<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1999
REGISTRATION NO. 333-78731
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ANTHONY & SYLVAN POOLS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
OHIO 1799 31-1522456
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
220 PARK DRIVE
CHARDON, OHIO 44024
(440) 285-7946
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STUART D. NEIDUS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ANTHONY & SYLVAN POOLS CORPORATION
220 PARK DRIVE
CHARDON, OHIO 44024
(440) 285-7946
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
MARY ANN JORGENSON, ESQ.
SQUIRE, SANDERS & DEMPSEY L.L.P.
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114-1304
(216) 479-8500
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon consummation of the transactions described herein.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE VALUE OF AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER UNIT(2) TRANSACTION(3) FILING FEE(4)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 4,094,021 $19.66 $316,412,842.50 $63,283
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</TABLE>
(1) Represents the number of common shares of Anthony & Sylvan Pools Corporation
to be issued in connection with the split-off of Anthony & Sylvan from
Essef.
(2) Represents an estimate of the price per unit determined pursuant to Rule
0-11(c)(1) and Rule 0-11(a)(4) of the Exchange Act based on the sum of (a)
the cash payment of $19.09 per Essef common share and (b) the book value of
Anthony & Sylvan as of March 31, 1999, per Anthony & Sylvan share to be
issued in connection with the split-off, which is $1.13 per share.
(3) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 14a-6(i)(4) and Rule 0-11(c)(1) of the Exchange Act,
based on the (a) the cash payment of $19.09 per Essef common share; (b) the
number of Essef common shares outstanding as of March 31, 1999, which was
13,073,400, plus the number of Essef common shares subject to options
exerciseable prior to the expected effective date of the merger which is
3,302,682; and (c) the book value of Anthony & Sylvan as of March 31, 1999.
(4) The registration fee of $63,283 for the securities registered hereby has
been calculated pursuant to Rule 14a-6(i)(4) and Rule 0-11(c)(1) of the
Exchange Act. In accordance with Rule 0-11(a)(2) under the Exchange Act, the
$6,638.00 previously paid by Anthony & Sylvan upon the filing of its
registration statement on Form S-1, File No. 333-63573, has been credited
against the registration fee payable in connection with this filing. The
remaining amount, $56,645, has been previously paid by Essef under the
reference "Essef."
------------------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON THE DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
ESSEF LOGO
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
, 1999
Dear Shareholder:
As you may know, the board of directors of Essef Corporation has agreed on
a merger with Pentair, Inc. The merger will give you the opportunity to realize
the substantial value we have achieved in our swimming pool and spa equipment
and water treatment and systems equipment businesses. If we complete the merger,
Essef will become a wholly-owned subsidiary of Pentair. We need approval of our
shareholders to complete the merger.
Concurrently with the merger, we will distribute all the common shares of
Anthony & Sylvan Pools Corporation to our shareholders on a pro rata basis. For
purposes of the securities laws, we may be deemed to be an underwriter of
Anthony & Sylvan common shares. The split-off of Anthony & Sylvan common shares
will allow you to continue to participate in the swimming pool sales and
installation business.
In exchange for each common share of Essef you own:
- Pentair will pay you $18.97 in cash; and
- we will distribute to you 0.25 of a share of Anthony & Sylvan.
TO READ ABOUT RISKS IN CONNECTION WITH THE MERGER AND THE SPLIT-OFF AND
RISKS ASSOCIATED WITH OWNING THE ANTHONY & SYLVAN COMMON SHARES THAT WE WILL
DISTRIBUTE TO YOU IN THE SPLIT-OFF, SEE "RISK FACTORS" BEGINNING ON PAGE 13 OF
THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
We cannot complete the merger unless the holders of two-thirds of our
shares vote for adoption of the merger agreement. We have scheduled a special
meeting for you to vote on this matter. YOUR VOTE IS VERY IMPORTANT.
If you owned shares of Essef at the close of business on June 14, 1999, you
are entitled to vote at the meeting.
Whether or not you plan to attend the meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. If you need assistance
in voting your shares, please call our proxy solicitor, Morrow & Co., Inc., toll
free at (800) 662-5200. The meeting will be held:
FRIDAY, AUGUST 6, 1999
9:00 A.M.
220 PARK DRIVE
CHARDON, OHIO 44024
The accompanying proxy statement/prospectus provides detailed information
about the meeting, the proposed merger, and the split-off of the common shares
of Anthony & Sylvan. In addition, the proxy statement/prospectus describes
Anthony & Sylvan's business,
<PAGE> 3
management, and financial condition. We encourage you to read all of the proxy
statement/prospectus carefully. In addition, you can find more information about
us and about Anthony & Sylvan in documents that we have filed with the
Securities and Exchange Commission.
Your board strongly supports this combination with Pentair, and recommends
that you vote in favor of the merger.
--------------------------------------
Ralph T. King
Chairman of the Board
Essef Corporation
--------------------------------------
Thomas B. Waldin
President and Chief Executive Officer
Essef Corporation
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE ANTHONY & SYLVAN COMMON SHARES TO BE
DISTRIBUTED TO YOU UNDER THIS PROXY STATEMENT/PROSPECTUS. NEITHER THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED IF
THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated , 1999 and is being
first mailed to shareholders on or about , 1999.
<PAGE> 4
ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Essef that is not included in or delivered with this
document. This information is available to you without charge upon written or
oral request. You may obtain information about us by requesting information from
the person and at the address or telephone number listed below:
Mark E. Brody
Vice President, Finance
Essef Corporation
220 Park Drive
Chardon, Ohio 44024
(440) 286-2200
IF YOU WOULD LIKE TO REQUEST ANY DOCUMENTS FROM US, PLEASE DO SO BY JULY
30, 1999 TO ENSURE TIMELY DELIVERY.
See "Where You Can Find More Information" beginning on page 100.
<PAGE> 5
ESSEF CORPORATION
220 PARK DRIVE
CHARDON, OHIO 44024
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 6, 1999
A special meeting of the shareholders of Essef Corporation will be held on
Friday, August 6, 1999 at 9:00 a.m., Eastern time, at Essef's headquarters, 220
Park Drive, Chardon, Ohio 44024. At that meeting, we will ask you to:
- consider and vote on a proposal to adopt a merger agreement among Essef,
Pentair, Inc., and Northstar Acquisition Company; and
- consider any other business that may properly come before the meeting or
any adjournments or postponements of the meeting.
Concurrently with the merger, we will distribute all the common shares of
Anthony & Sylvan Pools Corporation to our shareholders on a pro rata basis. In
exchange for each common share of Essef you own:
- Pentair will pay you $18.97 in cash; and
- we will distribute to you 0.25 of a share of Anthony & Sylvan.
After the merger, Essef will be a wholly-owned subsidiary of Pentair. After the
split-off, Anthony & Sylvan will operate as an independent public company. The
merger and split-off will occur on the terms and conditions contained in the
merger agreement and the related documents.
If you owned shares of Essef at the close of business on June 14, 1999, you
are entitled to vote at the special meeting and at any adjournments and
postponements of that meeting.
Whether or not you expect to attend the meeting, please fill in, sign, and
date the enclosed proxy card and promptly return it in the postage-paid return
envelope provided to:
National City Bank
4100 West 150th Street
3rd Floor, North Annex
Cleveland, Ohio 44135
In order to avoid the additional expense of more solicitation, we ask you to
cooperate in mailing your proxy card promptly.
If you decide later that you will attend the meeting or, for any other
reason, you decide to revoke or change your proxy, you may do so at any time
before we vote your proxy.
PLEASE DO NOT SEND ANY SHARE CERTIFICATES WITH YOUR PROXY CARD.
After we complete the merger, Bank of America National Trust and Savings
Association, the depositary, will send you instructions on how to receive your
cash payment and share certificates for the Anthony & Sylvan common shares.
By order of the board of directors,
--------------------------------------
Mary Ann Jorgenson
Secretary of Essef Corporation
Cleveland, Ohio
, 1999
<PAGE> 6
To find any one of the principal sections identified below, simply bend the
document slightly to expose the gray tabs and open the document to the tab which
corresponds to the title of the section you wish to read.
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE PENTAIR/ESSEF MERGER
SUMMARY
RISK FACTORS
THE SPECIAL SHAREHOLDER MEETING
THE MERGER
THE MERGER AGREEMENT
THE SPLIT-OFF
ANTHONY & SYLVAN
FINANCIAL INFORMATION ABOUT ESSEF AND ANTHONY & SYLVAN
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ANTHONY & SYLVAN
ADDITIONAL INFORMATION
WHERE YOU CAN FIND MORE INFORMATION
ANNEXES
FINANCIAL STATEMENTS OF ANTHONY & SYLVAN
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE PENTAIR/ESSEF MERGER........ 1
SUMMARY..................................................... 3
The Companies............................................. 3
Reasons for the Merger.................................... 3
Board Recommendation to Shareholders...................... 4
Special Shareholder Meeting............................... 4
The Merger................................................ 4
The Split-Off............................................. 8
Summary Consolidated Financial Data....................... 10
RISK FACTORS................................................ 13
THE SPECIAL SHAREHOLDER MEETING............................. 18
Purpose of the Special Shareholder Meeting................ 18
Record Date; Voting Rights; Proxies....................... 18
Quorum.................................................... 19
Required Vote............................................. 19
Solicitation of Proxies................................... 19
Exchange of Certificates After We Complete the Merger..... 19
THE MERGER.................................................. 21
Background of the Merger.................................. 21
Reasons for the Merger; Recommendation of Our Board....... 22
Cautionary Statement Concerning Forward-Looking
Statements............................................. 25
Fairness Opinion of Financial Advisor..................... 26
Interests of Executive Officers and Directors in the
Merger................................................. 35
Outstanding Stock-Based Awards....................... 35
Employment Agreements................................ 36
Anthony & Sylvan Stock Options....................... 36
Certain Effects of the Merger............................. 36
Material Federal Income Tax Consequences.................. 37
Regulatory Matters........................................ 38
Dissenters' Rights........................................ 38
THE MERGER AGREEMENT........................................ 40
The Merger................................................ 40
Effective Date............................................ 40
Conversion of Our Common Shares........................... 40
Conversion of Our Stock Options........................... 41
Conduct of Business Prior to Effective Time............... 42
No Solicitation........................................... 44
Termination............................................... 45
Termination Rights................................... 45
Termination Fees; Termination Fee Triggers........... 46
Amendment; Waiver......................................... 46
Conditions to Completion of the Merger.................... 47
Conditions to Pentair's Obligation and Essef's
Obligation to Complete the Merger................... 47
Conditions to Our Obligation to Complete the
Merger.............................................. 47
Conditions to Obligations of Pentair and Northstar
Acquisition to Complete the Merger.................. 47
Representations and Warranties............................ 48
THE SPLIT-OFF............................................... 49
Anticipated Structure of the Split-Off.................... 49
Transition Agreement...................................... 49
Operations of Anthony & Sylvan....................... 50
Intercompany Liabilities and Intercompany Dividend... 50
Transferred Employees................................ 51
</TABLE>
TABLE OF CONTENTS
i
<PAGE> 8
<TABLE>
<S> <C>
Employee Benefits........................................................................ 51
Transition Services...................................................................... 51
Representations and Warranties; Disclaimers.............................................. 52
Release and Indemnification.............................................................. 52
Use of Names; Intellectual Property...................................................... 53
Conditions to the Split-Off.............................................................. 53
Termination.............................................................................. 54
Amendment or Modification................................................................ 54
Tax Sharing Agreement......................................................................... 54
Overview................................................................................. 54
Tax Benefit to Pentair................................................................... 55
Determination of Tax Benefit to Pentair.................................................. 55
Tax Benefit Payment...................................................................... 56
Relationship and Transactions with Essef Following the Split-Off.............................. 56
ANTHONY & SYLVAN................................................................................ 57
Business...................................................................................... 57
Swimming Pool Sales and Installation Industry................................................. 57
Marketing and Sales........................................................................... 57
Competition in the Swimming Pool Sales and Installation Industry.............................. 58
Principal Suppliers and Subcontractors........................................................ 58
Facilities.................................................................................... 58
Legal Proceedings............................................................................. 58
Non-Management Employees...................................................................... 59
Management.................................................................................... 59
Directors, Executive Officers and Key Employees.......................................... 59
Committees of the Board of Directors..................................................... 60
Compensation............................................................................. 62
Indemnification.......................................................................... 62
Executive Compensation................................................................... 62
Employment Agreements.................................................................... 63
1999 Long-Term Incentive Plan............................................................ 64
Principal Shareholders........................................................................ 70
Description of Capital Stock of Anthony & Sylvan.............................................. 72
Possible Effects of Certain Provisions of Anthony & Sylvan's
Organizational Documents and Ohio Law................................................. 73
Transactions and Relationships with Interested Parties................................... 74
Chapter 1704 Transactions................................................................ 75
Admission for Listing on Nasdaq SmallCap Market.......................................... 75
Dividend Policy............................................................................... 76
Capitalization................................................................................ 77
SELECTED CONSOLIDATED FINANCIAL DATA OF ESSEF CORPORATION....................................... 78
SELECTED CONSOLIDATED FINANCIAL DATA OF ANTHONY & SYLVAN........................................ 79
UNAUDITED PRO FORMA FINANCIAL DATA OF ANTHONY & SYLVAN.......................................... 81
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999.................. 81
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998....................... 82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ANTHONY
& SYLVAN...................................................................................... 83
Overview...................................................................................... 83
Results of Operations......................................................................... 84
Quarterly Results of Operations............................................................... 87
Liquidity and Capital Resources............................................................... 88
Cyclicality and Seasonality................................................................... 89
Inflation..................................................................................... 89
</TABLE>
TABLE OF CONTENTS
ii
<PAGE> 9
<TABLE>
<S> <C>
Year 2000 Matters............................................................................. 89
PRINCIPAL SHAREHOLDERS.......................................................................... 91
MARKET PRICES AND DIVIDEND POLICY............................................................... 94
MATERIAL DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS OF ESSEF AND ANTHONY & SYLVAN................ 95
Authorized Shares............................................................................. 95
Amendments to Articles of Incorporation or Code of Regulations................................ 95
Special Meetings of Shareholders.............................................................. 96
Number of Directors; Classified Board of Directors............................................ 96
Removal of Directors.......................................................................... 96
Vote Required to Approve Merger, Consolidation, Sale of Substantially All Assets.............. 97
OTHER MATTERS................................................................................... 98
LEGAL MATTERS................................................................................... 98
EXPERTS......................................................................................... 98
SHAREHOLDER PROPOSALS........................................................................... 98
WHERE YOU CAN FIND MORE INFORMATION............................................................. 100
ANNEX A -- Agreement and Plan of Merger......................................................... A-1
ANNEX B -- Transition Agreement................................................................. B-1
ANNEX C -- Tax Sharing Agreement................................................................ C-1
ANNEX D -- Fairness Opinion of Rhone Group LLC.................................................. D-1
ANNEX E -- Section 1701.85 of the Ohio Revised Code............................................. E-1
FINANCIAL STATEMENTS OF ANTHONY & SYLVAN........................................................ F-1
</TABLE>
TABLE OF CONTENTS
iii
<PAGE> 10
QUESTIONS AND ANSWERS ABOUT THE
PENTAIR/ESSEF MERGER
Q: WHY ARE PENTAIR AND ESSEF PROPOSING TO MERGE?
A: Pentair is acquiring Essef as part of its strategy to grow its existing water
technologies business by expanding its product line into our water treatment
systems and equipment and swimming pool and spa equipment businesses. The
products offered by Pentair and Essef have very little overlap. The combined
product lines will enhance Pentair's ability to add to market share in the
water treatment and systems market. The Essef board believes the transaction
maximizes value to our shareholders, allows our shareholders to continue to
participate in part of the business and puts the two other business segments
into a company with synergistic businesses and more access to capital.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed and dated proxy card in the enclosed return envelope as
soon as possible so that your shares may be represented at the special
shareholder meeting to vote on the merger. The meeting will take place on
August 6, 1999. Our board of directors unanimously recommends the merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send in a later-dated, signed proxy card before the meeting or
attend the meeting in person and vote.
You may send a new proxy card to the following address:
National City Bank
4100 West 150th Street
3rd Floor, North Annex
Cleveland, Ohio 44135
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker may vote your shares only if you provide instructions on how to
vote. Please tell your broker how to vote your shares. If you do not tell
your broker how to vote, your broker will not vote your shares.
Q: SHOULD I SEND IN MY SHARE CERTIFICATES NOW?
A: No. If you continue to hold your Essef shares when we complete the merger,
Bank of America National Trust and Savings Association, the depositary, will
send you written instructions describing how to turn in your old Essef share
certificates in exchange for your cash payment from Pentair and shares of
Anthony & Sylvan from Essef.
Q: DO THE PENTAIR SHAREHOLDERS NEED TO ADOPT THE MERGER WITH PENTAIR?
A: No, the Pentair shareholders do not need to adopt the merger.
Q: WILL I STILL BE A SHAREHOLDER OF ESSEF AFTER THE MERGER?
A: No, you will not. Pentair will pay you cash and we will distribute common
shares of Anthony & Sylvan in exchange for your Essef common shares. Essef
common shares will be delisted from the Nasdaq National Market, and Pentair
will own all of them.
QUESTIONS AND ANSWERS ABOUT THE PENTAIR/ESSEF MERGER
1
<PAGE> 11
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We are working to complete the merger as quickly as possible. We hope to
complete the merger during the third quarter of 1999. However, we may
complete the merger later if:
- all applicable antitrust waiting periods have not expired by that time; or
- other conditions to the merger have not been satisfied by that time.
Q: WILL THE ANTHONY & SYLVAN SHARES BE LISTED ON A PUBLIC MARKET OR EXCHANGE?
A: Yes. Anthony & Sylvan intends to apply to have its common shares listed on
the Nasdaq SmallCap Market. Its proposed symbol is "SWIM." However, we cannot
assure you that a market for Anthony & Sylvan common shares will develop or,
if a market develops, that it will continue. If Anthony & Sylvan does not
meet the qualifications for listing on the Nasdaq SmallCap Market, you will
be able to trade your Anthony & Sylvan shares on the over-the-counter market.
Q: WHEN WILL I BE ABLE TO TRADE MY ANTHONY & SYLVAN SHARES?
A: You will be able to trade your Anthony Sylvan shares as soon as we complete
the merger.
Q: WHAT IF I HAVE QUESTIONS?
A: If you have more questions about how to exchange your shares of Essef for
cash and shares of Anthony & Sylvan, you should contact:
National City Bank
4100 West 150th Street
3rd Floor, North Annex
Cleveland, Ohio 44135
Q: WHAT MUST I DO TO BE ABLE TO EXERCISE MY DISSENTERS' RIGHTS?
A: You may exercise your dissenters' rights only if you did not vote for the
merger, and within 10 days after the special shareholder meeting you must
send us your demand for payment.
You may find more information from various sources as described under "Where
You Can Find More Information" beginning on page 100.
Q: WHAT IS THE ROLE OF ESSEF IN THE DISTRIBUTION OF MY ANTHONY & SYLVAN SHARES?
A: Unless and until we complete the split-off, Essef will own indirectly 100% of
the outstanding shares of Anthony & Sylvan. As a result, Essef may be deemed
an underwriter of the distribution of the Anthony & Sylvan shares to you.
Therefore, Essef may be subject to liability if the information in this proxy
statement/prospectus is incorrect or misleading.
QUESTIONS AND ANSWERS ABOUT THE PENTAIR/ESSEF MERGER
2
<PAGE> 12
SUMMARY
Because this is a summary, it does not contain all the information that may
be important to you. Before you decide how to vote, you should carefully read
this entire proxy statement/prospectus and all of its annexes and all the
documents to which it refers. For a description of the documents referred to in
this proxy statement/prospectus, you should review "Where You Can Find More
Information" beginning on page 100.
THE COMPANIES
Pentair, Inc.
Waters Edge Plaza
1500 County Road B2 West
Saint Paul, Minnesota 55113-3105
(651) 636-7920
Pentair is a diversified industrial manufacturer that acquires, operates
and develops manufacturing companies. Pentair conducts its business in three
operating groups: the Professional Tools and Equipment Group comprising the
manufacture of power tools and equipment for professionals and
do-it-yourselfers; the Water and Fluid Technologies Group comprising the
development of technologies and products related to the treatment and
transportation of water, wastewater and other fluids; and the Electrical and
Electronic Enclosures Group comprising the manufacture of metallic and composite
enclosures that house and protect sensitive electrical controls and electronic
components. Pentair employs approximately 10,000 people in 60 manufacturing and
distribution locations in North America, Europe and Asia.
Essef Corporation
220 Park Drive
Chardon, Ohio 44024
(440) 286-2200
We design, manufacture and distribute products and technologies used in
moving, treating, storing and enjoying water. We operate in three segments: the
swimming pool and spa equipment segment comprising the manufacture and
distribution of filtration systems, pumps, heaters, control valves, lights,
accessories and tile; the water treatment and systems equipment segment
comprising the manufacture and distribution of fiberglass-reinforced pressure
vessels and subsystems for water and other liquids; and the swimming pool sales
and installation segment comprising the sale and installation of residential
in-ground concrete swimming pools. Not including our swimming pool sales and
installation business, we employ approximately 2,000 people and operate from 12
manufacturing and distribution locations throughout the United States, Europe
and India. In our swimming pool sales and installation business, we employ
approximately 700 people and operate in 40 sales offices throughout the United
States.
REASONS FOR THE MERGER
We believe that the merger with Pentair will give you the opportunity to
realize the substantial value we have achieved in our swimming pool and spa
equipment and water treatment and systems equipment businesses. In addition, the
split-off will allow you to continue to participate in the swimming pool sales
and installation business. To review our
SUMMARY
3
<PAGE> 13
reasons for the merger in detail, as well as how we came to agree on the merger,
see "The Merger -- Reasons for the Merger; Recommendations of Our Board"
beginning on page 22.
BOARD RECOMMENDATION TO SHAREHOLDERS
OUR BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED MERGER IS IN YOUR BEST
INTERESTS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO ADOPT THE
MERGER AGREEMENT.
SPECIAL SHAREHOLDER MEETING
If you owned Essef shares as of the close of business on June 14, 1999, you
are entitled to vote at the special shareholder meeting. As of that date, a
total of 13,077,566 shares were eligible to vote at the meeting. At the meeting,
you will consider and vote upon a proposal to adopt the merger agreement.
THE MERGER
THE MERGER AGREEMENT IS ATTACHED AS ANNEX A TO THIS PROXY
STATEMENT/PROSPECTUS. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT IN ITS
ENTIRETY BECAUSE IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
WHAT WILL HAPPEN TO ESSEF AT THE TIME OF THE MERGER (SEE PAGE 40)
At the time of the merger, Pentair will pay you cash and we will distribute
shares of Anthony & Sylvan to you in exchange for your shares of Essef. Upon
completion of the merger,
- we will be a wholly-owned subsidiary of Pentair; and
- Anthony & Sylvan will be an independent public company.
WHAT YOU WILL RECEIVE IN THE MERGER (SEE PAGE 40)
Concurrently with the merger, we will distribute all the shares of Anthony
& Sylvan to our shareholders on a pro rata basis. In exchange for each share of
Essef you own:
- Pentair will pay you $18.97 in cash; and
- we will distribute to you 0.25 of a share of Anthony & Sylvan.
We will not distribute fractional shares of Anthony & Sylvan in the
split-off. Therefore, the total number of Anthony & Sylvan shares that we will
distribute as partial payment for your Essef common shares will be rounded down
to the nearest whole number. We will send you a cash payment based on the value
of the remaining fraction of a share of Anthony & Sylvan that you would
otherwise be entitled to receive. Neither we nor Pentair will pay you any
interest on the cash portion of the merger consideration.
Example: If you own 100 shares of Essef, then as a result of the merger and
split-off, you will be entitled to receive $1,897 in cash and 25 shares of
Anthony & Sylvan.
SUMMARY
4
<PAGE> 14
CONVERSION OF ESSEF STOCK OPTIONS (SEE PAGE 41)
In addition, if you own any option to purchase shares of Essef, those stock
options will become exercisable and vested. Your option will then be converted
into the right to receive:
- from Pentair, $18.97 less the exercise price per share of the stock
option; and
- from Essef, 0.25 of a share of Anthony & Sylvan.
If you are to become an Anthony & Sylvan employee or director and you own
any option to purchase shares of Essef, your option and its exercise price will
be allocated on a pro-rata basis between:
- an option to acquire Essef shares, which will be converted into the right
to receive from Pentair $18.97 less the portion of the exercise price per
share of your option allocable to the part of Essef being merged into
Pentair; and
- an option to acquire Anthony & Sylvan shares at the portion of the
exercise price per share of your option allocable to the Anthony & Sylvan
part of the Essef business.
Formulas describing this process are described on page 43.
PAYMENT FOR YOUR SHARES (SEE PAGE 40)
Immediately before the merger, Pentair will deposit the cash portion of the
merger consideration with the depositary, Bank of America National Trust and
Savings Association. At the same time, we will deposit the shares of Anthony &
Sylvan with Bank of America. As soon as we complete the merger, Bank of America
will mail you a letter of transmittal and instructions for you to use to turn in
your Essef share certificates in exchange for cash and shares of Anthony &
Sylvan.
RISK FACTORS (SEE PAGE 13)
This proxy statement/prospectus describes the merger and Anthony & Sylvan,
including a number of risks associated with the swimming pool sales and
installation business. We discuss those risks beginning on page 13.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGE 35)
Some of our executive officers have interests in the merger in addition to
their interests as our shareholders. These other interests exist because of:
- rights that the executive officers have under our employee incentive,
benefit, and compensation plans; and
- other employment agreements that the executive officers have with us.
As a result of the merger, unvested stock options of executive officers
granted under Essef plans will become exercisable. In addition, because of the
federal income tax consequences of the vesting of those options, other benefits
will be payable to one of our executive officers pursuant to the terms of his
employment agreement. Finally, several executive officers will receive stock
options relating to shares of Anthony & Sylvan to replace a portion of their
Essef stock options rather than receiving shares of Anthony & Sylvan.
SUMMARY
5
<PAGE> 15
CONDITIONS TO THE MERGER (SEE PAGE 47)
The completion of the merger has a number of conditions, including the
following, any of which may be waived by one party or the other:
- accuracy of the representations and warranties made in the merger
agreement;
- adoption of the merger agreement by our shareholders;
- expiration of waiting periods under antitrust laws;
- absence of other orders by any court or governmental entity, statute or
law which would prohibit or materially restrict consummation of the
merger;
- performance by the parties in all material respects of their agreements
contained in the merger agreement; and
- satisfaction of all conditions to the split-off.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 45)
We can agree to terminate the merger agreement without completing the
merger. In addition, either of us acting alone can terminate the merger
agreement under the circumstances described on page 45.
TERMINATION FEES (SEE PAGE 46)
The merger agreement provides for termination fees that could discourage
other companies from trying or proposing to combine with us before we complete
the merger. The merger agreement requires us to pay to Pentair a termination fee
if the merger agreement is terminated under the circumstances described
beginning on page 45. The amount of the termination fee is dependent on the
reason for termination. We discuss how the termination fee is determined
beginning on page 46. Termination provisions are customary for transactions like
the merger. We agreed to the amount of the fees and the circumstances under
which they are payable after extensive negotiation. Our financial advisor
advised our board that the amount of these fees is within a customary range when
compared to similar transactions.
REGULATORY MATTERS (SEE PAGE 38)
Under federal antitrust law, we must submit information to regulatory
authorities about the merger and about us and Pentair. Before we complete the
merger, the waiting periods required under those antitrust laws must have
expired.
FAIRNESS OPINION OF FINANCIAL ADVISOR (SEE PAGE 26)
In deciding to approve the merger, our board considered the opinion from
our financial advisor as to the fairness from a financial point of view of the
cash and Anthony & Sylvan shares to be received by our shareholders.
We received an opinion from our financial advisor, Rhone Group LLC, that as
of the date of its opinion, the original merger consideration to be received by
the holders of Essef common shares pursuant to the merger agreement was fair to
those holders from a financial point of view.
SUMMARY
6
<PAGE> 16
After April 30, 1999, Essef agreed to reduce the cash portion of the merger
consideration. Rhone Group confirmed to Essef that subject to the matters set
forth in its opinion dated April 30, 1999, it could have delivered the same
opinion on April 30, 1999 if the cash portion of the merger consideration on
that date had been $18.97 per Essef common share instead of $19.09 per Essef
common share.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 37)
To the extent that you have held your Essef shares for more than one year
and to the extent that those shares are capital assets, you will recognize
long-term capital gain as a result of the merger. The amount of long-term
capital gain you will recognize will be equal to the amount by which the sum of
the following two amounts exceeds your federal income tax basis in your Essef
shares:
- amount of any cash you receive, including cash you receive in lieu of
Anthony & Sylvan fractional shares; and
- the fair market value, as of the time of the merger, of the shares of
Anthony & Sylvan you receive.
DISSENTERS' RIGHTS (SEE PAGE 38)
Ohio law permits you to dissent from the merger and have the fair value of
your shares appraised by a court and paid to you in cash. In order to do this,
you must follow required procedures, including filing required notices and not
voting your shares in favor of the merger. In particular you must comply with
Section 1701.85 of the Ohio Revised Code. HOLDERS OF ESSEF SHARES WHO WANT TO
EXERCISE THEIR DISSENTERS' RIGHTS MUST NOT VOTE IN FAVOR OF THE MERGER AT THE
ESSEF SPECIAL SHAREHOLDER MEETING AND MUST SEND A WRITTEN DEMAND FOR PAYMENT FOR
THEIR SHARES WITHIN 10 DAYS AFTER THE SPECIAL MEETING. The full text of Section
1701.85 is attached as Annex E to this proxy statement/prospectus. WE ENCOURAGE
YOU TO READ SECTION 1701.85 IN ITS ENTIRETY. You will not receive the $18.97 per
share in cash or shares of Anthony & Sylvan, if you dissent and follow all of
the required procedures. Instead, you will receive only cash in the amount of
the value of your Essef shares.
VOTES REQUIRED (SEE PAGE 19)
Two-thirds of the outstanding shares must vote to adopt the merger for it
to be approved. A majority of our issued and outstanding shares must be present
either in person or by proxy for any vote to be valid.
MARKET PRICES OF ESSEF COMMON SHARES (SEE PAGE 94)
On April 29, 1999, the last day of trading before we announced our proposed
merger with Pentair, the following were the sales prices of our common shares as
quoted on the Nasdaq National Market:
- high price, $19.00 per share;
- low price, $18.50 per share; and
- closing price, $18.56 per share.
SUMMARY
7
<PAGE> 17
On June 21, 1999, the most recent practicable date before we printed this
proxy statement/prospectus, the following were the sales prices of our common
shares as quoted on the Nasdaq National Market:
- high price, $19.50 per share;
- low price, $19.125 per share; and
- closing price, $19.125 per share.
THE SPLIT-OFF
THE TRANSITION AGREEMENT GOVERNS THE RELATIONSHIP BETWEEN US AND ANTHONY &
SYLVAN BEFORE AND AFTER THE MERGER AND IS ATTACHED AS ANNEX B TO THIS PROXY
STATEMENT/PROSPECTUS. WE ENCOURAGE YOU TO READ THE TRANSITION AGREEMENT IN ITS
ENTIRETY BECAUSE IT IS THE LEGAL DOCUMENT THAT GOVERNS THE SPLIT-OFF.
HOW THE SPLIT-OFF WILL OCCUR (SEE PAGE 49)
Anthony & Sylvan is an indirect wholly-owned subsidiary of Essef.
Immediately before we complete the merger, Anthony & Sylvan will be split off
from Essef through the partial redemption of Essef shares with Anthony & Sylvan
shares.
REASONS FOR THE SPLIT-OFF (SEE PAGE 49)
The split-off is an integral part of the transaction and is being done to
address the competitive concerns of our swimming pool and spa equipment
customers. Pentair did not desire to acquire our swimming pool sales and
installation business. It will also allow our shareholders to continue to
participate in the swimming pool sales and installation business.
TERMS OF THE SPLIT-OFF (SEE PAGE 50)
In connection with the split-off, Essef and Anthony & Sylvan have agreed to
the following:
- Anthony & Sylvan will pay Essef an intercompany dividend in the amount of
$17,000,000 that may be:
- increased by the amount by which Anthony & Sylvan's net assets on June
30, 1999 exceed $40,836,000; and
- decreased by the amount by which the merger tax benefit realized by
Pentair exceeds $4,200,000.
- Anthony & Sylvan will pay Pentair, with a senior subordinated note, an
amount equal to the amount, if any, by which the merger tax benefit
realized by Pentair is less than $4,200,000;
- Essef has agreed to forgive any intercompany liability at the same time
as the payment of the intercompany dividend and has agreed that Anthony &
Sylvan will treat those remaining intercompany liabilities as a
contribution to the capital of Anthony & Sylvan;
- Anthony & Sylvan has agreed to indemnify Pentair and Essef under the
circumstances described beginning on page 53;
SUMMARY
8
<PAGE> 18
- Essef has agreed to indemnify Anthony & Sylvan under the circumstances
described beginning on page 52; and
- Anthony & Sylvan may request and we will provide the transition services
described beginning on page 51.
