affiliate is a party to any
employment agreement, whether written or oral, or agreement with
change-in-control or similar provisions, or collective bargaining
agreement or contract with any labor union relating to any employees or
former employees;
(ii) The consummation of the transactions contemplated by this
Agreement will not entitle any individual to severance pay or accelerate
the time of payment or vesting, or increase the amount, of compensation
or benefits due to any individual; and
(iii) Neither the Company nor any ERISA Affiliate has currently
outstanding any loan or loans to any current or former employees, nor
has the Company nor any ERISA Affiliate guaranteed such loans.
(j) There has been no act or acts which would result in a disallowance
of a deduction or the imposition of a tax pursuant to Section 4980B of the
Code, or any predecessor provision thereof, or any regulations promulgated
thereunder, whether final, temporary or proposed.
(k) With respect to each Employee Benefit Plan, the Company has
delivered to Parent accurate and complete copies of the following (where
applicable): (i) the plan documents, including any related
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trust agreements, insurance contracts or other funding arrangements, or a
written summary of the terms and conditions of the plan if there is no
written plan document, and summaries of material modifications; (ii) the
most recent determination letter received from the Internal Revenue
Service; (iii) the two most recent IRS Form 5500 annual reports, including
all schedules and attachments thereto; (iv) the most recent financial
statements; (v) all correspondence with the Internal Revenue Service and
the Department of Labor with respect to the past three plan years (other
than IRS Form 5500 filings); and (vi) the most recent summary plan
description.
(l) With respect to employees of the Company or its subsidiaries in
Canada: (i) except as set forth in Section 3.9(l) of the Disclosure
Schedule, the Company has no obligation under and does not participate in
any registered pension plan as defined in the Income Tax Act (Canada)
and/or any pension plan registered under applicable federal or provincial
pension legislation, and as of the Closing Date, the Company shall have
paid all amounts due to or to be paid on behalf of the Company's employees
prior to the Closing Date, including, without limitation, all accrued
wages, salaries, commissions, bonuses, vacation pay, termination pay,
severance pay, employment benefit plans, income tax withholdings, Canada
Pension Plan contributions and Employment Insurance premiums; (ii) the
Company is in good standing under each of (A) Canada Pension Plan, (B)
Employment Standards Act (Ontario), (C) Income Tax Act, (D) Labour
Relations Act (Ontario), (E) Occupational Health and Safety Act (Ontario),
(F) Ontario Human Rights Code, (G) Pension Benefits Act (Ontario), (H)
Workers' Compensation Act (Ontario), (I) Employer Health Tax (Ontario), (J)
Unemployment Insurance Act and (K) Pay Equity Act (Ontario), and (iii) the
Company is in compliance with all applicable laws, rules and regulations
relating to pensions and employee benefits; provided, however, that the
Company represents and warrants as to the matters in this Section 3.9(l)
only to the extent that such matters, individually or in the aggregate,
have a Material Adverse Effect.
(m) With respect to employees of the Company or its subsidiaries in
the United Kingdom: (i) no circumstances have arisen under which the
Company is likely to be required to pay damages for wrongful dismissal, to
make any statutory redundancy payment or make or pay any compensation in
respect of unfair dismissal, to make any other payment under any employment
protection legislation or to reinstate or re-engage any former employee;
(ii) no circumstances have arisen under which the Company is likely to be
required to pay damages or compensation, or suffer any penalty or be
required to take corrective action or be subject to any form of discipline
under The Wages Act 1986, The Sex Discrimination Act 1975, The Equal Pay
Act 1970, Article 119 of the Treaty of Rome or The Race Relations Act 1976;
and (iii) all retirement schemes and other employee benefit plans described
in Section 3.9 (m) of the Disclosure Schedule comply with and have at all
times complied with the provisions of relevant legislation and the
requirements of applicable law and the Company has duly complied with its
obligations under such schemes and plans; provided, however, that the
Company represents and warrants as to the matters in this Section 3.9(m)
only to the extent that such matters, individually or in the aggregate,
have a Material Adverse Effect.
3.10 Absence of Certain Changes. Except as disclosed in Section 3.10 of the
Disclosure Schedule, from December 31, 1996 until the date of this Agreement,
the Company and its subsidiaries have conducted their respective businesses and
operations consistent with past practice only in the ordinary course and there
have not occurred (i) any events, changes, or effects (including the incurrence
of any liabilities or obligations of any nature, whether accrued, contingent or
otherwise) having, individually or in the aggregate, a Material Adverse Effect;
(ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to the equity
interests of the Company or of any of its subsidiaries; (iii) any change by the
Company or any of its subsidiaries in accounting principles or methods, except
insofar as may be required by a change in GAAP; (iv) any grant of options or
stock appreciation rights under any Benefit Plan; (v) any change in the
aggregate indebtedness for money borrowed of the Company and its subsidiaries,
except for short-term borrowings incurred in the ordinary course of business and
prepayable at any time in accordance with their terms without penalty, (vi) any
loans, advances or capital contributions to, or investments in, any person other
than any subsidiaries of the Company, except for customary loans or advances to
employees or trade credit in the ordinary course of business, (vii) any sales,
transfers, mortgages
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or other dispositions of, or the imposition of encumbrances on, any business,
subsidiary or assets that are material to the Company and its subsidiaries taken
as a whole, or fixed assets that have an individual value on the Company's books
in excess of $25,000, (viii) any settlements or compromises of any suit, action
or claim in which the amount involved is greater than $25,000 or which is
material to the Company and its subsidiaries taken as a whole or which relates
to the transactions contemplated hereby, (ix) the making of any tax election or
the cancellation or termination of any insurance policy naming it as a
beneficiary or a loss payable payee, without notice to Parent, (x) the taking of
any of the actions specified in Section 5.1(h), except as permitted therein,
(xi) the acquisition of any business or stock, the merger or consolidation with
any person, or the sale, encumbrance or transfer of any business or material
portion thereof, or (xii) any agreement to do any of the foregoing.
3.11 Litigation. Except as disclosed in Section 3.11 of the Disclosure
Schedule, there are no suits, claims, actions, proceedings or investigations
pending or, to the knowledge of the Company, threatened against, the Company or
any of its subsidiaries (i) that, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect, or (ii) to delay
materially or prevent the consummation of the Merger or the other transactions
contemplated hereby.
3.12 Taxes. (a) Except as otherwise disclosed in Section 3.12(a) of the
Disclosure Schedule: (i) the Company and each of its subsidiaries has filed (or
received an appropriate extension of time to file) all federal, state, local,
and foreign Tax Returns required to be filed by them prior to the date hereof,
except for Tax Returns the nonfiling of which would not, individually or in the
aggregate, have a Material Adverse Effect; (ii) since the taxable year from
August 1, 1987 to July 31, 1988, the Company and its subsidiaries have filed
consolidated U.S. federal income tax returns as members of an affiliated group,
the common parent of which is the Company; (iii) all such Tax Returns were true
and correct in all material respects; (iv) the Company and each of its
subsidiaries have paid all Taxes shown to be due on such Tax Returns, and have
made appropriate provisions in the Company's consolidated financial statements
for any Taxes not yet due, or which are being contested in good faith, except
for Taxes the failure to pay which would not have a Material Adverse Effect; (v)
the Company and each of its subsidiaries have withheld and paid over to the
appropriate governmental authority all Taxes required by law to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party, except for
amounts which would not, individually or in the aggregate, have a Material
Adverse Effect; (vi) the Company and each of its subsidiaries have made all
payments of estimated Taxes required to be made under federal, state, local or
foreign law, except for amounts which would not, individually or in the
aggregate, have a Material Adverse Effect; (vii) all tax deficiencies asserted
or assessed against the Company and each of its subsidiaries have been paid or
finally settled or are being contested in good faith; (viii) no claims have ever
been made by any taxing authority in a jurisdiction where the Company and each
of its subsidiaries do not file Tax Returns that it or they is or are or may be
subject to taxation by that jurisdiction; (ix) no waiver or comparable consent
given by the Company or any of its subsidiaries regarding the application of the
statute of limitations with respect to any Taxes or Tax Returns is outstanding,
nor is any request for any such waiver or consent pending; (x) neither the
Company nor any of its subsidiaries is (nor has any of them ever been) a party
to any written tax sharing agreement; (xi) there is no pending, or to the
knowledge of the Company, threatened, action, audit, proceeding or investigation
for the assessment or collection of any Taxes; (xii) there are no requests for
rulings, subpoenas or requests for information pending with respect to any
taxing authority; (xiii) any adjustments of Taxes made by any federal taxing
authority in any examination which is required to be reported by the Company or
any of its subsidiaries to a state, local, or foreign taxing authority have been
reported to the appropriate authority, and any additional Taxes due with respect
thereto have been paid, except for adjustments with respect to which any
additional Taxes due would not, individually or in the aggregate, have a
Material Adverse Effect; (xiv) no power of attorney has been granted by the
Company or any of its subsidiaries, which is currently in force, with respect to
any matter relating to Taxes; and (xv) there are no liens (other than liens for
Taxes that are not yet due or which are being contested in good faith) on any
assets of the Company or any of its subsidiaries that arose in connection with
any failure (or alleged failure) to pay any Tax, except for liens which would
not, individually or in the aggregate, have a Material Adverse Effect.
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(b) (i) Neither the Company nor any of its subsidiaries has made an
election under Section 341(f) of the Code; (ii) neither the Company nor any
of its subsidiaries has made any payments, is obligated to make any
payments, or is a party to any agreement that under certain circumstances
could obligate it to make any payments that will not be deductible under
Section 280G of the Code; (iii) neither the Company nor any of its
subsidiaries has been a United States real property holding company within
the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii); (iv) neither the Company nor any of
its subsidiaries will be required to include in income on a Tax Return
filed after the Effective Time any adjustment pursuant to Section 481(a) of
the Code (or any similar provision of law or regulations) by reason of a
change in accounting method prior to the Effective Time; (v) to the
knowledge of the Company neither the Company nor any of its subsidiaries
has disposed of any property which has been accounted for tax purposes
under the installment method that would require installment gain to be
reflected on a Tax Return filed after the Effective Time; and (vi) neither
the Company nor any of its subsidiaries would be liable for any increase in
Tax under former Section 47 of the Code, were such entity to dispose of all
of its assets at the Effective Time.
(c) For purposes of this Section 3.12, the following terms will have
the following meanings: (i) "Tax" or "Taxes" shall mean any and all
federal, state, local, foreign, and other taxes, levies, fees, imposts,
duties and charges of whatever kind (including any interest, penalties or
additions to the tax imposed in connection therewith or with respect
thereto), whether imposed on the Company or any of its subsidiaries,
including, without limitation, taxes imposed on, or measured by, income,
franchise, profits, or gross receipts, and also ad valorem, value added,
sales, use, service, real or personal property, capital stock, license,
payroll, withholding, employment, social security, workers' compensation,
unemployment compensation, utility, severance, production, excise, stamp,
occupation, premium, windfall profits, transfer, and gains taxes and
customs duties, and (ii) "Tax Return" shall mean returns, reports,
information statements, or other documentation (including any additional or
supporting material) filed or maintained, or required to be filed or
maintained in connection with the calculation, determination, assessment or
collection of any Tax.