CONDITIONS TO THE SPLIT-OFF (SEE PAGE 53)
The completion of the split-off has a number of conditions, including the
following, any of which may be waived:
- we and Pentair have satisfied the conditions to the merger;
- the Securities and Exchange Commission has declared effective the
registration statement of which this proxy statement/prospectus is a
part;
- we have received all third party consents or other approvals relating to
the completion of the split-off have been received;
- Anthony & Sylvan has paid the intercompany dividend to Essef; and
- there is no order by any court or government entity preventing or
materially restricting the completion of the merger.
TERMINATION OF THE TRANSITION AGREEMENT (SEE PAGE 54)
If the merger agreement is terminated, the transition agreement will be
automatically terminated. In addition, the parties can agree in writing to
terminate the transition agreement.
TRADING MARKET (SEE PAGES 16 AND 75)
Anthony & Sylvan intends to apply to have its common shares approved for
quotation on the Nasdaq SmallCap Market. However, the company may not meet the
admission requirements of the Nasdaq SmallCap Market. If Anthony & Sylvan does
not meet the qualifications for listing on the Nasdaq SmallCap Market, you will
be able to trade your Anthony & Sylvan shares on the over-the-counter market.
SUMMARY
9
<PAGE> 19
SUMMARY CONSOLIDATED FINANCIAL DATA
ESSEF
The following table provides selected consolidated financial data of Essef
and subsidiaries for each of the fiscal years in the five-year period ended
September 30, 1998 and for the six-month periods ended March 31, 1998 and 1999.
We prepared the data as of and for each of the fiscal years in the five-year
period ended September 30, 1998 using our consolidated audited financial
statements. We prepared the selected historical data as of and for the six
months ended March 31, 1998 and 1999 using our unaudited consolidated financial
statements, and they include, in the opinion of management, all adjustments
necessary to present fairly the data for those periods. You should read this
selected consolidated financial data along with the historical financial
statements and accompanying notes that we have included in this proxy
statement/prospectus or incorporated by reference in our Annual Report on Form
10-K for the year ended September 30, 1998. You can obtain this report by
following the instructions we have provided in this proxy statement/prospectus
under "Where You Can Find More Information" beginning on page 100.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net Sales.......................... $126,811 $149,255 $193,788 $306,061 $436,027 $171,374 $208,822
Income from operations............. 10,947 10,777 16,592 22,519 33,857 6,975 6,334
Income from
operations -- Adjusted(1)........ 10,947 10,777 16,592 26,019 33,857 6,975 6,334
Net income......................... 6,995 7,511 9,326 11,766 16,578 2,087 1,106
Net income -- Adjusted(1).......... 6,995 7,511 9,326 14,041 16,578 2,087 1,106
Per Diluted Share:
Net Income....................... $ 0.49 $ 0.51 $ 0.62 $ 0.81 $ 1.12 $ 0.14 $ 0.07
Net Income -- Adjusted(1)........ 0.49 0.51 0.62 0.97 1.12 0.14 0.07
Return on Shareholders' Equity..... 20.6% 16.8% 17.4% 20.3% 23.1% N/A N/A
BALANCE SHEET DATA:
Total Assets....................... $ 74,171 $106,624 $111,248 $214,883 $266,923 $271,990 $313,994
Working Capital.................... 18,212 18,725 15,201 14,148 33,345 54,334 78,962
Long-Term Debt..................... 16,246 20,788 17,512 81,658 112,622 130,671 151,554
Total Debt......................... 17,682 27,693 25,978 87,527 117,334 136,594 157,614
Shareholders' Equity............... 37,896 51,426 53,338 65,446 83,678 67,675 83,732
Debt to Total Capital.............. 31.8% 35.0% 32.8% 57.2% 58.4% 66.9% 65.3%
OTHER DATA:
Cash Flow from Operations.......... $ 8,317 $ 11,287 $ 16,403 $ 33,077 $ 18,776 $(32,211) $(34,377)
Capital Expenditures............... 4,906 8,387 6,580 16,058 15,407 9,625 4,717
Depreciation and Amortization...... 5,147 5,896 5,467 7,621 12,148 5,413 7,418
Engineering and Development........ 3,168 3,925 4,874 5,834 6,056 2,842 2,765
EBITDA............................. 16,733 17,274 22,317 30,004 45,755 7,007 6,212
EBITDA -- Adjusted(1).............. 16,733 17,274 22,317 33,504 45,755 7,007 6,212
Average Shares Outstanding
Basic............................ 12,961 13,809 12,785 12,810 12,893 12,850 13,065
Diluted.......................... 14,387 14,683 15,127 14,541 14,854 14,769 14,967
Market Price of Shares
High............................. $ 6.86 $ 6.95 $ 6.95 $ 14.67 $ 20.91 $ 18.18 $ 20.91
Low.............................. 4.32 5.26 5.35 6.48 12.40 12.40 13.86
at Period End.................... 5.35 6.57 6.57 14.26 15.91 17.16 15.25
Market Capitalization at Period
End.............................. $ 69,383 $ 90,783 $ 84,051 $182,615 $206,815 $221,477 $199,307
</TABLE>
- ---------------
(1) "Adjusted" amounts exclude $3,500,000, or $2,275,000 after tax, in plant
closing costs incurred in 1997.
SUMMARY
10
<PAGE> 20
ANTHONY & SYLVAN
The following table sets forth summary historical and pro forma operating
results, balance sheet and operating data of Anthony & Sylvan. We prepared the
summary historical financial data for the year ended December 31, 1996 and for
the four-month period ended April 30, 1997, using the audited financial
statements of Anthony & Sylvan's predecessor before Anthony & Sylvan's May 1997
acquisition of substantially all of the assets of that predecessor corporation.
We prepared the summary historical financial data for the eight months ended
December 31, 1997 and the year ended December 31, 1998, using the audited
financial statements of Anthony & Sylvan. We prepared the summary historical
financial data for the three months ended March 31, 1998 and March 31, 1999,
using the unaudited financial statements of Anthony & Sylvan. The summary
historical financial data for the three months ended March 31, 1998 and March
31, 1999 include, in the opinion of management, all adjustments necessary to
present fairly the data for those periods. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the results that
Anthony & Sylvan may achieve for the fiscal year ending December 31, 1999 or any
future period. The summary pro forma data for the year ended December 31, 1998
give effect to the split-off as if it had occurred on January 1, 1998. The
summary pro forma data for the three months ended March 31, 1999 give effect to
the split-off as if it had occurred on January 1, 1999. The summary pro forma
balance sheet data for the three months ended March 31, 1999 give effect to the
split-off as if it had occurred as of March 31, 1999. The pro forma operating
results for the year ended December 31, 1998 and three months ended March 31,
1999 are not necessarily indicative of what would have occurred had the
split-off been made at the beginning of the earliest period presented, and they
are not necessarily indicative of results which may occur in the future. You
should read the data presented below along with the financial statements and the
accompanying notes and other financial information that we have included in this
proxy statement/prospectus, set forth on pages 79 and 81 through 91.
SUMMARY
11
<PAGE> 21
<TABLE>
<CAPTION>
ANTHONY & SYLVAN'S PREDECESSOR ANTHONY & SYLVAN
-------------------------------- ---------------------------
FOR THE
PERIOD
YEAR FOR THE PERIOD MAY 1, 1997 YEAR
ENDED JANUARY 1, 1997 TO ENDED
DECEMBER 31, TO DECEMBER 31, DECEMBER 31,
1996(1) APRIL 30, 1997(1) 1997(2) 1998
------------ ----------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Net sales............ $112,167 $28,883 $98,829 $155,765
Cost of sales........ 82,018 22,291 70,814 113,873
-------- ------- ------- --------
Gross profit....... 30,149 6,592 28,015 41,892
Selling expenses..... 18,875 6,073 13,578 23,342
Administrative
expenses........... 9,049 3,980 5,598 13,012
-------- ------- ------- --------
Total operating
expenses......... 27,924 10,053 19,176 36,354
-------- ------- ------- --------
Income/(loss) from
operations......... 2,225 (3,461) 8,839 5,538
Interest and other
expense............ 354 303 1,637 1,916
-------- ------- ------- --------
Income/(loss) before
taxes.............. 1,871 (3,764) 7,202 3,622
Income tax
expense/(benefit)... 704 (1,350) 2,649 1,434
-------- ------- ------- --------
Net income/(loss).... $ 1,167 $(2,414) $ 4,553 $ 2,188
======== ======= ======= ========
Pro forma shares
outstanding:
Basic(4)........... 3,382 3,357
Diluted(5).........
Pro forma net
income/(loss) per
share:
Basic(4)........... $ 1.35 $ 0.65
Diluted(5).........
BALANCE SHEET DATA:
Working capital......
Total assets.........
Total debt...........
Equity...............
OTHER DATA:
Number of pools
installed.......... 3,803 949 3,162 5,153
<CAPTION>
ANTHONY & SYLVAN
----------------------------------------------
PRO FORMA
PRO FORMA THREE THREE THREE
YEAR MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH MARCH MARCH 31,
1998(3) 31, 1998 31, 1999 1999(3)
------------ -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Net sales............ $155,765 $18,040 $26,422 $26,422
Cost of sales........ 113,873 13,669 20,719 20,719
-------- ------- ------- -------
Gross profit....... 41,892 4,371 5,703 5,703
Selling expenses..... 23,342 3,857 6,333 6,333
Administrative
expenses........... 14,212 2,520 3,172 3,472
-------- ------- ------- -------
Total operating
expenses......... 37,554 6,377 9,505 9,805
-------- ------- ------- -------
Income/(loss) from
operations......... 4,338 (2,006) (3,802) (4,102)
Interest and other
expense............ 1,360 479 1,095 340
-------- ------- ------- -------
Income/(loss) before
taxes.............. 2,978 (2,485) (4,897) (4,442)
Income tax
expense/(benefit)... 1,179 (984) (1,939) (1,759)
-------- ------- ------- -------
Net income/(loss).... $ 1,799 $(1,501) $(2,958) $(2,683)
======== ======= ======= =======
Pro forma shares
outstanding:
Basic(4)........... 3,357 3,382 3,353 3,353
Diluted(5).........
Pro forma net
income/(loss) per
share:
Basic(4)........... $ 0.54 $ (0.44) $ (0.88) $ (0.80)
Diluted(5).........
BALANCE SHEET DATA:
Working capital...... $(3,046) $(3,046)
Total assets......... 58,568 58,568
Total debt........... 27,661 17,444
Equity............... 3,783 14,000
OTHER DATA:
Number of pools
installed.......... 5,153 655 971 971
</TABLE>
- ---------------
(1) In March 1996, Anthony and Sylvan's predecessor acquired the assets of
Anthony Pools. This acquisition was accounted for as a purchase, and,
accordingly, the results of operations of Anthony Pools are included in
Anthony and Sylvan's predecessor's financial statements from the date
of acquisition. As a result, period to period comparisons are not
necessarily meaningful.
(2) The acquisition of the Anthony & Sylvan predecessor's assets by Anthony
& Sylvan in May 1997 was accounted for as a purchase with the purchase
price being allocated to the assets and liabilities based on their
estimated fair value as of the date of the acquisition.
(3) Reflects pro forma adjustments to interest expense as the result of the
$17,000,000 payment to Essef funded by external bank financing at the
time of the split-off, the contribution to capital of the remaining
intercompany debt of Anthony & Sylvan with Essef, and the addition of
estimated stand-alone public company administrative expenses to be
incurred by Anthony & Sylvan following the split-off.
(4) Pro forma net income/(loss) per share assumes the conversion of Essef
shares and Essef options into Anthony & Sylvan common shares assuming
the split-off occurred at the end of each period presented. Historical
net income per share prior to the acquisition of Anthony & Sylvan's
predecessor by Anthony & Sylvan in May 1997 is not presented as it
would not be meaningful.
(5) Diluted shares and earnings per share are not presented as the
utilization of the treasury stock method of calculating earnings per
share requires information about Anthony & Sylvan's share price and the
exercise price for the stock options to be issued to Anthony & Sylvan
employees and directors, which information is not determinable at this
time. See pages 41 and 42 for a further description of these stock
options.
SUMMARY
12
<PAGE> 22
RISK FACTORS
This proxy statement/prospectus contains forward-looking statements which
involve a number of risks and uncertainties. Actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause actual results to differ materially include, without limitation, the
risk factors discussed below and elsewhere in this proxy statement/prospectus.
In addition to the other information contained in this proxy
statement/prospectus, you should consider the following risk factors carefully
before you make a decision on the merger.
THE TERMINATION FEES MAY DISCOURAGE OTHER COMPANIES FROM TRYING TO COMBINE WITH
US.
The merger agreement provides for termination fees that could discourage
other companies from trying or proposing to combine with us in an alternative
transaction before we complete the merger. An alternative transaction involving
us may be more advantageous to our shareholders than the merger. If the merger
is terminated for other reasons, termination fees could have a material negative
impact on our earnings and financial condition. This may discourage other
companies from trying to or proposing to combine with us.
A COURT COULD PREVENT US FROM COMPLETING THE MERGER.
Even though we have received early termination of the waiting period under
the Hart-Scott-Rodino Antitrust Act of 1976, a court could delay or prevent the
merger before or after you adopt the merger, and could still require us to
divest one or more of our product lines or to agree to various operating
restrictions before or after you approve the merger. We cannot guarantee that we
could complete any required divestiture for a fair market price.
PENTAIR MAY NOT BE ABLE TO OBTAIN FINANCING TO PAY THE CASH PORTION OF THE
MERGER CONSIDERATION.
Pentair needs to obtain financing for the cash portion of the merger
consideration. Pentair has told us that it will use existing credit facilities
or proceeds from a public offering of securities. However, we cannot assure you
that Pentair's existing credit facilities will be available or sufficient, or
that any securities offering by Pentair will be successful. If Pentair cannot
pay the cash portion of the merger consideration because it cannot obtain
financing, it will breach its obligations under the merger agreement.
A HIGHER THAN EXPECTED TRADING PRICE FOR ANTHONY & SYLVAN MAY ADVERSELY AFFECT
ANTHONY & SYLVAN'S OPERATIONS AND ABILITY TO OBTAIN FINANCING.
The merger consideration to be paid to you is predicated on Pentair
receiving a tax benefit from the merger equal to $4,200,000. If the tax benefit
is less than $4,200,000, Anthony & Sylvan is required to issue a senior
subordinated promissory note to Pentair in a principal amount equal to the tax
benefit deficiency. Anthony & Sylvan's issuance of the subordinated promissory
note may adversely affect Anthony & Sylvan's ability to obtain financing and to
use cash flow from operations to grow its business.
A key element in determining the tax benefit of the merger is the trading
value of Anthony & Sylvan shares immediately following the merger. The higher
the Anthony & Sylvan trading value is immediately following the merger, the
higher the tax Essef, and therefore Pentair, will owe on the gain resulting from
the split-off of Anthony & Sylvan. A higher gain on the split-off of Anthony &
Sylvan may result in a lower tax benefit to Pentair.
RISK FACTORS
13
<PAGE> 23
We have discussed the calculation of the tax benefit to Pentair in the merger
beginning on page 55.
IF WE COMPLETE THE MERGER AND YOU BECOME AN ANTHONY & SYLVAN SHAREHOLDER, YOU
WILL BE SUBJECT TO THE RISKS OF INVESTING IN ANTHONY & SYLVAN.
If you become an Anthony & Sylvan shareholder, you will continue to be
subject to the risks associated with the swimming pool sales and installation
business. In addition, you will be subject to the risks affecting Anthony &
Sylvan specifically.
ANTHONY & SYLVAN'S GROWTH STRATEGY INVOLVES A VARIETY OF RISKS.
Anthony & Sylvan has experienced substantial growth in recent years
resulting in significant increases in the size, scope and geographic
distribution of its operations. Anthony & Sylvan plans to continue its growth
strategy through acquisitions and internal expansion. There are risks involved
in this growth strategy, including the following:
- inability to identify, attract or acquire acquisition candidates or
identify opportunities for internal growth;
- difficulties in integrating acquired businesses into Anthony & Sylvan's
operations, which could cost money and divert Anthony & Sylvan from other
important matters;
- inability to manage the impact of growth on Anthony & Sylvan's personnel,
information systems and financial systems;
- diversion of management's attention from other ongoing business concerns;
- difficulty in recruiting additional managers with the skills necessary to
operate successfully in new markets or to enhance the management of
acquired companies;
- failure to retain key personnel at acquired companies; and
- failure of new operations and acquisitions to achieve expected results.
The costs of expansion and integration of acquisitions may have adverse
short-term effects on Anthony & Sylvan's operating results. These costs could
include:
- integration costs, including:
- converting computer systems;
- combining space; and
- standardizing processes and procedures;
- restructuring charges;
- accounting and legal fees;
- investment banking fees; and
- recognition of transaction-related obligations.
ANTHONY & SYLVAN MAY NOT BE ABLE TO OBTAIN SUFFICIENT CAPITAL TO TAKE ADVANTAGE
OF ITS GROWTH STRATEGY.
Anthony & Sylvan may choose to finance future acquisitions by using its
shares for all or a portion of the purchase price. If Anthony & Sylvan pays for
an acquisition with shares,
RISK FACTORS
14
<PAGE> 24
the acquisition would reduce the percentage ownership of the then current
shareholders. In addition, shares used to finance an acquisition may have
rights, preferences or privileges senior to those of then existing shareholders.
The extent to which Anthony & Sylvan is willing or able to use shares for
acquisitions will depend on its market value from time to time and the
willingness of sellers of acquisition targets to accept shares as payment.
Because of these factors, Anthony & Sylvan may have difficulty financing
acquisitions. If acquisition candidates are unwilling to accept Anthony & Sylvan
shares as part of the purchase price, Anthony & Sylvan would be required to use
more of its cash resources, if available, to initiate and maintain its
acquisition program. In those instances, Anthony & Sylvan may not be able to
find sufficient cash resources on acceptable terms, and its growth may be
limited.
Anthony & Sylvan is required to make an intercompany dividend to Essef in
connection with the split-off. The amount of this intercompany dividend will be
$17,000,000. However, in addition to downward adjustments, this amount may be
increased by the amount of the value of the net assets of Anthony & Sylvan as of
June 30, 1999 over $40,836,000. Anthony & Sylvan expects to borrow funds from a
group of financial institutions under a revolving line of credit to finance the
payment of the intercompany dividend. Anthony & Sylvan also intends to borrow
funds to finance its working capital needs. If the intercompany dividend is
significantly more than $17,000,000, Anthony & Sylvan's ability to obtain
financing for working capital purposes will, in turn, be inhibited. We cannot
assure you that financial institutions will be willing to provide Anthony &
Sylvan with financing in a sufficient amount or on terms acceptable to Anthony &
Sylvan.
ANTHONY & SYLVAN HAS NO OPERATING HISTORY AS A STAND-ALONE COMPANY.
After the merger, Anthony & Sylvan will be a stand-alone public company
operating through various subsidiaries. Anthony & Sylvan's previous financial
results as our subsidiary may not be representative of what its results would
have been had it been a separate, stand-alone public company during the periods
presented. For a year after the split-off, Pentair has agreed to provide some
tax, legal and technical support services to Anthony & Sylvan on a cost basis as
agreed to between Essef and Anthony & Sylvan, if necessary.
As a stand-alone company, Anthony & Sylvan may experience some difficulties
and inefficiencies it did not experience when it was part of Essef. Those
difficulties and inefficiencies may include:
- corporate personnel previously available may not be available to it; and
- buying power for some services and supplies.
A DOWNTURN IN THE ECONOMY COULD ADVERSELY AFFECT ANTHONY & SYLVAN'S BUSINESS AND
FINANCIAL CONDITION.
Anthony & Sylvan's business is cyclical. Because the majority of Anthony &
Sylvan's customers finance their pool installations, its sales are particularly
sensitive to interest rate fluctuations and credit availability. If there is a
downturn in the economy, Anthony & Sylvan may experience sustained periods of
declining sales which could adversely affect its business and financial
condition.
SEASONALITY AND WEATHER MAY SIGNIFICANTLY IMPACT ANTHONY & SYLVAN'S SALES.
Anthony & Sylvan's business is highly seasonal. Historically, approximately
70% of Anthony & Sylvan's net sales have been generated in the second and third
quarters of the
RISK FACTORS
15
<PAGE> 25
year, the peak season for swimming pool installation and use. Moreover, Anthony
& Sylvan typically incurs net losses during the first and fourth quarters of the
year. Unseasonably cold weather or extraordinary amounts of rainfall during the
peak sales season can significantly reduce pool purchases and disrupt
installation schedules, and, in doing so, can adversely affect Anthony &
Sylvan's sales and operating profit.
CHANGES IN ANTHONY & SYLVAN'S KEY PERSONNEL MAY HAVE AN ADVERSE EFFECT ON ITS
SUCCESS.
Anthony & Sylvan's future success depends heavily upon the continued
involvement of a number of key employees. Anthony & Sylvan has entered into
employment agreements with some of its key employees. If any of Anthony &
Sylvan's key personnel leave the company, its profitability and growth may be
adversely affected.
YOU MAY FIND IT HARD TO SELL YOUR ANTHONY & SYLVAN SHARES.
There will be no public market for the Anthony & Sylvan shares immediately
after the merger. Although Anthony & Sylvan intends to apply to have its common
shares approved for listing on the Nasdaq SmallCap Market, the company may not
meet the admission requirements of the Nasdaq SmallCap Market. Even if Anthony &
Sylvan's common shares are listed on the Nasdaq SmallCap Market, an active
trading market may not develop. In addition, the stock may not be followed by
market analysts or the investment community unless a large number of the shares
are held by investors other than Anthony & Sylvan affiliates. A limited
following by market analysts or the investment community may reduce the amount
of market activity in Anthony & Sylvan common shares and make it more difficult
for you to sell your shares. Accordingly, you may be required to bear the
financial risks of your investment for an indefinite period of time.
If the Anthony & Sylvan common shares are not approved for listing on the
Nasdaq SmallCap Market, we would expect that trading of the Anthony & Sylvan
common shares would be conducted on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in what is
commonly referred to as the "pink sheets." As a result, you may find it more
difficult to dispose of, or obtain accurate quotations as to the price of,
Anthony & Sylvan common shares. We cannot assure you that investors will develop
an interest in Anthony & Sylvan common shares so that a trading market develops
or, if a trading market does develop, how active that trading market will be or
whether it will be sustained.
Even if a trading market for your shares does develop, the market price of
the Anthony & Sylvan shares could be highly volatile, fluctuating in response to
a wide variety of factors, some of which may be out of our control. Some
shareholders who receive shares of Anthony & Sylvan may decide that they do not
want to invest in the swimming pool sales and installation market. Those
shareholders could decide to sell their shares and those sales could cause the
trading value of your shares to decline.
Immediately after the split-off, Anthony & Sylvan will have the same
shareholders as Essef had immediately before the split-off and you will own the
same proportional interest in Anthony & Sylvan as you did in Essef. As has been
true for Essef, there will initially be a few large blocks of Anthony & Sylvan
shares, and those large blocks of shares do not trade frequently. Therefore,
even trading of a small number of shares of Anthony & Sylvan could have a large
impact on the trading price of your shares.
RISK FACTORS
16
<PAGE> 26
CONCENTRATION OF LARGE BLOCKS OF SHARES MAY DEPRESS THE TRADING VALUE OF YOUR
SHARES.
Following the split-off, a large number of shares of Anthony & Sylvan will
be concentrated in the hands of relatively few shareholders. If these
shareholders decide to sell all or a portion of their shares, or the market
perceives that those sales could occur, the trading value of your shares may
decline.
ANTHONY & SYLVAN'S ARTICLES AND REGULATIONS AND OHIO LAW CONTAIN PROVISIONS THAT
COULD DETER A TAKEOVER ATTEMPT, EVEN AT A PRICE ATTRACTIVE TO SHAREHOLDERS.
Anthony & Sylvan's articles of incorporation and regulations, along with
Ohio and federal law, may make it difficult to change or gain control of Anthony
& Sylvan, even at a price attractive to shareholders. As a result, shareholders
who might desire to participate in a change of control transaction may not have
an opportunity to do so. These provisions may reduce the market price of Anthony
& Sylvan's shares. Some of these provisions may also make the removal of the
current board of directors or management more difficult. These provisions
include:
- restrictions on the acquisition of Anthony & Sylvan's equity securities;
- classification of the terms of the board of directors;
- restrictions on calling shareholders' meetings; and
- ability of the board to issue serial preferred stock and additional
common shares without shareholder approval.
COMPUTER SYSTEMS FAILURE OR MISCALCULATIONS RESULTING FROM AN INABILITY TO
INTERPRET DATES BEYOND 1999 COULD MATERIALLY AND ADVERSELY AFFECT ANTHONY &
SYLVAN'S OPERATIONS.
Any computer equipment that uses two digits instead of four to specify the
year will be unable to interpret dates beyond the year 1999. This "year 2000"
issue could result in system failures or miscalculations causing disruptions of
operations. The major areas within Anthony & Sylvan's business that could be
affected critically are financial and operating systems and third-party
relationships with suppliers and service providers. Anthony & Sylvan has
developed plans to address these exposures.
Anthony & Sylvan's operations are not highly dependent on computerized
recordkeeping, financial reporting and other systems. In addition, some of the
Anthony & Sylvan's vendors and other third parties with which Anthony & Sylvan
conducts business may use computer systems that could be adversely affected by
year 2000-related programming errors. Although Anthony & Sylvan is evaluating
its computer systems and endeavoring to identify and correct any year
2000-related problems, we cannot guarantee that it, or third parties, will
identify and correct all these problems. In addition, Anthony & Sylvan's
business may be adversely affected if it or other organizations with which it
does business are unsuccessful in timely completing the conversion to year 2000
compliant applications.
Although we cannot guarantee it, we believe that Anthony & Sylvan's
internal systems will be year 2000 compliant. However, the failure of major
suppliers and service providers to achieve year 2000 compliance could materially
and adversely affect Anthony & Sylvan's results of operations. See page 88 for
further details regarding year 2000 matters.
RISK FACTORS
17
<PAGE> 27
THE SPECIAL SHAREHOLDER MEETING
PURPOSE OF THE SPECIAL SHAREHOLDER MEETING
At the special meeting of shareholders to be held at Essef's headquarters,
at 220 Park Drive, Chardon, Ohio 44024 on August 6, 1999 at 9:00 a.m., Eastern
time, and at any adjournment or postponement of that meeting, as a holder of our
shares, you will consider and vote on a proposal to adopt the merger agreement
and any other matters that properly come before the meeting.
Along with each copy of this proxy statement/prospectus, we are sending a
form of proxy for use at the meeting.
OUR BOARD HAS APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED IN THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS A VOTE FOR
ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE; VOTING RIGHTS; PROXIES
If you owned our shares at the close of business on June 14, 1999, you are
entitled to notice of and to vote at the meeting.
As of June 14, 1999, there were 13,077,566 shares issued and outstanding
and entitled to vote at the meeting. For each of your shares, you are entitled
to one vote. Shares held by us as treasury shares or shares of any of our
subsidiaries do not have voting rights.
All shares represented by properly executed proxies will, unless those
proxies have been revoked before the vote, be voted in accordance with the
instructions indicated in the proxies. If your shares are represented by more
than one properly executed proxy, the proxy bearing the most recent date will be
voted at the meeting. IF YOUR PROXY CARD DOES NOT SHOW HOW YOU WANT TO VOTE,
YOUR ESSEF COMMON SHARES WILL BE VOTED FOR ADOPTION OF THE MERGER AGREEMENT.
If you give the proxy we are soliciting, you may revoke it at any time
before it is exercised by giving written notice to Morrow & Co., Inc., 445 Park
Avenue, 5th Floor, New York, NY 10022, Attention: Proxy Department, by signing
and returning a later-dated proxy or by voting in person at the meeting. You
should note that just attending the meeting without voting in person will not
revoke an otherwise valid proxy.
If you do not return a properly executed proxy and do not vote at the
meeting, your shares will not be voted. That would have the same effect as a
vote "against" adoption of the merger agreement.
Inspectors of election will tabulate votes cast by proxy or in person at
the meeting and will determine whether a quorum is present. The inspectors of
election will treat abstentions as shares that are present and entitled to vote
for purposes of determining whether there is a quorum but as unvoted for
purposes of determining whether any matter submitted to the shareholders for a
vote is approved. As a result, abstentions will have the same effect as a vote
"against" adoption of the merger agreement. Under Nasdaq rules, brokers who hold
our shares in "street name" for the beneficial owners of those shares cannot
vote those shares on the adoption of the merger agreement without specific
instruction from their customers.
We have hired Morrow & Co., Inc., as proxy tabulator, to assist the
inspectors of election.
THE SPECIAL SHAREHOLDER MEETING
18
<PAGE> 28
QUORUM
A majority of the issued and outstanding Essef common shares must be
present either in person or by proxy for any vote on the merger to be valid.
REQUIRED VOTE
Under Ohio law and our articles of incorporation, holders of two-thirds of
the outstanding shares must vote for adoption of the merger agreement for it to
be approved. A quorum must be present at the meeting, either in person or by
proxy, for the vote to be valid. If a quorum is not present at the meeting, we
expect to adjourn or postpone the meeting to allow additional time to obtain
additional proxies or votes. Whenever we reconvene the meeting, all proxies we
receive before the adjournment or postponement will be voted in the manner they
would have been voted at the original convening of the meeting. However, any
proxies that have been effectively revoked or withdrawn, even if they were
effectively voted on the same or any other matter at a previous meeting, will be
voted as revoked or withdrawn.
As of June 14, 1999, our directors and executive officers and their
affiliates beneficially owned an aggregate of 5,421,973 of our shares entitled
to vote at the meeting. This number amounts to 41.46 percent of our shares
outstanding and entitled to vote at the meeting on that date. Our directors and
executive officers and the directors and executive officers of our affiliates
have indicated that they intend to vote their shares in favor of adoption of the
merger agreement. See "The Merger -- Interests of Executive Officers and
Directors in the Merger" beginning on page 35.
THE MATTERS TO BE CONSIDERED AT THE MEETING ARE OF GREAT IMPORTANCE TO YOU.
THEREFORE, WE URGE YOU TO READ AND CONSIDER CAREFULLY THE INFORMATION IN THIS
PROXY STATEMENT/PROSPECTUS. WE ALSO URGE YOU TO COMPLETE, DATE, SIGN AND RETURN
PROMPTLY THE ENCLOSED PROXY USING THE ENCLOSED POSTAGE-PAID ENVELOPE.
SOLICITATION OF PROXIES
We will bear our own cost of solicitation of proxies. In addition to any
solicitation by mail, our directors, officers and employees may solicit proxies
personally or by telephone, facsimile transmission or otherwise. Those
directors, officers and employees will not receive additional compensation for
their solicitation efforts, but we may reimburse them for out-of-pocket expenses
they incur in connection with these efforts. We will reimburse brokerage houses,
fiduciaries, nominees and others for the out-of-pocket expenses incurred in
forwarding proxy materials to beneficial owners of shares held in their names.
In addition, we have engaged Morrow & Co., Inc. to act as our proxy solicitor
and have agreed to pay it $7,500 plus expenses for these proxy solicitation
services.
YOU SHOULD NOT SEND YOUR SHARE CERTIFICATES WITH YOUR PROXY CARDS. AFTER
THE MERGER, THE DEPOSITARY WILL SEND YOU A LETTER OF TRANSMITTAL WITH
INSTRUCTIONS ON HOW TO SURRENDER YOUR SHARE CERTIFICATES.
EXCHANGE OF CERTIFICATES AFTER WE COMPLETE THE MERGER
We have designated Bank of America as depositary to hold and then to
deliver the merger consideration to you. Immediately prior to the closing,
Pentair will make cash available to the depositary in amounts necessary to pay
the cash portion of the merger
THE SPECIAL SHAREHOLDER MEETING
19
<PAGE> 29
consideration when you surrender your share certificates. We will make available
to the depositary enough shares of Anthony & Sylvan and cash for payment in lieu
of fractional shares for distribution to you. Promptly after we complete the
merger, the depositary will mail to you:
- a letter of transmittal; and
- instructions for use when you surrender your share certificates in
exchange for the merger consideration.
When you send your share certificates to the depositary for cancellation,
together with a properly executed letter of transmittal and any other documents
that the depositary may require, you will be entitled to receive the cash and
shares of Anthony & Sylvan in exchange for the Essef shares that your
surrendered certificates represent. After we complete the merger, until you
surrender your Essef share certificates, you will have only the right to receive
cash and shares of Anthony & Sylvan when you surrender your Essef share
certificates. Neither we nor Pentair will pay any interest to you and no
interest will accrue on the merger consideration payable to you.
THE SPECIAL SHAREHOLDER MEETING
20
<PAGE> 30
THE MERGER
BACKGROUND OF THE MERGER
As companies serving the water treatment industry, we and Pentair and our
managements have maintained a business relationship for a number of years. On
February 11, 1998, Thomas B. Waldin, our president and chief executive officer,
met with Richard J. Cathcart, executive vice president of Pentair, to discuss a
possible business transaction and the potential strategic fit between us and
Pentair.
On February 12, 1998, we retained Rhone Group LLC to advise us with respect
to a variety of financial matters, including the appropriateness of various
financial and strategic alternatives. About that time, we also retained, Squire,
Sanders & Dempsey L.L.P. to assist with legal and regulatory matters related to
any potential acquisition or combination transaction.
Between February 12, 1998 and April 7, 1998, Mr. Waldin and Mr. Cathcart
continued to discuss a possible business transaction. In furtherance of the
discussions between Mr. Waldin and Mr. Cathcart, we entered into a
confidentiality agreement with Pentair on April 7, 1998. After we signed the
confidentiality agreement, Mr. Waldin, Mr. Cathcart and Winslow Buxton,
president and chief executive officer of Pentair, met to discuss further the
potential strategic fit of Pentair's product lines as well as possible
transaction structures.
On June 11, 1998, Mr. Waldin and members of Essef's management met in New
York City at the offices of Rhone Group with Mr. Buxton, Mr. Cathcart, and other
Pentair representatives. At this meeting, representatives from Rhone Group
reviewed different possible forms of transactions, but Pentair was not
interested in acquiring all of Essef's business. Pricing was not discussed
during the meeting and the parties concluded that a transaction would not be
possible at that time.
In October 1998, at Pentair's initiative, discussions resumed between
representatives of us and Pentair. Effective October 1, 1998, we and Pentair
entered into another confidentiality agreement to replace the previous
confidentiality agreement. At our November 18, 1998 board meeting, Mr. Waldin
informed our board that discussions had taken place between us and Pentair. Our
board took no action relating to the discussions with Pentair at that meeting.
On November 20, 1998, representatives of the management of Pentair and Credit
Suisse First Boston met with our management and representatives from Rhone Group
at our facilities in Chardon, Ohio to learn more about the water treatment
systems and equipment and swimming pool and spa equipment businesses and review
possible transaction structures. Again, pricing was not discussed, but we did
agree to provide some diligence materials to Pentair.
On December 7, 1998, Mr. Cathcart sent an indication of interest letter to
Mr. Waldin. The stated purpose of this letter was to clarify the various issues
previously discussed by our and Pentair's representatives. After reviewing the
letter, our management and representatives determined that several of the issues
set forth in Mr. Cathcart's letter were unclear or unacceptable and as a result,
we took no formal action regarding the letter.
On December 23, 1998, Mr. Cathcart sent a second indication of interest
letter to Mr. Waldin in order to further clarify the issues set forth in
Pentair's December 7, 1998 letter. On December 24, 1998, our board held an
informational conference call to discuss Pentair's December 23, 1998 indication
of interest. Our board took no formal action during
THE MERGER
21
<PAGE> 31
the conference call but did support management's continued discussions with
Pentair. Consequently, we invited representatives of Pentair to conduct limited
due diligence relating to us and our operations.
During the week of January 4, 1999, representatives of Pentair conducted
confidential due diligence at the offices of our legal counsel, Squire, Sanders
& Dempsey L.L.P. in Cleveland, Ohio. During this time, Rhone Group also
continued its due diligence investigation of us. On January 11, 1999, our
management issued a press release stating that we were in discussions regarding
a possible transaction but did not identify Pentair as a party to those
discussions. We issued that press release in response to increased trading
activity in our stock on January 8, 1999. During the week of January 11, 1999,
negotiations with Pentair were terminated between us and Pentair as we were
unable to reach agreement on terms and conditions. On January 15, 1999, we
issued a press release stating that merger discussions had been terminated,
again not identifying Pentair as a party to those discussions.
In late February 1999, representatives from Pentair once again contacted us
regarding a possible transaction. After several weeks of negotiation, Essef
authorized Squire, Sanders & Dempsey L.L.P. to prepare drafts of definitive
transaction documents. On March 22, 1999, Squire Sanders & Dempsey delivered a
preliminary draft of a merger agreement on our behalf to Pentair. Between March
24, 1999 and April 25, 1999, we and our representatives met numerous times with
Pentair and its representatives to negotiate the terms of the merger agreement
and the related agreements.
On April 26 and 27, 1999, special meetings of the Pentair board were held
to review the terms of the merger agreement and the material factors for and
against the merger. Representatives from Credit Suisse First Boston made
presentations to the Pentair board concerning the proposed merger. On April 27,
1999, the Pentair board unanimously approved the merger and all related
transactions, the merger agreement, the transition agreement and the tax sharing
agreement.
On April 30, 1999, our board met to review the terms of the merger
agreement and the material factors for and against the merger. At this meeting,
representatives from Rhone Group made presentations to our board concerning the
proposed merger. These representatives advised our board that as of such date,
the original merger consideration that Essef shareholders will receive was fair
to them from a financial point of view. At this meeting, our board unanimously
approved the merger and all related transactions, the merger agreement, the
transition agreement and the tax sharing agreement.
On April 30, 1999, we and Pentair entered into the merger agreement,
transition agreement and tax sharing agreement and issued separate press
releases announcing the transaction.
REASONS FOR THE MERGER; RECOMMENDATION OF OUR BOARD
Our board believes that the merger and the separation of the swimming pool
sales and installation business from the swimming pool and spa equipment and
water treatment and systems equipment businesses will accomplish a number of
important business objectives. The merger and cash payment will allow you to
liquidate your holdings and realize the value of our existing swimming pool and
spa equipment and water treatment and systems equipment businesses. Receiving
Anthony & Sylvan shares will allow you to continue to participate in the
swimming pool sales and installation business. Our board believes that the
split-off of Anthony & Sylvan from our other businesses will permit Anthony &
Sylvan
THE MERGER
22
<PAGE> 32
management to adopt strategies and pursue investment opportunities without
having to consider the concerns of customers of the swimming pool and spa
equipment business who compete with Anthony & Sylvan. The split-off will:
- allow Anthony & Sylvan to have its own publicly traded equity securities
to finance its own growth opportunities;
- increase the possibility that the long-term value of your investment in
the swimming pool sales and installation business will increase;
- allow you and others to evaluate better the performance and future
prospects of the swimming pool sales and installation business; and
- increase the likelihood that the market will recognize the performance
and potential of Anthony & Sylvan.
Our board of directors believes that the merger is fair to you from a
financial point of view. At its April 30, 1999 meeting, our board approved the
merger agreement. We have set forth below the material factors weighing in favor
of the merger that our board considered in reaching its decision to approve the
merger agreement and to recommend that you vote to adopt the merger agreement:
- prospects of each of Essef and Pentair indicate that the combined
businesses will have a stronger presence in their markets than either
company standing alone;
- ability to achieve a premium from the cash from Pentair plus the value of
the Anthony & Sylvan shares to be distributed over the market price at
which our shares had previously traded;
- possibility that our future performance might not lead to a market price
of our shares more than the consideration that you would receive as part
of the proposed merger and split-off;
- desire of several of our major shareholders to liquidate their
investments:
- in a manner that will provide them the opportunity to diversify their
investment portfolio; and
- at a sales price that may not be available either by selling their
shares in the market or in a public offering;
- possible enhancement of our existing businesses as a result of combining
with those of Pentair, including the combined company's attractiveness as
a supplier and its ability to fund its internal growth and research and
development, attributable in part to the greater size and financial
strength of the combined company;
- relative value to us and our shareholders that could be generated from
other various strategic alternatives available to us, including the
alternative of remaining independent;
- financial and business prospects of the combined company, including the
potential for material cost savings and other synergies from integrating
our water treatment and systems business and adding the swimming pool and
spa equipment business to Pentair's businesses;
THE MERGER
23
<PAGE> 33
- potential beneficial effects on our various constituencies, including our
employees, customers and creditors and on the communities in which our
plants and offices are located;
- expiration in 2000 of 2,586,932 options, adjusted for stock splits and
dividends, granted to Thomas B. Waldin when he was employed by us in 1990
that could trigger an obligation by us:
- to purchase the underlying shares from him; or
- to register the underlying shares for sale to the public;
- our board's belief, after consultation with its legal counsel, that the
competition approvals necessary to complete the merger could be obtained;
- presentation by our financial advisor, Rhone Group LLC, on April 30, 1999
with respect to the merger and the opinion of Rhone Group dated as of
April 30, 1999 that as of that date the original merger consideration to
be received by the holders of the Essef common shares was fair to them
from a financial point of view;
- value to you of splitting off Anthony & Sylvan from our other businesses
as compared to the value to you of keeping Anthony & Sylvan with our
other businesses balanced against the need to separate Anthony & Sylvan
from our swimming pool equipment business to alleviate competitive
concerns of some of our swimming pool equipment customers that compete
with Anthony & Sylvan;
- taxation of shareholders at a capital gains rate for the merger
consideration and avoidance of taxation at the corporate level if either
of the businesses to be combined with Pentair had been sold separately;
- increased ease of evaluating the performance and future prospects of the
swimming pool sales and installation business and the likelihood the
market will recognize the value of Anthony & Sylvan;
- principal terms and conditions of the merger agreement, in particular:
- extent to which Pentair's obligation to consummate the merger was
unconditional other than for conditions that our board believes are
typical or likely to be satisfied; and
- our ability to respond to and engage in negotiations about, provide
confidential information about, or otherwise facilitate unsolicited
alternative proposals to acquire Essef that our board determines in
good faith, after consultation with its outside counsel and its
financial advisors, is necessary in order to avoid a breach of its
fiduciary duties; and
- our exploration over the last two years of potential business
combinations with other third parties.
We have set forth below the material factors weighing against the merger
that our board considered in reaching its decision to approve the merger
agreement and to recommend that you vote to adopt the merger agreement:
- our obligation to pay Pentair a termination fee of $9,317,000 if the
merger agreement is terminated because we accept a superior proposal;
THE MERGER
24
<PAGE> 34
- our obligation to pay Pentair a termination fee of $9,317,000 if the
merger agreement is terminated because our board withdraws its
recommendation that you vote for the merger;
- our obligation to pay Pentair a termination fee of $4,658,000 if the
merger agreement is terminated because the parties do not complete the
merger by September 30, 1999 and we accept, within 12 months after
termination, an acquisition proposal from someone who contacted us
between April 30, 1999 and the termination date;
- our obligation to pay up to $500,000 if the merger agreement is
terminated due to excessive environmental or year 2000 non-compliance
costs and transaction fees as described on page 46;
- entire merger consideration being taxable to our shareholders instead of
possibly separating Anthony & Sylvan from Essef in a manner that is tax
free;
- restrictions on our ability to engage in acquisition, merger or
combination transactions before we complete the merger;
- possibility that Anthony & Sylvan will not be able to obtain financing on
favorable terms to operate and grow its businesses as a stand-alone
company; and
- possibility that you could achieve more value over the long-term from
continued operation of Essef as an independent company.
In considering all of these factors, our board was aware of the interests
of our executive officers in the merger and the split-off as described beginning
on page 35. Our board was also aware that we had requested and might obtain a
ruling from the Internal Revenue Service that a spin-off of Anthony & Sylvan
from Essef would be tax free to Essef and our shareholders in a transaction that
would not include a sale of the other businesses.
The merger and the split-off of Anthony & Sylvan from our other businesses
were structured to achieve the strategic benefits discussed. Pentair was not
interested in a transaction that would require it to acquire all of our
businesses.
Because of the variety of factors considered in connection with its
evaluation of the merger, our board did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors it
considered in reaching its determination. Individual members of our board may
have assigned different weights to different factors or may have considered
additional factors not listed above.
Our board weighed both the material factors in favor of and against the
merger and the merger agreement and determined that the material factors in
favor of the merger outweighed the material factors against the merger.
Consequently, it was our board's judgment that the merger agreement is in the
best interests of our shareholders.
OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ADOPTION OF THE MERGER
AGREEMENT.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus, and the documents that have been
incorporated by reference, include statements with respect to the merger and
with respect to Anthony & Sylvan that are subject to risk and uncertainty,
including statements that reflect expectations of our future financial
condition, results of operations and business and expectations of
THE MERGER
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<PAGE> 35
Anthony & Sylvan's future financial condition, results of operations and
business. We believe those statements are "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements also include other
information concerning possible or assumed future results of operations of Essef
and Anthony & Sylvan set forth under "Background of the Merger," "-- Reasons for
the Merger; Recommendation of Our Board," and "--Fairness Opinion of Financial
Advisor." Forward-looking statements also include those statements preceded by,
followed by, or that include the words "believes," "expects," "anticipates" or
similar expressions.
We cannot guarantee that actual results or events will not differ
materially from those estimated, assumed or anticipated in any of the
forward-looking statements contained in this proxy statement/prospectus or in
any of the documents incorporated by reference. In addition to those factors
specifically noted in the forward-looking statements and those factors noted in
"Risk Factors," other important factors that could result in these differences
include:
- global economic conditions, levels of consumer spending, and the
unpredictability of markets;
- casualty to, or other disruption of, facilities and operations;
- results of product development activities;
- dependence on existing management;
- events that may impact the availability of bank financing;
- year 2000 issues; and
- other factors, including weather, that affect the swimming pool sales and
installation business or the construction industry.
We caution you not to place undue reliance on these statements, which speak
only as of the date of this proxy statement/prospectus or in the case of any
document incorporated by reference, the date of that document.
Whenever you read or hear any subsequent written or oral forward-looking
statements attributable to us or any person acting on our behalf, you should
keep in mind the cautionary statements contained or referred to in this section.
We do not undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this proxy statement/prospectus or to reflect the occurrence of unanticipated
events.
FAIRNESS OPINION OF FINANCIAL ADVISOR
Essef retained Rhone Group to act as its financial advisor in connection
with the merger and related matters based on its expertise and reputation and
its familiarity with Essef. At the April 30, 1999 meeting of the Essef board,
Rhone Group rendered its oral opinion to the Essef board, which it subsequently
confirmed in writing. The opinion that Rhone Group gave was to the effect that,
as of April 30, 1999, the original aggregate consideration, which consisted of
$19.09 in cash per Essef common share and Anthony & Sylvan common shares, to be
received by the holders of the Essef common shares pursuant to the merger
agreement was fair to those holders from a financial point of view.
THE MERGER
26
<PAGE> 36
After April 30, 1999, Essef agreed to reduce the cash portion of the merger
consideration from $19.09 per Essef common share to $18.97 per Essef common
share. Rhone Group has confirmed to Essef that, subject to the matters set forth
in its opinion dated April 30, 1999 and other matters as it deemed relevant,
Rhone Group could have delivered the same opinion on April 30, 1999 if the cash
portion of the merger consideration on that date had been $18.97 per Essef
common share. In providing its confirmation, Rhone Group noted that Essef had
not asked it to update its fairness opinion to June 23, 1999 and that it had not
done so. Accordingly, Rhone Group did not perform any analysis that would be
necessary to update its opinion. Rhone Group also noted that its confirmation in
no way related to any date other than April 30, 1999.
The Rhone Group opinion does not apply to holders who have properly
exercised and perfected dissenters' rights under Section 1701.85 of the Ohio
Revised Code.
We have attached a copy of the full text of the written opinion of Rhone
Group, dated April 30, 1999, which sets forth the assumptions made, matters
considered and limits on the review undertaken, as Annex D to this proxy
statement/prospectus. The Rhone Group opinion is directed to our board and
addresses only the fairness, from a financial point of view, of the aggregate
consideration to the holders of Essef common shares. For purposes of this
section, the Rhone Group opinion contemplated the cash portion of the merger
consideration to be $19.09 per Essef common share. It does not address any other
aspect of the transactions contemplated by the merger agreement. In that regard,
the opinion of Rhone Group is not directed separately as to either the cash
portion of the merger consideration or the Anthony & Sylvan common shares
included as part of the merger consideration. The opinion of Rhone Group is not
intended to and does not constitute a recommendation to you as to how you should
vote with respect to the transactions contemplated by the merger agreement. THE
SUMMARY OF THE FAIRNESS OPINION INCLUDED BELOW SHOULD NOT BE VIEWED AS A
SUBSTITUTE FOR THE ENTIRE FAIRNESS OPINION. WE URGE YOU TO READ THE RHONE GROUP
OPINION IN ITS ENTIRETY.
In connection with rendering its opinion to the Essef board, Rhone Group,
among other things:
- reviewed the financial terms of the merger agreement;
- reviewed the financial terms of the transition agreement;
- reviewed the financial terms of the tax sharing agreement;
- analyzed certain publicly available historical business and financial
information relating to Essef and pro forma historical business and
financial information provided to Rhone Group by Essef for Anthony &
Sylvan;
- reviewed historical stock prices and trading volumes of the Essef common
shares;
- reviewed and discussed with representatives of the senior management of
Essef:
- Essef's budget for fiscal year 1999;
- Essef's forecast for 1999 based on the fiscal year 1999 budget;
- Essef's pro forma balance sheet;
- Essef's projections for 2000-2003 based on Essef's 1999 forecasts with
growth factors approved by Essef; and
- expectations as to Anthony & Sylvan's ability to finance operating and
capital requirements as a stand-alone company;
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27
<PAGE> 37
- reviewed public information with respect to certain other public
companies in lines of business generally comparable to the business of
Essef;
- reviewed certain publicly available security research reports regarding
the business of Essef and forecasts for Essef;
- considered the financial terms, to the extent publicly available, of
certain business combinations in the water treatment industry
specifically and in other industries; and
- conducted such other financial studies, analyses and investigations as
Rhone Group deemed appropriate.
In conducting its analysis and in arriving at its opinion, Rhone Group:
- assumed and relied upon the accuracy and the completeness of the
financial and other information reviewed by it and did not assume any
responsibility for any independent verification of such information;
- after discussion and review of the Essef budget, forecasts and other
financial data with Essef's management, assumed that the Essef budget,
forecasts and other financial data were reasonably prepared on bases
reflecting the best currently available information and judgments of the
management of Essef;
- assumed no responsibility for the budget and forecasts or the assumptions
on which they were based;
- was not requested to act and did not act as an appraiser and did not make
any independent appraisals or evaluations with respect to the assets or
liabilities, contingent or otherwise, of Essef or Anthony & Sylvan or
concerning the solvency or fair value of Anthony & Sylvan for any state
law or federal bankruptcy law purposes and was not furnished with any
such appraisals or evaluations;
- assumed that the transactions contemplated by the merger agreement, the
transition agreement and the tax sharing agreement would be consummated
pursuant to the terms and subject to the conditions contained in these
agreements;
- relied on Essef's estimate of the net tax benefit as that term is defined
in the tax sharing agreement;
- assumed that obtaining the necessary regulatory and governmental
approvals for the consummation of the transactions contemplated by the
merger agreement, the transition agreement and the tax sharing agreement
and the waiver, if any, by Essef of any conditions to consummation would
not have an adverse effect on Anthony & Sylvan or on the financial terms
of the transactions contemplated by the merger agreement, the transition
agreement and the tax sharing agreement; and
- did not express any opinion as to the prices at which the Anthony &
Sylvan common shares would trade, if issued, which will be a function of
unpredictable market factors.
The opinion of Rhone Group was also necessarily based on economic,
monetary, market and other conditions existing on, and information made
available to Rhone Group as of, the date of its opinion. The opinion of Rhone
Group also does not address Essef's underlying business decision to effect the
transactions contemplated by the merger agreement, the transition agreement and
the tax sharing agreement.
The following is a summary of the material analyses Rhone Group performed
in connection with rendering its opinion dated April 30, 1999 as to the
fairness, from a financial point of view, of the aggregate consideration to be
received by the holders of Essef common
THE MERGER
28
<PAGE> 38
shares. Rhone Group discussed these material analyses with the Essef board in
connection with rendering its opinion.
COMPARABLE PUBLICLY TRADED COMPANIES ANALYSES
Rhone Group reviewed and compared certain publicly available actual and
projected financial operating and stock market information of companies in lines
of business believed to be comparable to those of Essef, including the business
of Anthony & Sylvan. Rhone Group used projections for certain companies that may
be considered comparable to Essef contained in published research reports and
estimates for Essef provided by its management for earnings per share ("EPS")
and earnings before income taxes, depreciation and amortization ("EBITDA") and
publicly available information for Essef for sales and earnings before income
taxes ("EBIT"). Rhone Group compared information for the comparable companies
with information for Essef both with results from Anthony & Sylvan and without
results from Anthony & Sylvan. Rhone Group noted that, although there were no
public companies with precisely the same mix of businesses and financial
conditions as Essef, Rhone Group believed that the companies analyzed in the
comparable companies analysis were similar to the various businesses of Essef.
Rhone Group analyzed companies in four different groups of industries which
it believed engaged in lines of business comparable to the lines of business of
Essef:
- diversified industrial;
- water treatment;
- pool and recreational equipment manufacturers and distributors; and
- pool installation and home construction.
Rhone Group analyzed the enterprise value, defined as market value of
common equity plus short-term debt and long-term debt less cash and investments,
of the groups of comparable companies:
- as a multiple of the latest twelve months, and estimated 1999 and 2000
sales;
- as a multiple of the latest twelve months, and estimated 1999 and 2000
EBITDA; and
- as a multiple of the latest twelve months, and estimated 1999 and 2000
EBIT.
THE MERGER
29
<PAGE> 39
Rhone Group also analyzed a public trading market price per share of the
comparable companies as a multiple of latest twelve months and estimated
calendar 1999 and 2000 EPS. We summarized the results of all of these analyses
below:
<TABLE>
<CAPTION>
MEAN OF MEAN OF
COMPARABLE POOL COMPARABLE
MEAN OF MEAN OF AND RECREATIONAL POOL
COMPARABLE COMPARABLE EQUIPMENT INSTALLATIONS
ESSEF DIVERSIFIED WATER MANUFACTURERS AND HOME
ENTERPRISE VALUE AS A WITHOUT INDUSTRIAL TREATMENT AND CONSTRUCTION
MULTIPLE OF: A&S(1) ESSEF(2) COMPANIES(3) COMPANIES(4) DISTRIBUTORS(5) COMPANIES(6)
- --------------------- ------- -------- ------------ ------------ ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
2000 Sales........... 1.3x 0.9x 1.3x 1.4x 0.9x 0.5x
1999 Sales........... 1.3 1.0 1.4 1.6 0.8 0.6
Latest Twelve Months
Sales.............. 1.4 1.1 1.4 1.7 0.9 0.6
2000 EBITDA.......... NA 9.6 8.1 8.8 7.6 6.6
1999 EBITDA.......... NA 10.3 8.8 10.3 8.1 7.4
Latest Twelve Months
EBITDA............. 10.2 10.9 9.0 12.0 9.5 8.7
2000 EBIT............ 13.8 11.8 10.5 12.9 9.4 8.3
1999 EBIT............ 14.2 12.8 11.5 15.8 10.8 9.8
Latest Twelve Months
EBIT............... 13.1 15.5 12.1 18.4 14.0 12.4
STOCK PRICE AS A
MULTIPLE OF:
2000 EPS............. NA 14.4x 16.0x 18.3x 13.6x 9.3x
1999 EPS............. NA 16.5 17.8 23.3 16.6 11.4
Latest Twelve Months
EPS................ NA 21.2 21.1 22.3 26.8 18.2
</TABLE>
- ---------------
(1) Assumes only the cash portion of the consideration is paid. 1999 and
2000 Sales and EBIT forecasts are from published research reports.
(2) Using an enterprise value for Anthony & Sylvan of $70 million and a
price of $19.09 per share for Essef common stock excluding the business
of Anthony & Sylvan. 1999 and 2000 forecasts for Essef are from
published research reports.
(3) Includes Essef, Pentair, Danaher Corporation, Flowserve Corporation,
IDEX Corporation, ITT Industries, Inc. and U.S. Industries, Inc.
(4) Includes Ionics, Inc., Millipore Corporation, Osmonics, Incorporated
and United States Filter Corporation.
(5) Includes K2 Incorporated, SCP Pool Corporation, West Marine, Inc. and
Zodiac SA.
(6) Includes D.R. Horton Inc., Kaufman and Broad Home Corporation, U.S.
Home Corporation, K2 Incorporated, SCP Pool Corporation and West
Marine, Inc.
No company used in the comparable company analysis is identical to Essef
either with or without Anthony & Sylvan. Accordingly, any analysis of the value
of Essef common shares based on the companies that may be considered comparable
to Essef involves complex considerations and judgments concerning differences in
potential financial and operating characteristics of the comparable companies
and other factors in relation to the trading and acquisition values of the
comparable companies. We cannot assure you that Essef would trade comparably or
with any relevance to any of these companies.
THE MERGER
30
<PAGE> 40
SELECTED PRECEDENT TRANSACTIONS ANALYSIS
Rhone Group reviewed and analyzed certain selected publicly available
financial, operating and stock market information relating to certain
acquisition transactions involving several of the companies referred to in the
comparable companies analysis, and relating to certain acquisition transactions
involving other related types of companies. Rhone Group noted that the reasons
for, and the circumstances surrounding, each of the transactions analyzed were
diverse and the characteristics of the companies involved were not directly
comparable to Essef or the transactions contemplated by the merger agreement.
We have summarized the results of the analysis of the selected transactions
below:
<TABLE>
<CAPTION>
LOW MEAN MEDIAN HIGH
----- ----- ------ -----
<S> <C> <C> <C> <C>
TRANSACTION ENTERPRISE VALUE AS A MULTIPLE
OF:
Latest Twelve Months Sales.................. 0.6x 1.7x 1.3x 3.6x
Latest Twelve Months EBITDA................. 6.5 10.8 11.0 14.3
Latest Twelve Months EBIT................... 8.1 14.0 13.1 25.1
EQUITY PRICE PAID AS A MULTIPLE OF:
Latest Twelve Months Net Income............. 12.8x 25.3x 20.9x 48.2x
</TABLE>
The transactions provided for in the merger agreement implied the following
multiples, when combined with a per share value of Anthony & Sylvan of $3.25, in
each case using latest twelve months data through March 31, 1999:
<TABLE>
<S> <C>
TRANSACTION ENTERPRISE VALUE AS A MULTIPLE OF:
Latest Twelve Months Sales.................................. 1.1x
Latest Twelve Months EBITDA................................. 10.9
Latest Twelve Months EBIT................................... 15.5
IMPLIED TOTAL VALUE PER SHARE AS A MULTIPLE OF:
Latest Twelve Months EPS.................................... 21.2x
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS
Rhone Group analyzed the present value of Essef management's forecast of
cash flow for the fiscal years 1999 through 2003, inclusive, and the estimated
2003 terminal values based upon a range of multiples of projected 2003 EBITDA.
Rhone Group applied discount rates ranging from 9.0% to 11.0% and terminal
multiples of EBITDA ranging from 6.0x to 9.0x for Essef's water treatment and
pool equipment segments and 4.0x to 7.0x for Anthony & Sylvan. These analyses
indicated an implied net present value per Essef common share ranging from
$17.35 to $28.34.
Rhone Group then adjusted the net present value of Essef by subtracting the
value relating to Anthony & Sylvan based on the discounted cash flow analysis
described above. This analysis indicated an implied net present value per Essef
common share, after such subtraction, ranging from $14.11 to $22.66.
HYPOTHETICAL STOCK PRICE ANALYSIS
Rhone Group reviewed Essef management's EPS forecasts for Essef's 1999
fiscal year. Rhone Group then calculated Essef's estimated EPS for Essef's 2004
fiscal year by
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31
<PAGE> 41
increasing Essef's estimated 1999 EPS at a rate of 10% per year. Rhone Group
then analyzed the hypothetical price of the Essef common shares of Essef by
applying discount rates of 0%, 11% and 13% and terminal year forward price per
earnings ("P/E") multiples ranging from 10.0x to 14.0x. We have summarized the
results of these analyses below.
<TABLE>
<CAPTION>
IMPLIED VALUE PER ESSEF
COMMON SHARE 2003 FORWARD
P/E MULTIPLES
--------------------------
DISCOUNT RATE 10.0X 12.0X 14.0X
------------- ------ ------ ------
<S> <C> <C> <C>
0%............................. $21.74 $26.09 $30.44
11%............................ 14.32 17.19 20.05
13%............................ 13.33 16.00 18.67
</TABLE>
Rhone Group then performed a similar analysis, but instead of assuming
constant EPS growth of 10% per year, Rhone Group assumed constant EPS growth
rates for fiscal 1999 through fiscal 2003 ranging from 4% per year to 20% per
year. In this analysis, Rhone Group used terminal year P/E multiples ranging
from 10.0x to 16.0x and applied a discount rate of 11% to calculate the present
value of the hypothetical future stock price of the Essef common shares. We have
summarized the results of these analyses below.
<TABLE>
<CAPTION>
IMPLIED VALUE PER SHARE 2003 P/E MULTIPLES
--------------------------------------------
10.0X 12.0X 14.0X 16.0X
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
ANNUAL EPS & 4% $10.82 $12.98 $15.15 $17.31
DIVIDEND GROWTH 6% 11.90 14.28 16.66 19.04
8% 13.07 15.68 18.29 20.91
10% 14.32 17.19 20.05 22.92
12% 15.67 18.81 21.94 25.08
14% 17.12 20.55 23.97 27.40
16% 18.68 22.41 26.15 29.88
18% 20.34 24.41 28.48 32.55
20% 22.13 26.55 30.98 35.41
</TABLE>
HISTORICAL STOCK PRICE PREMIUM REVIEW
Rhone Group reviewed information regarding the historical price for the
Essef common shares. The following table sets forth implied transaction premiums
based on the market price
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32
<PAGE> 42
of the Essef common shares as of April 27, 1999 and certain historical average
stock prices using for those purposes an enterprise value for Anthony & Sylvan
of $70 million.
<TABLE>
<CAPTION>
ESSEF SHARE IMPLIED TRANSACTION
PRICE PREMIUM
----------------- -------------------
<S> <C> <C>
April 27, 1999...................... $17.00 31%
1 Month Average..................... 15.36 45
3 Month Average..................... 16.30 37
1999 Year To Date Average........... 16.83 33
12 Month Average.................... $17.00 31%
12 Month High....................... 20.91 7
12 Month Low........................ 12.88 73
3 Year Average...................... $12.24 83%
3 Year High......................... 20.91 7
3 Year Low.......................... 5.45 310
</TABLE>
ANTHONY & SYLVAN
In estimating the enterprise value of Anthony & Sylvan, Rhone Group
reviewed and analyzed certain selected publicly available financial, operating
and stock market information relating to certain construction and recreational
equipment companies and distributors and acquisition transactions involving
several pool and spa equipment companies. Rhone Group noted that the reasons
for, and the circumstances surrounding, each of the transactions analyzed were
diverse and the characteristics of the companies involved were not directly
comparable to Anthony & Sylvan or the split-off.
We have summarized the results of the comparable publicly traded companies
below:
<TABLE>
<CAPTION>
ENTERPRISE VALUE AS A MULTIPLE OF: LOW MEDIAN HIGH
---------------------------------- ----- ------ -----
<S> <C> <C> <C>
Latest Twelve Months Sales.................... 0.53x 0.60x 1.86x
Latest Twelve Months EBITDA................... 5.6 8.4 12.5
Latest Twelve Months EBIT..................... 5.9 13.2 21.0
</TABLE>
We have summarized the results of the selected precedent transactions
analysis below:
<TABLE>
<CAPTION>
TRANSACTION VALUE AS A MULTIPLE OF: LOW HIGH
----------------------------------- ----- -----
<S> <C> <C>
Latest Twelve Months Sales............................. 0.2x 2.7x
Latest Twelve Months EBITDA............................ 6.5 15.1
Latest Twelve Months EBIT.............................. 8.7 16.9
Net Income............................................. 12.8 29.9
</TABLE>
THE MERGER
33
<PAGE> 43
Rhone Group compared the results of the foregoing analyses with the
multiples which resulted using various implied enterprise values for Anthony &
Sylvan set forth below, in each case using the latest twelve months data through
March 31, 1999.
<TABLE>
<CAPTION>
IMPLIED IMPLIED IMPLIED
ENTERPRISE ENTERPRISE ENTERPRISE
VALUE VALUE VALUE
OF $66.1 OF $70.2 OF $74.3
(EQUAL TO $3.00 (EQUAL TO $3.25 (EQUAL TO $3.50
AS A MULTIPLE OF: PER SHARE) PER SHARE) PER SHARE)
----------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Latest Twelve Months
Sales.................... 0.40x 0.40x 0.50x
Latest Twelve Months
EBITDA................... 12.4 13.1 13.9
Latest Twelve Months
EBIT..................... 22.5 23.9 25.3
</TABLE>
The foregoing results are not on a pro forma basis to take into full account
acquisitions made by Anthony & Sylvan in 1998.