3.13 Environmental and Occupational Safety and Health Matters. (a) Except
as disclosed in Section 3.13 (a) of the Disclosure Schedule, the Company and its
subsidiaries do not have any Environmental, Occupational Safety and Health
Liabilities (as defined below) that have a Material Adverse Effect. Except as
disclosed in Section 3.13 (a) of the Disclosure Schedule, the Company does not
know of any Environmental, Occupational Safety and Health Liabilities of any of
the Company's corporate predecessors that have a Material Adverse Effect.
(b) As used in this Agreement, "Environmental, Occupational Safety and
Health Liabilities" with respect to any person means any and all
liabilities of or relating to such person or any of its subsidiaries
(including any entity which is, in whole or in part, a predecessor of such
person or any of its subsidiaries), whether vested or invested, contingent
or fixed, actual or potential, known or unknown, which (i) arise under or
are otherwise covered by Environmental Laws or Occupational Safety and
Health Laws and (ii) relate to actions occurring or conditions existing on
or prior to the date of this Agreement. "Environmental Laws" means any and
all applicable federal, state, local and foreign, international,
multinational or other administrative statutes, laws, regulations,
ordinances, rules, and, to the extent directed in writing to the Company,
any of its subsidiaries, or any corporate predecessor, judgments, orders,
decrees, codes, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and governmental restrictions relating to
the environment or to emissions, discharges or releases of Hazardous
Materials into the environment, including without limitation ambient air,
indoor air, natural resource, surface water, ground water, drinking water
supply, sediments, wetlands, soil or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials or the clean-up or other
remediation thereof. "Hazardous Materials" means any (i) "hazardous
substance," "pollutant," or "contaminant" (as defined in Sections 101(14)
and (33) of the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended (42 U.S.C. Section 9601 et seq.) ("CERCLA") or
the regulations issued pursuant to Section 102 of CERCLA and found at 40
C.F.R. Section 302), including any element, compound, mixture, solution, or
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substance that is designated pursuant to Section 102 of CERCLA; (ii)
substance that is designated pursuant to Section 311(b)(2)(A) of the
Federal Water Pollution Control Act, as amended (33 U.S.C. Sections 1251
and 1321(b)(2)(A)) ("FWPCA"); (iii) hazardous waste having the
characteristics identified under or listed pursuant to Section 3001 of the
Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901
and 6921) ("RCRA"); (iv) substance containing petroleum, as that term is
defined in Section 9001(8) of RCRA; (v) toxic pollutant that is listed
under Section 307(a) of the FWPCA; (vi) hazardous air pollutant that is
listed under Section 112 of the Clean Air Act, as amended (42 U.S.C.
Sections 7401 and 7412); (vii) imminently hazardous chemical substance or
mixture with respect to which action has been taken pursuant to Section 7
of the Toxic Substances Control Act, as amended (15 U.S.C. Sections 2601
and 2606); (viii) source, special nuclear, or by-product material as
defined by the Atomic Energy Act of 1954, as amended (42 U.S.C. Section
2011 et seq.); (ix) asbestos, asbestos-containing material, or urea
formaldehyde or material that contains urea formaldehyde; (x) waste oil and
other petroleum products; and (xi) any toxic materials, contaminants, or
hazardous substances or wastes regulated, listed, defined or classified
under or pursuant to any other Environmental Law. "Occupational Safety and
Health Laws" means any and all applicable federal, state, local and
foreign, international, multinational or other administrative statutes,
laws, regulations, ordinances, rules, and, to the extent directed in
writing to the Company, any of its subsidiaries, or any corporate
predecessor, judgments, orders, decrees, codes, plans, injunctions,
permits, concessions, grants, franchises, licenses, agreements and
governmental restrictions designed to provide or promote safe and healthful
working conditions and to reduce occupational safety and health hazards in
the workplace.
(c) Except as disclosed in Section 3.13 (c) of the Disclosure
Schedule, neither the Company nor any of its subsidiaries has violated, or
has received any actual or threatened claim, order, notice, inquiry,
inspection request or other written communication from anyone that alleges
that the Company or any of its subsidiaries is not in compliance with or is
otherwise liable under any Environmental Law or any Occupational Safety and
Health Law, except for violations, noncompliance or liability that would
not, individually or in the aggregate, have a Material Adverse Effect.
Except as disclosed in Section 3.13(c) of the Disclosure Schedule, the
Company does not know of any actual or threatened claim, order, notice,
inquiry, inspection request or other written communication from anyone that
alleges that any of the Company's corporate predecessors was not in
compliance with or is otherwise liable for noncompliance under any
Environmental Law or any Occupational Safety and Health Law, except for
noncompliance or liability that would not, individually or in the
aggregate, have a Material Adverse Effect.
(d) Except as disclosed in Section 3.13 (d) of the Disclosure
Schedule, and except as, individually or in the aggregate, would not have a
Material Adverse Effect, the Company and its subsidiaries have all permits,
licenses, consents, approvals, and other authorizations required under
Environmental Laws and Occupational Safety and Health Laws that are
necessary to the existing operations of the Company and its subsidiaries
("Authorizations"). Schedule 3.13 (d) of the Disclosure Schedule contains a
complete and accurate list of each material Authorization, and an
indication that it is valid and in full force and effect, its expiration
date, and any notice, transfer or other obligations triggered by this
proposed transaction.
(e) Notwithstanding any other provisions of this Agreement, including,
but not limited to, Sections 3.11 and 3.17, the sole and exclusive
representations and warranties of the Company with respect to environmental
matters and occupational safety and health matters (including, without
limitation, Environmental, Occupational Safety and Health Liabilities) are
set forth in this Section 3.13.
3.14 Opinion of Financial Advisor. The Company has received the written
opinion of Cowen & Company, its financial advisor, to the effect that the
consideration to be received in the Merger by the Company's shareholders is fair
to the Company's shareholders, other than Biofin, from a financial point of
view, a copy of which opinion has been delivered to Parent.
3.15 Certain Anti-takeover Provisions Not Applicable. The Board of
Directors and the Special Committee have each approved the Merger and this
Agreement, such Special Committee has been duly constituted pursuant to Section
302A.673 of the MBCA and consists only of, and includes all, disinterested
directors as
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defined therein and such approval by the Special Committee is sufficient to
render inapplicable to this Agreement and the Merger the restrictions on
business combinations (as defined in Section 302A.011 of the MBCA) contained in
Section 302A.673 of the MBCA. The Merger does not constitute a "control share
acquisition" subject to the provisions of Section 302A.671 of the MBCA, by
virtue of Section 302A.011, Subd. 38(d) of the MBCA. Except for any state
takeover statutes (of a state or states other than Minnesota), the purported
application of which would not reasonably be expected to prevent or materially
delay the Merger, no other state takeover statute or similar statute or
regulation in any jurisdiction in which the Company or any of its subsidiaries
does business, applies or purports to apply to the Merger or to this Agreement,
or any of the transactions contemplated hereby. The representations and
warranties contained in this Section 3.15 are based upon the assumption of the
accuracy of the representations contained in Section 4.8 hereof.
3.16 Intellectual Property. (a) Section 3.16(a)-Part I of the Disclosure
Schedule sets forth an accurate list of all patents, patent applications,
registered trademarks, registered trade names, and other material trademarks,
registered service marks, registered trade names, and registered copyrights
which are owned by the Company and/or its subsidiaries and used in the conduct
of their business. Section 3.16(a) -- Part II of the Disclosure Schedule sets
forth an accurate list of all licenses to the Company and/or its subsidiaries
licensing rights under patents, patent applications and/or know-how used by the
Company and/or its subsidiaries in the conduct of their business. There are no
patents, patent applications, registered trademarks, registered service marks or
registered trade names or other material trademarks, registered service marks or
registered trade names used by the Company and/or its subsidiaries in the
conduct of their business which are not listed in Section 3.16(a) of the
Disclosure Schedule. To the knowledge of the Company, all the patents and
registered trademarks listed in Section 3.16(a) of the Disclosure Schedule are
valid. All patents, patent applications and registered trademarks listed in
Section 3.16(a) of the Disclosure Schedule are in good standing. All fees
(including annuity fees) due to applicable patent and trademark offices in
respect to such patents, patent applications, and registered trademarks and
payable by the Closing Date have been paid or will be paid prior to the Closing
Date. All renewals of registered trademarks listed in Section 3.16(a) of the
Disclosure Schedule have been effected in due time. To the knowledge of the
Company, no third party is infringing any patent, trademark, trade name or
service mark set forth in Section 3.16(a) of the Disclosure Schedule.
(b) No claim has been made by any third party to the Company and/or
its subsidiaries that any patent, trademark, trade name or service mark set
forth in Section 3.16(a) of the Disclosure Schedule is invalid or that the
exercise of the rights thereto constitutes any form of unfair competition.
(c) None of the Company nor any of its subsidiaries has done or
committed any act that to the knowledge of the Company has impaired or will
impair the validity of the patents, trademarks, service marks and trade
names set forth in Section 3.16(a) of the Disclosure Schedule so as to have
a Material Adverse Effect.
(d) Except as set forth in Section 3.16(d) of the Disclosure Schedule,
the Company and/or its subsidiaries have not granted any license(s) under
any of the patents, patent applications, trade marks, service marks or
trade names set forth in Section 3.16(a) of the Disclosure Schedule. The
Company and/or its subsidiaries own or have acquired a right from third
parties to use all know-how used by the Company and/or its subsidiaries in
the conduct of their business and such rights will not be impaired by the
Merger or the consummation of the other transactions contemplated hereby.
(e) No claims for infringement of any patents, trademarks, trade names
or service marks are pending or known by the Company and/or its
subsidiaries to be threatened in writing (i) against the Company and/or its
subsidiaries, or (ii) to the knowledge of the Company, with respect to any
of the products of the Company and/or its subsidiaries (other than products
sold pursuant to the agreements listed in Section 3.16(a) -- Part II(B)),
against any of their respective customers.
3.17 Licenses and Permits. (a) The Company and its subsidiaries have all
governmental licenses and permits necessary to conduct their business as
currently conducted and to own and operate their assets, and such licenses and
permits are valid and in full force and effect except where the failure to have
such governmental licenses and permits would not have a Material Adverse Effect.
No defaults or violations exist or
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have been recorded in respect of any governmental license or permit of the
Company and its subsidiaries other than defaults or violations which would not
have a Material Adverse Effect. Except to the extent it would not reasonably be
expected to have a Material Adverse Effect, no proceeding is pending or, to the
knowledge of the Company, threatened looking toward the revocation, limitation
or non-renewal of any such governmental license or permit.