Rhone Group also analyzed the present value of Anthony & Sylvan's estimated
cash flow for the fiscal years 1999 through 2003, inclusive, and the estimated
aggregate value of Anthony & Sylvan based upon a range of multiples of projected
2003 EBITDA. Rhone Group performed these analyses based on Essef's management
forecasts and applied discount rates ranging from 9.0% to 12.0% and the terminal
multiples of EBITDA ranging from 4.0x to 7.0x. These analyses indicated an
implied aggregate value of Anthony & Sylvan ranging from $76 million to $124
million.
Based on all of the factors set forth above, Rhone Group estimated the
enterprise value of Anthony & Sylvan, on a fully-diluted basis, in the range of
approximately $66,000,000 to $70,000,000. After attributing $17,000,000 of Essef
debt to Anthony & Sylvan as a result of the split-off of Anthony & Sylvan, an
equity value of approximately $49,000,000 to $53,000,000 was implied which, in
turn, implies a value to each Essef shareholder of approximately $3.00 to $3.50
per share. Rhone Group's analyses are not indicative of actual trading values of
the Anthony & Sylvan shares when we complete the merger, which will be a
function of unpredictable market factors.
SPECIAL CONSIDERATIONS
The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or the summary set forth above, without considering the
analyses as a whole, could create an incomplete or a misleading view of the
process underlying the opinion of Rhone Group. No company or transaction used in
the analyses as a comparison is identical to Essef or the transactions
contemplated by the merger agreement.
The analyses were prepared for the purpose of Rhone Group providing its
opinion to the Essef board in connection with its consideration of the
transactions contemplated by the merger agreement and do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold, which may be significantly more or less favorable than as set forth
in the analyses. Similarly, any estimate of values or forecasts of future
results contained in the analyses is not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses.
THE MERGER
34
<PAGE> 44
In performing its analyses, Rhone Group made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters. Because the analyses are inherently subject to uncertainty, being
based upon numerous factors or events beyond the control of Essef or its
advisors, none of Essef, Rhone Group or any other person assumes responsibility
if future results or actual values are materially different from those forecasts
or estimates contained in the analyses. As described above, the opinion of Rhone
Group to the Essef board was one of many factors that the Essef board took into
consideration in making its determination. The foregoing summary describes the
material analyses performed by Rhone Group.
Rhone Group is an investment banking firm and engages in the valuation of
businesses and their securities in connection with mergers and acquisitions,
leveraged buyouts and other purposes.
In connection with Rhone Group's services as investment banker to Essef,
including its rendering of the opinion summarized above, Essef has agreed to pay
Rhone Group approximately $3.7 million.
Whether or not the transactions contemplated by the merger agreement are
consummated, Essef has agreed to reimburse Rhone Group for its out-of-pocket
expenses, including reasonable fees and expenses of its legal counsel, and to
indemnify Rhone Group and other related parties against a number of liabilities,
including a number of liabilities arising under U.S. securities laws.
In the past, Rhone Group has provided investment banking and financial
advisory service to Essef. In the ordinary course of business, Rhone Group and
its affiliates may actively trade in securities of Essef for their own account
and for the account of their customers and, accordingly, may at any time hold
long or short positions in such securities.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
Several of our executive officers have interests in the merger in addition
to their interests as our shareholders. Our board was aware of these interests
and considered them, among other matters, in approving the merger agreement and
the related transactions.
OUTSTANDING STOCK-BASED AWARDS
All currently outstanding agreements granting stock options to our
executive officers contain change of control provisions. In the case of stock
options, upon a change of control the options become fully exercisable.
Consummation of the merger agreement will constitute a change of control for
purposes of those agreements.
As of May 12, 1999, the number of nonexercisable stock options to acquire
our shares held by Stuart Neidus, our executive vice president and chief
financial officer, that will become fully vested and exercisable when our
shareholders approve the merger are 279,510 with a weighted average exercise
price of $6.57. As of May 12, 1999, the number of nonexercisable stock options
to acquire our shares held by Douglas Brittelle, an executive vice president,
that will become fully vested and exercisable when our shareholders approve the
merger are 61,226 with a weighted average exercise price of $6.13. As of May 12,
1999, the number of nonexercisable stock options to acquire our shares held by
Mark Brody, our vice president-finance, that will become fully vested and
exercisable when our shareholders approve the merger are 19,360 with a weighted
average exercise price of $12.88.
THE MERGER
35
<PAGE> 45
EMPLOYMENT AGREEMENTS
We have an employment agreement with Stuart Neidus. Under that employment
agreement, Mr. Neidus is entitled to receive a gross-up payment which, net of
all taxes, is sufficient to put him in the same after-tax position as if no
excise tax had been imposed under Section 4999 of the Internal Revenue Code on
any payments made or benefits provided to him under his employment agreement.
Because the vesting of Mr. Neidus' stock options is treated as a benefit which
requires the payment of an excise tax, we anticipate that a gross-up payment of
$700,000 will be made to him. This amount is subject to adjustment based on the
ultimate trading value of Anthony & Sylvan.
Under our original 1990 employment agreement with Thomas B. Waldin, our
chief executive officer and president, he received a grant of 2,586,932 options,
adjusted for stock splits and dividends, which expire in 2000. If the merger is
not consummated, we could be obligated under Mr. Waldin's employment agreement
to register for sale to the public or to purchase any or all shares underlying
options that Mr. Waldin exercises before the options expire.
ANTHONY & SYLVAN STOCK OPTIONS
Pursuant to the merger agreement, Thomas Waldin, Stuart Neidus and Mark
Brody will surrender their stock options to purchase our shares in exchange for
modified options on our shares and newly-granted options on Anthony & Sylvan
shares. The modified Essef options will then be cancelled and the executives
will receive cash in exchange for those Essef options, based on the excess of
$18.97 over the exercise price of each option. The terms of the Anthony & Sylvan
stock options are intended, in conjunction with the modified Essef options, to
provide the executives with the same aggregate economic benefit after the merger
as they would have had if the options had not been modified. The modified
options will not result in any charges to operations for Anthony & Sylvan in
future periods. You may read more about the procedures for replacing the
existing Essef stock options with the modified Essef stock options and the
Anthony & Sylvan stock options under "The Merger Agreement -- Conversion of Our
Stock Options" beginning on page 41.
CERTAIN EFFECTS OF THE MERGER
If we complete the merger, you will not have any ownership interest in
Essef and its swimming pool and spa equipment and water treatment and systems
equipment businesses. Therefore, you will not share in the future earnings and
growth of those businesses. If we complete the merger:
- there will be no more public trading of our shares;
- Nasdaq National Market System will no longer quote prices for our shares;
- we will terminate the registration of shares under the Securities and
Exchange Act of 1934; and
- we will no longer file informational reports about those businesses with
the Securities and Exchange Commission.
THE MERGER
36
<PAGE> 46
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The split-off of the Anthony & Sylvan shares has been structured to occur
in connection with the merger and pursuant to the terms of the merger agreement.
According to the merger agreement, in exchange for each Essef share you own:
- Pentair will pay you $18.97 in cash; and
- we will distribute to you 0.25 of a share of Anthony & Sylvan.
Under the long-standing position of the Internal Revenue Service, this type
of transaction is treated as a purchase of Essef shares to the extent that the
consideration, in this case, the cash, is supplied by Pentair. This type of
transaction is treated as a redemption of Essef shares to the extent that the
consideration, in this case, the Anthony & Sylvan common shares, is supplied by
us.
In addition, in determining whether the redemption portion of the
transaction should be characterized as a dividend or as a sale or exchange, the
authorities are also long-standing that the redemption will usually be treated
as a complete termination of each shareholder's interest in us. As a complete
termination of interest in us, the redemption will be treated as a sale or
exchange of the redeemed Essef shares, so long as you do not have a continuing
stock interest in us after the payment of both the cash consideration and the
Anthony & Sylvan share consideration.
Complex attribution rules apply in determining whether the redemption
results in a complete termination of interest. However, those rules should
prevent a complete termination of interest in us only in the very unlikely event
that an Essef shareholder owns, either directly or indirectly through related
individuals or entities, 50% or more of the stock of Pentair or in the equally
unlikely event that a group of Essef shareholders owns, directly or through
related individuals or entities, 50% or more of the stock of both Essef and
Pentair. We believe that neither of these remote factual possibilities exists
and as a result should not interfere with the conclusion that the merger will
result in a complete termination of interest in us by each Essef shareholder. In
connection with the opinion that our counsel is going to give regarding various
federal income tax consequences of the merger, our counsel intends to request
representations from the major Essef shareholders regarding their direct and
indirect ownership of Pentair stock, both currently and as of the time of the
merger.
Accordingly, we believe it is highly unlikely that you will be regarded as
owning, directly or by attribution, any of our shares after the merger.
Accordingly, you will be treated for federal income tax purposes as having sold
part of your Essef shares to Pentair in exchange for the $18.97 of cash
consideration paid as part of the merger and as having sold the remainder of
your Essef shares to Essef in exchange for the Anthony & Sylvan shares, or the
cash received in lieu of fractional shares of Anthony & Sylvan, distributed as
part of the merger.
As a result, you will be treated for federal income tax purposes as
recognizing taxable gain in the amount by which the sum of the following two
amounts exceeds your federal income tax basis in your Essef shares surrendered
in the merger:
- amount of any cash you receive in the merger, including cash you receive
in lieu of Anthony & Sylvan fractional shares; and
- the fair market value, as of the time of the merger, of any shares of
Anthony & Sylvan you receive in the merger.
THE MERGER
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The gain will be treated as capital gain to the extent that the Essef
shares are is a capital asset in your hands. That capital gain will be taxed as
long-term capital gain to the extent that you have owned your Essef shares for
more than one year.
Although our counsel is giving us an opinion that the federal income tax
consequences are as described above, we are not requesting a ruling to that
effect from the Internal Revenue Service, and the opinion of counsel is not
binding on the Internal Revenue Service. As noted above, the opinion of counsel
is based on long-standing authorities applied by the Internal Revenue Service.
Nevertheless, we cannot assure you that those authorities will not be modified
or reversed after the merger or that any modification or reversal would not be
applied retroactively so as to impact the federal income tax consequences of the
merger.
REGULATORY MATTERS
As required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, we
filed a Notification and Report Form for review with the Federal Trade
Commission and the Antitrust Division of the Justice Department in May, 1999.
Under the Hart-Scott-Rodino Act, we may not complete the merger until we satisfy
the waiting period requirements. On June 7, 1999, the Federal Trade Commission
and the Antitrust Division of the Department of Justice granted early
termination of the waiting period. Even though we received early termination of
the waiting period, at any time before we complete the merger, the Department of
Justice, the Federal Trade Commission or a court could take action under the
antitrust laws seeking to enjoin the merger.
We do not believe that additional governmental filings, other than the
filing of the certificate of merger with the Secretary of State of the State of
Ohio, are required in order to complete the merger.
DISSENTERS' RIGHTS
You are entitled to dissenters' rights pursuant to Section 1701.85 of the
Ohio Revised Code. Section 1701.85 generally provides that you will not be
entitled to these rights absent compliance with Section 1701.85 and failure to
take any one of the required steps may result in the termination or waiver of
these rights. Specifically, as long as you do not vote your shares in favor of
the merger, you may be entitled to be paid the fair cash value for your Essef
common shares after the completion of the merger. To be entitled to this
payment, you must deliver a written demand for payment to Essef on or before the
tenth day following the meeting and must otherwise comply with Section 1701.85.
Any written demand must specify your name and address, the number and class of
shares held by you on the record date, and the amount claimed as the fair cash
value of your Essef common shares.
You will not receive the $18.97 per share in cash or shares of Anthony &
Sylvan, if you dissent and follow all of the required procedures. Instead, you
will receive only cash in the amount of the value of your Essef shares. We have
attached the text of Section 1701.85 to this joint proxy statement/prospectus as
Annex E for specific information on the procedure to be followed in exercising
dissenters' rights. WE ENCOURAGE YOU TO READ SECTION 1701.85 IN ITS ENTIRETY.
If Essef so requests, within fifteen days of this request, dissenting
shareholders must submit their share certificates to Essef for endorsement that
demand for appraisal has been made. Failure to comply with the request could
terminate the dissenting shareholders' rights. Essef will promptly return these
certificates to the dissenting shareholders. If Essef and any
THE MERGER
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dissenting shareholder cannot agree upon the fair cash value of these Essef
common shares, either may, within three months after service of demand by the
shareholder, file a petition in the Court of Common Pleas of Geauga County, Ohio
for a determination of the fair cash value of these shares of Essef. The court
may appoint one or more appraisers to determine the fair cash value. If this
court approves the appraisers' report, judgment will be entered, and the costs
of the proceedings, including reasonable compensation of the appraisers, will be
assessed or apportioned as this court considers equitable.
BECAUSE PROXY CARDS WHICH DO NOT CONTAIN VOTING INSTRUCTIONS WILL, UNLESS
REVOKED, BE VOTED FOR ADOPTION OF THE MERGER AGREEMENT, IF YOU WISH TO EXERCISE
YOUR DISSENTERS' RIGHTS, YOU MUST EITHER NOT SIGN OR NOT RETURN YOUR PROXY CARD
OR, IF YOU SIGN AND RETURN YOUR PROXY CARD, VOTE AGAINST OR ABSTAIN FROM VOTING
ON THE ADOPTION OF THE MERGER AGREEMENT.
THE MERGER
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<PAGE> 49
THE MERGER AGREEMENT
The merger agreement contains the terms and conditions on which Essef will
be merged into Northstar Acquisition and become a wholly-owned subsidiary of
Pentair. THE SUMMARY OF THE MERGER AGREEMENT INCLUDED BELOW SHOULD NOT BE VIEWED
AS A SUBSTITUTE FOR THE ENTIRE MERGER AGREEMENT. WE URGE YOU TO, AND YOU SHOULD,
READ THE MERGER AGREEMENT IN ITS ENTIRETY. WE HAVE INCLUDED THE MERGER AGREEMENT
AS ANNEX A TO THIS PROXY STATEMENT/PROSPECTUS.
THE MERGER
When we complete the merger, two things will occur:
- Northstar Acquisition Company, a wholly-owned subsidiary of Pentair, will
merge into Essef; and
- we will split off Anthony & Sylvan from Essef.
After the merger, we will be a wholly-owned subsidiary of Pentair. As a
result of the split-off Anthony & Sylvan will be an independent public company.
Concurrently with the merger, we will distribute all the outstanding shares of
Anthony & Sylvan to you on a pro rata basis. In exchange for each share of Essef
you own:
- Pentair will pay you $18.97 in cash; and
- we will distribute to you 0.25 of a share of Anthony & Sylvan.
The merger agreement as executed set the cash portion of the merger
consideration at $19.09 per common share of Essef. The merger agreement,
however, also provided a period during which Essef and Pentair would determine
transaction costs and costs contemplated by environmental remediation
activities. According to the merger agreement, if the sum of those amounts
exceeded a specified figure, Essef could agree to a reduced cash consideration.
The sum of those amounts did exceed that specified figure, and Essef has agreed
to a reduction in the cash portion of the merger consideration from $19.09 per
Essef common share to $18.97 per Essef common share.
Because we and Northstar Acquisition are corporations that were formed
under Ohio law, we must complete the merger in accordance with Ohio law.
EFFECTIVE DATE
The merger will become effective on the date we file the certificate of
merger with the Secretary of State of the State of Ohio. We plan to file the
certificate of merger as soon as possible after all of the conditions described
in the merger agreement have been satisfied.
CONVERSION OF OUR COMMON SHARES
Just before we complete the merger, Pentair will deposit with Bank of
America National Trust and Savings Association the cash portion of the merger
consideration. Bank of America will act as the depositary for the merger. On
that same date, we will deposit with Bank of America certificates representing
all the outstanding shares of Anthony & Sylvan.
As soon as practicable after we complete the merger, the depositary will
mail to you a letter of transmittal and instructions for exchanging certificates
representing our shares for cash and certificates evidencing shares of Anthony &
Sylvan. You will have to follow the instructions and surrender your certificates
for our shares, together with the properly executed
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40
<PAGE> 50
letter of transmittal, and any other required documents to the depositary. Until
you surrender your share certificates, each outstanding certificate that
represented our shares will evidence the right to the cash portion of the merger
consideration and the ownership of the number of whole shares of Anthony &
Sylvan into which our shares will be converted.
We will not distribute fractional shares of Anthony & Sylvan in the
split-off. Instead, you will receive cash. The cash amount will be in an amount
equal to the fraction of a share to which you would otherwise have been
entitled, multiplied by the mean between the high and low trading prices of
Anthony & Sylvan common shares on the first full day of trading for the Anthony
& Sylvan shares minus the amount of any withholding taxes that may be required
on that payment. We will not pay you any interest on the fractional share
payment. For purposes of paying cash instead of fractional shares, all
certificates formerly representing our shares that you surrender in exchange by
the same letter of transmittal will be added together. Consequently, you will
receive cash instead of fractional shares for less than the value of one full
Anthony & Sylvan common share.
You will not be entitled to receive any dividends or other distributions by
Anthony & Sylvan until you exchange your Essef share certificates for cash and
certificates representing shares of Anthony & Sylvan. After you deliver your
Essef share certificates to the depositary, Anthony & Sylvan will send you any
accumulated dividends and distributions that have become payable on those
Anthony & Sylvan shares for any date after the day we complete the merger. We
will not pay any interest on dividends and distributions for the time between
the record date and the date we actually pay you those dividends and
distributions. In addition, we will not pay you any interest on any cash payable
in place of fractional shares of Anthony & Sylvan.
From the day we complete the merger, all Essef shares will automatically be
cancelled and will cease to exist. From the day we complete the merger, you will
not have any right with respect to Essef shares other than your right to receive
Anthony & Sylvan shares, dividends or other distributions and cash as described
above.
If you want any certificate for shares of Anthony & Sylvan shares to be
issued in a name other than the name in which the Essef certificate you
surrendered is registered, you must endorse your Anthony & Sylvan certificate
and put it in proper form for transfer. You also must pay to Anthony & Sylvan or
its agent any resulting transfer or other tax, or establish to the satisfaction
of Anthony & Sylvan that this tax has been paid or is not payable.
We and Pentair will not be liable to you for any merger consideration
delivered to a public official pursuant to any applicable abandoned property or
similar law. The depositary will deduct from the merger consideration paid to
you any amounts that the depositary is required to withhold under any provision
of federal, state, local or foreign tax law.
The depositary will deliver cash and Anthony & Sylvan shares in exchange
for a lost, stolen or destroyed Essef certificate when it receives an affidavit
of that fact by the owner of the certificate. However, we will require you to
deliver a reasonable indemnity bond against any claim that may be made against
us, Pentair or the depositary with respect to a certificate alleged to have been
lost, stolen or destroyed.
CONVERSION OF OUR STOCK OPTIONS
If you own an option to purchase our shares that we granted to you under
any Essef stock option plan, deferred compensation program or employment
arrangement and that
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<PAGE> 51
option is outstanding and unexercised immediately before we complete the merger,
your option will become immediately exercisable and vested before we complete
the merger. When we complete the merger, your stock options will be converted
into the right to receive:
- cash equal to the difference between $18.97 and the exercise price per
share of the stock options; and
- 0.25 of a share of Anthony & Sylvan for each option to acquire one Essef
common share.
If you hold options to acquire Essef common shares and you are an officer
or director of Essef who will become an officer or director of Anthony & Sylvan
your options will first be allocated on a pro rata basis between the right to
acquire shares of Essef and the right to acquire shares of Anthony & Sylvan as
follows:
- you will be entitled to purchase the same number of Essef shares that
your option represented before the merger at a new per share exercise
price determined pursuant to the following formula:
<TABLE>
<C> <C> <C> <S> <C>
New Essef option Old Essef option $18.97
per share exercise price = per share exercise price X -----------------------------
$18.97 plus 25%
of the value of one
Anthony & Sylvan share
</TABLE>
where,
- the value of an Anthony & Sylvan common share equals the mean between the
high and low trading value of Anthony & Sylvan common shares on the first
full trading day following the merger;
- you will be entitled to purchase a number of Anthony & Sylvan shares
equal to 25% of the number of shares represented by Essef options at a
per share exercise price determined pursuant to the following formula:
<TABLE>
<C> <C> <C> <C> <C> <C> <C> <S>
Anthony & Sylvan option
per share exercise = ( Old Essef option - New Essef option ) X 4
price per share exercise price per share exercise price
</TABLE>
After the options are amended, the option to purchase Essef shares will be
converted into the right to receive cash equal to $18.97 less the new Essef
option exercise price.
All applicable withholding taxes attributable to the payments on any
options will be deducted from the amount payable to the option holder and all
taxes attributable to the exercise of the stock options at the merger closing
shall be withheld from the proceeds received in the merger.
CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME
The merger agreement provides that from the day the merger agreement was
signed until the effective date of the merger, except for the deposit of the
cash consideration and the shares of Anthony & Sylvan with a depositary, or
unless Pentair otherwise consents in writing, we and our subsidiaries must:
- conduct our business in the ordinary course consistent with past
practices;
- use our reasonable best efforts to preserve intact our present business
organizations;
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- use our reasonable best efforts to keep available the services of our
present officers and employees; and
- use our reasonable best efforts to preserve our relationships with
customers, suppliers and others having business dealings with them.
In addition, except as otherwise provided in the merger agreement, during
this period we and our subsidiaries may not:
- sell or pledge any of our capital stock;
- amend our organizational documents;
- declare dividends or make any other distribution with respect to our
capital stock other than in a manner consistent with our prior practices;
- redeem, purchase or acquire any shares of our capital stock;
- issue or sell any of our equity securities convertible into or
exchangeable for any of our equity securities other than pursuant to the
exercise of our stock options;
- acquire or sell or otherwise dispose of capital assets or any other
assets in excess of $1,000,000 except as provided in our annual capital
expenditure budget or other than in the ordinary course of business;
- incur, assume or guaranty any indebtedness from third parties except as
provided in our annual capital expenditure budget other than in the
ordinary course for working capital purposes;
- enter into any severance, termination pay, employment, deferred
compensation or similar agreements with directors, officers or employees;
- increase employee compensation, severance or other benefits other than in
the ordinary course of business;
- grant any awards under any bonus, incentive, performance or other
compensation plan or arrangement except in the ordinary course of
business or in a manner consistent with our past practices;
- take any action to fund or to secure the payment of compensation or
benefits under any plan or arrangement with employees other than in the
ordinary course of business;
- acquire or agree to acquire any business, corporation, partnership,
association or other business organization or division; or
- invest in any non-investment grade debt securities although we can create
new wholly-owned subsidiaries.
The merger agreement does not restrict Pentair in the conduct of its
business. The merger agreement does, however, provide that if Pentair fails to
consent to an acquisition proposed to be made by us and the merger agreement is
later terminated, Pentair is then precluded from pursuing the same acquisition
for a three year period.
THE MERGER AGREEMENT
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NO SOLICITATION
We have agreed that, until the termination of the merger agreement, we will
not, with respect to our company:
- take any action to solicit, initiate or encourage any acquisition
proposal relating to us;
- enter into any agreement with respect to any acquisition proposal; or
- participate in discussions or negotiations or take any action that may
reasonably be expected to lead to any acquisition proposal relating to
us.
We may, however, respond to any unsolicited communication regarding an
acquisition proposal if our board determines, with advice of its outside counsel
and financial advisor that the acquisition proposal constitutes a superior
proposal. We must notify Pentair promptly if we receive any solicitation or
inquiry regarding an acquisition proposal.
The term "acquisition proposal" means any proposed:
- merger, consolidation, share exchange or similar transaction involving
us;
- sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of 20% or more of our
consolidated assets or the consolidated assets of our subsidiaries;
- issuance, sale, or other disposition of, or acquisition of, securities
representing 20% or more of our voting stock; or
- transaction in which any person would acquire beneficial ownership of, or
the right to acquire beneficial ownership of, 20% or more of any class of
our equity.
The term "superior proposal" means any acquisition proposal:
- that we determine in good faith, after consultation with our financial
advisors and outside counsel, is more favorable to you than the merger
taking into account the nature of the acquisition proposal, the nature
and amount of the consideration, the likelihood of completion and any
other factors deemed appropriate by our board; and
- that involves 50% or more of our consolidated assets or voting shares.
Before furnishing nonpublic information to, or entering into discussions or
negotiations with, any other persons or entities relating to any acquisition
proposal, we must enter into a customary confidentiality agreement with that
third person, but the confidentiality agreement may not include any provision
calling for that party to have an exclusive right to negotiate with us.
If we provide nonpublic information to a third party in connection with an
acquisition proposal, we must advise Pentair of the nature of the nonpublic
information delivered reasonably promptly following its delivery.
THE MERGER AGREEMENT
44
<PAGE> 54
TERMINATION
TERMINATION RIGHTS
We can agree with Pentair to terminate the merger agreement without
completing the merger, and either of us or Pentair acting alone can terminate
the merger agreement if:
- we do not complete the merger on or before September 30, 1999 and the
terminating party is not otherwise in breach of the merger agreement;
- our shareholders do not adopt the merger agreement and the terminating
party is not otherwise in breach of the merger agreement;
- any of the conditions to our obligation to complete the merger can no
longer be satisfied; or
- any injunction or other order by any court or other governmental entity
that prohibits or prevents the merger becomes final and non-appealable.
Pentair, acting alone, can terminate the merger agreement if:
- there has been a material adverse change affecting us other than as a
result of our environmental non-compliance or year 2000 non-compliance;
- we enter into a definitive agreement providing for a superior proposal;
- our board recommends or approves a superior proposal;
- our board withdraws, modifies in a manner adverse to Pentair or refrains
from making its recommendation in favor of the merger; as long as Pentair
is not in material breach under the merger agreement and has sufficient
funds to pay the cash consideration in the merger; or
- the sum of the following is over $5,000,000 and we have refused to adjust
the cash consideration:
- costs identified by Pentair to correct any environmental non-compliance
or year 2000 non-compliance in the businesses Pentair will acquire; and
- the amount of transaction fees we incur after December 31, 1998 in
excess of $4,000,000.
Essef, acting alone, can terminate the merger agreement if:
- our board has accepted or resolved to accept a superior proposal; or
- the sum of the following is over $5,000,000 and Pentair has declined to
close the merger anyway:
- the costs identified by Pentair for us to correct any environmental
non-compliance or year 2000 non-compliance; and
- the amount of the transaction fees we incur after December 31, 1998 in
excess of $4,000,000.
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45
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TERMINATION FEES; TERMINATION FEE TRIGGERS
Pursuant to the merger agreement, we must pay a termination fee to Pentair:
- in the amount of $9,317,000 if the merger agreement is terminated:
- by Pentair because we have entered into a definitive agreement
providing for a superior proposal;
- by Pentair because our board has approved or recommended a superior
proposal;
- by Pentair because our board has withdrawn, modified in a manner
adverse to Pentair or refrained from making its recommendation for
approval of the merger or disclosed its intention to change its
recommendation; or
- by us because our board has approved a superior proposal.
- in the amount of $4,658,000 if the merger agreement is terminated by
either Pentair or us where:
- we do not complete the merger on or before September 30, 1999; and
- within 12 months after the termination of the merger agreement, we
enter into an agreement pursuant to a solicitation or inquiry regarding
an acquisition proposal if that solicitation or inquiry was made
between April 30, 1999 and the termination.
- in an amount equal to actual expenses that Pentair incurs in connection
with the merger, up to a limit of $500,000, if the merger agreement is
terminated by either Pentair or us because the sum of the following is
over $5,000,000:
- costs identified by Pentair to correct any environmental non-compliance
or year 2000 non-compliance in the businesses they acquire; and
- the amount of the transaction fees we incur after December 31, 1998 in
excess of $4,000,000.
After input and discussions with our financial advisor, we negotiated the
amount of the various termination fees based on the value of our company, the
consideration being paid and an estimate of the opportunities that could be lost
if the merger agreement were signed but then terminated. In addition, our
financial advisor advised us that the amounts of these fees are within a
customary range when compared to similar transactions.
AMENDMENT; WAIVER
The merger agreement may be amended in writing if both Pentair and Essef
sign the amendment. We may amend the merger agreement at any time before or
after our shareholders adopt the merger agreement. However, after the meeting,
we cannot make any amendment without our shareholders' further approval that
would:
- change the merger consideration you will receive;
- change the articles of incorporation of the surviving corporation; or
- materially adversely affect your rights.
Pentair or Essef may:
- extend the time for performance;
- waive any inaccuracies by the other party in the representations and
warranties under the merger agreement; or
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46
<PAGE> 56
- waive compliance by the other party with any conditions or agreements
under the merger agreement.
CONDITIONS TO COMPLETION OF THE MERGER
CONDITIONS TO PENTAIR'S OBLIGATION AND ESSEF'S OBLIGATION TO COMPLETE THE
MERGER
The obligation of Pentair and Essef to complete the merger are subject to
the satisfaction of the following conditions:
- adoption by our shareholders of the merger agreement;
- expiration or termination of applicable waiting periods under antitrust
and competition laws;
- lack of any statute, rule or regulation prohibiting or materially
restricting consummation of the merger;
- Essef must deposit the shares of Anthony & Sylvan to be issued in the
split-off with the depositary; and
- lack of any injunction or other order by any court or governmental entity
prohibiting or preventing the merger.
CONDITIONS TO OUR OBLIGATION TO COMPLETE THE MERGER
Our obligation to complete the merger is also subject to the satisfaction
of several conditions, including:
- Pentair and Northstar Acquisition must have performed their obligations
under the merger agreement in all material respects;
- representations and warranties of Pentair and Northstar Acquisition
contained in the merger agreement must have been true and correct, in all
material respects, when made and as if made on the effective date of the
merger; and
- Pentair must deposit the cash portion of the merger consideration with
the depositary.
CONDITIONS TO OBLIGATIONS OF PENTAIR AND NORTHSTAR ACQUISITION TO COMPLETE THE
MERGER
The obligations of Pentair and Northstar Acquisition to complete the merger
are also subject to the satisfaction of several conditions, including:
- we and Anthony & Sylvan must have performed our obligations under the
merger agreement in all material respects;
- our representations and warranties contained in the merger agreement must
have been true and correct, in all material respects, when made and as if
made on the effective date of the merger; and
- Pentair must have approved the form of promissory note issuable by
Anthony & Sylvan for any deficient net tax benefit.
Each of us could, to the extent permitted by applicable law, decide to
waive the other's conditions to complete the merger even though one or more of
these conditions have not been met. In the case of mutual conditions, however,
both of us would have to decide to waive a condition to our obligations to
complete the merger. We cannot guarantee that the
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47
<PAGE> 57
conditions to the merger will be satisfied or waived or that the merger will be
completed at all.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains some customary representations and warranties
made both by us and by Pentair, including representations and warranties
relating to:
- due organization and good standing;
- corporate authorization to enter into the transactions contemplated by
the merger agreement; and
- governmental reviews and approvals required in connection with the
transactions contemplated by the merger agreement.
In addition, we made additional representations and warranties to Pentair
relating to:
- capitalization;
- subsidiaries' organization, good standing and capitalization;
- filings with the Securities and Exchange Commission;
- financial statements;
- absence of material changes or events;
- receipt of fairness opinion from our financial advisor;
- absence of undisclosed material liabilities;
- tax matters;
- determinations by our board;
- actions required to approve the merger and required vote of our
shareholders;
- title to assets;
- information included in this proxy statement/prospectus for the shares of
Anthony & Sylvan;
- litigation;
- compliance with laws, including laws regarding takeovers;
- product liability;
- employee benefit plans and plan compliance;
- material contracts;
- patents and trademarks; and
- insurance coverage.
Northstar Acquisition has made some representations and warranties to us as
to organization, capitalization, corporate authorization and financing.
The representations and warranties in the merger agreement do not survive
the effective date of the merger.
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THE SPLIT-OFF
This section of the proxy statement/prospectus describes aspects of the
proposed split-off. For purposes of the split-off and for purposes of governing
the relationships between Essef and Anthony & Sylvan after the merger, we,
Anthony & Sylvan and Pentair have entered into a transition agreement and a tax
sharing agreement. The transition agreement is attached as Annex B to this proxy
statement/prospectus. The tax sharing agreement is attached as Annex C to this
proxy statement/prospectus. You should read the transition agreement and the tax
sharing agreement in their entirety.
ANTICIPATED STRUCTURE OF THE SPLIT-OFF
Anthony & Sylvan is an indirect wholly-owned subsidiary of Essef. Pursuant
to the terms of the merger agreement and transition agreement, Anthony & Sylvan
will be split off from Essef through the partial redemption of Essef shares with
Anthony & Sylvan shares. Because of the structure of the transaction, it is
possible that we will be deemed to be a statutory underwriter of the
distribution of shares of Anthony & Sylvan to our shareholders. Although the
split-off will not be effective until we close the merger, Anthony & Sylvan is
required under the merger agreement to finance its operations on an independent
basis starting on June 30, 1999.
The split-off is an integral part of the transaction and is being done to
address the competitive concerns of our swimming pool and spa equipment
customers. Pentair did not desire to acquire our swimming pool sales and
installation business. Our board believes that the split-off is in the best
interest of our shareholders. Even if the merger does not occur, we intend to
complete the separation of the swimming pool sales and installation business
from our other businesses to alleviate competitive concerns of some of our
swimming pool equipment customers that compete with Anthony & Sylvan. However,
we cannot guarantee that we will complete the split-off on the terms described
below, or at all.
BEFORE THE SPLIT-OFF, ANTHONY & SYLVAN WILL AMEND AND RESTATE ITS ARTICLES
OF INCORPORATION TO DO SEVERAL THINGS, INCLUDING TO INCREASE ITS AUTHORIZED
CAPITAL STOCK. ANTHONY & SYLVAN WILL THEN ISSUE TO US THE NUMBER OF ANTHONY &
SYLVAN SHARES NECESSARY TO COMPLETE THE SPLIT-OFF.
The receipt of shares of Anthony & Sylvan in the split-off will be taxable
to the recipients of shares. See "Material Federal Income Tax Consequences"
beginning on page 37.
WE DO NOT NEED SHAREHOLDER APPROVAL TO COMPLETE THE SPLIT-OFF, AND WE ARE
NOT SEEKING YOUR APPROVAL OF THE SPLIT-OFF.
THE TRANSITION AGREEMENT
The transition agreement contains the terms and conditions on which Anthony
& Sylvan will be split off from us. THE SUMMARY OF THE TRANSITION AGREEMENT
INCLUDED BELOW SHOULD NOT BE VIEWED AS A SUBSTITUTE FOR THE ENTIRE TRANSITION
AGREEMENT. WE URGE YOU TO, AND YOU SHOULD, READ THE TRANSITION AGREEMENT IN ITS
ENTIRETY. WE HAVE INCLUDED THE TRANSITION AGREEMENT AS ANNEX B TO THIS PROXY
STATEMENT/PROSPECTUS.
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<PAGE> 59
OPERATIONS OF ANTHONY & SYLVAN
Prior to June 30, 1999, Anthony & Sylvan is required to operate its
business in the ordinary course. In addition, by June 30, 1999 or as soon as
practicable thereafter, Anthony & Sylvan is required to obtain financing to
enable it to carry out the split-off, including the payment of the intercompany
dividend.
After June 30, 1999, Anthony & Sylvan will finance its operations on an
independent basis. If the net assets of Anthony & Sylvan are more than
$40,836,000 on June 30, 1999, Anthony & Sylvan must increase the amount of the
intercompany dividend payable to us by the amount of increased net assets.
After June 30, 1999, Anthony & Sylvan will be:
- entitled to all income realized from its activities and operations;
- responsible for all taxes on income realized from its activities and
operations; and
- entitled to any tax benefits attributable to any losses or other tax
attributes resulting from its activities and operations.
INTERCOMPANY LIABILITIES AND INTERCOMPANY DIVIDEND
Pursuant to the terms of the transition agreement, before the split-off
Anthony & Sylvan will declare and pay an intercompany cash dividend to us as
payment for a portion of existing intercompany liabilities between us and
Anthony & Sylvan. As of March 31, 1999, the total amount of existing
intercompany liabilities was approximately $27.2 million.
The intercompany dividend will be paid in the following manner:
- immediately before we complete the merger and the split-off, Anthony &
Sylvan will pay an initial distribution to Essef in amount equal to $17
million,
- plus the amount, if any, by which the actual net assets of Anthony &
Sylvan on June 30, 1999 exceed $40,836,000; and
- minus the amount, if any, by which the tax benefit expected to be
realized by Pentair in the merger exceeds $4,200,000.
In determining the tax on the gain recognized by Essef as a result of the
split-off, Anthony & Sylvan will initially use a pre-closing trading value for
Anthony & Sylvan shares equal to the difference between the mean of the high and
low trading prices of our common shares two days before the split-off and
$18.97.
This initial distribution by Anthony & Sylvan is required to allow Anthony
& Sylvan to complete its transition to a stand alone company at the time of the
split-off. Since the actual value of Anthony & Sylvan shares will not be known
until after the completion of the split-off, Anthony & Sylvan agreed to use the
pre-closing trading value of the Anthony & Sylvan shares and to recalculate and
adjust the amount of the intercompany dividend once the actual value of the
Anthony & Sylvan shares and the actual tax benefit realized by Pentair are
determined. The determination of the actual value of the Anthony & Sylvan shares
and the actual tax benefit realized by Pentair are described on page 55.
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If the intercompany dividend calculated using the actual tax benefit
realized by Pentair is:
- less than the amount of the intercompany dividend initially paid to us,
Essef will make a cash payment to Anthony & Sylvan equal to the amount of
the initial overpayment on the intercompany dividend; or
- more than the amount of the intercompany dividend initially paid to us,
Anthony & Sylvan will make an additional payment to Essef equal to the
amount of the initial underpayment on the intercompany dividend, provided
that the amount of this payment shall not be greater than the amount
necessary to make the total intercompany dividend payment equal
$17,000,000 plus any adjustment for the difference between actual net
assets of Anthony & Sylvan on June 30, 1999 and $40,836,000.
After the payment of the intercompany dividend, any remaining intercompany
liabilities of Anthony & Sylvan to us other than trade payable liabilities
incurred in connection with the purchase of swimming pool equipment from us and
our subsidiaries will be converted and reclassified as a contribution to the
capital of Anthony & Sylvan. Anthony & Sylvan shall have no further obligation
with regard to these reclassified liabilities.
TRANSFERRED EMPLOYEES
Some individuals employed by Essef at its corporate level will become
employees of Anthony & Sylvan.
EMPLOYEE BENEFITS
Anthony & Sylvan maintains a defined contribution plan and trust intended
to qualify under Sections 401(a), 401(k) and 501(c) of the Internal Revenue Code
for the benefit of all Anthony & Sylvan employees. Anthony & Sylvan also agrees
to assume our responsibilities under our deferred compensation plan to any
Anthony & Sylvan employees including any transferred employees and directors and
to make all payments to these individuals under this plan. In connection with
this agreement, immediately before the completion of the merger and split-off,
we will pay to Anthony & Sylvan an amount equal to our accrued liability, net of
income taxes.
At the completion of the merger and split-off, Anthony & Sylvan employees
will be transferred from our welfare benefit plans to welfare benefit plans set
up and maintained by Anthony & Sylvan. However, Anthony & Sylvan employees will
have the option to continue to participate in our group medical plan until
December 31, 1999. After an Anthony & Sylvan employee has been transferred to
the Anthony & Sylvan welfare benefit plans, we will be responsible only for
benefit claims incurred by Anthony & Sylvan employees before the completion of
the merger and split-off.
TRANSITION SERVICES
After we complete the merger and the split-off, Anthony & Sylvan will have
the option, for up to one year after the split-off, to obtain the following
services from us:
- tax preparation and filing services;
- legal services;
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- information and technology support; and
- other additional services as we and Anthony & Sylvan may agree.
We will provide the services on a cost basis as agreed between us and
Pentair. We will not have any liability for any loss, liability or damage that
Anthony & Sylvan incurs or that arises out of our providing these services.
We will also allow Anthony & Sylvan to continue to occupy and use without
charge its corporate offices for two months after we complete the merger and
split-off.
REPRESENTATIONS AND WARRANTIES; DISCLAIMERS
In connection with the split-off, Anthony & Sylvan made representations and
warranties to us relating to:
- existence of any contract or agreement between us and Anthony & Sylvan;
- absence of intercompany transfers, dividends and payments since December
31, 1998 other than in the ordinary course;
- ownership or use of any assets, properties, licenses or rights necessary
to the operation of our business;
- use of any Anthony & Sylvan assets in our business since December 31,
1998;
- our liability in connection with Anthony & Sylvan liabilities after the
split-off; and
- conduct of Anthony & Sylvan's business in the ordinary course since
December 31, 1998.
In addition, we, Pentair and Anthony & Sylvan agreed that:
- no representation or warranty was being made as to the value or freedom
from encumbrance of any Anthony & Sylvan assets;
- the Anthony & Sylvan assets were being transferred on an as is, where is
basis; and
- Anthony & Sylvan will bear the risk that any conveyance of Anthony &
Sylvan assets might be insufficient, subject to our obligation to provide
any necessary further assurances.
The representation and warranties in the transition agreement will survive
for a period of three years following the completion of the split-off. However,
the representations and warranties will not survive any termination of the
transition agreement.
RELEASE AND INDEMNIFICATION
We agreed to indemnify, defend and hold Anthony & Sylvan and each of its
directors, officers, agents or employees harmless from and against any and all
claims arising from:
- any breach of any agreement or covenant in the transition agreement by
Pentair;
- any breach of the transition agreement by us after we complete the merger
and split-off;
- the conduct of our business after we complete the merger and split-off;
and
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- any false or misleading statement or any omission with respect to a
material fact in this proxy statement/prospectus relating to Pentair or
Northstar Acquisition or their affiliates based on information provided
by Pentair.
Anthony & Sylvan agreed to indemnify, defend and hold us and our
subsidiaries, other than Anthony & Sylvan, and each of its directors, officers,
employees and agents harmless from and against any and all damages, losses,
liabilities and claims arising from:
- any misrepresentation or breach of any warranty in the transition
agreement by us before we complete the merger and split-off;
- any misrepresentation or breach of any warranty, agreement or covenant in
the transition agreement by Anthony & Sylvan;
- any breach of any agreement or covenant in the transition agreement by us
before we complete the merger and split-off;
- any liability of Anthony & Sylvan;
- the conduct of Anthony & Sylvan's business after we complete the merger
and split-off;
- any transfer of assets to Anthony & Sylvan in connection with the
split-off;
- any false or misleading statement or any omission with respect to a
material fact in this proxy statement/prospectus relating to Anthony &
Sylvan based on information provided other than by Pentair, Northstar
Acquisition or their affiliates;
- any actions we or our subsidiaries take in connection with the forming of
a holding company structure for Anthony & Sylvan; and
- any transaction suit resulting from a false or misleading statement in
this proxy statement/prospectus, the business of Anthony & Sylvan or from
the exercise of dissenters' rights with respect to the value of the
Anthony & Sylvan common shares distributed in the split-off.
The release and indemnification obligations contained in the transition
agreement will survive for three years after the split-off and will continue as
to any claims for indemnification that are asserted before that period expires.
USE OF NAMES; INTELLECTUAL PROPERTY
When we complete the merger, we will assign to Anthony & Sylvan or its
designee the name "Anthony & Sylvan Pools Corporation" and all rights related to
the name plus any other trademarks, trade names, service marks or other
proprietary names that Anthony & Sylvan owns or uses.
CONDITIONS TO THE SPLIT-OFF
Pursuant to the transition agreement, the obligations of Anthony & Sylvan
and Essef to consummate the split-off will be subject to the fulfillment or
waiver of each of the following conditions:
- Pentair shall have notified Essef that it is prepared to accept the Essef
common shares in exchange for its payment of the cash portion of the
merger consideration;
- we shall have deposited share certificates representing the shares of
Anthony & Sylvan with the depositary;
- registration statement of which this proxy statement/prospectus is a part
must have been declared effective by the Securities and Exchange
Commission;
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- all necessary third party consents or other approvals arising or relating
to the consummation of the split-off or necessary in order to avoid a
material default by us under any contract or agreement must have been
obtained;
- Anthony & Sylvan must have paid the intercompany dividend to us; and
- no temporary restraining order, preliminary or permanent injunction or
other order or other legal restraint prohibiting, preventing or
materially restricting the consummation of the split-off shall be in
effect.
We may not waive any of the conditions to the split-off without the prior
written consent of Pentair. However, Pentair may waive the conditions related to
third party consents, approvals or the existence of any injunction or other
order if it believes that completing the split-off will have no material adverse
effect on Anthony & Sylvan and it agrees to indemnify Anthony & Sylvan for any
material adverse effect suffered as a result of this waiver.
TERMINATION
If the merger agreement is terminated, the transition agreement will
automatically terminate. In addition, the parties may agree in writing to
terminate the transition agreement and abandon the split-off at any time before
we complete the merger. If the transition agreement is terminated under those
circumstances, no party will have any liability to any other party except for
any breach of the transition agreement before the date of termination.
AMENDMENT OR MODIFICATION
Essef, Anthony & Sylvan and Pentair can amend the transition agreement only
by written agreement.
TAX SHARING AGREEMENT
The tax sharing agreement contains the terms and conditions of the
allocation among Essef, Pentair and Anthony & Sylvan of the tax attributes
resulting from the merger and the split-off. THE SUMMARY OF THE TAX SHARING
AGREEMENT INCLUDED BELOW SHOULD NOT BE VIEWED AS A SUBSTITUTE FOR THE ENTIRE TAX
SHARING AGREEMENT. WE URGE YOU TO, AND YOU SHOULD, READ THE TAX SHARING
AGREEMENT IN ITS ENTIRETY. WE HAVE INCLUDED THE TAX SHARING AGREEMENT AS ANNEX C
TO THIS PROXY STATEMENT/PROSPECTUS.
OVERVIEW
Under the tax sharing agreement,
- Anthony & Sylvan agreed to indemnify Essef for any taxes Anthony & Sylvan
incurs after June 30, 1999; and
- Essef and Pentair agreed to indemnify Anthony & Sylvan for any taxes that
Anthony & Sylvan incurs on or before June 30, 1999.
In addition, Essef and Pentair agreed to indemnify Anthony & Sylvan for any
other taxes arising out of Anthony & Sylvan's being included in the Essef
consolidated federal income tax return and for any other taxes for which Essef
may be liable. Amounts that the parties may owe to one another under the tax
sharing agreement could be subject to the results of later audits by federal,
state and local taxing authorities. Therefore, they may not
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be finally determined for a substantial period of time after we complete the
merger and split-off.
TAX BENEFIT TO PENTAIR
In determining the amount of cash consideration paid by Pentair in the
merger, we and Pentair agreed that Pentair would realize a tax benefit from the
merger and the split-off equal to $4,200,000. In addition, Essef and Pentair
agreed that:
- if the tax benefit realized by Pentair is more than $4,200,000, Essef
will pay to Anthony & Sylvan an amount equal to the excess in the manner
described on page 56; and
- if the tax benefit realized by Pentair is less than $4,200,000, Anthony &
Sylvan will pay to Essef an amount equal to the deficiency in the manner
described on page 56.
DETERMINATION OF TAX BENEFIT TO PENTAIR
As structured, the merger and split-off will result in the following tax
consequences to Essef, as a wholly-owned subsidiary of Pentair:
- a tax deduction to Essef for payments in cancellation of compensatory
stock options to employees of Essef in the merger; and
- a tax on the gain realized by Essef from the split-off.
In determining the tax benefit to Pentair, the net of these tax
consequences is then:
- increased by the amount, if any, by which the aggregate stock option
exercise price for the compensatory stock options exceeds $6,050,000;
- decreased by the amount, if any, by which such aggregate exercise price
is less than $5,550,000; and
- reduced to take account of any nondeductible amounts that Essef may have
to pay on account of the exercise of compensatory stock options.
For purposes of determining the tax benefit, the tax imposed on Essef as a
result of the split-off will be calculated based on the trading value of the
Anthony & Sylvan shares. The tax sharing agreement provides that the trading
value of the Anthony & Sylvan shares will equal the average between the high and
low trading prices for the Anthony & Sylvan shares on the first full trading day
following the merger. However, if either Anthony & Sylvan or Pentair believes
that this amount does not represent the proper value for purposes of determining
the amount of gain resulting from the split-off, the tax sharing agreement
requires that:
- Pentair, Essef and Anthony & Sylvan negotiate an alternative value
considering all relevant factors and circumstances, including:
- the trading pattern of the Anthony & Sylvan shares;
- an appraisal from the Rhone Group; and
- if Pentair, Essef and Anthony & Sylvan are unable to agree on a value,
then they will refer the matter to an arbitrator.
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If the parties disagree on the trading value of the Anthony & Sylvan
shares, it may take several months or longer for the arbitrator to determine the
proper valuation for the Anthony & Sylvan shares, which will delay the final
calculation of the tax benefit. Therefore, it may also take several months or
longer to determine whether a payment adjustment is required.
TAX BENEFIT PAYMENT
If the actual tax benefit realized by Pentair is greater than $4,200,000,
the intercompany dividend will be reduced by this amount in the manner described
on page 55.
If Anthony & Sylvan is required to make an additional payment to Essef
because the tax benefit to Pentair is less than $4,200,000, Anthony & Sylvan has
the option of paying cash or issuing a senior subordinated note:
- bearing interest at a fixed rate equal to Anthony & Sylvan's initial bank
financing plus a basis point spread of between 225 and 550 basis points
determined based on Anthony & Sylvan's debt to pro-forma earnings before
interest, taxes, depreciation and amortization ratio maintenance
requirement;
- due three years and one day following the completion of the merger;
- redeemable by Anthony & Sylvan:
- at Anthony & Sylvan's option;
- in the event of sale, merger or other disposition involving Anthony &
Sylvan; or
- in the event of a sale of substantially all of Anthony & Sylvan's
assets;
- ranking:
- junior to all Anthony & Sylvan bank financing; and
- senior to:
- all other indebtedness of Anthony & Sylvan; and
- all equity interests in Anthony & Sylvan;
- containing default provisions similar to the default provisions
governing Anthony & Sylvan's initial bank financing; and
- containing the same covenants made by Anthony & Sylvan in its initial
bank financing.
RELATIONSHIP AND TRANSACTIONS WITH ESSEF FOLLOWING THE SPLIT-OFF
We expect that Anthony & Sylvan will continue to purchase equipment and
other supplies from us and our subsidiaries following the split-off. Neither of
us is bound by any formal supply agreement, and either of us may discontinue
this relationship at any time. We believe that there are currently a number of
other suppliers which could provide that equipment and those supplies to Anthony
& Sylvan on comparable terms.
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ANTHONY & SYLVAN
BUSINESS
Anthony & Sylvan was formed in 1997 to acquire the assets and business of a
predecessor corporation. That predecessor corporation was the successor to the
pool installation businesses of Pennsylvania-based Sylvan Pools and
California-based Anthony Pools. Sylvan Pools was founded by Herman Silverman in
1946 and grew to become the leading pool installer in the Northeast, with
operations stretching out to the Southeast, Texas and Nevada. Anthony Pools was
founded by Phil Anthony in 1947 and eventually established itself as one of the
largest pool companies in the United States. In 1996, the parent company of
Sylvan Pools purchased Anthony Pools and combined the two businesses under the
name "Anthony & Sylvan." Anthony & Sylvan has built over 300,000 pools in its
history.
Anthony & Sylvan believes it is the largest installer of residential
in-ground concrete swimming pools in the United States. Anthony & Sylvan has a
network of 40 sales offices serving 15 states. The majority of Anthony &
Sylvan's pools range in price from $15,000 to $40,000. Historically, Anthony &
Sylvan's sales have been seasonally strongest in the second and third quarters
and weakest in the first and fourth quarters. Anthony & Sylvan built 5,153 pools
in 1998.
In addition to installing residential pools, Anthony & Sylvan:
- markets pool renovation services in selected markets;
- operates a commercial pool installation business in the Northeast focused
primarily on smaller hotel chains and clubs;
- operates 16 retail locations that sell chemicals, replacement parts,
accessories, equipment and inflatables; and
- operates four field service operations that offer post-installation
services such as pool openings, closings and weekly maintenance.
Sales from these businesses accounted for $18.2 million, or 11.7%, of
Anthony & Sylvan's 1998 sales.
SWIMMING POOL SALES AND INSTALLATION INDUSTRY
Anthony & Sylvan estimates that the installation of residential in-ground
swimming pools is a $3.5 billion per year industry in the United States.
According to the National Spa & Pool Institute, the total number of residential
in-ground swimming pools installed annually in the United States has grown from
121,000 in 1994 to 160,000 in 1997. In each of these years, the percentage of
residential in-ground swimming pools installed using formative structures made
of concrete, vinyl liners and pre-molded fiberglass has remained fairly
consistent and in 1997 represented 68.8%, 28.7% and 2.5%, respectively, of total
residential in-ground swimming pools installed. While other sectors of the
residential in-ground swimming pool business, such as manufacturing,
distribution and retailing of pool products and equipment, have undergone
significant consolidation in recent years, the sales and installation industry
has remained highly fragmented.
MARKETING AND SALES
Anthony & Sylvan sells its products to a large number of customers,
primarily residential homeowners. Anthony & Sylvan's principal sales activities
are conducted by a dedicated sales force of approximately 175 employees who have
responsibility for developing and maintaining customer relationships. Sales
visits are conducted in the customer's home or at an Anthony & Sylvan office
near the customer's home. The introduction of the laptop
ANTHONY & SYLVAN
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computer as a selling tool in recent years has significantly enhanced the
quality and professionalism of Anthony & Sylvan's sales presentations and
reinforced Anthony & Sylvan's image as an expert installer. As a service to its
customers, Anthony & Sylvan maintains relationships with lenders that provide
financing for its customers.
Anthony & Sylvan does most of its advertising in local newspapers and
Yellow Pages. Anthony & Sylvan has advertised, to a lesser extent, using radio,
television, billboards and direct mail and has also attracted buyers as a result
of referrals from previous customers and realtors, among others.
COMPETITION IN THE SWIMMING POOL SALES AND INSTALLATION INDUSTRY
Anthony & Sylvan primarily faces competition from regional and local
installers. Anthony & Sylvan believes that there are a small number of swimming
pool companies that compete with Anthony & Sylvan on a national basis. Barriers
to entry in the swimming pool sales and installation industry are relatively
low.
Anthony & Sylvan believes that the principal competitive factors in the
pool installation business are the quality and level of customer service,
product pricing, breadth and quality of products offered, ability to procure
labor and materials on a market-by-market basis from local and regional sources,
financial integrity and stability, and consistency of business relationships
with customers. Anthony & Sylvan believes it competes favorably with respect to
each of these factors.
PRINCIPAL SUPPLIERS AND SUBCONTRACTORS
Anthony & Sylvan regularly evaluates supplier relationships and considers
alternate sourcing as appropriate to assure competitive costs and quality
standards. Anthony & Sylvan currently does not have long-term contracts with any
of its suppliers. Anthony & Sylvan believes there are currently a number of
other suppliers of that equipment and those supplies on comparable terms.
Anthony & Sylvan utilizes both company employees as well as subcontractors
to install pools; however, the majority of Anthony & Sylvan's installation labor
base consists of subcontractors. Anthony & Sylvan personnel act as field
supervisors to oversee all aspects of the installation process and as schedulers
who coordinate the activities of the craftsmen and communicate information to
the customer.
FACILITIES
Anthony & Sylvan currently operates 40 sales offices in 15 states. Anthony
& Sylvan's executive offices are located in Chardon, Ohio. Anthony & Sylvan
believes that no single property is material to its operations and that
alternate sites are presently available at market rates.
LEGAL PROCEEDINGS
From time to time, Anthony & Sylvan is involved in litigation and
proceedings arising in the ordinary course of its business. Although the outcome
of litigation and claims is uncertain, Anthony & Sylvan does not believe that
there are any pending proceedings which could be expected to have a material
adverse effect on Anthony & Sylvan's financial condition or its results of
operations.
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NON-MANAGEMENT EMPLOYEES
At March 31, 1999, Anthony & Sylvan employed:
- 661 persons on a full-time basis, of whom:
- 247 were management, administration and operations employees;
- 237 were installation employees; and
- 177 were commissioned sales personnel; and
- 42 persons on a part-time basis, all of whom were employed at Anthony &
Sylvan's retail stores.
No employees are covered by collective bargaining agreements. Anthony &
Sylvan believes it has satisfactory relations with its employees.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of Anthony & Sylvan are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stuart D. Neidus..................... 48 Chairman of the Board and Chief Executive
Officer
Howard P. Wertman.................... 54 President
Mark E. Brody........................ 37 Executive Vice President and Chief
Financial Officer
Richard M. Kelso..................... 50 Executive Vice President
Edward W. Andrews III................ 40 Vice President
Thomas J. Casey...................... 38 Vice President
Lawrence M. Mazzenga................. 46 Vice President
Phillip A. Pascucci.................. 52 Vice President
Mary Ann Jorgenson................... 58 Director
Thomas B. Waldin..................... 56 Director
</TABLE>
Mr. Neidus has served as Chairman of the board of directors and Chief
Executive Officer of Anthony & Sylvan since September 1998 and as a Director
since May 1997. He served as Chief Financial Officer of Anthony & Sylvan from
September 1998 through April 1999. In addition, Mr. Neidus has served as
Executive Vice President and Chief Financial Officer of Essef since September
1996. Prior to that, from 1992 to 1996 Mr. Neidus served with Premier Farnell
plc, successor to Premier Industrial Corporation, most recently as Executive
Vice President. Prior to joining Premier Farnell plc, Mr. Neidus spent 19 years
as an independent public accountant with KPMG Peat Marwick, including eight
years as a partner.
Mr. Wertman has served as President of Anthony & Sylvan since October 1995.
He previously served as Divisional Vice President of Sylvan Pools from 1990 to
1995. Mr. Wertman's career in the swimming pool industry began in 1973, and
since then he has served in various management positions with both Anthony Pools
and Sylvan Pools.
Mr. Brody has served as Executive Vice President and Chief Financial
Officer since April 1999. He served as Vice President of Anthony & Sylvan from
January 1998 through April 1999. In addition, Mr. Brody has served as Vice
President-Finance of Essef since
ANTHONY & SYLVAN
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August 1997. Prior to that, from 1987 to 1997, Mr. Brody served with Sudbury,
Inc., most recently as Vice President and Chief Financial Officer. Prior to
joining Sudbury, Inc., Mr. Brody spent five years as an independent public
accountant with Ernst & Young, L.L.P.
Mr. Kelso has served as Executive Vice President of Anthony & Sylvan since
1996. His experience in the pool industry includes service as Vice President of
Anthony Pools from 1989 to 1996. Prior to that, from 1979 to 1988 Mr. Kelso was
the General Manager of the Washington, D.C. division of Anthony Pools. His
career includes 23 years of pool service, all in management positions with
Anthony Pools.
Mr. Andrews has served as Vice President of Anthony & Sylvan since August
1998, following the Andrews Acquisition. Mr. Andrews was the founder of Pools by
Andrews, Inc., established in 1983, and served as its President for 15 years.
His more than 20 years of experience in the swimming pool industry includes
service as a General Manager of Andrews Gunite Company, a New England based
swimming pool builder.
Mr. Casey has served as Vice President of Anthony & Sylvan since 1998 and
as the National Sales Manager since 1995. Prior to that, he served as Sales
Manager and a sales designer with Sylvan Pools from 1986 to 1995.
Mr. Mazzenga has served as Vice President of Anthony & Sylvan since 1996.
He served as Vice President of Sylvan Pools from 1994 to 1996. Prior to that,
from 1979 to 1994 he served in various operational and management positions with
Anthony Pools.
Mr. Pascucci has served as Vice President of Anthony & Sylvan since 1997.
Prior to that, from 1992 to 1997 he served as General Manager of the Las Vegas
Division of Sylvan Pools. Mr. Pascucci has served in various operational and
management positions with Sylvan Pools during the period 1986-1992.
Ms. Jorgenson has served as a director of Anthony & Sylvan since September
1998. Ms. Jorgenson is a partner and head of the corporate practice in the law
firm of Squire, Sanders & Dempsey L.L.P., and has been associated with that firm
since 1975. She is a director of the general partner of Cedar Fair, L.P., the
owner of five regional amusement parks. She is also a director of S2 Golf Inc.,
a manufacturer and distributor of golf clubs and bags, and a director of
Continental Business Enterprises, Inc., an Ohio-based metal stamping company.
Mr. Waldin has served as a director of Anthony & Sylvan since May 1997. Mr.
Waldin has served as Chief Executive Officer and President of Essef since 1990
and a Director since 1991.
COMMITTEES OF THE BOARD OF DIRECTORS
GENERAL. Anthony & Sylvan's amended and restated regulations will provide
for a minimum of three and a maximum of nine directors. Initially there will be
three directors on the Anthony & Sylvan board. Anthony & Sylvan expects to
increase the size of the board to as many as six directors after the split-off
and to seek qualified candidates with expertise in consumer products industries
and other areas of importance to Anthony & Sylvan's business. Anthony & Sylvan's
regulations will also provide that whenever there are more than five directors,
the board of directors will be divided into at least two classes of at least
three directors each, with staggered terms. All directors shall serve three year
terms.
All officers of Anthony & Sylvan serve at the pleasure of the board of
directors.
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COMMITTEES. Immediately following the split-off, Anthony & Sylvan's board
of directors will establish three committees:
- executive committee will have all authority of the board between meetings
of the board. However, the executive committee will not have the
authority to:
- declare dividends;
- appoint or elect officers;
- determine compensation for officers; or
- fill vacancies on the board or on any committee of the board.
The executive committee will be chaired by Mr. Waldin, and the other
members will be Mr. Neidus and Ms. Jorgenson.
- compensation committee responsible for compensation and employee benefits
matters including the following:
- recommending to the board of directors and Anthony & Sylvan's
management the overall compensation programs of Anthony & Sylvan;
- reviewing and approving the compensation payable to the senior
management personnel of Anthony & Sylvan;
- reviewing and monitoring the executive development efforts of Anthony &
Sylvan to assure development of a core of management and executive
personnel adequate for orderly management succession;
- reviewing significant changes in employee benefits plans and stock
related plans; and
- serving as the committee responsible for the management of the 1999
Long-Term Incentive Plan.
The compensation committee will consist of three members at least two of
whom will be non-employee directors as that term is defined in Rule 16b-3 under
the Exchange Act of 1934, and will also be outside directors as that term is
defined in Section 162(m) of the Internal Revenue Code of 1986.
- audit committee responsible for financial affairs and accounting methods,
including the following:
- reviewing the scope and results of Anthony & Sylvan's annual
independent audit;
- reviewing the scope of other services provided by independent
accountants;
- proposing changes in financial and accounting standards and principles;
- proposing changes to internal accounting, auditing and financial
control policies and procedures;
- selecting and retaining independent accountants;
- reviewing all related party transactions; and
- monitoring the ethics and compliance program.
ANTHONY & SYLVAN
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The audit committee will consist of three members at least two of whom will
be independent directors as that term is defined in the rules of the Nasdaq
National Market.
The board of directors may, from time to time, establish other committees
to facilitate its work.
COMPENSATION
Employee directors will receive no compensation for their services as
directors. Non-employee directors will receive reimbursement of reasonable
expenses incurred in serving as a director. In addition, each non-employee
directors of Anthony & Sylvan will receive:
- a grant of 2,000 nonqualified options to purchase shares of Anthony &
Sylvan on the date that person first becomes a director that will vest in
equal amounts over the director's initial three year term and have an
exercise price of $16.00 per share;
- an annual grant of 1,000 non-qualified options at each annual meeting of
shareholders under the 1999 Long-Term Incentive Plan; and
- deferred compensation in the form determined by the compensation
committee equivalent in value to $25,000.
INDEMNIFICATION
Anthony & Sylvan will enter into indemnification agreements with each of
its directors and executive officers. These indemnification agreements will
provide the maximum indemnification allowed to directors and executive officers
under the laws of Ohio. In addition, as authorized by Anthony & Sylvan's amended
and restated regulations and Ohio law, the indemnification agreements will
provide that Anthony & Sylvan will advance expenses incurred by directors and
executive officers in any action or proceeding as to which they may be entitled
to indemnification.
However, Anthony & Sylvan will not indemnify the directors and executive
officers:
- if the director or executive officer is found to have been in willful
misfeasance or willful disregard of duties;
- if the director or executive officer must pay a fine for improper use of
insider information;
- if the director or executive officer improperly gained personal profit or
gain; or
- in any action that the director or executive officer commenced himself or
herself.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid by Essef to the
chairman of the board and chief executive officer of Anthony & Sylvan and by
Anthony & Sylvan to the
ANTHONY & SYLVAN
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other four most highly compensated executive officers of Anthony & Sylvan who
received an annual salary and bonus in excess of $100,000 for services rendered
during 1998.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
OTHER
YEAR SALARY BONUS COMPENSATION(3)
---- ------- ------- ---------------
<S> <C> <C> <C> <C>
Stuart D. Neidus, chairman of the
board and chief executive
officer(2)....................... 1998 228,461 129,000 10,734
Howard P. Wertman, president....... 1998 174,300 114,344 8,576
Richard M. Kelso, executive vice
president........................ 1998 135,300 90,879 7,664
Mark E. Brody, executive vice
president and chief financial
officer(2)....................... 1998 135,000 76,217 9,600
Thomas J. Casey, vice president.... 1998 100,000 66,439 8,573
</TABLE>
- ---------------
(1) Since Anthony & Sylvan was not a reporting company during the three
immediately preceding fiscal years, only the information with respect
to the most recently completed fiscal year is noted in the table.
(2) Represents amounts earned by Messrs. Neidus and Brody in their
capacities as officers of Essef. Those amounts were paid by Essef and a
portion for Mr. Neidus was allocated to Anthony & Sylvan.