(b) The Company has delivered or made available for inspection to
Parent a true and complete copy of each material governmental license and
permit, and each pending application for any material governmental license
or permit, including all amendments and supplements thereto and
modifications thereof, relating to the Company and its subsidiaries. Except
to the extent that they would not reasonably be expected to have a Material
Adverse Effect, (i) all of such pending applications are, to the knowledge
of the Company, in good standing and without challenge of any kind; (ii)
each statement, application and other document submitted or filed by the
Company or any subsidiary to or with any federal, state or other
governmental agency or authority, or to or with any other person or entity,
for purposes of obtaining a new or renewed lease, license or permit of any
type described in this subsection in connection with the transactions
contemplated hereby is complete and accurate; and (iii) subject to the
receipt of any consents specified in Section 3.4 of the Disclosure
Schedule, none of the rights of the Company or any subsidiary under any
governmental license or permit will be impaired by the consummation of the
Merger or the other transactions contemplated hereby.
3.18 Insurance. As of the date hereof, the Company and each of its
subsidiaries are insured by insurers, reasonably believed by the Company to be
of recognized financial responsibility and solvency, against such losses and
risks and in such amounts as are customary in the businesses in which they are
engaged. All material policies of insurance and fidelity or surety bonds
insuring the Company or any of its subsidiaries or their respective business,
assets, employees, officers and directors have previously been made available
for inspection by Parent and are in full force and effect. As of the date
hereof, there are no material claims by the Company or any subsidiary under any
such policy or instrument as to which any insurance company is denying liability
or defending under a reservation of rights clause. All necessary notifications
of claims have been made to insurance carriers other than those which will not
have a Material Adverse Effect.
3.19 Contracts. All contracts, agreements, commitments and other documents
to which the Company or any subsidiary is a party or by which the Company, any
subsidiary, or any of their assets is in any way affected or subject, including
all amendments and supplements thereto and modifications thereof, of a nature
specified in Exhibit C hereto (collectively, the "Material Contracts"), are
legally valid and binding and in full force and effect except where failure to
be legally valid and binding and in full force and effect would not have a
Material Adverse Effect, and there are no defaults thereunder by the Company or
its subsidiaries or, to the Company's knowledge, by any other party thereto,
except those defaults that would not have a Material Adverse Effect. The Company
has previously made available for inspection by Parent all written Material
Contracts (and, to the extent a Material Contract is oral, a true and complete
summary of all material terms thereof).
3.20 Vote Required. The affirmative vote of the holders of a majority of
the outstanding Shares is the only vote of the holders of any class or series of
the Company's capital stock necessary to approve the Merger, this Agreement and
the transactions contemplated hereby (assuming for purposes of this
representation, the accuracy of the representations contained in Section 4.8
hereof).
3.21 Finders and Investment Bankers. All negotiations relating to this
Agreement and the transactions contemplated hereby have been carried on without
the intervention of any person acting on behalf of the Company in such manner as
to give rise to any valid claim against Parent, Holdings, Mergeco or the Company
for any broker's or finder's fee or similar compensation, except for Cowen &
Company, whose fees (which have been described in a writing furnished by the
Company to Parent) shall be paid by the Company.
3.22 Real Property and Leases. (a) Section 3.22(a) of the Disclosure
Schedule lists and describes briefly all real property owned by the Company or
any of its subsidiaries. With respect to each such parcel of owned real property
and except as noted in Section 3.22(a) of the Disclosure Schedule: (i) the
identified owner has good and valid title to the parcel of real property, free
and clear of any lien, encumbrance, easement, covenant,
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or other restriction, except for taxes not yet delinquent or special assessments
and other governmental charges not yet delinquent or which may thereafter be
paid without penalty or which are being contested in good faith by appropriate
proceedings and for which appropriate reserves have been taken (all of which are
listed in Section 3.22(a) of the Disclosure Schedule), recorded easements,
covenants, and other restrictions, and utility easements, building restrictions,
zoning restrictions, inchoate mechanic's and workmen's and other similar liens
arising in the ordinary course of business and other easements, restrictions,
liens and encumbrances (other than purchase money liens and liens for money
borrowed) which do not affect materially and adversely the current use,
occupancy, or value, or the marketability of title, of the property subject
thereto, (ii) there are no leases, subleases, licenses, concessions, or other
agreements, written or oral, granting to any party or parties the right of use
or occupancy of any portion of the parcel of real property that would materially
interfere with the Company's use of such property, and (iii) there are no
outstanding options or rights of first refusal to purchase, lease or occupy the
parcel of real property, or any portion thereof or interest therein which would
materially interfere with the Company's use of such property.
(b) Section 3.22(b) of the Disclosure Schedule lists and describes
briefly all real property leased or subleased to the Company or any of its
subsidiaries. With respect to each lease and sublease (i) the lease or
sublease is legal, valid, binding and enforceable by the Company or such
subsidiary, and in full force and effect in all material respects, (ii)
except as set forth in Section 3.22(b) of the Disclosure Schedule neither
the Company nor any of its subsidiaries, and, to the Company's knowledge,
no other party to the lease or sublease is in material breach or default,
and no event has occurred which, with notice or lapse of time, would
constitute a material breach or default or permit termination,
modification, or acceleration thereunder, (iii) neither of the Company nor
any of its subsidiaries and, to the knowledge of the Company, no other
party to the lease or sublease has repudiated any material provision
thereof, (iv) there are no material disputes, oral agreements, or
forbearance programs in effect as to the lease or sublease, (v) neither the
Company nor any of its subsidiaries has assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the leasehold or
subleasehold (except encumbrances of a nature described in clause (i) of
Section 3.22(a) hereof), and (vi) to the knowledge of Company, all
facilities leased or subleased thereunder have received all approvals of
governmental authorities (including material licenses and permits) legally
required, except where the failure to obtain such approvals would not have
a Material Adverse Effect.
3.23 No Other Representations and Warranties. The Company represents and
warrants that it is not relying upon any representations and warranties of
Parent, Holdings or Mergeco that are not contained in this Agreement or in the
Exhibits hereto and agrees that there shall not be deemed to be any other
express or implied representations or warranties made by or on behalf of Parent,
Holdings or Mergeco in connection with the Merger or the other transactions
contemplated by this Agreement (which includes the Exhibits hereto).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGECO
Parent and Mergeco each jointly and severally represent and warrant to the
Company as follows:
4.1 Organization. Each of Parent, Holdings and Mergeco is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and each has all requisite corporate power and
corporate authority to own, lease and operate its properties and to conduct its
business as now being conducted, except where the failure to be so organized,
existing and in good standing or to have such power and authority would not,
individually or in the aggregate, have a material adverse effect on the business
or financial condition of Parent and its subsidiaries taken as a whole. Each of
Parent, Holdings and Mergeco is duly qualified or licensed and in good standing
to do business in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified or licensed
and in good standing would not individually or in the aggregate have a material
adverse effect on the business or financial condition of Parent and its
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subsidiaries taken as a whole. Holdings is a wholly owned subsidiary of Parent,
and Mergeco is a wholly-owned subsidiary of Holdings.
4.2 Authorization of this Agreement. Each of Parent, Holdings and Mergeco
has all requisite corporate power and corporate authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized and
approved by the Boards of Directors of Parent, Holdings and Mergeco and by
Holdings as the sole shareholder of Mergeco, and no other corporate proceedings
on the part of Parent, Holdings or Mergeco are necessary to authorize this
Agreement or consummate the transactions contemplated hereby. No vote of
Parent's shareholders is required to approve this Agreement or the transactions
contemplated thereby. This Agreement has been duly and validly executed and
delivered by each of Parent, Holdings and Mergeco and, assuming the accuracy of
the representations and warranties set forth in Section 3.3, constitutes a valid
and binding agreement of Parent, Holdings and Mergeco enforceable against each
of Parent, Holdings and Mergeco in accordance with its terms.
4.3 Consents and Approvals; No Violations. Except for (i) compliance with
any applicable requirements of the Exchange Act, (ii) compliance with any
applicable requirements of the HSR Act, (iii) the filing and recordation of the
Articles of Merger with the Minnesota Secretary of State, (iv) filings under the
securities or blue sky laws or takeover laws of the various states (other than
Minnesota), (v) filings required under the listing requirements of the NASD and
the Nasdaq National Market and (vi) filings in connection with any applicable
transfer or other taxes in any applicable jurisdiction, no filing with, and no
permit, authorization, consent or approval of, any public body or other
governmental authority is necessary for the consummation by Parent, Holdings and
Mergeco of the transactions contemplated by this Agreement, the failure of which
to obtain is reasonably likely to impair the ability of Parent, Holdings or
Mergeco to perform their respective obligations hereunder or to consummate the
transactions contemplated hereby. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby nor
compliance by Parent, Holdings or Mergeco with any of the provisions hereof will
(i) conflict with or result in any violation of any provision of the Certificate
or Articles of Incorporation or By-Laws of Parent, Holdings or Mergeco, (ii)
result in a violation or breach of, or constitute a default (or give rise to any
right of termination, cancellation or acceleration) under, any note, bond,
mortgage, indenture, license, agreement or other instrument or obligation to
which Parent or any of its subsidiaries is a party, or by which any of them or
any of their respective properties or assets is bound, or (iii) assuming the
truth of the representations and warranties of the Company hereunder and its
compliance with all agreements contained herein and assuming the due making or
obtaining of all filings, permits, authorizations, consents and approvals
referred to in the preceding sentence, violate any statute, rule, regulation,
order, injunction, writ or decree of any public body or authority by which
Parent or any of its subsidiaries or any of their respective properties or
assets is bound, excluding from the foregoing clauses (ii) and (iii) violations,
breaches or defaults which, either individually or in the aggregate, are not
reasonably likely to impair the ability of Parent, Holdings or Mergeco to
perform their respective obligations hereunder or to consummate the Merger or
the other transactions contemplated hereby.
4.4 Proxy Statement. None of the information supplied or to be supplied in
writing by Parent, Holdings or Mergeco specifically for inclusion in the Proxy
Statement will, at the time the Proxy Statement is mailed, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading or, at the time of
the meeting of shareholders to which such Proxy Statement relates or at the
Effective Time, as then amended or supplemented, omit to state any material fact
necessary to correct any statement which has become false or misleading in any
earlier communication with respect to the solicitation of any proxy for such
meeting. If at any time prior to the Effective Time, any event relating to
Parent or any of its subsidiaries is discovered which should be set forth in an
amendment of, or a supplement to, such Proxy Statement, Parent shall promptly so
inform the Company and will furnish all necessary information to the Company
relating to such event.
4.5 Financial Ability to Perform. Parent and Mergeco have cash funds
available sufficient to make all cash payments required to be made hereby for
Shares in the Merger and to pay all related fees and expenses.
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4.6 Finders and Investment Bankers. All negotiations relating to this
Agreement and the transactions contemplated hereby have been carried on without
the intervention of any person acting on behalf of Parent, Holdings or Mergeco
in such manner as to give rise to any valid claim against Parent, Holdings,
Mergeco or the Company for any broker's or finder's fee or similar compensation,
except for Goldman, Sachs & Co., whose fees shall be paid by Parent.
4.7 Litigation. There are no suits, claims, actions, proceedings or
investigations pending or, to the knowledge of Parent, threatened against,
Parent, Holdings or Mergeco that, individually or in the aggregate, would
reasonably be expected to delay materially or prevent the consummation of the
Merger or the other transactions contemplated hereby.
4.8 Certain Anti-takeover Provisions Not Applicable. Neither Parent,
Holdings nor Mergeco nor any affiliate or associate of any of the foregoing
persons was an "interested shareholder" of the Company as defined in Section
302A.011, Subd. 49(a) of the MBCA immediately prior to Parent's, Holdings' and
Mergeco's execution and delivery of this Agreement.
4.9 No Other Representations and Warranties. Parent, Holdings and Mergeco
represent and warrant that they are not relying upon any representations and
warranties of the Company that are not contained in this Agreement or in the
Exhibits hereto or in the Disclosure Schedule and agree that there shall not be
deemed to be any other express or implied representations or warranties made or
on behalf of the Company in connection with the Merger or the other transactions
contemplated by this Agreement (which includes the Exhibits hereto and the
Disclosure Schedule).
ARTICLE V
COVENANTS
5.1 Conduct of the Business of the Company. Except as contemplated by this
Agreement, during the period from the date of this Agreement to the Effective
Time, the Company and its subsidiaries will each conduct its operations in all
material respects according to its ordinary course of business, and will use all
reasonable efforts to preserve intact its business organization and to maintain
its relationships with suppliers, distributors, customers and others having
business relationships with it. The Company will confer at Parent's request on a
regular and frequent basis with representatives of Parent to report upon the
status of operations. Without limiting the generality of the foregoing, and
except as otherwise expressly contemplated by this Agreement, prior to the
Effective Time, neither the Company nor any of its subsidiaries will, without
the prior written consent of Parent:
(a) amend its Articles of Incorporation or Amended By-Laws (or
equivalent instruments);
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
additional options, warrants, commitments, subscriptions, rights to
purchase or otherwise) any shares of capital stock of any class (including,
without limitation, the Shares) or any securities convertible into shares
of capital stock of any class, or designate any class or series of shares
of capital stock of the Company from the undesignated shares of capital
stock of the Company;
(c) split, combine or reclassify any shares of its capital stock
(including, without limitation, the Shares), declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem or
otherwise acquire any shares of its capital stock; provided, however, that
any of the Company's wholly-owned subsidiaries may declare, set aside or
pay any dividend or other distribution with respect to their capital stock;
(d) (i) create, incur or assume any indebtedness for money borrowed
(including obligations in respect of capital leases), except for short-term
borrowings incurred in the ordinary course of business and prepayable at
any time in accordance with their terms without penalty; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any person
other than any subsidiary of the Company; or (iii) make any loans, advances
or
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capital contributions to, or investments in, any person other than any of
the subsidiaries of the Company, except for customary loans or advances to
employees or trade credit in the ordinary course of business;
(e) except in the ordinary course of business, sell, transfer,
mortgage or otherwise dispose of or encumber, any business, subsidiary,
assets that are material to the Company and its subsidiaries taken as a
whole, or fixed assets that individually have a value on the Company's
books in excess of $25,000;
(f) settle or compromise any pending or threatened suit, action or
claim in which the amount involved is greater than $25,000 or which is
material to the Company and its subsidiaries taken as a whole or which
relates to the transactions contemplated hereby or modify, amend or
terminate any of its Material Contracts in any material respects or waive,
release or assign any material rights or claims;
(g) make any material tax election or any material accounting charge
or permit any insurance policy naming it as a beneficiary or a loss payable
payee to be canceled or terminated without notice to Parent;
(h) except for (A) increases in salaries, bonuses and severance
benefits as contemplated in Section 5.1(h) of the Disclosure Schedule, (B)
salary and wage increases and bonuses in the ordinary course of business
and (C) salary and wage increases that may be required by law, grant any
material increase in the compensation payable or to become payable to any
of its officers or employees or establish, adopt, enter into, make any new
grants or awards under, be obligated to grant any awards under, or amend,
any collective bargaining, bonus, profit sharing, thrift, compensation,
stock option or other equity, pension, retirement, incentive or deferred
compensation, employment, retention, termination, severance, health, life
or other welfare, fringe or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any current or former directors, officers or
employees, or grant or pay any benefit not required by any existing plan or
arrangement;
(i) change any of the accounting principles used by it, unless
required by GAAP;
(j) acquire any business or stock, merge or consolidate with any other
person or sell, encumber or otherwise transfer any business or material
portion thereof;
(k) other than in the ordinary course of business, enter into any
Material Contracts; or
(l) agree to do any of the foregoing.
5.2 Access to Information. From the date hereof to the Effective Time, the
Company shall, and shall cause its subsidiaries, officers, directors, employees,
auditors and other agents to, afford the officers, employees, auditors and other
agents of Parent, and to representatives of and advisors to financing sources,
complete access at all reasonable times to its officers, employees, agents,
properties, offices, plants and other facilities and to all books, records and
contracts, and shall furnish Parent and such financing sources with all
financial, operating and other data and information as Parent, through its
officers, employees or agents, or such financing sources may from time to time
request. The Company will promptly furnish to Parent a copy of each document
filed or received by it pursuant to the Federal securities laws or Federal or
state tax laws or any Environmental Laws, and of such other documents as Parent
may reasonably request. All information obtained by Parent pursuant to this
Section 5.2 shall be kept confidential in accordance with the confidentiality
agreement dated as of November 1, 1996 (the "Confidentiality Agreement"),
between Parent and the Company.
5.3 Shareholder Approval. (a) As soon as practicable following the
execution of this Agreement, the Company, acting through its Board of Directors,
shall in accordance with applicable law, and subject to the fiduciary duties of
the Board of Directors under applicable law as advised by outside counsel, take
all steps necessary duly to call, set a record date for, give notice of, convene
and hold a meeting of its shareholders for the purpose of voting upon the
adoption and approval of this Agreement and the Merger and the other
transactions contemplated hereby.
(b) The Company will, as promptly as practicable, prepare and file a
Proxy Statement with the SEC, and shall use all reasonable efforts to
obtain and furnish the information required to be included by
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it in the Proxy Statement and, after consultation with Parent, to respond
promptly to any comments made by the SEC with respect to the Proxy
Statement and any preliminary version thereof and cause the Proxy Statement
to be mailed to its shareholders in accordance with the provisions of the
MBCA. Subject to their fiduciary duties under applicable law as advised by
outside counsel, the Board of Directors and the Special Committee will (i)
recommend to shareholders of the Company the adoption and approval of this
Agreement and the transactions contemplated hereby and the other matters to
be submitted to such shareholders in connection therewith and (ii) solicit
proxies for the necessary approvals by such shareholders of this Agreement
and the Merger and the other transactions contemplated hereby.
5.4 All Reasonable Efforts. Subject to the terms and conditions herein
provided and the fiduciary duties of the Board of Directors under applicable
law, as advised by outside counsel, each of the parties hereto agrees to use all
reasonable efforts consistent with applicable legal requirements to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary or proper and advisable under applicable laws and regulations to
ensure that the conditions set forth in Article VI hereof are satisfied and to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by this Agreement.
5.5 Consents. Parent and the Company each shall use all reasonable efforts
to obtain all material consents of third parties and governmental authorities,
and to make all governmental filings, necessary to the consummation of the
transactions contemplated by this Agreement. The Company, Parent and Mergeco
shall as soon as practicable file Pre-Merger Notification and Report Forms under
the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Department of Justice (the "Antitrust Division") and shall use
all reasonable efforts to respond as promptly as practicable to all inquiries
received from the FTC or the Antitrust Division for additional information or
documentation.
5.6 Public Announcements. Parent and the Company will consult with each
other before issuing any press release or otherwise making any public statements
with respect to the Merger and shall not issue any such press release or make
any such public statement prior to such consultation, except as may be required
by law or by obligations pursuant to any listing agreement with any national
securities exchange or automated interdealer quotation system.
5.7 Consent of Holdings. Holdings, as the sole shareholder of Mergeco, by
executing this Agreement consents to the execution and delivery of this
Agreement by Mergeco and the consummation of the Merger and the other
transactions contemplated hereby and such consent shall be treated for all
purposes as a vote duly cast at a meeting of the shareholders of Mergeco held
for such purpose.
5.8 No Solicitation. (1) From and after the date hereof until the earlier
of the Effective Time or the termination of this Agreement, neither the Company
nor any of its subsidiaries nor any of their respective officers, directors,
employees, agents or representatives (including, without limitation, investment
bankers, attorneys and accountants) shall, directly or indirectly, (i) solicit,
initiate or encourage or (ii) enter into any discussions or negotiations with,
in any way continue any discussions or negotiations commenced before the date of
this Agreement with, or disclose directly or indirectly any information not
customarily disclosed concerning its business and properties to, or afford any
access to its properties, books and records to, any corporation, partnership or
other person or group in connection with any possible proposal (an "Acquisition
Proposal") regarding a sale of all or any part of the Company's capital stock or
a merger, consolidation or statutory share exchange involving the Company or any
subsidiary of the Company or sale or spin-off of all or a substantial portion of
the assets of the Company or any subsidiary of the Company which is material to
the Company and its subsidiaries taken as a whole, or a liquidation or a
recapitalization of the Company, or any similar transaction; provided that (x)
in response to an Acquisition Proposal made without such solicitation,
initiation or encouragement, the Company may (if the Board of Directors shall
have concluded in good faith, based on the advice of outside counsel that any
action is required for the Board of Directors to comply with its fiduciary
duties under applicable law) (i) furnish information with respect to the Company
to any person pursuant to a confidentiality agreement no more favorable to such
person than the Confidentiality Agreement is to Parent and (ii) participate in
negotiations regarding such Acquisition Proposal and (y) the Board of Directors
shall be free to take and disclose any position with respect to a third party
offer pursuant to
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Rules 14d-9 and 14e-2 under the Exchange Act and make such disclosures to the
Company's shareholders, which, upon the advice of outside counsel, is required
by applicable law. The Company will notify Parent immediately, orally and in
writing, if any discussions or negotiations are sought to be initiated, any
inquiry or proposal is made, or any such information is requested, with respect
to an Acquisition Proposal or potential Acquisition Proposal or if any
Acquisition Proposal is received or indicated to be forthcoming, and will
include in such notification the identity of the other party or parties and the
material terms and conditions of any such request, inquiry or Acquisition
Proposal. The Company will keep Parent fully informed of the status and details
(including amendments or proposed amendments) of any such request, inquiry or
Acquisition Proposal.