(3) Includes for each named officer matching contributions under either
Essef's or Anthony & Sylvan's 401(k) profit sharing plan.
Grants and Exercises. No stock options were granted to the executive
officers of Anthony & Sylvan, and the executive officers of Anthony & Sylvan did
not exercise any options, to purchase Essef shares or Anthony & Sylvan shares
during 1998.
EMPLOYMENT AGREEMENTS
Anthony & Sylvan currently has employment agreements with four of its
executive officers: Messrs. Neidus, Wertman, Kelso and Brody.
Each of the agreements expires on December 31, 2000, unless it is
terminated or extended according to its terms. As compensation for his service
as chief executive officer of Anthony & Sylvan, Mr. Neidus will receive an
annual base salary of at least $229,000 and performance-based bonuses targeted
at 60% of his annual salary. In addition, at the time of the split-off, Mr.
Neidus will be granted options to purchase 75,000 common shares at an exercise
price equal to $16.00 per share exercisable 25% per year following the second
anniversary of the split-off. As compensation for his service as president, Mr.
Wertman will receive an annual base salary of $175,000 and performance-based
bonuses targeted at 50% of his annual salary. In addition, at the time of the
split-off, Mr. Wertman will be granted options to purchase 30,000 common shares
at an exercise price equal to $16.00 per share exercisable 25% per year
following the second anniversary of the split-off. As compensation for his
services as executive vice president, Mr. Kelso will receive an annual base
salary of $137,000 and performance-based bonuses targeted at 50% of his annual
salary. In addition, at the time of the split-off, Mr. Kelso will be granted
options to purchase 25,000 common
ANTHONY & SYLVAN
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shares at an exercise price equal to $16.00 per share exercisable 25% per year
following the second anniversary of the split-off. As compensation for his
service as executive vice president and chief financial officer, Mr. Brody will
receive an annual base salary of $140,000 and performance-based bonuses targeted
at 35% of his salary. In addition, at the time of the split-off, Mr. Brody will
be granted options to purchase 25,000 common shares at an exercise price equal
to $16.00 per share exercisable 25% per year following the second anniversary of
the split-off.
If any of Messrs. Neidus, Wertman, Kelso or Brody is terminated by Anthony
& Sylvan without cause, he will be entitled to receive salary for a period of
one year, or in the case of Mr. Neidus, until the later of one year or December
31, 2000, along with the pro rata portion of any bonus payable for such fiscal
year. Messrs. Wertman, Kelso and Brody also would receive the right to exercise,
for three months, any options to acquire shares of Anthony & Sylvan granted to
them that are exercisable. Mr. Neidus will be entitled to exercise, for one
year, any options to acquire shares of Anthony & Sylvan granted to him whether
or not exercisable. Mr. Neidus will be deemed to have been terminated without
cause if, among other things, Anthony & Sylvan at any time materially changes
his duties and responsibilities without his consent.
Upon a change in control of Anthony & Sylvan, Mr. Neidus shall have the
right to terminate his employment with Anthony & Sylvan and receive the same
rights and benefits to which he would be entitled upon his termination without
cause. The split-off is not included as a change in control under Mr. Neidus'
employment agreement.
1999 LONG-TERM INCENTIVE PLAN
OVERVIEW. All key employees and directors of Anthony & Sylvan and its
direct and indirect subsidiaries and other persons who the compensation
committee determines will be eligible to receive awards under the 1999 Long-Term
Incentive Plan, including the executives named in the summary compensation table
on page 63.
The compensation committee will administer the long-term incentive plan.
The Anthony & Sylvan compensation committee will have authority to:
- interpret the plan;
- grant waivers of plan restrictions; and
- adopt any rules, regulations and policies for carrying out the plan as it
deems necessary or proper to further the purposes of the plan;
- select participants;
- determine the number and type of awards to be granted;
- determine the terms and conditions to any award granted in a manner
consistent with the terms of the plan;
- interpret the terms and provisions of the plan and any award granted;
- prescribe the form of any agreement or instrument executed in connection
with any award; and
- establish, amend and rescind any rules, regulations and policies for the
administration of the plan as it may deem advisable from time to time.
ANTHONY & SYLVAN
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Awards under the long-term incentive plan may be in the form of:
- incentive stock options within the meaning of Section 422 of the Internal
Revenue Code;
- nonstatutory stock options;
- stock appreciation rights;
- restricted shares;
- performance shares; or
- stock awards.
Stock options will be exercisable in whole or in installments and at the
times and upon the terms as the compensation committee determines. However, no
stock options will be exercisable more than ten years after the date of grant.
The exercise price of any stock option granted to an employee may not be less
than the fair market value of a share of Anthony & Sylvan shares on the date of
the grant. Participants may pay the exercise price of a stock option in:
- cash;
- shares of Anthony & Sylvan; or
- a combination of cash and shares of Anthony & Sylvan.
Stock appreciation rights entitle the recipient to receive a payment,
either in cash or in shares of Anthony & Sylvan. The amount of the payment will
equal the appreciation in market value of a stated number of shares of Anthony &
Sylvan from the exercise price to the average value of the shares on the ten
days before the date of exercise. Anthony & Sylvan may grant stock appreciation
rights either separately or in conjunction with other awards granted under the
long-term incentive plan. Anthony & Sylvan may grant any stock appreciation
right related to a nonstatutory stock option at the same time as the
nonstatutory stock option is granted or at any time thereafter before its
exercise or expiration. Anthony & Sylvan must grant any stock appreciation right
related to an incentive stock option at the same time it grants the incentive
stock option. Any stock appreciation right related to an option will be
exercisable only to the extent the related option is exercisable and that stock
appreciation right, or the applicable portion thereof, will terminate and will
no longer be exercisable upon the termination or exercise of the related option.
Similarly, upon the exercise of a stock appreciation right as to some or all of
the shares of Anthony & Sylvan covered by a related option, the related option
will be canceled automatically to the extent of the stock appreciation rights
exercised, and those shares of Anthony & Sylvan will not thereafter be eligible
for grant.
Anthony & Sylvan may award restricted shares in numbers and at times as the
compensation committee determines. Restricted shares will be subject to such
terms, conditions or restrictions as the compensation committee deems
appropriate including, without limitation:
- restrictions on transferability;
- requirements of continued employment;
ANTHONY & SYLVAN
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<PAGE> 75
- individual performance; or
- financial performance of Anthony & Sylvan.
The compensation committee will establish periods of vesting and forfeiture
restrictions at the time of grant. No restriction period may be less than 12
months. During the period in which any restricted shares are subject to
forfeiture restrictions, the compensation committee may, in its discretion,
grant to the participant to whom those shares have been awarded all or any of
the rights of a shareholder with respect to those restricted shares, including
the right to vote those shares and to receive dividends with respect to those
shares.
Anthony & Sylvan may award performance shares in the form of shares of
Anthony & Sylvan that are earned only after Anthony & Sylvan attains
predetermined performance targets established by the compensation committee at
the time an award is made. A performance target may be based upon one or any
combination of the following:
- revenues;
- operating income;
- net income;
- earnings per share;
- return on equity;
- cash flow;
- shareholder total return;
- return on assets;
- return on investment;
- asset turnover;
- liquidity;
- capitalization;
- stock price;
- expenses;
- operating profit and margin;
- retained earnings;
- market share;
- sales to targeted customers;
- customer satisfaction;
- quality measures;
- productivity;
- safety measures; or
- educational and technical skills of employees.
The compensation committee is allowed to make adjustments when it
determines whether performance targets have been attained. Those adjustments may
reflect extraordinary or nonrecurring items or events or unusual nonrecurring
gains or losses identified in Anthony & Sylvan's financial statements. Those
adjustments are made in a manner consistent with Section 162(m) of the Internal
Revenue Code to the extent applicable. Awards of performance shares must be made
to participants subject to Section 162(m) of the Internal Revenue Code are
intended to qualify under Section 162(m) and provisions of those awards
ANTHONY & SYLVAN
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will be interpreted in a manner consistent with that intent to the extent
appropriate. This paragraph is also applicable to awards of restricted shares to
the extent those awards of restricted shares are subject to the financial
performance of Anthony & Sylvan. At the end of the applicable performance
period, performance shares will be converted into shares of Anthony & Sylvan,
cash or a combination of shares and cash and then distributed to participants
based upon the applicable performance entitlement. Award payments made in cash
rather than the issuance of shares of Anthony & Sylvan will not, by reason of
the cash payment, result in additional shares being available under the
long-term incentive plan.
Anthony & Sylvan may make stock awards in common shares of Anthony & Sylvan
or on a basis valued in whole or in part by reference to, or otherwise based
upon, shares of Anthony & Sylvan. Stock awards will be subject to conditions
established by the compensation committee.
The aggregate number of shares of Anthony & Sylvan common stock that
Anthony & Sylvan may award under the long-term incentive plan shall be 500,000
shares. This number may be adjusted in the event of any change in the number of
outstanding shares by reason of a reorganization, recapitalization, stock split,
stock dividend, combination or exchange of shares, merger, consolidation or any
change in the corporate structure or capital stock of Anthony & Sylvan. No more
than 500,000 shares are available for the grant of incentive stock options under
the plan and Anthony & Sylvan may not award more than 120,000 shares to any
individual participant in any one calendar year. Shares issuable under the plan
may consist of authorized and unissued shares of Anthony & Sylvan or shares of
Anthony & Sylvan held in treasury. Immediately after the split-off, 93,674
options will be outstanding under the long term incentive plan representing
options resulting from the modification of the Essef options held by Messrs.
Neidus and Waldin. In addition, a total of 200,000 options will be granted under
the long term incentive plan to nine key employees including options granted
under the employment agreements described on page 63.
In the event of a change in control of Anthony & Sylvan, as defined in the
long-term incentive plan, and except as the Anthony & Sylvan board expressly
provides otherwise:
- all stock options or stock appreciation rights then outstanding will
become fully exercisable as of the date of the change in control, whether
or not then otherwise exercisable;
- all restrictions and conditions of all awards of restricted shares then
outstanding shall be deemed satisfied as of the date of the change in
control; and
- all awards of performance shares will be deemed to have been fully earned
as of the date of the change in control.
For purposes of the long-term incentive plan, a change in control of
Anthony & Sylvan occurs when:
- Anthony & Sylvan is:
- merged, consolidated or reorganized into or with another corporation or
entity; and
- immediately after the merger, consolidation or reorganization less than
a majority of the voting power of the combined entity is held by the
Anthony & Sylvan shareholders;
ANTHONY & SYLVAN
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- Anthony & Sylvan sells all or substantially all of its assets and
immediately after the sale the Anthony & Sylvan shareholders hold less
than a majority of the voting power of the purchasing entity;
- a person other than shareholders immediately after the split-off becomes
a beneficial owner of more than 50% of the voting power of Anthony &
Sylvan; and
- Anthony & Sylvan files a report or proxy statement with the Securities
and Exchange Commission that a change of control of Anthony & Sylvan has
or may occur.
The Anthony & Sylvan board may amend, suspend or terminate the long-term
incentive plan at any time. However, the Anthony & Sylvan board may not take any
action that would impair the rights under an outstanding award without the
participant's consent. Similarly, the Anthony & Sylvan board may amend the terms
of any outstanding award, prospectively or retroactively, but no amendment may:
- impair the rights of any participant without the participant's consent;
and
- no amendment may, for any employee subject to Section 162(m) of the
Internal Revenue Code, increase the amount of any award from the amount
that would otherwise be payable pursuant to the formula and/or goals
previously established for that participant.
Unless otherwise provided in the relevant award agreement, no one other
than the participant to whom it was granted may assign, transfer, receive
payment under or exercise any award or benefit under the long-term incentive
plan.
FEDERAL INCOME TAX CONSEQUENCES OF THE LONG-TERM INCENTIVE PLAN. The
following summary describes all material federal income tax consequences under
current tax laws of events under the long-term incentive plan. The summary is
general in nature and is not intended to cover all tax consequences that may
apply to a particular participant or to Anthony & Sylvan. In addition, it does
not describe foreign, state or local tax consequences.
No income will result to a participant when Anthony & Sylvan grants an
incentive stock option or when the participant exercises the incentive stock
option. This is true as long as:
- the participant does not dispose of stock received upon exercise of an
incentive stock option within two years from the date Anthony & Sylvan
grants the incentive stock option or within one year from the date the
participant exercises the incentive stock option;
- the participant is an employee of Anthony & Sylvan or a subsidiary of
Anthony & Sylvan at all times from the date of grant until three months
before the date of exercise; and
- for a participant who is totally and permanently disabled, he or she is
an employee of Anthony & Sylvan or a subsidiary of Anthony & Sylvan at
all times from the date of grant until one year before the date of
exercise.
If a participant disposes of stock he or she receives on exercise of an
incentive stock option after the incentive stock option holding periods have
been satisfied, any gain or loss usually will be taxable as capital gain or
loss. The gain or loss is equal to the difference between the amount realized on
the disposition and the option price. If a participant disposes of stock he or
she receives on exercise of an incentive stock option before the expiration of
the incentive stock option holding periods, the participant will recognize
ordinary income
ANTHONY & SYLVAN
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equal to the excess of the fair market value of the stock at the time of
exercise, or the amount realized upon the disposition, if less, over the option
price. If the amount realized on the disqualifying disposition exceeds the fair
market value of the stock at the time of exercise, the excess will be taxable as
capital gain.
Anthony & Sylvan may not take any deduction on the grant or exercise of an
incentive stock option. If a participant in the long-term incentive plan
recognizes ordinary income as a result of a disposition of stock he or she
received upon exercise of an incentive stock option before the expiration of the
incentive stock option holding periods, Anthony & Sylvan usually will be
entitled to a deduction in an amount equal to the ordinary income recognized by
the participant.
No income is recognized when Anthony & Sylvan grants a nonstatutory stock
option to a participant in the long-term incentive plan. The participant
recognizes ordinary income upon exercise of the nonstatutory stock option equal
to the excess of the fair market value of the stock received upon exercise of
the stock option on the date of exercise over the option price. That ordinary
income, in the case of an employee, is subject to withholding. The participant's
tax basis in these shares will be equal to fair market value of the shares when
purchased. On subsequent sale of those shares, gain or loss will be recognized
in an amount equal to the difference between the tax basis of the shares and the
amount realized on the sale of the shares.
A participant in the long-term incentive plan will not be taxed when
Anthony & Sylvan awards a stock appreciation right. When the participant
exercises the stock appreciation right, the participant will recognize ordinary
income equal to the amount of cash received and Anthony & Sylvan will be
entitled to a corresponding deduction. If a participant receives shares upon the
exercise of a stock appreciation right, the participant will recognize ordinary
income equal to the value of the shares at the time of exercise. If the
participant is an employee, any ordinary income recognized upon the exercise of
a stock appreciation right is treated as wages subject to withholding.
A participant in the long-term incentive plan usually will not recognize
taxable income when Anthony & Sylvan grants restricted shares. The recognition
of any income will be postponed until the time that the restrictions on the
shares lapse. At that time the participant will recognize ordinary income equal
to the fair market value of the restricted shares at the time these restrictions
lapse. A participant may elect to be taxed at the time of the grant of
restricted stock and, if this election is made, the participant will recognize
ordinary income equal to the fair market value of the restricted shares at the
time of grant determined without regard to any of the restrictions on the
shares. If the participant is an employee, any ordinary income recognized with
respect to restricted shares will be subject to withholding.
When a participant earns performance shares and Anthony & Sylvan issues
stock as a result, a participant in the long-term incentive plan will realize
ordinary income, equal to the fair market value of the performance shares. If
the participant is an employee, any ordinary income recognized as a result of
the share issuance will be subject to withholding.
A participant in the long-term incentive plan will recognize ordinary
income upon the receipt of a stock award, other than an award of performance
shares or restricted shares, equal to the fair market value of that stock on the
award date. If the participant is an employee, any ordinary income recognized as
a result of a stock award is treated as wages subject to withholding.
ANTHONY & SYLVAN
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Anthony & Sylvan usually will be entitled to a deduction equal to the
ordinary income recognized by the participant in the long-term incentive plan in
the same taxable year in which the participant recognizes ordinary income with
respect to nonstatutory stock options, restricted stock, performance shares,
stock appreciation rights and stock awards.
PRINCIPAL SHAREHOLDERS
The following table gives information about the beneficial ownership of
Anthony & Sylvan common shares upon completion of the split-off. We have
supplied information about:
- each person who, known by us, will own beneficially more than 5% of our
voting shares;
- each of Anthony & Sylvan's directors and executive officers; and
- all of Anthony & Sylvan's executive officers and directors as a group.
<TABLE>
<CAPTION>
ANTHONY & SYLVAN
COMMON SHARES
---------------------
NUMBER PERCENT
NAME OF BENEFICIAL OWNER(1) OF SHARES OF CLASS
--------------------------- --------- --------
<S> <C> <C>
5% Shareholders:
KeyBank National Association(2)(3)(4)(5)............... 667,780 19.89%
127 Public Square
Cleveland, Ohio 44114
Thomas B. Waldin(9).................................... 691,508 16.89
220 Park Drive
Chardon, Ohio 44024
The Jane B. King Irrevocable Trust
Ralph T. King and Alexander S. Taylor,
Trustees(6)....................................... 309,457 9.22
30050 Chagrin Boulevard, Suite 150
Pepper Pike, Ohio 44124
Fenimore Asset Management.............................. 343,194 10.22
118 North Grand Street
Cobleskill, New York 12043
James A. Horner Trust
James A. Horner, Jr., Douglas M. Horner and Mary Ann
Jorgenson, Trustees(5)(7)(8)...................... 191,774 5.71
4900 Key Tower
Cleveland, Ohio 44114
Directors and Executive Officers:
Stuart D. Neidus(10)................................... 87,119 2.13
Howard P. Wertman...................................... 925 0.02
Mark E. Brody(11)...................................... 6,655 0.16
Edward W. Andrews III.................................. 6,010 0.18
Thomas J. Casey........................................ 275 0.01
Thomas B. Waldin(9).................................... 691,508 16.89
Mary Ann Jorgenson(5).................................. 932,488 27.78
All directors and executive officers as a group (7
persons)............................................... 1,724,880 42.14
</TABLE>
- ---------------
(1) Rule 13d-3 of the Securities Exchange Act of 1934 defines beneficial
ownership as the sole or shared power to vote, or to direct the sale of, a
security. For purposes of this table, a person is deemed to have beneficial
ownership of any security that the person
ANTHONY & SYLVAN
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has the right to acquire within 60 days of June 14, 1999. For purposes of
this table, beneficial ownership does not include common shares issuable
upon exercise of options that are not scheduled to vest within 60 days of
June 14, 1999. Unless noted otherwise:
- information as to beneficial ownership is based on statements made by the
beneficial owners to us; and
- shareholders will possess sole voting and sales power with respect to
shares listed on this table.
Upon completion of the split-off, there will be approximately 3,357,024
issued and outstanding Anthony & Sylvan shares, adjusted for fractional
shares.
(2) Keybank National Association will exercise:
(a) sole voting and shared dispositive power over 609,357 shares; and
(b) shared voting and dispositive power over 36,192 shares held by a trust
of which Keybank National Association is one of three trustees and
noted in notes 3(a) and 5(b) below.
(3) James H. Dempsey, Jr. will share dispositive power over 609,357 shares as
one of three trust advisors noted in notes 2(a) above and 4 and 5(d), and
will also be the beneficial owner of:
(a) 36,192 shares held by a trust of which he is one of three trustees with
shared voting and dispositive power and noted in notes 2(b) above and
5(b) below; and
(b) 22,227 shares held by a trust of which he is a co-trustee with shared
voting and dispositive power and noted in note 5(c) below.
Mr. Dempsey disclaims the benefits of ownership of any of the
aforementioned shares. Mr. Dempsey is a partner in the law firm of Squire,
Sanders & Dempsey L.L.P., which we retain as our outside general counsel.
(4) James P. Oliver will share dispositive power over 609,357 shares as one of
three trust advisors noted in notes 2(a) and (3) above and 5(d) below. Mr.
Oliver disclaims the benefits of ownership of any of the aforementioned
shares. Mr. Oliver is a partner in the law firm of Squire, Sanders &
Dempsey L.L.P., which we retain as our outside general counsel.
(5) Mary Ann Jorgenson shares voting and dispositive power as co-trustee and is
also beneficial owner of:
(a) 23,026 shares will be held by six trusts of which she is sole trustee
with sole voting and dispositive power;
(b) 36,192 shares will be held by a trust of which she is a one of three
trustees with shared voting and dispositive power and noted in notes
2(b) and 3(a) above;
(c) 22,227 shares will be held by a trust of which she is a co-trustee with
shared voting and dispositive power and noted in note 3(b) above;
(d) 609,357 shares will be held by two trusts over which she has shared
dispositive power as one of three trust advisors and noted in notes
2(a), 3 and 4 above; and
(e) 49,912 shares will be held by trusts of which she is one of three
trustees with shared voting and dispositive power.
Ms. Jorgenson disclaims the benefits of ownership of any of the
aforementioned shares. Ms. Jorgenson is a partner in the law firm of
Squire, Sanders & Dempsey L.L.P., which Anthony & Sylvan retains as its
outside general counsel.
(6) Ralph T. King will share voting and dispositive power as co-trustee and is
also beneficial owner of (a) 41,238 shares owned directly; and (b) 7,440
shares held by a foundation of which he is a trustee with shared
dispositive power.
ANTHONY & SYLVAN
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(7) James A. Horner, Jr. will share voting and dispositive power as co-trustee
and will also be the beneficial owner of:
(a) 208,332 shares owned by or benefiting him or his children directly or
indirectly; and
(b) 44,912 shares held by trusts for the benefit of his children, nieces
and nephews, of which he is one of three trustees sharing voting and
dispositive power, and noted in notes 5(e) above and 8(b) below.
(8) Douglas A. Horner, Jr. will share voting and dispositive power as
co-trustee and will also be the beneficial owner of:
(a) 95,232 shares owned by or benefiting him or his children directly or
indirectly; and
(b) 49,912 shares held by trusts for the benefit of his children, nieces
and nephews, of which he is one of three trustees sharing voting and
dispositive power, and noted in notes 5(e) and 7(b) above.
(9) Thomas B. Waldin will be the beneficial owner of 691,508 shares owned by or
benefiting him, his wife or child directly, 652,320 shares consisting of
fully vested options to purchase Anthony & Sylvan shares.
(10) Stuart D. Neidus will be the beneficial owner of 87,119 shares owned by or
benefiting him, his wife or children directly, 83,187 shares consisting of
fully vested options to purchase Anthony & Sylvan shares.
(11) Mark E. Brody will be the beneficial owner of 6,665 shares owned by or
benefiting him, his wife or children directly, 6,050 shares consisting of
fully vested options to purchase Anthony & Sylvan shares.
DESCRIPTION OF CAPITAL STOCK OF ANTHONY & SYLVAN
Set forth below is a description of material provisions of Anthony &
Sylvan's capital stock that will be authorized for issuance upon the
effectiveness of Anthony & Sylvan's amended and restated articles of
incorporation. Anthony & Sylvan will cause these amended and restated articles
and regulations to become effective before the merger.
Anthony & Sylvan will be authorized to issue 30,000,000 common shares,
without par value, and 1,000,000 serial preferred shares, without par value. No
serial preferred shares have been issued as of the date of this proxy
statement/prospectus, and no serial preferred shares will be outstanding
immediately following the merger. Anthony & Sylvan's articles will permit its
board of directors to fix the rights and designations of the serial preferred
shares, to the extent allowed by Ohio law.
Common shareholders will be entitled to one vote per share on all matters
submitted to a vote of shareholders, and will not have the right to vote
cumulatively in the election of directors.
Common shareholders will have equal rights to receive dividends ratably, as
and when declared by the Anthony & Sylvan's board out of funds legally
available, subject to the dividend rights of serial preferred shareholders that
may be issued in the future. In the event of any liquidation, dissolution or
winding up of Anthony & Sylvan, holders of common shares will receive the assets
of Anthony & Sylvan available for distribution on a pro rata basis.
No holder of common shares will have any preemptive or preferential rights
to purchase or subscribe to any shares of any class of Anthony & Sylvan, except
to the extent provided by the board of directors.
ANTHONY & SYLVAN
72
<PAGE> 82
The transfer agent and registrar for the common shares is National City
Bank, Cleveland, Ohio.
POSSIBLE EFFECTS OF CERTAIN PROVISIONS OF ANTHONY & SYLVAN'S ORGANIZATIONAL
DOCUMENTS AND OHIO LAW
Anthony & Sylvan's strategy focuses primarily on the goal of building value
for the benefit of long-term shareholders. Our board of directors believes that,
if we complete the merger, this goal can best be attained by Anthony & Sylvan's
operation as an independent entity. Under Ohio law, the directors have the
responsibility for selecting the time frame for achieving corporate goals. In
order to assure that the directors can carry out that responsibility, Anthony &
Sylvan's articles and regulations will contain some provisions which may have
the effect of discouraging unilateral tender offers or other attempts to take
over and acquire the business of Anthony & Sylvan. If they discourage potential
takeover bids, these provisions could limit the opportunity for Anthony &
Sylvan's shareholders to sell their shares at a premium over then prevailing
market prices. Such provisions are intended to help preserve for the public
shareholders of Anthony & Sylvan the long-term value inherent in their
investment in the common shares and guard against offers which are not, or are
otherwise made at a time or in a manner which is not, in the best interests of
Anthony & Sylvan and its shareholders.
We believe that the Anthony & Sylvan board of directors will be in the best
position to consider all of the factors that may be relevant to a determination
of whether a control bid is in the best interests of Anthony & Sylvan and its
shareholders. A transaction that is negotiated and approved by the Anthony &
Sylvan board of directors can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for Anthony & Sylvan and its
shareholders, with due consideration given to matters such as:
- the management and business of the acquiror;
- the interests of other constituencies of Anthony & Sylvan; and
- maximum strategic development of the assets of Anthony & Sylvan.
By contrast, we believe that non-negotiated takeover attempts present to
shareholders the risk of a sale on terms which may be less favorable than might
otherwise be available. Those non-negotiated takeover offers may be timed to
exploit fluctuations in the stock market to capture for the acquiror the
intrinsic value of the target company's capital stock at the expense of the
target company's public shareholders. Moreover, although a tender offer or other
takeover attempt may be made at a price substantially above the prevailing
market price for the target company's shares, those offers are sometimes made
for less than all of the outstanding target company shares, presenting
shareholders with the alternatives of:
- partially liquidating their investment at a time that may be
disadvantageous; or
- retaining their investment in an enterprise which is under different
management and whose objectives may not be similar to, or as attractive
as, those of the remaining shareholders.
Tender offers may also be made for illegitimate or improper purposes which
seek to enrich the bidder at the expense of the target company and its
shareholders and may cause significant disruption of the target company's
business and management.
ANTHONY & SYLVAN
73
<PAGE> 83
Accordingly, we believe that the provisions described below, which
encourage potential acquirors to negotiate with the board of directors and
discourage the use of improper and coercive tactics, are in the best interests
of Anthony & Sylvan and its shareholders. In addition to these provisions, the
Anthony & Sylvan board of directors may, in the future, adopt other measures
designed to discourage non-negotiated takeover attempts, including a shareholder
rights plan. We are not aware of any plan by any third party to effect a change
of control in Anthony & Sylvan.
SPECIAL VOTE REQUIRED FOR SOME AMENDMENTS TO ORGANIZATIONAL DOCUMENTS. Some
provisions in Anthony & Sylvan's articles, such as those set forth in Article
SIXTH governing control share acquisitions, will not be subject to amendment,
alteration or repeal except by the affirmative vote of at least 80% of the
outstanding voting shares of the company. That 80% vote will also required to
amend, alter or repeal any of the provisions governing the number of directors
or the classification, election and term of office of directors or the removal
of directors, unless the proposed amendment has been recommended by at least
two-thirds of the directors.
OTHER PROVISIONS. Some other provisions of Anthony & Sylvan's articles and
regulations may also tend to discourage attempts to acquire control of Anthony &
Sylvan. These will include:
- advance notice requirements for director nominations and shareholder
proposals;
- provisions which require the unanimous written consent of the holders of
all voting shares in order for the shareholders to take action without a
meeting;
- provisions which permit a special meeting to be called by shareholders
only with the approval of the holders of 50% or more of outstanding
voting shares;
- provisions which permit shareholders to set the number of directors only
upon the recommendation of the board of directors; and
- provisions which permit Anthony & Sylvan to repurchase outstanding shares
of its capital stock as permitted by law.
TRANSACTIONS AND RELATIONSHIPS WITH INTERESTED PARTIES
The articles will contain provisions intended to clarify the duties and
obligations of directors and officers of Anthony & Sylvan with respect to
related party transactions. The articles will provide that no contract or
arrangement between Anthony & Sylvan and Essef, or between Anthony & Sylvan and
any director or officer of Anthony & Sylvan or Essef, will be void or voidable
solely because:
- Essef or that officer or director is a party; or
- that officer or director participated in, or voted with respect to, the
authorization of that contract or arrangement in question.
Further, the articles will provide that if Essef or any of its officers or
directors, in good faith, take any action or exercise any right in connection
with a contract or arrangement
ANTHONY & SYLVAN
74
<PAGE> 84
between Anthony & Sylvan and Essef, they will not be liable to Anthony & Sylvan
or its shareholders for:
- breach of any fiduciary duty or duty of loyalty;
- failure to act in the best interests of Anthony & Sylvan; or
- the derivation of any improper personal benefit.
CHAPTER 1704 TRANSACTIONS
Chapter 1704 of the Ohio Revised Code applies to Anthony & Sylvan. Under
Chapter 1704, the Anthony & Sylvan board must approve in advance specified
transactions with a person or entity that controls 10% or more of Anthony &
Sylvan's voting power for three years after that person or entity becomes a 10%
shareholder. The types of transactions covered by Chapter 1704 include:
- mergers;
- assets and stock sales; and
- other financing transactions.
Chapter 1704 transactions with a 10% shareholder who has held the Anthony &
Sylvan shares for three years from transactions not approved by the directors in
advance are subject to additional shareholder approval requirements or fairness
criteria. The provisions of Chapter 1704 may deter or prevent takeover bids that
have not been approved in advance by the directors. Therefore, the provisions of
Chapter 1704 may decrease the chances of shareholders realizing a premium over
market price for their common shares as a result of a takeover bid not approved
in advance by the Anthony & Sylvan board.
ADMISSION FOR LISTING ON NASDAQ SMALLCAP MARKET
Anthony & Sylvan intends to apply to have its common shares approved for
listing on the Nasdaq SmallCap Market. The companies listed on Nasdaq SmallCap
Market are usually followed by market analysts and the investment community,
making it more likely that an active trading market will develop. However,
Anthony & Sylvan may not meet the admission requirements of the Nasdaq SmallCap
Market.
To qualify for listing on the Nasdaq SmallCap Market, the Anthony & Sylvan
common shares must:
- be registered under the Securities Exchange Act of 1934;
- have at least three registered and active market makers, one of which may
be a market maker entering a stabilizing bid;
- for initial inclusion, be issued by a company with $4,000,000 in net
tangible assets, or $50,000,000 in market capitalization, or $750,000 in
net income in two of the last three years, or if operating history is
less than one year then market capitalization must be at least
$50,000,000;
- have at a public float of at least 1,000,000 shares with a value of at
least $5,000,000;
- have a minimum bid price of $4.00 per share; and
- have at least 300 beneficial shareholders.
ANTHONY & SYLVAN
75
<PAGE> 85
If Anthony & Sylvan does not meet the qualifications for listing on Nasdaq
SmallCap Market, it intends to apply for listing of its common shares on the
NASD OTC bulletin board. The over-the-counter market differs from national and
regional stock exchanges in that:
- it is not cited in a single location but operates through communication
of bids, offers and confirmations between broker-dealers and
- securities admitted to quotation are offered by one or more
broker-dealers rather than the "specialist" which acts in the stock
exchanges. To qualify for quotation on the NASD OTC bulletin board, an
equity security must have one registered broker-dealer, known as the
market maker, who is willing to list bid or sale quotations and to
sponsor the listing.
If it meets the qualifications for the NASD OTC bulletin board, Anthony &
Sylvan's common shares will trade on the electronic bulletin board until some
future time, if at all, that the company applies and qualifies for listing on
the Nasdaq SmallCap Market. If it does not meet the qualifications for the NASD
OTC bulletin board, Anthony & Sylvan's common shares will trade on what is
commonly referred to as the "pink sheets."
DIVIDEND POLICY
Anthony & Sylvan has never paid any cash dividends on its common shares.
Other than the intercompany dividend contemplated by the split-off, Anthony &
Sylvan does not anticipate paying any cash dividends in the foreseeable future.
Anthony & Sylvan has indicated that it intends to retain any future earnings for
reinvestment in its business. Any future determination as to the payment of
dividends will be made at the discretion of the Anthony & Sylvan board of
directors and will depend upon:
- operating results;
- its financial condition;
- its capital requirements;
- general business conditions;
- the terms of Anthony & Sylvan's credit facility; and
- any other facts that the board of directors deems relevant.