(b) If the Board of Directors, after consultation with and based upon
the advice of outside counsel, determines in good faith that it is
necessary to do so in order to comply with its fiduciary duties under
applicable law, the Board of Directors, (i) may modify or amend its
approval or recommendation of this Agreement or Merger, (ii) approve or
recommend any Superior Proposal (as hereinafter defined) or (iii) following
the termination of this Agreement in accordance with its terms, enter into
an agreement with respect to a Superior Proposal; provided, however, in
case of clauses (ii) and (iii) only at a time after the second business day
after Parent's receipt of written notice from the Company advising Parent
of the Company's receipt of a Superior Proposal, specifying the material
terms and conditions of such Superior Proposal and identifying the person
making such Superior Proposal. For purposes of this Agreement, a "Superior
Proposal" means a proposal to acquire, directly or indirectly, more than
50% of the Shares or all or any substantial portion of the consolidated
assets of the Company and its subsidiaries and otherwise on terms that the
Board of Directors determines in its good faith judgment (based on the
advice of a financial advisor of nationally recognized reputation) to be
more favorable to the Company's shareholders than the Merger.
5.9 Indemnification. (a) For a period of six years after the Effective
Time, the Surviving Corporation shall indemnify, defend and hold harmless the
present and former officers, directors, employees and committee members of the
Company and its subsidiaries (collectively, the "Indemnified Parties") from and
against, and pay or reimburse the Indemnified Parties for judgments, penalties,
fines, settlements and expenses, including attorneys fees and disbursements
resulting from or arising out of actions or omissions occurring at or prior to
the Effective Time (including, without limitation, the transactions contemplated
by this Agreement) by such persons in their capacities as officers, directors,
employees or committee members of the Company or any of its subsidiaries to the
full extent permitted or required under applicable law and to the extent
permitted under the provisions of the Articles of Incorporation and the Amended
By-Laws of the Company in effect at the date hereof (which provisions shall not
be amended in any manner which adversely affects any Indemnified Party, for a
period of six years), including provisions relating to advances of expenses
incurred in the defense of any proceeding; provided that in the event any claim
or claims are asserted or made within such six-year period, all rights to
indemnification in respect of each such claim shall continue until final
disposition of such claim.
(b) Any Indemnified Party wishing to claim indemnification under
Section 5.9(a) shall provide notice to the Surviving Corporation promptly
after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and the Indemnified Party shall permit the
Surviving Corporation (at the Surviving Corporation's expense) to assume
the defense of any claim or any litigation resulting therefrom; provided
that (i) counsel for the Surviving Corporation who shall conduct the
defense of such claim or litigation shall be reasonably satisfactory to the
Indemnified Party, and the Indemnified Party may participate in such
defense at such Indemnified Party's expense, and (ii) the omission by any
Indemnified Party to give notice as provided herein shall not relieve the
Surviving Corporation of its indemnification obligation under this
Agreement except to the extent that such omission results in a failure of
actual notice to the Surviving Corporation and the Surviving Corporation is
materially damaged as a result of such failure to give notice. The
Surviving Corporation shall not, in the defense of any such claim or
litigation, except with the consent of the Indemnified Party, consent to
entry of any judgment or enter into any settlement that provides for
injunctive or other nonmonetary relief affecting the Indemnified Party or
that does not include as an unconditional term thereof the giving by
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the claimant or plaintiff to such Indemnified Party of a release from all
liability with respect to such claim or litigation. In the event that the
Surviving Corporation does not accept the defense of any matter as above
provided, or counsel for the Indemnified Parties advises that there are
issues which raise conflicts of interest between the Surviving Corporation
and the Indemnified Parties, the Indemnified Parties may retain counsel
satisfactory to them, and the Surviving Corporation shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided that the Surviving
Corporation shall not be liable for any settlement effected without its
prior written consent (which consent shall not be unreasonably withheld,
provided that such settlement does not in any way require the Surviving
Corporation to make any admission of liability with respect to such claim
or litigation). In any event, the Surviving Corporation and the Indemnified
Parties shall cooperate in the defense of any action or claim subject to
this Section 5.9 and the records of each shall be available to the other
with respect to such defense.
(c) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect either (i) the current
policy of directors' and officers' liability insurance maintained by the
Company (provided that Parent or the Surviving Corporation may substitute
therefor policies of at least the same coverage and amounts containing
terms and conditions which are no less advantageous in any material
respects to the Indemnified Parties) with respect to claims arising from
facts or events which occurred before the Effective Time; provided,
however, that in no event shall the Surviving Corporation be required to
expend pursuant to this Section 5.9(c)(i) more than an amount per year
equal to 150% of the current annual premium (which current annual premium
for the policy year ending September 1, 1997 the Company represents and
warrants to be approximately $47,355 in the aggregate) paid by the Company
for such existing insurance coverage (the "Cap"); and provided, further,
that if equivalent coverage cannot be obtained, or can be obtained only by
paying an annual premium in excess of the Cap, the Surviving Corporation
shall only be required to obtain as much coverage as can be obtained by
paying an annual premium equal to the Cap, or (ii) a run-off (i.e., "tail")
policy or endorsement with respect to the current policy of directors' and
officers' liability insurance covering claims asserted within six years
after the Effective Time arising from facts or events which occurred before
the Effective Time.
(d) The provisions of this Section 5.9 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of the Surviving Corporation.
5.10 Transfer Taxes. The Surviving Corporation shall pay any transfer Taxes
payable in connection with the Merger and shall be responsible for the
preparation and filing of any required Tax Returns with respect to such Taxes.
5.11 Anti-takeover Statutes. If any "fair price", "moratorium", "control
share acquisition" or other form of anti-takeover statute is or shall become
applicable to the Merger or the other transactions contemplated hereby, the
Company and the members of the Board of Directors and the Special Committee
shall, subject to their fiduciary duties under applicable law as advised by
outside counsel, grant such approvals and take such actions as are necessary so
that the Merger and the other transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of any such anti-takeover
statute on the transactions contemplated hereby.
5.12 Notification of Certain Matters. The Company will give prompt notice
to Parent and Mergeco, and Parent and Mergeco will give prompt notice to the
Company, of the occurrence or non-occurrence of any event (i) which has had a
Material Adverse Effect, (ii) which has caused any representation or warranty
contained in this Agreement to be untrue or inaccurate or (iii) which has caused
any failure of the Company, or of Parent or Mergeco, as the case may be, to in
all material respects comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied under this Agreement; provided,
however, that the delivery of any notice pursuant to this Section 5.12 will not
limit or otherwise affect the remedies available under this Agreement to the
party receiving such notice.
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5.13 Certain Resignations. The Company will use all reasonable efforts to
assist Parent in procuring the resignation of all of the members of the Board of
Directors and the directors of all of the Company's subsidiaries effective as of
the Effective Time.
5.14 Employee matters. (a) For a period of two years after the Effective
Time, Parent shall cause the Surviving Corporation (i) to continue to maintain
the Company's individual base salaries (as in effect immediately prior to the
Effective Time) for each employee residing in the United States and actively
employed full-time by the Company immediately prior to the Effective Time as
long as that employee continues to be actively employed full-time by the
Surviving Corporation in the same capacity as such employee was actively
employed full-time by the Company immediately prior to the Effective Time and
(ii) to maintain welfare and pension benefit plans, programs and arrangements
(other than stock based plans, programs and arrangements) which, in the
aggregate, for the employees as a whole who were active full-time employees of
the Company immediately prior to the Effective Time and continue to be active
full-time employees of the Surviving Corporation, are no less favorable than
those provided by the Company immediately prior to the Effective Time, provided
that nothing herein shall obligate Parent or the Surviving Corporation to
provide such employees with any stock based compensation (including, without
limitation, stock options or stock appreciation rights).
(b) From and after the Effective Time, for purposes of determining
eligibility and vesting (but not benefit accrual) for employees residing in
the United States and actively employed full-time by the Company
immediately prior to the Effective Time, under any compensation, severance,
welfare, pension, benefit or savings plan of Parent or any of its
affiliates, in effect on the Effective Time or established within two years
after the Effective Time, in which active full-time employees of the
Company and its subsidiaries become eligible to participate (to the extent
required by clause (ii) of Section 5.14(a) above), service with the Company
or any of its subsidiaries (whether before or after the Effective Time)
shall be credited as if such services had been rendered to Parent or any of
its affiliates.
(c) No provision of this Section 5.14 shall create any third party
beneficiary rights in any employee of the Company or its subsidiaries
(including any beneficiary thereof).
5.15 Extinguishment of Credit Line. Prior to the Effective Time, the
Company shall terminate its existing line or lines of credit with an affiliate
of Biofin, and there shall not have been any borrowings thereunder by the
Company or any of its subsidiaries from the date hereof through and including
the Effective Time.
ARTICLE VI
CLOSING CONDITIONS
6.1 Conditions to the Obligations of Parent, Mergeco and the Company. The
respective obligations of each party hereto to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) There shall not be in effect any statute, rule or regulation
enacted, promulgated or deemed applicable by any governmental authority of
competent jurisdiction that makes consummation of the Merger illegal and no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Merger shall be
in effect; provided, however, that each of the parties shall use all
reasonable efforts to prevent the entry of any such injunction or other
order and to appeal as promptly as possible any injunction or other order
that may be entered.
(b) This Agreement shall have been approved and adopted by the
affirmative vote of the holders of a majority of the outstanding Shares in
accordance with the Articles of Incorporation and Amended By-Laws of the
Company and the MBCA.
(c) Each of Parent, the Company and any other person (as defined in
the HSR Act and the rules and regulations thereunder) required in
connection with the Merger to file a Pre-Merger Notification and
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<PAGE> 109
Report Form under the HSR Act with the FTC and the Antitrust Division shall
have made such filing and the applicable waiting period with respect to
each such filing (including any extension thereof by reason of a request
for additional information) shall have expired or been terminated.
(d) This Agreement shall not have been terminated in accordance with
its terms.
(e) All of the conditions set forth in that certain agreement, dated
as of the date hereof (the "European Agreement"), between Parent, certain
of its affiliates and Sorin Biomedica S.p.A. ("Sorin"), pertaining to the
acquisition of Sorin's European Diagnostics Division shall have been
satisfied or waived, and the Closing (as such term is defined in the
European Agreement) shall have occurred simultaneously with the Effective
Time.
6.2 Conditions to the Obligations of Parent and Mergeco. The
obligations of Parent and Mergeco pursuant to this Agreement to consummate
the Merger is also subject to the fulfillment at or prior to the Effective
Time of the following additional conditions:
(a) The representations and warranties of the Company contained herein
shall be true and correct in all material aspects as of the Closing with
the same effect as though all such representations and warranties had been
made as of the Closing, except for any such representations and warranties
made as of a specified date, which shall be true and correct as of such
date, and Parent shall have received from the Company's Chief Executive
Officer and its Chief Financial Officer an officers' certificate to this
effect.
(b) Each and all of the covenants and agreements of the Company to be
performed and complied with pursuant to this Agreement prior to the Closing
shall have been duly performed and complied with in all material respects,
and Parent shall have received from the Company's Chief Executive Officer
and its Chief Financial Officer an officers' certificate to this effect.