ANTHONY & SYLVAN
76
<PAGE> 86
CAPITALIZATION
The following table sets forth the capitalization of Anthony & Sylvan at
March 31, 1999 on an actual and adjusted basis after giving effect to the
following:
- the issuance of common shares in connection with the split-off of Anthony
& Sylvan from Essef;
- expected borrowings of $17 million to fund the payment to Essef at the
time of the split-off; and
- contribution of the balance of the payable to Essef to the capital of
Anthony & Sylvan.
You should read this table along with Anthony & Sylvan's financial
statements and the related notes included elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
AS
ACTUAL ADJUSTED
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt....................... $ 239 $ 239
Payable to Essef........................................... 27,217 0
------- -------
Total current debt.................................... 27,456 239
Long-term debt............................................. 205 205
Bank debt.................................................. 0 17,000
Shareholders' equity:
Preferred shares (1,000,000 shares authorized; no shares
outstanding).......................................... 0 0
Common Shares, no par value (30,000,000 shares
authorized, 100 shares outstanding actual, 3,353,000
as adjusted)(1)....................................... 0 10,217
Retained earnings........................................ 3,783 3,783
------- -------
Total shareholders' equity....................... 3,783 14,000
------- -------
Total capitalization............................. $31,444 $31,444
======= =======
</TABLE>
- ---------------
(1) Excludes 500,000 shares of Anthony & Sylvan reserved for issuance under the
1999 Long-Term Incentive Plan and additional Anthony & Sylvan stock options
which may be issued to Anthony & Sylvan employees and directors in
substitution for some of their Essef stock options. See pages 41 and 42 for
a further description of these options.
ANTHONY & SYLVAN
77
<PAGE> 87
SELECTED CONSOLIDATED FINANCIAL DATA
OF ESSEF CORPORATION
The following table provides selected consolidated financial data of Essef
and subsidiaries for each of the fiscal years in the five-year period ended
September 30, 1998 and for the six-month periods ended March 31, 1998 and 1999.
We prepared the data as of and for each of the fiscal years in the five-year
period ended September 30, 1998 using our consolidated audited financial
statements. The selected historical data as of and for the six months ended
March 31, 1998 and 1999 have been derived from the unaudited consolidated
financial statements of Essef, and include in the opinion of management, all
adjustments necessary to present fairly the data for such periods. You should
read this selected consolidated financial data along with the historical
financial statements and accompanying notes that we have included or
incorporated by reference in our Annual Report on Form 10-K for the year ended
September 30, 1998. You can obtain this report by following the instructions we
have provided in this proxy statement/prospectus under "Where You Can Find More
Information" beginning on page 100.
The following table also provides selected operating results for the six
months ended March 31, 1999. Those operating results are not necessarily
indicative of the results we may achieve for the year ending September 30, 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net Sales.......................... $126,811 $149,255 $193,788 $306,061 $436,027 $171,374 $208,822
Income from operations............. 10,947 10,777 16,592 22,519 33,857 6,975 6,334
Net income......................... 6,995 7,511 9,326 11,766 16,578 2,087 1,106
Per Diluted Share: Net Income...... $ 0.49 $ 0.51 $ 0.62 $ 0.81 $ 1.12 $ 0.14 $ 0.07
Return on Shareholders' Equity..... 20.6% 16.8% 17.4% 20.3% 23.1% N/A N/A
BALANCE SHEET DATA:
Total Assets....................... $ 74,171 $106,624 $111,248 $214,883 $266,923 $271,990 $313,994
Working Capital.................... 18,212 18,725 15,201 14,148 33,345 54,334 78,962
Long-Term Debt..................... 16,246 20,788 17,512 81,658 112,622 130,671 151,554
Total Debt......................... 17,682 27,693 25,978 87,527 117,334 136,594 157,614
Shareholders' Equity............... 37,896 51,426 53,338 65,446 83,678 67,675 83,732
Debt to Total Capital.............. 31.8% 35.0% 32.8% 57.2% 58.4% 66.9% 65.3%
OTHER DATA:
Cash Flow from Operations.......... $ 8,317 $ 11,287 $ 16,403 $ 33,077 $ 18,776 $(32,211) $(34,377)
Capital Expenditures............... 4,906 8,387 6,580 16,058 15,407 9,625 4,717
Depreciation and Amortization...... 5,147 5,896 5,467 7,621 12,148 5,413 7,418
Engineering and Development........ 3,168 3,925 4,874 5,834 6,056 2,842 2,765
Average Shares Outstanding
Basic............................ 12,961 13,809 12,785 12,810 12,893 12,850 13,065
Diluted.......................... 14,387 14,683 15,127 14,541 14,854 14,769 14,967
Market Price of Stock
High............................. $ 6.86 $ 6.95 $ 6.95 $ 14.67 $ 20.91 $ 18.18 $ 20.91
Low.............................. 4.32 5.26 5.35 6.48 12.40 12.40 13.86
at Period End.................... 5.35 6.57 6.57 14.26 15.91 17.16 15.25
Market Capitalization at Period
End.............................. $ 69,383 $ 90,783 $ 84,051 $182,615 $206,815 $221,477 $199,307
</TABLE>
FINANCIAL INFORMATION
78
<PAGE> 88
SELECTED CONSOLIDATED FINANCIAL DATA
OF ANTHONY & SYLVAN
The following table sets forth selected historical operating results and
balance sheet data for Anthony & Sylvan. We prepared the selected historical
financial data as of and for the year ended December 31, 1994 by using the
unaudited financial statements of Anthony & Sylvan's predecessor before Anthony
& Sylvan's May 1997 acquisition of substantially all of the assets of that
predecessor corporation. The selected historical financial data as of and for
the years ended December 31, 1995 and 1996 were derived from the audited
financial statements of Anthony & Sylvan's predecessor. We prepared the selected
historical financial data as of and for the eight months ended December 31, 1997
and the year ended December 31, 1998 by using the audited financial statements
of Anthony & Sylvan. We prepared the selected financial data as of and for the
three months ended March 31, 1998 and 1999 by using the unaudited financial
statements of Anthony & Sylvan. The selected financial data for the three month
periods ended March 31, 1998 and 1999 include, in the opinion of management, all
adjustments necessary to present fairly the data for those periods. The results
for the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999 or for any future
period. You should read the selected consolidated financial data along with
other financial statements and information included in this joint
proxy/prospectus and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Anthony & Sylvan" beginning on page 83.
<TABLE>
<CAPTION>
ANTHONY & SYLVAN'S PREDECESSOR ANTHONY & SYLVAN
----------------------------------------------------------- -----------------------------
FOR THE PERIOD FOR THE PERIOD
YEAR YEAR YEAR JANUARY 1, MAY 1, YEAR
ENDED ENDED ENDED 1997 TO 1997 TO ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31,
1994(1) 1995(1) 1996(1) 1997(1) 1997(2) 1998
------------ ------------ ------------ -------------- -------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales.............. $56,418 $58,569 $112,167 $28,883 $98,829 $155,765
Cost of sales.......... 40,899 42,454 82,018 22,291 70,814 113,873
------- ------- -------- ------- ------- --------
Gross profit.......... 15,519 16,115 30,149 6,592 28,015 41,892
Selling expenses....... 8,662 9,373 18,875 6,073 13,578 23,342
Administrative
expenses.............. 4,876 5,695 9,049 3,980 5,598 13,012
------- ------- -------- ------- ------- --------
Total operating
expenses............ 13,538 15,068 27,924 10,053 19,176 36,354
------- ------- -------- ------- ------- --------
Income/(loss) from
operations............ 1,981 1,047 2,225 (3,461) 8,839 5,538
Interest and other
(income)/expense...... (15) 101 354 303 1,637 1,916
------- ------- -------- ------- ------- --------
Income/(loss) before
taxes................. 1,996 946 1,871 (3,764) 7,202 3,622
Income tax
expense/(benefit)..... 725 342 704 (1,350) 2,649 1,434
------- ------- -------- ------- ------- --------
Net income/(loss)...... $ 1,271 $ 604 $ 1,167 $(2,414) $ 4,553 $ 2,188
======= ======= ======== ======= ======= ========
Pro forma shares
outstanding:
Basic (3)............. 3,382 3,357
Diluted (4)
Pro forma net
income/(loss) per
share:
Basic (3)............. $ 1.35 $ 0.65
Diluted (4)
BALANCE SHEET DATA:
Working capital........ $ 99 $ (156) $ (3,636) $ 966 $ 2,176
Total assets........... 8,722 8,721 20,658 42,620 54,273
Total debt............. 881 949 9,790 24,638 29,865
Equity................. 2,360 1,943 (3,402) 4,553 6,741
<CAPTION>
ANTHONY & SYLVAN
---------------------
THREE THREE
MONTHS MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1998 1999
--------- ---------
<S> <C> <C>
OPERATING RESULTS:
Net sales.............. $18,040 $26,422
Cost of sales.......... 13,669 20,719
------- -------
Gross profit.......... 4,371 5,703
Selling expenses....... 3,857 6,333
Administrative
expenses.............. 2,520 3,172
------- -------
Total operating
expenses............ 6,377 9,505
------- -------
Income/(loss) from
operations............ (2,006) (3,802)
Interest and other
(income)/expense...... 479 1,095
------- -------
Income/(loss) before
taxes................. (2,485) (4,897)
Income tax
expense/(benefit)..... (984) (1,939)
------- -------
Net income/(loss)...... $(1,501) $(2,958)
======= =======
Pro forma shares
outstanding:
Basic (3)............. 3,382 3,353
Diluted (4)
Pro forma net
income/(loss) per
share:
Basic (3)............. $ (0.44) $ (0.88)
Diluted (4)
BALANCE SHEET DATA:
Working capital........ $ (467) $(3,046)
Total assets........... 51,006 58,568
Total debt............. 31,543 27,661
Equity................. 3,052 3,783
</TABLE>
FINANCIAL INFORMATION
79
<PAGE> 89
- ---------------
(1) In March 1996, Anthony and Sylvan's predecessor acquired the assets of
Anthony Pools. This acquisition was accounted for as a purchase, and,
accordingly, the results of operations of Anthony Pools are included in
Anthony and Sylvan's predecessor's financial statements from the date of
acquisition. As a result, period to period comparisons are not necessarily
meaningful.
(2) The acquisition of the assets of Anthony and Sylvan's predecessor by Anthony
& Sylvan in May 1997 was accounted for as a purchase, with the purchase
price being allocated to the assets and liabilities based on the estimated
fair value thereof as of the date of the acquisition.
(3) Pro forma net income/(loss) per share assumes the conversion of shares of
Essef and Essef stock options held other than by officers or directors of
Anthony & Sylvan into shares of Anthony & Sylvan assuming the split-off
occurred at the end of each period presented. Historical net income per
share prior to the acquisition of Anthony & Sylvan's predecessor by Anthony
& Sylvan in May 1997 is not presented as it would not be meaningful.
(4) Diluted shares and earnings per share are not presented as the utilization
of the treasury stock method of calculating earnings per share requires
information about Anthony & Sylvan's stock price and the exercise price of
Anthony & Sylvan stock options for the options held by officers and
directors of Essef who will become officers or directors of Anthony &
Sylvan. That information is not determinable at this time. See pages 41 and
42 for a further description of these stock options.
FINANCIAL INFORMATION
80
<PAGE> 90
UNAUDITED PRO FORMA FINANCIAL DATA OF ANTHONY & SYLVAN
We prepared the following unaudited pro forma financial data by applying
pro forma adjustments to Anthony & Sylvan's historical financial data included
elsewhere in this proxy statement/prospectus. The unaudited pro forma statements
of operations for the periods presented give effect to the split-off as if it
had been consummated as of the beginning of the earliest period presented. The
adjustments are described in the accompanying notes. The unaudited pro forma
financial data do not purport to represent what Anthony & Sylvan's results of
operations actually would have been if the split-off had been consummated on the
date indicated, or what results will be for any future period.
You should read the unaudited pro forma financial data along with the
financial statements and the accompanying notes included elsewhere in this proxy
statement/prospectus.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net sales................................... $26,422 $26,422
Cost of sales............................... 20,719 20,719
------- -------
Gross profit.............................. 5,703 5,703
Selling and administrative expenses......... 9,505 $ 300(1) 9,805
------- -------- -------
Loss from operations...................... (3,802) (300) (4,102)
Interest and other expense/(income)......... 1,095 (755)(2) 340
------- -------- -------
(Loss)/income before income taxes......... (4,897) 455 (4,442)
------- -------- -------
(Benefit)/provision for income taxes........ (1,939) 180(3) (1,759)
------- -------- -------
Net (loss)/income......................... $(2,958) $ 275 $(2,683)
======= ======== =======
Pro forma shares outstanding
Basic(4).................................. 3,353 3,353
Diluted(5)
Pro forma net loss per share
Basic(4).................................. $ (0.88) $ (0.80)
Diluted(5)
</TABLE>
The accompanying notes are an integral part of this statement.
FINANCIAL INFORMATION
81
<PAGE> 91
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net sales................................. $155,765 $155,765
Cost of sales............................. 113,873 113,873
-------- --------
Gross profit............................ 41,892 41,892
Selling and administrative expenses....... 36,354 $1,200(1) 37,554
-------- ------ --------
Income/(loss) from operations........... 5,538 (1,200) 4,338
Interest and other expense/(income)....... 1,916 (556)(2) 1,360
-------- ------ --------
Income/(loss) before income taxes....... 3,622 (644) 2,978
Provision /(benefit) for income taxes..... 1,434 (255)(3) 1,179
-------- ------ --------
Net income/(loss)....................... $ 2,188 $ (389) $ 1,799
======== ====== ========
Pro forma shares outstanding
Basic(4)................................ 3,357 3,357
Diluted(5)
Pro forma net income per share
Basic(4)................................ $ 0.65 $ 0.54
Diluted(5)
</TABLE>
The accompanying notes are an integral part of this statement.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(1) Anthony & Sylvan is an indirect wholly-owned subsidiary of Essef and, as
such, will incur additional costs as a stand-alone public company. The pro
forma financial statements have been adjusted to include these costs, which
are estimated to be $1,200,000 annually. These costs include incremental
managerial, legal, risk management and investor relations costs and the
costs associated with an independent board of directors.
(2) Represents a reduction in interest expense that Anthony & Sylvan will incur
as a result of the $17,000,000 payment to Essef funded by external bank
financing at an assumed interest rate of 8.0%, and the elimination of
historical interest expense charged on intercompany debt that will be
contributed to the capital of Anthony & Sylvan at the time of the split-off.
(3) Recognition of income taxes, at Anthony & Sylvan's effective rate of 39.6%,
on the pro forma adjustments described in (a) and (b).
(4) Represents the shares of Anthony & Sylvan expected to be issued in
connection with the split-off.
(5) Diluted shares and earnings per share are not presented as the utilization
of the treasury stock method of calculating earnings per share requires
information about Anthony & Sylvan's stock price and the exercise price of
stock options for the options held by officers and directors of Essef who
will become officers or directors of Anthony & Sylvan. That information is
not determinable at this time. See pages 41 and 42 for a further description
of these stock options.
FINANCIAL INFORMATION
82
<PAGE> 92
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ANTHONY & SYLVAN
You should read the following discussion in conjunction with Anthony &
Sylvan's consolidated financial statements and related notes contained elsewhere
in this proxy statement/prospectus.
OVERVIEW
In May 1997, Anthony & Sylvan acquired the assets of its predecessor
company. As reflected in the periods presented before May 1997, the predecessor
operated as a wholly-owned subsidiary of General Aquatics, Inc. As reflected in
the periods presented after May 1997, Anthony & Sylvan has operated as an
indirect wholly-owned subsidiary of Essef.
After the split-off, Anthony & Sylvan will operate as a stand alone
company. As a stand alone company, Anthony & Sylvan expects to incur additional
legal, audit, risk management, administrative and other incremental expenses
that it did not experience as an indirect wholly-owned subsidiary of Essef. The
financial information included in this proxy statement/prospectus is not
necessarily indicative of Anthony & Sylvan's future results of operations,
financial position and cash flows.
Anthony & Sylvan's expenses principally consist of the following:
- swimming pool and spa installation expenses;
- expenses related to the purchase of products used in swimming pool and
spa installation; and
- operating expenses, consisting of:
- administrative expenses;
- occupancy expenses;
- marketing and advertising expenses; and
- sales commissions.
MANAGEMENT'S DISCUSSION AND ANALYSIS
83
<PAGE> 93
RESULTS OF OPERATIONS
The following table shows Anthony & Sylvan's operating results for the
periods presented expressed as a percentage of net sales. The percentage of net
sales data is derived from Anthony & Sylvan's and its predecessor's statement of
operations for the periods presented.
<TABLE>
<CAPTION>
AS A PERCENT OF NET SALES
----------------------------------------------------------------------
FOUR EIGHT
YEAR MONTHS MONTHS YEAR THREE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1997 1998 1998 1999
------------ --------- ------------ ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 73.1 77.2 71.7 73.1 75.8 78.4
----- ----- ----- ----- ----- -----
Gross profit.................... 26.9 22.8 28.3 26.9 24.2 21.6
Operating expenses:
Selling expenses.............. 16.8 21.0 13.7 15.0 21.4 24.0
Administrative expenses....... 8.1 13.8 5.7 8.4 14.0 12.0
----- ----- ----- ----- ----- -----
Total..................... 24.9 34.8 19.4 23.4 35.4 36.0
----- ----- ----- ----- ----- -----
Income/(loss) from operations... 2.0 (12.0) 8.9 3.5 (11.2) (14.4)
Interest and other expense...... 0.3 1.1 1.7 1.2 2.7 4.1
Provision/(benefit) for income
taxes......................... 0.6 (4.7) 2.7 0.9 (5.5) (7.3)
----- ----- ----- ----- ----- -----
Net income/(loss)............... 1.1% (8.4%) 4.6% 1.4% (8.4%) (11.2%)
===== ===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
NET SALES. Net sales increased by $8.4 million to $26.4 million for the
three months ended March 31, 1999 from $18.0 million for the same period in the
prior year. The increase was attributable to the combination of:
- $6.0 million due to the acquisition of Pools by Andrews completed in
August of 1998;
- $1.0 million due to increased volume within existing markets; and
- approximately $1.4 million due to increases in average selling prices.
GROSS PROFIT. Gross profit increased to $5.7 million in 1999 from $4.4
million in 1998 as a result of the increase in net sales. Gross profit as a
percentage of net sales for the three months decreased from 24.2% of net sales
in the prior year to 21.6% in the current period. The decrease is primarily
attributable to material and subcontractor cost increases.
OPERATING EXPENSES. Operating expenses consisting of sales and marketing
and administrative expenses increased by $3.1 million to $9.5 million in 1999 or
36.0% of sales from $6.4 million in 1998 or 35.4% of sales. The increase was
attributable to the combination of:
- $1.6 million due to the acquisition of Pools by Andrews; and
- increased spending for sales, marketing and lead generating activities to
support the higher level of sales.
MANAGEMENT'S DISCUSSION AND ANALYSIS
84
<PAGE> 94
INTEREST AND OTHER EXPENSE. Interest and other expense increased $0.6
million from $0.5 million for the three months ended March 31, 1998 to $1.1
million for the same period in the current year. The increase is attributable to
increased borrowings from Essef, the proceeds of which were used to finance
operations and the acquisition of Pools by Andrews in August 1998.
BENEFIT FOR INCOME TAXES. The effective tax rate remained consistent at
39.6% in both periods.
NET LOSS. As a result of the above items, the net loss increased $1.5
million to $3.0 million for the three months ended March 31, 1999 from $1.5
million for the same period in the prior year.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO FOUR MONTH PERIOD ENDED APRIL 30,
1997 FOR ANTHONY & SYLVAN'S PREDECESSOR AND EIGHT MONTH PERIOD ENDED DECEMBER
31, 1997 FOR ANTHONY & SYLVAN
Anthony & Sylvan's predecessor was a wholly-owned subsidiary of General
Aquatics, Inc. during the four months ended April 30, 1997. Periodic references
have been made to the combined results of operations for the twelve months ended
December 31, 1997 throughout this discussion and analysis. These references are
made without giving effect to any pro forma adjustments which may be required to
present combined results on a consistent basis of accounting.
NET SALES. Net sales increased $28.1 million, or 22.0%, to $155.8 million
for the year ended December 31, 1998 from $127.7 million in 1997, consisting of
$28.9 million for the four month period ended April 30, 1997 and $98.8 million
for the eight month period ended December 31, 1997. The increase was
attributable to the combination of:
- $15.8 million due to increased volume within existing markets;
- $10.2 million due to the acquisitions of Tango Pools in January 1998 and
Pools by Andrews in August 1998; and
- approximately $2.1 million due to increases in average selling prices.
GROSS PROFIT. Gross profit increased to $41.9 million in 1998 from $34.6
million for the year ended December 31, 1997 as a result of the increase in net
sales. Gross profit as a percentage of net sales decreased slightly from 27.1%
in 1997, comprised of 28.3% for the eight month period ended December 31, 1997
and 22.8% for the four month period ended April 30, 1997, to 26.9% in 1998. The
gross profit percentage differences between the year ended December 31, 1998,
the four month period ended April 30, 1997 and the eight month period ended
December 31, 1997 were primarily related to the seasonality of Anthony &
Sylvan's business.
OPERATING EXPENSES. Operating expenses consisting of sales and marketing
and administrative expenses increased $7.2 million to $36.4 million in 1998 from
$29.2 million in the 1997. The expense in 1998 consisted of $19.2 million for
the eight month period ended December 31, 1997 and $10 million for the four
month period ended April 30, 1997. Operating expenses as a percentage of sales
were 23.4% in 1998 compared to 19.4% in the eight month period ended December
31, 1997 and 34.8% for the four month period ended April 30, 1997. The
percentage decrease in 1998 compared to the four month period ended April 30,
1997 is due to the fact that this period of the year is a seasonally slow period
of
MANAGEMENT'S DISCUSSION AND ANALYSIS
85
<PAGE> 95
sales and the majority of the company's operating expenses are relatively
constant. The higher percentage in 1998 compared to the eight month period ended
December 31, 1997 is primarily attributable to the inclusion of the lower sales
first four months of 1998.
INTEREST AND OTHER EXPENSE. Interest and other expense of $1.9 million was
consistent with 1997. Interest of $0.3 million for the four month period ended
April 30, 1997 was charged by Anthony & Sylvan's predecessor. Interest for the
eight month period ended December 31, 1997 of $1.6 million and for the year
ended December 31, 1998 of $1.9 million was charged by Essef based on the
average outstanding payable to Essef. Increased borrowings in 1998 were offset
by a lower average borrowing rate than that charged in the eight month period
ended December 31, 1997.
PROVISION FOR INCOME TAXES. The effective tax rate increased from 36.8% in
the eight month period ended December 31, 1997 to 39.6% for the year ended
December 31, 1998. The increase is attributable to permanent differences in the
basis of goodwill being amortized for financial reporting and income tax
purposes and increased state income taxes. Anthony & Sylvan's predecessor's
effective tax rate was 35.9% for the four month period ended April 30, 1997.
NET INCOME. As a result of the above items, net income in 1998 was $2.2
million compared to $4.6 million for the eight month period ended December 31,
1997 and a loss of $2.4 million for the four months ended April 30, 1997.
FOUR MONTH PERIOD ENDED APRIL 30, 1997 FOR ANTHONY & SYLVAN'S PREDECESSOR AND
EIGHT MONTH PERIOD ENDED DECEMBER 31, 1997 FOR ANTHONY & SYLVAN COMPARED TO
YEAR ENDED DECEMBER 31, 1996 FOR ANTHONY SYLVAN'S PREDECESSOR
Anthony & Sylvan's predecessor was a wholly-owned subsidiary of General
Aquatics, Inc. during the four months ended April 30, 1997 and the year ended
December 31, 1996. Periodic references have been made to the combined results of
operations for the twelve months ended December 31, 1997 throughout this
discussion and analysis. These references are made without giving effect to any
pro forma adjustments which may be required to present combined results on a
consistent basis of accounting.
NET SALES. Net sales increased $15.5 million, or 13.9%, to $127.7 million
for 1997, consisting of $28.9 million for the four month period ended April 30,
1997 and $98.8 million for the eight month period ended December 31, 1997, from
$112.2 million in the year ended December 31, 1996. The increase was primarily
attributable to the combination of:
- $9.5 million due to increased volume within existing markets and the
inclusion of a full year's results from the operations of Anthony Pools
which was acquired March 6, 1996; and
- $6.0 million due to increases in average selling prices.
GROSS PROFIT. Gross profit increased to $34.6 million for 1997 from $30.1
million in 1996. Gross profit as a percentage of net sales increased from 26.9%
in 1996 to 27.1% for 1997, comprised of 22.8% for the four month period ended
April 30, 1997 and 28.3% for the eight month period ended December 31, 1997. The
gross profit percentage differences between the year ended December 31, 1996,
the four month period ended April 30, 1997 and eight month period ended December
31, 1997 were primarily related to the seasonality of the business.
MANAGEMENT'S DISCUSSION AND ANALYSIS
86
<PAGE> 96
OPERATING EXPENSES. Operating expenses consisting of sales and marketing
and administrative expenses increased $1.3 million to $29.2 million in 1997 from
$27.9 million in 1996. Operating expenses as a percentage of sales were 24.9% in
1996 compared to 19.4% in the eight month period ended December 31, 1997 and
34.8% for the four month period ended April 30, 1997. Compared to 1996, the
percentage of sales increase in the four month period ended April 30, 1997 is
due to that period being a seasonally slow period of sales, while the percentage
of sales decrease in the eight month period ended December 31, 1997 is in line
with the normal seasonal increase in sales and the inclusion of a full year of
cost savings arising from the consolidation activities undertaken following the
acquisition of Anthony Pools.
INTEREST AND OTHER EXPENSE. Interest and other expense was $1.9 million for
1997. Interest for the eight month period ended December 31, 1997 of $1.6 was
charged by Essef based on the average outstanding payable at a rate of 10.25%.
Interest for the four month period ended April 30, 1997 of $0.3 million and for
the year ended December 31, 1996 of $0.4 million was charged by Anthony &
Sylvan's predecessor.
PROVISION FOR INCOME TAXES. The effective tax rate was 36.8% for the eight
month period ended December 31, 1997. The effective tax rate was 35.9% for the
four month period ended April 30, 1997 and 37.6% for the year ended December 31,
1996. The difference in tax rates between the periods is primarily due to the
impact of goodwill amortization and state income taxes.
NET INCOME. As a result of the above items, net income was $4.6 million for
the eight month period ended December 31, 1997 compared with a net loss of $2.4
million for the four month period ended April 30, 1997 and net income of $1.2
million for the year ended December 31, 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial
information for the nine consecutive quarters ended March 31, 1999. In the
opinion of Anthony & Sylvan's management, this information has been prepared on
the same basis as the audited financial statements appearing elsewhere in this
proxy statement/prospectus and includes all adjustments, consisting of only
normal and recurring adjustments, necessary to present fairly the unaudited
quarterly results set forth herein. Anthony & Sylvan expects that it will
continue to experience significant fluctuations in its quarterly operating
results. In the past, these fluctuations have been caused by a variety of
factors, including the seasonality of the swimming pool industry and sensitivity
to fluctuations in the overall economy, which cannot be predicted with any
degree of certainty. Anthony & Sylvan's quarterly results have in the past been
subject to fluctuations, and therefore the operating results for any quarter or
quarters are not necessarily indicative of results for any future period. We
discuss reasons for
MANAGEMENT'S DISCUSSION AND ANALYSIS
87
<PAGE> 97
and risks associated with these fluctuations under the heading "Risk Factors"
beginning on page 13.
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------------- ------------------------------------- -------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $14,166 $44,091 $44,831 $24,624 $18,040 $52,415 $53,037 $32,273 $26,422
% of total year...... 11.1% 34.5% 35.1% 19.3% 11.6% 33.7% 34.0% 20.7% --
Gross profit......... 2,484 12,985 13,005 6,133 4,371 15,487 14,498 7,536 5,703
(Loss)/income from
operations......... $(3,199) $ 3,599 $ 4,306 $ 672 $(2,006) $ 4,793 $ 4,269 $(1,518) $(3,802)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its acquisition by Essef on May 1, 1997, Anthony & Sylvan has relied
upon internal cash flow from operations and interest bearing advances from Essef
to provide the necessary financing for its operating and investing activities.
Anthony & Sylvan's advances from Essef also include an allocation of debt
incurred by Essef in connection with the acquisition of Anthony & Sylvan. At
March 31, 1999, these advances aggregated $27.2 million. At the time of the
split-off, Anthony & Sylvan will pay $17 million to Essef, subject to some
adjustments, and all remaining debt with Essef will be contributed to the
capital of Anthony & Sylvan. Anthony & Sylvan intends to establish a revolving
credit facility with a group of banks to finance the dividend and its working
capital needs. We discuss reasons for and risks associated with the revolving
credit facility under "Risk Factors" beginning on page 13.
For the year ended December 31, 1998, Anthony & Sylvan generated $1,019,000
of cash from operating activities. Offsetting cash flow from operating
activities were $4,747,000 in acquisition payments and $2,407,000 of capital
expenditures. Such amounts were funded through an increase in Anthony & Sylvan's
intercompany debt to Essef of $4,382,000 and proceeds from asset sales of
$1,404,000. Due to the changes in ownership and the capital structure of Anthony
& Sylvan related to Anthony & Sylvan's acquisition by Essef in May 1997, cash
flow data for the previous periods are not presented as period to period
comparisons are not necessarily meaningful.
For the three months ended March 31, 1999, Anthony & Sylvan generated
$3,625,000 of cash from operating activities, an increase of $7,061,000 from the
same period in the prior year. The increase in operating cash flow came
principally from an increase in accrued expenses associated with excess progress
payments for pools under installation. Capital expenditures were $712,000 for
the three-month period compared with $972,000 in the prior year. The prior year
period also includes acquisition related payments of $2,139,000. The increase in
cash flow from operating activities and reduction in cash used in investing
activities resulted in repayments of intercompany debt to Essef of $2,144,000 in
1999 compared with additional advances of $6,258,000 required in the prior year.
As discussed on page 41, stock options held by employees of Essef who will
become either employees or directors of Anthony & Sylvan following the split-off
will be allocated on a pro rata basis between the right to acquire Essef common
shares and the right to acquire shares of Anthony & Sylvan. The options
allocated to acquire Anthony & Sylvan common shares will not result in future
charges to Anthony & Sylvan because at the date of the split-off they will be
fully vested and not subject to any performance criteria.
MANAGEMENT'S DISCUSSION AND ANALYSIS
88
<PAGE> 98
Anthony & Sylvan believes that existing cash and cash equivalents,
internally generated funds and funds that will be advanced from Essef until June
30, 1999 will be sufficient to meet Anthony & Sylvan's presently anticipated
short-term working capital, capital expenditure and acquisition financing
requirements. Following that date Anthony & Sylvan is required to finance its
operations as an independent company, as Anthony & Sylvan will no longer have
access to advances from Essef. After the split-off Anthony & Sylvan believes
that it will have access to bank or other forms of debt financing. However, we
cannot assure you that additional financing will be available on terms favorable
to Anthony & Sylvan or at all. We discuss "Risk Factors" beginning on page 13.
CYCLICALITY AND SEASONALITY
Anthony & Sylvan believes that the in-ground swimming pool industry is
strongly influenced by general economic conditions and tends to experience
periods of decline during economic downturns. Since the majority of Anthony &
Sylvan's swimming pool installation purchases are financed, pool sales are
particularly sensitive to interest rate fluctuations and the availability of
credit. A sustained period of high interest rates could result in declining
sales, which could have a material adverse effect on Anthony & Sylvan's
condition and results of operations.
Historically, approximately 70% of Anthony & Sylvan's net sales have been
generated in the second and third quarters of the year, the peak season for
swimming pool installation and use. Conversely, Anthony & Sylvan typically
incurs net losses during the first and fourth quarters of the year. Unseasonably
cold weather or extraordinary amounts of rainfall during the peak sales season
can significantly reduce pool purchases. In addition, unseasonably early or late
warming trends can increase or decrease the length of the swimming pool season,
significantly affecting sales and operating profit.
INFLATION
Anthony & Sylvan does not believe that inflation has had a significant
impact on its results of operations or financial condition for the periods
presented. To reduce the impact of inflation on its operations, Anthony & Sylvan
attempts to pass price increases through to its customers when received.
YEAR 2000 MATTERS
In 1997, as part of an overall modernization and upgrade of its information
systems, Anthony & Sylvan began preparing its computer systems and applications
for the date change in the year 2000. To date, this process has involved
modifying or replacing certain hardware and upgrading certain software and has
not involved material costs to Anthony & Sylvan. Management believes that
substantially all of the necessary systems and applications changes will be
completed during the third quarter of 1999, that Anthony & Sylvan's level of
preparedness is appropriate and that the amount of additional costs, if any,
needed to address the year 2000 issue will be immaterial.