(c) There shall not have occurred any event having, a Material Adverse
Effect (provided, however, that the items set forth in the Disclosure
Schedule shall not be deemed to have a Material Adverse Effect for purposes
of this Section 6.2(c)).
(d) Dissenting Shares shall constitute not more than 10% of the Shares
issued and outstanding immediately prior to the Effective Time.
(e) There shall have been received all governmental authorizations
listed in Section 6.2(e) of the Disclosure Schedule which are required in
connection with the consummation of the Merger and the other transactions
contemplated hereby and are required for the operation of the Surviving
Corporation following the Merger.
6.3 Conditions to the Obligations of the Company. The obligations of the
Company pursuant to this Agreement to consummate the Merger is also subject to
the fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) The representations and warranties of Parent and Mergeco contained
herein shall be true and correct in all material respects as of the Closing
with the same effect as though all such representations and warranties had
been made as of the Closing, except for any such representations and
warranties made as of a specified date, which shall be true and correct as
of such date, and the Company shall have received from Parent and Mergeco
officers' certificates to this effect.
(b) Each and all of the covenants and agreements of Parent and Mergeco
to be performed and complied with pursuant to this Agreement prior to the
Closing shall have been duly performed and complied with in all material
respects, and the Company shall have received from Parent and Mergeco
officers' certificates to this effect.
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<PAGE> 110
ARTICLE VII
CLOSING
7.1 Time and Place. The closing of the Merger (the "Closing") shall take
place at the offices of Baker & McKenzie, 805 Third Avenue, New York, New York
10022, or at such other place as the parties may mutually agree, as soon as
practicable following satisfaction or waiver, if permissible, of the conditions
set forth in Article VI. The date on which the Closing actually occurs is herein
referred to as the "Closing Date."
7.2 Filing at the Closing. At the Closing, Parent, Mergeco and the Company
shall cause the Articles of Merger to be filed with the Secretary of State of
the State of Minnesota in accordance with the MBCA, and shall take any and all
other lawful actions and do any and all other lawful things necessary to cause
the Merger to become effective.
ARTICLE VIII
TERMINATION AND ABANDONMENT
8.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the shareholders of the
Company by action taken or authorized by the Board of Directors of the
terminating party:
(a) by mutual written consent of Parent and the Company;
(b) without action needing to be taken by either Parent or the
Company, upon termination of the European Agreement;
(c) by either Parent or the Company:
(i) if the Merger shall not have been consummated on or before
August 1, 1997, provided, however, that the right to terminate this
Agreement shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of, or resulted
in, the failure of the Merger to have occurred on or before the
aforesaid date;
(ii) if, at the meeting of the holders of the Shares duly convened
to vote to approve the Merger and adopt this Agreement or at any
adjournment or postponement thereof, said approval shall not have been
obtained from the holders of at least a majority of the Shares; or
(iii) if any court or other governmental agency of competent
jurisdiction in the United States or elsewhere shall have issued an
order, decree or ruling or taken any other action permanently
restraining, enjoining, or otherwise prohibiting the Merger, and such
order, decree, ruling or other action shall have become final and
non-appealable; provided, however that the party seeking to terminate
this Agreement pursuant to this clause (c)(iii) shall have used all
reasonable efforts to prevent the entry of and to remove such restraint
or other action;
(d) by Parent, if the Company shall have breached in any material
respect or failed to perform in any material respect any of its
representations, warranties, covenants or other agreements contained in
this Agreement, including, without limitation, those set forth in Section
5.8, which breach or failure to perform (A) would give rise to the failure
of the conditions set forth in Section 6.2 (a) or (b), and (B) cannot be or
has not been cured within 30 days of the giving of written notice to the
Company of such breach;
(e) by Parent, if (i) the Board of Directors (or any independent
committee thereof including, without limitation, the Special Committee)
shall have withdrawn or modified in a manner adverse to Parent, Mergeco or
Holdings its approval or recommendation of the Merger or this Agreement, or
shall have approved or recommended any Acquisition Proposal (other than the
Merger), or (ii) the Board of Directors or any independent committee
thereof (including, without limitation, the Special Committee) shall have
resolved to take any of the foregoing actions;
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(f) by the Company, if Parent, Mergeco or Holdings shall have breached
in any material respect or failed to perform in any material respect any of
its representations, warranties, covenants or other agreements contained in
this Agreement, which breach or failure to perform (A) would give rise to
the failure of the conditions set forth in Sections 6.3(a) or (b), and (B)
cannot be or has not been cured within 30 days of the giving of written
notice to Parent of such breach; or
(g) by the Company if prior to the Effective Time, and after the
Company's receipt of a Superior Proposal the Board of Directors or any
independent committee thereof (including, without limitation, the Special
Committee) in a manner consistent with Section 5.8 (b), (A) shall have
withdrawn or modified, in a manner adverse to Parent, Mergeco or Holdings,
its approval or recommendation of the Merger or this Agreement, (B) shall
have approved or recommended a Superior Proposal or (C) shall have resolved
to do any of the foregoing; provided, however, that such termination under
this paragraph (g) shall not be effective until the Company has made
payment to Parent of the Fee (as defined in Section 8.3(a)) required to be
paid pursuant to Section 8.3(a).
8.2 Procedure and Effect of Termination. In the event of termination and
abandonment of the Merger by Parent or the Company pursuant to Section 8.1,
written notice thereof shall forthwith be given to the others, and this
Agreement shall terminate and the Merger shall be abandoned, without further
action by any of the parties hereto. Each of Holdings and Mergeco agrees that
any termination by Parent shall be conclusively binding upon it, whether given
expressly on its behalf or not, and the Company shall have no further obligation
with respect to it. If this Agreement is terminated as provided herein, no party
hereto shall have any liability or further obligation to any other party to this
Agreement, provided that any termination shall be without prejudice to the
rights of any party hereto arising out of the willful and material breach by any
other party of any covenant or agreement contained in this Agreement, and
provided, further, that provisions set forth in Sections 3.21, 4.6, 8.3 and 9.7
and the Confidentiality Agreement shall in any event survive any termination
(subject, in the case of the Confidentiality Agreement, to Section 9.10 hereof)
and that no party shall be liable to any other party for consequential or
special damages or loss of profits.
8.3 Fees and Expenses. (1) In the event that this Agreement is terminated
pursuant to Section 8.1(e) or as a precondition to a termination by the Company
pursuant to section 8.1(g), then in either event, the Company shall pay Parent
promptly (but in no event later than five business days after the date of such
termination) a fee of $2.5 million (the "Fee"), which amount shall be payable in
immediately available funds. In the event of a termination of this Agreement
pursuant to Section 8.1 (other than a termination pursuant to Section 8.1(f)),
then, if a Third Party Acquisition (as defined in Section 8.3(c)) shall have
occurred within twelve (12) months following the date of termination, within
five business days of the date such Third Party Acquisition is concluded, the
Company shall pay Parent the Fee (to the extent not previously paid), plus all
Expenses (as defined in Section 8.3(b)).
(b) "Expenses" means all documented out-of-pocket expenses and fees up
to $1.5 million in the aggregate (including, without limitation, fees and
expenses payable to all banks, investment banking firms, other financial
institutions, consulting firms and other persons and their respective
agents and counsel for arranging, committing to provide or providing any
financing for the Merger and any transactions contemplated thereby or
structuring the transactions and all fees of counsel, accountants, experts
and consultants to Parent, Holdings and Mergeco, and all printing and
advertising expenses) actually incurred by any of them or on their behalf
in connection with the transactions, including, without limitation,
litigation related thereto and the financing thereof, and actually incurred
by banks, investment banking firms, other financial institutions and other
persons and assumed by Parent, Holdings or Mergeco in connection with the
negotiation, preparation, execution and performance of this Agreement, the
structuring and financing of the Merger and any transactions contemplated
thereby and any litigation and any financing commitments or agreements
relating thereto.
(c) "Third Party Acquisition" means the occurrence of any of the
following events: (i) the acquisition of the Company by merger,
consolidation, statutory share exchange or other business combination
transaction by any person other than Parent, Mergeco or any affiliate
thereof (a "Third Party"), in which transaction the holders of Shares are
to receive a per Share consideration equal to, or in
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<PAGE> 112
excess of, the Merger Consideration, (ii) the acquisition by any Third
Party of 50% or more (in book value or market value) of the total assets of
the Company and its subsidiaries, taken as a whole, in a transaction or
series of transactions that indicates an enterprise value for the Company
equal to or greater than the product of the number of Shares outstanding at
the Effective Time multiplied by the Merger Consideration, (iii) the
acquisition by a Third Party of 50% or more of the outstanding Shares,
whether by tender offer, exchange offer or otherwise, for a per Share price
equal to, or in excess of, the Merger Consideration; (iv) the adoption by
the Company of a plan of liquidation or dissolution, or the declaration or
payment of an extraordinary dividend, the amount of which indicates an
enterprise value for the Company equal to or greater than the product of
the number of shares outstanding at the Effective Time multiplied by the
Merger Consideration; or (v) the repurchase by the Company or any of its
subsidiaries of 50% or more of the outstanding Shares for a per Share
consideration in excess of the Merger Consideration. In each case,
appropriate adjustments shall be made for any stock splits, reverse stock
splits, stock dividends or similar events affecting the number of Shares
outstanding, effected after the date hereof. For purposes of clauses (iii)
and (v) hereof, such Third Party Acquisition shall have been deemed to have
been concluded upon the acceptance of Shares for payment, exchange or
repurchase, for purposes of clause (i), such Third Party Acquisition shall
be deemed to have concluded at the effective time of such merger,
consolidation or other transaction, for purposes of clause (ii), such
acquisition shall have been deemed to have been concluded on its closing
date, and for purposes of clause (iv), such event shall have been deemed to
have been concluded on the date such plan of liquidation or dissolution is
adopted, or the record date for payment of such extraordinary dividend.
(d) Except as set forth in this Section 8.3, all costs and expenses
incurred in connection with this Agreement and the Merger and any
transactions contemplated thereby shall be paid by the party incurring such
expenses, whether or not any transaction is consummated.
(e) In the event that the Company shall fail to pay the Fee or any
expenses when due, the term "Expenses" shall be deemed to include the costs
and expenses actually incurred or accrued by Parent, Holdings and Mergeco
(including, without limitation, fees and expenses of counsel) in connection
with the collection under and enforcement of this Section 8.3, together
with interest on such unpaid Fee and Expenses, commencing on the date that
the Fee or such Expenses became due, at a rate equal to the rate of
interest publicly announced by The Chase Manhattan Bank, from time to time,
in the City of New York, as such bank's Prime Rate plus 1.00%.
ARTICLE IX
MISCELLANEOUS
9.1 Amendment and Modification. Subject to applicable law, this Agreement
may be amended, modified or supplemented only by written agreement of Parent,
Holdings, Mergeco and the Company at any time prior to the Effective Time with
respect to any of the terms contained herein, provided, that after this
Agreement is adopted by the Company's shareholders pursuant to Section 5.3, no
such amendment or modification shall be made that reduces the amount or changes
the form of the Merger Consideration or otherwise materially and adversely
affects the rights of the Company's shareholders hereunder, without the further
approval of such shareholders.
9.2 Waiver of Compliance; Consents. Any failure of the Parent, Holdings or
Mergeco, on the one hand, or the Company, on the other hand, to comply with any
obligation, covenant, agreement or condition herein may be waived by the Company
or Parent, respectively, only by a written instrument signed by the party
granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Section
9.2. Each of Holdings and Mergeco hereby agrees that any consent or waiver of
compliance given by Parent hereunder shall be conclusively binding upon it,
whether given expressly on its behalf or not.
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<PAGE> 113
9.3 Survival of Warranties. Each and every representation and warranty made
in this Agreement (including the Exhibits hereto and the Disclosure Schedule)
shall survive until the Effective Time of the Merger. This Section 9.3 shall
have no effect upon any other obligation of the parties hereto.
9.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if (a) delivered personally or by overnight
courier, (b) mailed by registered or certified mail, return receipt requested,
postage prepaid, or (c) transmitted by telecopy, and in each case, addressed to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice; provided that notices of a change of address
shall be effective only upon receipt thereof):
(a) if to Parent, Holdings or Mergeco, to:
American Standard Inc.
One Centennial Avenue
P.O. Box 6820
Piscataway, NJ 08855-6820
Telecopy: (908) 980-6118
Attention: Richard A. Kalaher, Esq.
Vice President and General Counsel
with copies to:
Baker & McKenzie
805 Third Avenue
New York, New York 10022
Telecopy: (212) 759-9133
Attention: Richard L. Nevins, Esq.
Faegre & Benson
2200 Norwest Center, 90 South Seventh Street
Minneapolis, Minnesota 55402-3901
Telecopy: (612) 336-3026
Attention: Philip S. Garon, Esq.
(b) if to the Company, to
INCSTAR Corporation
1951 Northwestern Avenue
Stillwater, Minnesota 55082
Telecopy: (612) 773-1552
Attention: John Booth
with a copy to
Dorsey & Whitney LLP
220 South 6th Street
Minneapolis, Minnesota 55402
Telecopy: (612) 340-8738
Attention: Jonathan B. Abram, Esq.
Any notice so addressed shall be deemed to be given (x) three business days
after being mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid and (y) upon delivery, if transmitted by hand
delivery, overnight courier or telecopy.
9.5 Assignment; Parties in Interest. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of the
other parties (except that Mergeco may assign to Parent or any other direct or
indirect wholly-owned subsidiary of Parent any and all rights and obligations of
Mergeco
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<PAGE> 114
under this Agreement, provided that any such assignment will not relieve Parent
from any of its obligations under this Agreement). Except for Section 5.9, which
is intended for the benefit of the Company's directors, officers, employees and
committee members, this Agreement is not intended to confer upon any other
person except the parties any rights or remedies under or by reason of this
Agreement.
9.6 Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
9.7 Governing Law. This Agreement shall be governed by the laws of the
State of Minnesota (regardless of the laws that might otherwise govern under
applicable principles of conflicts of law) as to all matters, including but not
limited to matters of validity, construction, effect, performance and remedies.
9.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.9 Interpretation. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. As used in this Agreement, (i) the term "person" shall mean and
include an individual, a partnership, a joint venture, a corporation, a trust,
an unincorporated organization and a government or any department or agency
thereof; (ii) the terms "affiliate" and "associate" shall have the meanings set
forth in Rule 12b-2 of the General Rules and Regulations promulgated under the
Exchange Act; (iii) the term "subsidiary" of any specified corporation shall
mean any corporation of which the outstanding securities having ordinary voting
power to elect a majority of the board of directors are directly or indirectly
owned by such specified corporation; and (iv) the term "knowledge" or any
similar term shall mean the actual knowledge of all of the directors and
executive officers of the Company and each of its subsidiaries.
9.10 Entire Agreement. This Agreement, including the exhibits and schedules
to this Agreement, and the Confidentiality Agreement, embody the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and supersede all prior agreements and the
understandings between the parties with respect to such subject matter. The
Confidentiality Agreement shall terminate and cease to have any effect from and
after the Effective Time.
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<PAGE> 115
IN WITNESS WHEREOF, Parent, Holdings, Mergeco and the Company have caused
this Agreement to be signed by their respective duly authorized officers as of
the date first above written.
AMERICAN STANDARD INC.
By /s/ BENSON I. STEIN
------------------------------------
Name: Benson I. Stein
Title: Vice President
AMERICAN STANDARD MEDICAL
SYSTEMS, INC.
By /s/ THOMAS B. BATTAGLIA
------------------------------------
Name: Thomas B. Battaglia
Title: Vice President
ISTR MERGER CORPORATION
By /s/ FREDERICK C. PAINE
------------------------------------
Name: Frederick C. Paine
Title: Director and Vice President
INCSTAR CORPORATION
By /s/ JOHN J. BOOTH
------------------------------------
Name: John J. Booth
Title: President and Chief Executive
Officer
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<PAGE> 116
EXHIBIT A
TO THE AGREEMENT AND PLAN OF MERGER
ARTICLES OF INCORPORATION
OF
ISTR MERGER CORPORATION
The undersigned incorporator, being a natural person 18 years of age or
older, in order to form a corporate entity under Minnesota Statutes, Chapter
302A, hereby adopts the following Articles of Incorporation
ARTICLE I
The name of the Corporation is ISTR Merger Corporation.
ARTICLE II
The registered office of this Corporation is located at 1990 Industrial
Boulevard, Stillwater, Minnesota 55082.
ARTICLE III
This Corporation is authorized to issue an aggregate total of 1,000,000
shares, all of which shall be designated Common Stock, having a par value of
$.01 per share.
ARTICLE IV
The name and address of the incorporator of this Corporation is as follows:
Keith P. Radtke
Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
ARTICLE V
No shareholder of this Corporation shall have any cumulative voting rights.
ARTICLE VI
No shareholder of this Corporation shall have any preemptive rights to
subscribe for, purchase or acquire any shares of the Corporation of any class,
whether unissued or now or hereafter authorized, or any obligations or other
securities convertible into or exchangeable for any such shares.
ARTICLE VII
The name of the first director of this Corporation is Frederick C. Paine.
ARTICLE VIII
Any action required or permitted to be taken at a meeting of the Board of
Directors of this Corporation not needing approval by the shareholders under
Minnesota Statutes, Chapter 302A, may be taken by written
<PAGE> 117
action signed by the number of directors that would be required to take such
action at a meeting of the Board of Directors at which all directors are
present.
ARTICLE IX
No director of this Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however. that this Article shall
not eliminate or limit the liability of a director to the extent provided by
applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
section 302A.599 or 80A.23 of the Minnesota Statutes, (iv) for any transaction
from which the director derived an improper personal benefit or (v) for any act
or omission occurring prior to the effective date of this Article. No amendment
to or repeal of this Article shall apply to or have any effect on the liability
or alleged liability of any director of the Corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment or
repeal.
IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of March,
1997.
/s/ KEITH P. RADTKE
--------------------------------------
Keith P. Radtke, Incorporator
<PAGE> 118
EXHIBIT B
TO THE AGREEMENT AND PLAN OF MERGER
LIST OF OPTIONS TO PURCHASE SHARES
PURSUANT TO THE INCSTAR CORPORATION
STOCK OPTION PLAN, AS AMENDED MAY 21, 1996
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS EXERCISE
OPTION HOLDER HELD PRICE
------------- ---------- --------
<S> <C> <C>
EXECUTIVES
Booth, John............................................... 25,000 2.500
10,000 6.000
10,000 5.750
10,000 6.250
35,000 3.375
50,000 2.500
Carter, Orwin L........................................... 20,000 2.500
20,000 6.000
15,000 6.250
60,000 3.375
Majewski, Gerald.......................................... 15,000 6.250
25,000 3.375
Maun, Tom................................................. 1,000 2.500
2,800 6.000
1,600 8.250
2,500 6.250
2,000 3.000
25,000 2.500
Wellock, George........................................... 10,000 6.500
5,000 8.250
10,000 6.250
25,000 3.375
BOARD MEMBERS
Denti, Ennio.............................................. 10,000 3.375
7,017 2.250
7,018 1.440
Dixon, George............................................. 10,000 3.375
Fornasari, Franco......................................... 10,000 3.440
Galletti, Pierre.......................................... 10,000 2.375
Garibaldi, Ezio........................................... 10,000 2.500
Hamilton, Ross............................................ 10,000 3.375
7,018 2.250
Rosa, Umberto............................................. 10,000 3.375
Steffes, Michael.......................................... 10,000 3.375
Vanoli, Carlo............................................. 10,000 2.500
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS EXERCISE
OPTION HOLDER HELD PRICE
------------- ---------- --------
<S> <C> <C>
MIDDLE MANAGEMENT
Ash, Jon.................................................. 4,000 8.250
2,500 6.250
2,000 3.000
3,000 2.375
2,000 4.375
Bevers, Keith............................................. 4,000 2.500
3,200 6.000
2,000 8.250
2,500 6.250
2,000 3.000
3,000 2.375
2,000 4.375
Buschman, Ross............................................ 2,000 2.500
Butkowski, Ralph.......................................... 2,000 5.630
4,000 4.375
Dow, Nancy................................................ 2,000 2.375
Dylla, Dan................................................ 4,000 2.500
3,000 6.000
2,000 8.250
2,500 6.250
2,000 3.000
3,000 2.375
2,000 4.375
Frick, Mary............................................... 2,000 2.500
Hanna, Dave............................................... 2,000 2.375
Hillam, Robyn............................................. 2,000 2.375
Ikeda, David.............................................. 2,000 2.375
Jones, Steve.............................................. 2,000 2.375
Kamerud, John............................................. 2,000 2.375
Kilbo, Trish.............................................. 1,500 2.500
2,000 8.250
2,500 6.250
2,000 3.000
3,000 2.375
3,000 4.375
Kolesar, Dave............................................. 2,000 6.000
Legray, John.............................................. 2,000 5.630
Linzmeier, Sue............................................ 3,000 2.500
2,800 6.000
1,600 8.250
2,500 6.250
2,000 3.000
3,000 2.375
2,000 4.375
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS EXERCISE
OPTION HOLDER HELD PRICE
------------- ---------- --------
<S> <C> <C>
Liu, Yung-Nan............................................. 2,000 2.375
4,000 4.375
Manor, Chaim.............................................. 2,000 3.000
4,000 4.375
Messenger, Lori........................................... 2,000 2.375
Meyer, Pat................................................ 2,000 4.375
Nicholas, Mervin.......................................... 2,000 2.500
Roesler, John............................................. 2,000 2.500
2,000 5.630
2,000 3.000
3,000 2.375
3,000 4.375
Sahnow, Karen............................................. 2,000 4.375
Skramstad, Dawn........................................... 2,000 5.630
Thompson, Jeff............................................ 2,000 2.500
Truffer, Tom.............................................. 4,000 4.375
Tynen, Pat................................................ 2,000 2.375
Tyson, Rick............................................... 2,000 2.375
Von Holtum, Laura......................................... 2,000 4.375
Walter, John.............................................. 2,000 4.375
Whetsone, Richard......................................... 2,000 2.500
Williams, Kay............................................. 2,000 6.250
SCIENTIFIC ADVISORY PANEL
Baylink, David J.......................................... 2,000 4.31
Kricka, Larry............................................. 4,000 3.88
Reichlin, Morris.......................................... 2,000 4.75
Schur, Peter.............................................. 2,000 3.88
Shaolwitz, Joel........................................... 4,000 4.50
Winfield, John............................................ 2,000 4.75
CSI CONVERTED OPTION HOLDERS
Samara, Joanne............................................ 1,332 2.250
Stork, Gary............................................... 1,755 1.440
TOTAL OPTIONS:.............................................. 669,640
</TABLE>
<PAGE> 121
EXHIBIT C
TO THE AGREEMENT AND PLAN OF MERGER
1. Employment and consulting agreements
2. Pension, bonus, incentive, severance, income continuation or retirement
plans
3. Distribution and agency agreements
4. Contracts for the purchase of materials and supplies, the amount of which
exceeds $25,000
5. Sales agreements, the amount of which exceeds $25,000
6. Any contract providing for the rendering of services to or by the Company or
its subsidiaries, the amount of which exceeds $25,000
7. Subcontractor agreements, requiring payments in excess of $25,000
8. Contracts or agreements with any individual, firm or corporation, requiring
payments in excess of $25,000
9. Operating and product licenses
10. Lease or rental agreements, requiring payments in excess of $25,000
<PAGE> 122
EXHIBIT B
[COWEN LETTERHEAD]
March 10, 1997
The Special Committee of the Board of Directors
INCSTAR Corporation
1990 Industrial Boulevard
P.O. Box 285
Stillwater, Minnesota 55082
The Special Committee of the Board of Directors:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of the outstanding shares of
common stock, $.01 par value per share ("INCSTAR Common Stock") of INCSTAR
Corporation, a Minnesota corporation (the "Company"), other than Biofin Holding
International B.V. and its affiliates (collectively, "Biofin"), of the
consideration to be received by them in the proposed Transaction (as hereinafter
defined). For the purposes of this opinion, the "Transaction" means the merger
described below pursuant to the Agreement and Plan of Merger among the Company,
American Standard Inc., a Delaware corporation ("Parent"), American Standard
Medical Systems, Inc., a Delaware corporation, and ISTR Merger Corporation, a
Minnesota corporation ("Merger Corp."), to be dated as of March 10, 1997 (the
"Agreement").
The Agreement provides for the merger of Merger Corp. with and into the
Company, subject to the terms and conditions thereof and as more specifically
set forth therein. Upon effectiveness of the Transaction, among other things,
each issued and outstanding share of INCSTAR Common Stock (other than Dissenting
Shares, as defined in the Agreement, and shares then owned by Parent or Merger
Corp. or any other subsidiary of Parent) will be converted into the right to
receive $6.32 in cash, without interest (in the aggregate, "Consideration").
In the ordinary course of its services, Cowen & Company ("Cowen") is
regularly engaged in the valuation and pricing of businesses and their
securities and in advising corporate securities issuers on related matters.
In arriving at our opinion, Cowen has, among other things:
(1) reviewed the Company's combined and consolidated financial
statements for the fiscal years ended December 31, 1994 through December
31, 1996, certain publicly available filings with the Securities and
Exchange Commission and certain other relevant financial and operating data
of the Company;
(2) reviewed the March 7, 1997 draft of the Agreement provided to us
by management of the Company;
(3) held meetings and discussions with management and senior personnel
of the Company to discuss the business, operations and future prospects of
the Company;
(4) reviewed financial projections furnished to us by the management
of the Company, including the capital structure, sales, operating income,
net income and other data of the Company we deemed relevant;
(5) reviewed the operating and financial performance of the Company
over the last three fiscal years and compared its results with the
operating and financial performance of certain other publicly traded
companies which we deemed relevant;
(6) reviewed the public market valuation and trading multiples of the
Company, and compared the Company's trading multiples to the trading
multiples of certain other publicly traded companies which we deemed
relevant;
B-1
<PAGE> 123
The Special Committee of the Board of Directors
INCSTAR Corporation
March 10, 1997
Page 2
(7) reviewed the historical prices and trading activity of the stock
of the Company from March 7, 1996 to March 7, 1997 and compared the
Company's stock price performance to the stock price performance of certain
other publicly traded companies which we deemed relevant over the same time
period;
(8) compared the financial terms of the Transaction with the financial
terms of the acquisitions of certain other companies which we deemed
relevant, including a comparison of the premiums paid in the Transaction
with the premiums paid in those other acquisitions;
(9) conducted such other studies, analysis, inquiries and
investigations as we deemed appropriate.
Cowen was not requested to, and did not, solicit third party indications of
interest in acquiring all or substantially all of the stock or assets of the
Company or all or substantially all of the stock held by parties other than
Biofin.
In rendering our opinion, we assumed, and relied upon the Company's
management with respect to, the accuracy and completeness of the financial and
other information furnished to us as described above. With respect to the
financial projections furnished to us by management of the Company, we have
assumed, with your consent, the attainability of the financial results therein
and that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the Company's management as to
the future financial performance of the Company. We have not assumed any
responsibility for independent verification of such information, including
financial information. We have not made an independent valuation or appraisal of
any of the assets or liabilities of the Company, nor have we been furnished with
any such valuations or appraisals.
We have assumed that there have been no material changes in the assets,
financial condition, results of operations, business or prospects of the Company
since the date of the last financial statements made available to us. In
addition, our opinion is based on economic, monetary and market and other
conditions existing on the date hereof.
We have acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the transaction contemplated by the
Agreement and will receive a fee for our services, a significant portion of
which is contingent upon the consummation of such transaction.
On the basis of our review and analysis, as described above, it is our
opinion as investment bankers that, as of the date hereof, the consideration to
be received in the proposed Transaction by the holders (other than Biofin) of
INCSTAR Common Stock is fair, from a financial point of view, to such
stockholders.
Very truly yours,
Cowen & Company
Cowen & Company
B-2
<PAGE> 124
EXHIBIT C
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATION
ACT -- DISSENTERS' APPRAISAL RIGHTS
302A.471. Rights of dissenting shareholders
Subdivision 1. Actions creating rights. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new
class or series with similar or different voting rights; except that an
amendment to the articles of an issuing public corporation that provides
that section 302A.671 does not apply to a control share acquisition does
not give rise to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to the
shareholders in accordance with their respective interests within one year
after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter
322B, to which the corporation is a party, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by
the board directs that dissenting shareholders may obtain payment for their
shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares that
are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under
the terms of this section and section 302A.473, if the beneficial owner
submits to the corporation at the time of or before the assertion of the
rights a written consent of the shareholder.
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<PAGE> 125
Subd. 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. Procedures for asserting dissenters' rights
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1
or the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision
1, up to and including the date of payment, calculated at the rate provided
in section 549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply
with any restrictions on transfer of uncertificated shares within 30 days
after the notice required by paragraph (a) was given, but the dissenter
retains all other rights of a shareholder until the proposed action takes
effect.
Subd. 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting
C-2
<PAGE> 126
shareholder who has complied with subdivisions 3 and 4 the amount the
corporation estimates to be the fair value of the shares, plus interest,
accompanied by:
(1) The corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date
of the corporate action, together with the latest available interim
financial statements;
(2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action
dissented from was first announced to the public or who is dissenting on
behalf of a person who was not a beneficial owner on that date. If the
dissenter has complied with subdivisions 3 and 4, the corporation shall
forward to the dissenter the materials described in paragraph (a) a
statement of the reason for withholding the remittance, and an offer to pay
to the dissenter the amount listed in the materials if the dissenter agrees
to accept that amount in full satisfaction. The dissenter may decline the
offer and demand payment under subdivision 6. Failure to do so entitles the
dissenter only to the amount offered. If the dissenter makes demand,
subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and
cancel all transfer restrictions. However, the corporation may again give
notice under subdivision 4 and require deposit or restrict transfer at a
later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
C-3
<PAGE> 127
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable expenses
and compensation of any appraisers appointed by the court, and shall assess
those costs and expenses against the corporation, except that the court may
assess part or all of those costs and expenses against a dissenter whose action
in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or
not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses
of any experts or attorneys as the court deems equitable. These fees and
expenses may also be assessed against a person who has acted arbitrarily,
vexatiously, or not in good faith in bringing the proceeding, and may be
awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if
any.
C-4
<PAGE> 128
PROXY
INCSTAR CORPORATION
1990 Industrial Boulevard
Stillwater, Minnesota 55082
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
John J. Booth and Thomas P. Maun, or either of them, are hereby
appointed attorneys and proxies of the undersigned, each with the power of
substitution, to attend, vote and act for the undersigned at the Special Meeting
of shareholders of INCSTAR Corporation (the "Company") to be held on June 26,
1997 in Minneapolis, Minnesota, and at any adjournment or adjournments thereof,
and in connection therewith to vote all of the shares of Common Stock of the
Company which the undersigned would be entitled to vote as follows:
If this proxy is duly executed and returned, this proxy will be voted,
and will be voted in accordance with the instructions specified below. If no
instruction is specified, the proxy will be voted for Item 1.
<PAGE> 129
X Please mark your
votes as in this
example using
dark ink only.
<TABLE>
<S><C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
1. A proposal to approve and adopt an Agreement and Plan of Merger, dated
as of March 10, 1997, among American Standard Inc. (ASI), a Delaware
corporation, American Standard Medical Systems, Inc. (ASM), a Delaware
corporation and a wholly owned subsidiary of ASI, ISTR Merger Corporation
(Mergeco), a Minnesota corporation and a wholly owned subsidiary of ASM, and the
Company, providing for the merger (the Merger) of Mergeco with and into the
Company, with the Company as the surviving corporation, pursuant to which each
outstanding share of common stock, par value $.01 per share, of the Company
(the Common Stock), other than shares of Common Stock with respect to which
dissenters rights have been properly exercised, will be converted into the
right to receive $6.32 in cash, without interest.
2. Such other business as may properly come before the Special Meeting or
any adjournment or adjournments thereof.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE.
</TABLE>
DATED: June ___ , 1997
SIGNATURE(S) OF SHAREHOLDER
This proxy should be signed exactly as your name appears thereon.
Joint owners should both sign. If signed by an attorney, executor, guardian or
in some other capacity or as officer of a corporation, please add title as
such.