Anthony & Sylvan is initiating communications with certain of its largest
suppliers and service providers regarding year 2000 preparedness. However,
management does not believe that Anthony & Sylvan would have any difficulty
securing alternate sources of supply in the event any of its current suppliers
and service providers experience year 2000 difficulties. In addition, because of
the seasonal nature of Anthony & Sylvan's business, which is slowest in the
first and fourth quarters of the calendar year, management believes that any
problems arising on January 1, 2000, either with Anthony & Sylvan's systems or
the systems of its
MANAGEMENT'S DISCUSSION AND ANALYSIS
89
<PAGE> 99
major suppliers and service providers, can be substantially remedied before the
start of the peak swimming pool installation season.
The costs of the project and the date on which Anthony & Sylvan believes it
will complete the year 2000 modifications are based on management's best
estimates, including the continued availability of certain resources, third
party modification plans and other factors. However, Anthony & Sylvan cannot
guarantee that these estimates can be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes and similar uncertainties.
MANAGEMENT'S DISCUSSION AND ANALYSIS
90
<PAGE> 100
PRINCIPAL SHAREHOLDERS
The following table gives information about who has beneficial ownership of
Essef's common shares as of June 21, 1999. We have supplied information about:
- each person known by us to own beneficially more than 5% of Essef voting
stock;
- each of Essef's directors and executive officers; and
- all of Essef's executive officers and directors as a group.
<TABLE>
<CAPTION>
ESSEF COMMON SHARES
----------------------
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER (1) SHARES CLASS
---------------------------- --------- ----------
<S> <C> <C>
5% Shareholders:
KeyBank National Association (2)(3)(4)(9)............... 2,671,120 20.43%
127 Public Square
Cleveland, Ohio 44114
Thomas B. Waldin (8).................................... 2,766,034 16.89
220 Park Drive
Chardon, Ohio 44024
The Jane B. King Irrevocable Trust
Ralph T. King and Alexander S. Taylor, Trustees
(5).................................................. 1,237,830 9.47
30050 Chagrin Boulevard, Suite 150
Pepper Pike, Ohio 44124
Fenimore Asset Management............................... 1,372,777 10.50
118 North Grand Street
Cobleskill, New York 12043
James A. Horner Trust
James A. Horner, Jr., Douglas M. Horner and Mary Ann
Jorgenson, Trustees (6)(7)(9)........................ 767,096 5.87
4900 Key Tower
Cleveland, Ohio 44114
Directors and Executive Officers:
James M. Biggar......................................... 6,534 0.05
Gordon D. Harnett (10).................................. 30,332 0.23
George M. Humphrey, II (10)............................. 40,653 0.31
Mary Ann Jorgenson (9).................................. 3,729,958 28.53
Ralph T. King (5)....................................... 1,432,543 10.96
Thomas B. Waldin (8).................................... 2,766,034 16.89
Douglas J. Brittelle (11)............................... 116,949 0.71
Mark E. Brody (11)...................................... 26,620 0.16
Stuart D. Neidus (11)................................... 348,480 2.13
All directors and executive officers as a group (9
Persons)................................................ 8,498,103 51.91
</TABLE>
- ---------------
(1) Rule 13d-3 of the Securities Exchange Act of 1934 defines beneficial
ownership as the sole or shared power to vote, or to direct the sale of, a
security. For purposes of this table in the event that the proposed merger
results in a change in control which will result in vesting of outstanding
options, a person is deemed to have beneficial ownership of any security
that the person has the right to acquire within 60 days of June 14, 1999.
For purposes of this table, beneficial ownership does not include shares of
common stock issuable upon exercise of options that are not scheduled to
vest within 60 days of June 14, 1999. Unless noted otherwise:
ADDITIONAL INFORMATION
91
<PAGE> 101
- information as to beneficial ownership is based on statements made by the
beneficial owners to us; and
- shareholders possess sole voting and sales power with respect to shares
listed on this table.
As of June 21, 1999, there were 13,073,400 issued and outstanding Essef
shares.
(2) Keybank National Association exercises:
(a) sole voting and shared dispositive power over 2,437,428 shares; and
(b) shared voting and dispositive power over 144,769 shares held by a trust
of which Keybank National Association is one of three trustees and
noted in notes 3(a) and 9(b) below.
(3) James H. Dempsey, Jr. shares dispositive power over 2,437,428 shares as one
of three trust advisors noted in notes 2(a) above and 4 and 9(d) below, and
is also the beneficial owner of:
(a) 144,769 shares held by a trust of which he is one of three trustees
with shared voting and dispositive power and noted in 2(b) above and
9(b) below; and
(b) 88,910 shares held by a trust of which he is a co-trustee with shared
voting and dispositive power and noted in 9(c) below.
Mr. Dempsey disclaims the benefits of ownership of any of the
aforementioned shares. Mr. Dempsey is a partner in the law firm of Squire,
Sanders & Dempsey L.L.P., which we retain as our outside general counsel.
(4) James P. Oliver shares dispositive power over 2,437,428 shares as one of
three trust advisors noted in notes 2(a) and (3) above and 9(d) below. Mr.
Oliver disclaims the benefits of ownership of any of the aforementioned
shares. Mr. Oliver is a partner in the law firm of Squire, Sanders &
Dempsey L.L.P., which we retain as our outside general counsel.
(5) Ralph T. King by him shares voting and dispositive power as co-trustee and
is also beneficial owner of (a) 164,953 shares owned directly; and (b)
29,760 shares held by a foundation of which he is a trustee with shared
dispositive power.
(6) James A. Horner, Jr. shares voting and dispositive power as co-trustee and
is also beneficial owner of:
(a) 833,328 shares owned by or benefiting him or his children directly or
indirectly; and
(b) 199,650 shares held by trusts for the benefit of his children, nieces
and nephews, of which he is one of three trustees sharing voting and
dispositive power, and noted in notes 7(b) and 9(e) below.
(7) Douglas A. Horner, Jr. shares voting and dispositive power as co-trustee
and is also beneficial owner of:
(a) 380,930 shares owned by or benefiting him or his children directly or
indirectly; and
(b) 199,650 shares held by trusts for the benefit of his children, nieces
and nephews, of which he is one of three trustees sharing voting and
dispositive power, and noted in notes 6(b) above and 9(e) below.
(8) Thomas B. Waldin is the beneficial owner of 2,766,034 shares owned by or
benefiting him, his wife or child directly, 2,609,282 shares consisting of
fully vested options to purchase Essef shares.
ADDITIONAL INFORMATION
92
<PAGE> 102
(9) Mary Ann Jorgenson shares voting and dispositive power as co-trustee and as
beneficial owner of:
(a) 92,105 held by six trusts of which she is sole trustee with sole voting
and dispositive power;
(b) 144,769 shares held by a trust of which she is a one of three trustees
with shared voting and dispositive power and noted in notes 2(b) and
3(a) above;
(c) 88,910 shares held by a trust of which she is a co-trustee with shared
voting and dispositive power and noted in notes 3(b) above;
(d) 2,437,428 shares held by two trusts over which she has shared
dispositive power as one of three trust advisors and noted in notes
(2), (3) and (4) above; and
(e) 199,650 shares held by trusts of which she is one of three trustees
with shared voting and dispositive power and noted in notes 6(b) and
7(b) above.
Ms. Jorgenson disclaims the benefits of ownership of any of the
aforementioned shares.
Ms. Jorgenson is a partner in the law firm of Squire, Sanders & Dempsey
L.L.P., which we retain as our outside general counsel.
(10) Includes shares held by trustee of the Essef Corporation deferred
compensation plan for directors as of March 31, 1999.
(11) Includes shares underlying options which are either fully vested or will
become fully vested in the event of a change of control of Essef:
- Douglas J. Brittelle 109,898
- Stuart D. Neidus 332,750
- Mark E. Brody 24,200
ADDITIONAL INFORMATION
93
<PAGE> 103
MARKET PRICES AND DIVIDEND POLICY
The table below sets forth the high and low sales prices per share of our
common shares, as reported by the Nasdaq National Market, for the calendar
quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C> <C>
1996: First Quarter................................... $ 6.95 $ 5.35
Second Quarter.................................. 6.67 5.92
Third Quarter................................... 6.76 5.45
Fourth Quarter.................................. 6.95 5.92
1997: First Quarter................................... 6.95 6.48
Second Quarter.................................. 8.99 6.48
Third Quarter................................... 10.12 8.16
Fourth Quarter.................................. 14.67 9.71
1998: First Quarter................................... 14.67 12.40
Second Quarter.................................. 18.18 12.40
Third Quarter................................... 20.91 15.91
Fourth Quarter.................................. 20.46 14.89
1999: First Quarter................................... 17.84 13.86
Second Quarter.................................. 20.91 14.00
Third Quarter (through June 21, 1999)........... 21.00 12.88
</TABLE>
On April 29, 1999, the last trading day before we announced the merger, the
high and low sale prices of our common stock as reported by the Nasdaq National
Market were $19.00 and $18.50. On June 21, 1999, the high and low sales prices
of our common stock as reported by the Nasdaq National Market were $19.50 and
$19.125. YOU SHOULD GET A CURRENT PRICE QUOTATION FOR YOUR SHARES OF COMMON
STOCK BEFORE YOU VOTE.
Essef has never paid any cash dividends on our common shares, and we do not
anticipate paying any cash dividends in the foreseeable future.
ADDITIONAL INFORMATION
94
<PAGE> 104
MATERIAL DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS
OF ESSEF AND ANTHONY & SYLVAN
In connection with the merger, the holder of each of our common shares will
receive 0.25 of an Anthony & Sylvan common share. As a result, our shareholders
will become shareholders of Anthony & Sylvan, an Ohio corporation. Anthony &
Sylvan's articles of incorporation and regulations and Ohio law will govern your
rights in these new Anthony & Sylvan shares. The following is a summary of the
material differences between the rights you have as an Essef shareholder and the
rights you will have as an Anthony & Sylvan shareholder. These differences arise
from differences between various provisions of Essef's articles of incorporation
and regulations and Anthony & Sylvan's articles of incorporation and
regulations. Although it is impractical to compare all of the aspects in which
the companies' governing instruments differ with respect to shareholders'
rights, the following discussion summarizes the material significant differences
between them.
We encourage you to read the relevant provisions of the each of Anthony &
Sylvan's articles of incorporation and regulations and our articles of
incorporation and regulations
AUTHORIZED SHARES
ANTHONY & SYLVAN
The Anthony & Sylvan articles will authorize the issuance of up to
30,000,000 common shares, without par value, and 1,000,000 serial preferred
shares, without par value. If the serial preferred shares were to be issued, the
rights of holders of Anthony & Sylvan common shares would be subordinated in
some respects to the rights of the holders of the serial preferred shares.
ESSEF
The Essef articles authorize the issuance of up to 40,000,000 common
shares, without par value, and 10,000,000 serial preferred shares, without par
value. No serial preferred shares are currently outstanding.
AMENDMENTS TO ARTICLES OF INCORPORATION OR CODE OF REGULATIONS
ANTHONY & SYLVAN
In general, an amendment to the Anthony & Sylvan articles of incorporation
will require the approval of a majority of the outstanding voting shares and an
amendment to Anthony & Sylvan's regulations will require the approval of
two-thirds of the outstanding voting shares. Some provisions in the articles,
such as those governing control share acquisitions, may not be amended without
the approval of at least 80% of the outstanding voting shares. That 80% vote
will also be required to amend, repeal or alter any of the provisions in the
regulations governing the number, classification, election or term of office of
directors or removal of directors, unless the proposed amendment is recommended
by at least two-thirds of the Anthony & Sylvan directors.
ESSEF
An amendment to the Essef articles of incorporation requires the approval
of a majority of the outstanding voting shares. However, any amendment to the
provisions governing control share acquisitions and procedures for amending the
articles requires the approval of
ADDITIONAL INFORMATION
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66 2/3% of the outstanding voting shares. An amendment to Essef's regulations
generally requires the approval of a majority of the outstanding voting shares.
However, provisions governing the number, classification, election or term of
office of directors or removal of directors, may be amended only with the
approval of 66 2/3% of the outstanding voting shares.
SPECIAL MEETINGS OF SHAREHOLDERS
ANTHONY & SYLVAN
The Anthony & Sylvan regulations will provide that a special meeting of the
shareholders of Anthony & Sylvan may be called at any time by the chairman, the
chief executive officer or a majority of directors. In addition, holders
representing at least 50% of the outstanding voting shares will have the
authority to call a special meeting.
ESSEF
The Essef regulations are essentially the same as Anthony & Sylvan's.
NUMBER OF DIRECTORS; CLASSIFIED BOARD OF DIRECTORS
ANTHONY & SYLVAN
The Anthony & Sylvan regulations will provide that the number of directors
will be no fewer than three nor more than nine. The exact number of directors
will be determined from time to time by the recommendation of a majority of the
directors. In addition, by a majority vote of the directors, the board may
change the number of directors and may fill any vacancy that is created by an
increase in the number of directors. If there are more than five directors, the
regulations will also provide for at least two classes of directors of at least
three directors each with three year terms. These provisions may render it more
difficult for a potential purchaser to obtain control of Anthony & Sylvan's
board of directors.
ESSEF
The Essef regulations provide that the number of directors will be no fewer
than six nor more than fifteen, with the exact number of directors to be
determined by a majority vote of the outstanding voting shares at an annual or
special meeting entitled to vote on such proposal, or by a majority of the
directors then in office. The regulations provide that if there are nine or more
directors, then the directors will be separated into three classes. If the
number of directors is less than nine, then the directors will be separated into
two classes. Each director serves a three year term.
REMOVAL OF DIRECTORS
ANTHONY & SYLVAN
The Anthony & Sylvan regulations will provide that a director may be
removed by the affirmative vote of 80% of the outstanding voting shares.
Amendment or repeal of the removal provision requires the vote of holders
representing at least 80% of the outstanding voting shares, unless the proposed
amendment has been recommended by at least two-thirds of the directors, in which
case only a two-thirds vote of the outstanding voting shares is required.
ADDITIONAL INFORMATION
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ESSEF
The Essef regulations provide that a director may be removed without cause
by the affirmative vote of 66 2/3% of the outstanding voting shares.
VOTE REQUIRED TO APPROVE MERGER, CONSOLIDATION, SALE OF SUBSTANTIALLY ALL ASSETS
ANTHONY & SYLVAN
Except as otherwise provided by the Anthony & Sylvan articles of
incorporation or the code of regulations, the holders of a majority of the
outstanding voting shares are authorized to act on any matter which may properly
come before them in a shareholder meeting.
ESSEF
The holders of two-thirds of Essef's outstanding voting shares must agree
to authorize Essef to approve a merger, consolidation or sale of substantially
all its assets.
ADDITIONAL INFORMATION
97
<PAGE> 107
OTHER MATTERS
We do not expect that any matters other than those described in this proxy
statement/prospectus will be brought before the meeting. If any other matters
are presented, however, we intend to vote your proxy in accordance with our
discretion.
LEGAL MATTERS
The validity of the shares of Anthony & Sylvan to be issued in the
split-off is being passed upon for Anthony & Sylvan by Squire, Sanders & Dempsey
L.L.P.
EXPERTS
The financial statements of Essef for the years ended September 30, 1996,
1997 and 1998, included in this proxy statement/prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing in this proxy statement/prospectus. The financial statements of
Anthony & Sylvan Pools Corporation as of December 31, 1997 and 1998 and for the
eight months ended December 31, 1997 and the year ended December 31, 1998; and
the financial statements of Anthony & Sylvan Pools, Inc. for the year ended
December 31, 1996 and the four month period ended April 30, 1997, included in
this proxy statement/prospectus and related financial statement schedule
included elsewhere in this proxy statement/prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing in this proxy statement/prospectus. Those audited financial statements
are included herein in reliance upon the reports of Deloitte & Touche LLP, given
upon their authority as experts in accounting and auditing.
SHAREHOLDER PROPOSALS
Under Essef's bylaws, shareholders who intend to bring any business before
an annual meeting of shareholders, including nominations of persons for election
as directors, must give prior written notice to our corporate secretary
regarding the business they intend to present or the persons they intend to
nominate. Essef's principle executive office must have received the notice
within the time period and the notice must be accompanied by the information and
documents required in the bylaws. You may obtain a copy of the bylaws by writing
to Essef's corporate secretary.
The provisions of the bylaws we described above do not affect your right to
request to include a proposal in the proxy statement pursuant to Rule 14a-8
under the Securities Exchange Act of 1934. However, you must also comply with
all applicable requirements of the Securities Exchange Act of 1934 and the rules
and regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
If we complete the merger, we will become a wholly-owned subsidiary of
Pentair. If that occurs, Essef will not hold an annual meeting of shareholders
in 2000. If our shareholders do not adopt the merger agreement or if the merger
otherwise does not occur, we would anticipate holding Essef's next annual
meeting of shareholders on or about February 3, 2000. In that event, any
proposal of shareholders that would be presented at the that annual meeting
would have to be received by our corporate secretary no later than December 10,
1999.
ADDITIONAL INFORMATION
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<PAGE> 108
We will also consider recommendations by shareholders for directors to be
nominated at the next annual meeting if that meeting is held. You must make any
recommendations in writing and you must include sufficient biographical and
other relevant information so that an informed judgment as to the proposed
nominee's qualifications can be made. You must include with your recommendation
a notarized statement executed by the proposed nominee consenting to be named in
the proxy statement if nominated and to serve as a director if elected. Any
recommendations received that comply with all these requirements and are
received by our corporate secretary at our principal executive office at least
six months before the meeting will be referred to and will be considered by the
executive committee.
You should review all applicable rules and, if you have questions, consult
your own legal counsel before you submit a nomination or a proposal to us. We
did not receive any recommendations or proposals from shareholders within the
required period before the annual meeting relating to the fiscal year 1998.
ADDITIONAL INFORMATION
99
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WHERE YOU CAN FIND MORE INFORMATION
Essef files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. This proxy
statement/prospectus is our proxy statement for the meeting. The registration
statement, of which the proxy statement/ prospectus is a part, contains
additional relevant information. As allowed by Securities and Exchange
Commission rules, this proxy statement/prospectus does not contain all the
information contained in the registration statement.
You may read and copy any reports, statements or other information Essef
files at the Securities and Exchange Commission's Public Reference Rooms at the
following locations:
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Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, DC 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. Essef's
Securities and Exchange Commission filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
Securities and Exchange Commission at "http://www.sec.gov."
In addition, our filings can be inspected at the offices of NASDAQ, 9801
Washingtonian, Gaithersburg, Maryland 20878, (202) 496-2500.
The Securities and Exchange Commission allows us to "incorporate by
reference" information into this proxy statement/prospectus, which means that we
can disclose important information to you by referring you to other information
we have filed with the Securities and Exchange Commission. The information
incorporated by reference is deemed to be part of this proxy
statement/prospectus, except for any information superseded by information in
this proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents set
forth below that Essef has previously filed with the Securities and Exchange
Commission. These documents contain important information about us.
<TABLE>
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PERIOD OR
ESSEF'S SEC FILINGS (FILE NO. 0-15902) DATE FILED
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<S> <C> <C>
Annual Report on Form 10-K Year ended: - September 30, 1998
Quarterly Report on Form 10-Q Quarter ended: - December 31, 1998
Quarterly Report on Form 10-Q Quarter ended: - March 31, 1999
Current Report on Form 8-K Filed on: - May 7, 1999
</TABLE>
We are also incorporating by reference additional documents that we file
with the Securities and Exchange Commission between the date of this proxy
statement/prospectus and the date of the meeting. These documents include
periodic reports, such as annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, as well as proxy statements.
WHERE YOU CAN FIND MORE INFORMATION
100
<PAGE> 110
You can request a free copy of all or any of these documents, other than
the exhibits to these documents unless those exhibits are specifically
incorporated by reference into these documents, by writing to or calling:
Mark E. Brody
Vice President, Finance
Essef Corporation
220 Park Drive
Chardon, OH 44024
(440) 286-2200
If you would like to request documents from us, please do so by July 30,
1999 to receive these before the meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO DECIDE HOW TO VOTE ON THE
MERGER. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM OR IN ADDITION TO WHAT IS CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. THEREFORE, IF ANYONE DOES GIVE YOU INFORMATION OF THIS
SORT, YOU SHOULD NOT RELY ON IT. IF YOU ARE IN A JURISDICTION WHERE IT IS
UNLAWFUL TO OFFER TO EXCHANGE OR SELL OR TO ASK FOR OFFERS TO EXCHANGE OR BUY
THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS OR TO ASK FOR PROXIES,
OR IF YOU ARE A PERSON TO WHOM IT IS UNLAWFUL TO DIRECT THOSE ACTIVITIES, THEN
THE OFFER PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS DOES NOT EXTEND TO YOU.
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS SPEAKS ONLY AS OF
ITS DATE UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE
APPLIES.
WHERE YOU CAN FIND MORE INFORMATION
101
<PAGE> 111
ANNEX A
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
APRIL 30, 1999
AMONG
PENTAIR, INC.,
NORTHSTAR ACQUISITION COMPANY
AND
ESSEF CORPORATION
ANNEXES
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TABLE OF CONTENTS
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ARTICLE I
THE MERGER
Section 1.1 The Merger.................................................. 2
Section 1.2 Effective Time of the Merger................................ 2
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Articles.................................................... 2
Section 2.2 Regulations................................................. 2
Section 2.3 Board of Directors; Officer................................. 2
Section 2.4 Effects of Merger........................................... 2
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Conversion of Shares of Company Common Stock................ 2
Section 3.2 Surrender and Payment....................................... 3
Section 3.3 Dissenting Shares........................................... 5
Section 3.4 Stock Options............................................... 5
Section 3.5 Shareholders' Meetings...................................... 7
Section 3.6 Assistance in Consummation of the Merger.................... 7
Section 3.7 Closing..................................................... 7
Section 3.8 Filing of Certificate of Merger............................. 7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Section 4.1 Organization and Qualification.............................. 8
Section 4.2 Authority Relative to this Merger Agreement................. 8
Section 4.3 Consents and Approvals; No Violations....................... 8
Section 4.4 Financial Advisor........................................... 9
Section 4.5 Financing................................................... 9
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 5.1 Organization and Qualification.............................. 9
Section 5.2 Capitalization.............................................. 9
Section 5.3 Subsidiaries................................................ 9
</TABLE>
ANNEXES
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Section 5.4 Authority Relative to this Merger Agreement................. 10
Section 5.5 Consents and Approvals; No Violations....................... 10
Section 5.6 Reports and Financial Statements............................ 11
Section 5.7 Absence of Certain Changes or Events........................ 11
Section 5.8 Litigation.................................................. 11
Section 5.9 Information in Disclosure Documents......................... 12
Section 5.10 Employee Benefit Plans...................................... 12
Section 5.11 ERISA....................................................... 13
Section 5.12 Company Action.............................................. 14
Section 5.13 Fairness Opinion............................................ 14
Section 5.14 Financial Advisor........................................... 14
Section 5.15 Compliance with Applicable Laws............................. 14
Section 5.16 Liabilities................................................. 14
Section 5.17 Taxes....................................................... 15
Section 5.18 Certain Agreements.......................................... 16
Section 5.19 Patents, Trademark, Etc..................................... 16
Section 5.20 Title to Assets; Liens...................................... 16
Section 5.21 Required Vote............................................... 16
Section 5.22 Insurance................................................... 17
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pending the Merger....... 17
Section 6.2 Notice of Breach............................................ 19
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information; Environmental and Year 2000
Compliance.................................................. 19
Section 7.2 Shareholders' Meeting; Filings.............................. 22
Section 7.3 Employment Arrangements..................................... 22
Section 7.4 Employee Benefits........................................... 22
Section 7.5 Indemnification............................................. 22
Section 7.6 Consents.................................................... 23
Section 7.7 Antitrust Filings........................................... 23
Section 7.8 Additional Agreements....................................... 24
Section 7.9 No Solicitation............................................. 25
Section 7.10 Split-Off of A&S............................................ 26
Section 7.11 Confidentiality............................................. 27
</TABLE>
ANNEXES
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ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... 27
Section 8.2 Conditions to Obligation of the Company to Effect the
Merger...................................................... 28
Section 8.3 Conditions to Obligation of Parent and Sub to Effect the
Merger...................................................... 28
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination................................................. 29
Section 9.2 Effect of Termination....................................... 30
Section 9.3 Amendment................................................... 30
Section 9.4 Waiver...................................................... 30
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations, Warranties and
Agreements.................................................. 31
Section 10.2 Notices..................................................... 31
Section 10.3 Fees and Expenses........................................... 32
Section 10.4 Publicity................................................... 32
Section 10.5 Specific Performance........................................ 33
Section 10.6 Interpretation.............................................. 33
Section 10.7 Third Party Beneficiaries................................... 33
Section 10.8 Miscellaneous............................................... 33
Section 10.9 Cure Period................................................. 34
Section 10.10 Validity.................................................... 34
Exhibit A Transition Agreement
Exhibit B Tax Sharing Agreement
</TABLE>
ANNEXES
A-iii
<PAGE> 115
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Merger Agreement"), dated as of
April 30, 1999, by and among PENTAIR, INC., a Minnesota corporation ("Parent"),
NORTHSTAR ACQUISITION COMPANY, an Ohio corporation and a wholly owned subsidiary
of Parent ("Sub"), and ESSEF CORPORATION, an Ohio corporation (the "Company").
RECITALS
WHEREAS, the respective boards of directors of Parent, Sub and the Company
have determined that it is fair to, and in the best interests of their
respective stockholders to consummate the acquisition of the Company (other than
the swimming pool installation business thereof) by Parent upon the terms and
subject to the conditions set forth herein; and
WHEREAS, as part of the Merger (as defined below), Anthony & Sylvan Pools
Corporation, an Ohio corporation and an indirect wholly-owned subsidiary of the
Company (including any successor in interest, "A&S"), will be split-off from the
Company, in a manner (as provided in the Transition Agreement, dated as of the
date hereof, among the Company, A&S and the Parent attached hereto as Exhibit A
(the "Transition Agreement")) whereby the holder of shares of Company common
stock, without par value ("Company Common Stock") will receive 100% of the
shares of common stock, without par value, of A&S (the "Split-Off") in
consideration for the redemption of a portion of their shares of Company Common
Stock; and
WHEREAS, in furtherance of the acquisition, the respective boards of
directors of Parent, Sub and the Company have approved the merger of Sub with
and into the Company (the "Merger") in accordance with the Ohio General
Corporation Law ("OGCL") whereby each issued and outstanding share of Company
Common Stock (other than shares of Company Common Stock held by the Company as
treasury stock or owned by Parent, Sub or any other Subsidiary (as defined in
Section 10.6 below) of Parent immediately prior to the Effective Time and other
than Dissenting Shares (as defined in Section 3.3 hereof)), will be converted
into the right to receive (i) the Cash Consideration (as defined in Section
3.1(c) hereof) and (ii) the Split-Off Consideration (as defined in Section
3.1(c) hereof) as set forth below; and
WHEREAS, as set forth in Section 7.10(a) hereof, as a condition to and in
consideration of the transactions contemplated hereby, following the date hereof
the Company, A&S and certain other parties will enter into a Tax Sharing
Agreement substantially in the form attached hereto as Exhibit B with such
changes as shall have been properly approved prior to the consummation of the
Merger (the "Tax Sharing Agreement" and together with the Transition Agreement,
hereafter collectively referred to as the "Ancillary Agreements"); and
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
ANNEXES
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NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 THE MERGER. Upon the terms and subject to the conditions
hereof and in accordance with the OGCL, at the Effective Time (as defined below
in Section 1.2), Sub shall be merged into the Company and the separate existence
of Sub shall thereupon cease, and the name of the Company, as the surviving
corporation in the Merger (the "Surviving Corporation"), shall by virtue of the
Merger be "Essef Corporation."
Section 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective when a properly executed Certificate of Merger is duly filed with the
Secretary of State of the State of Ohio in accordance with the OGCL, which
filing shall be made as soon as practicable after the closing of the
transactions contemplated by this Merger Agreement in accordance with Section
3.8. When used in this Merger Agreement, the term "Effective Time" shall mean
the date and time at which such filing shall have been made.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 ARTICLES. The Surviving Corporation shall adopt the Articles
of Incorporation of Sub in effect immediately prior to the Merger as the
Articles of Incorporation of the Surviving Corporation until amended in
accordance with its terms and as provided by law and this Merger Agreement.
Section 2.2 REGULATIONS. The Surviving Corporation shall adopt the
Regulations of Sub as in effect at the Effective Time as the Regulations of the
Surviving Corporation.
Section 2.3 BOARD OF DIRECTORS; OFFICERS. The directors of Sub
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation and the officers of Sub immediately prior to the Effective Time
shall be the officers of the Surviving Corporation, in each case until their
respective successors are duly elected and qualified in the manner provided in
the Articles of Incorporation and Regulations of the Surviving Corporation.
Section 2.4 EFFECTS OF MERGER. The Merger shall have the effects set
forth in the applicable provisions of the OGCL. Without limiting the generality
of the foregoing, and subject thereto at the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises and
be subject to all restrictions, debts, liabilities and duties of the Sub.
ARTICLE III
CONVERSION OF SHARES
Section 3.1 CONVERSION OF SHARES OF COMPANY COMMON STOCK. At the
Effective Time:
(a) CANCELLATION OF CERTAIN STOCK. Each share of Company Common Stock
held by the Company as treasury stock or owned by Parent, Sub or any other
Subsidiary of
ANNEXES
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Parent immediately prior to the Effective Time shall automatically be
cancelled and retired and cease to exist, and no payment shall be made with
respect thereto; provided, that shares of Company Common Stock held
beneficially or of record by any plan, program or arrangement sponsored or
maintained for the benefit of employees of Parent or the Company or any
Subsidiaries thereof shall not be deemed to be held by Parent or the
Company regardless of whether Parent or Company has, directly or
indirectly, the power to vote or control the disposition of such shares of
Company Common Stock.
(b) CAPITAL STOCK OF SUB. Each share of common stock of Sub issued
and outstanding immediately prior to the Effective Time shall be converted
into and become one fully paid and non-assessable share of common stock,
par value $0.01, of the Surviving Corporation and shall constitute the only
outstanding shares of capital stock of the Surviving Corporation.
(c) CONVERSION OF SHARES. Each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time shall, except as
otherwise provided in Sections 3.1(a) and 3.3 hereof, be converted into the
right to receive Nineteen Dollars and Nine Cents ($19.09) per share,
without interest (the "Cash Consideration") and 0.25 shares of A&S Common
Stock (as defined in the Transition Agreement) (the "Split-Off
Consideration").
Section 3.2 SURRENDER AND PAYMENT.
(a) Prior to the Effective Time, Parent and Company shall jointly appoint a
depositary (the "Depositary") for the purpose of exchanging certificates
representing shares of Company Common Stock for the Cash Consideration and the
Split-Off Consideration. The Depositary shall be Bank of America National Trust
and Savings Association. Parent will pay to the Depositary immediately prior to
the Effective Time, the Cash Consideration, and the Company shall cause A&S to
deposit with the Depositary the Split-Off Consideration (comprised of shares of
A&S Common Stock and cash sufficient to pay any fractional shares), to be paid
in respect of the shares of Company Common Stock. For purposes of determining
the Cash Consideration and the Split-Off Consideration to be so paid, Parent and
Company shall assume that no holder of shares of Company Common Stock will
perfect his right to appraisal of his shares of Company Common Stock. Promptly
after the Effective Time, Parent will send, or will cause the Depositary to
send, but in no event later than three (3) business days after the Effective
Time, to each holder of shares of Company Common Stock at the Effective Time a
letter of transmittal for use in such exchange (which shall specify that the
delivery shall be effected, and risk of loss and title shall pass, only upon
proper delivery of the certificates representing shares of Company Common Stock
to the Depositary) and instructions for use in effecting the surrender of shares
of Company Common Stock in exchange for the Cash Consideration and Split-Off
Consideration, and no interest shall accrue or be paid on any Cash Consideration
payable upon the surrender of certificates.
(b) Each holder of shares of Company Common Stock that have been converted
into the right to receive the Cash Consideration and Split-Off Consideration,
upon surrender to the Depositary of a certificate or certificates properly
representing such shares of Company Common Stock, together with a properly
completed letter of transmittal covering such shares of Company Common Stock,
will be entitled to receive the Cash Consideration and Split-Off Consideration
payable in respect of such shares of Company Common Stock less any amounts
required to be withheld under applicable federal, state, local or foreign income
tax
ANNEXES
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regulations. Until so surrendered, each such certificate shall, after the
Effective Time, represent for all purposes, only the right to receive such Cash
Consideration and Split-Off Consideration. No certificates representing
fractional shares of A&S Common Stock shall be issued upon the surrender for
exchange of shares of Company Common Stock, and such fractional share interests
will not entitle the owner thereof to vote or to any other rights as a
shareholder of A&S. Each holder of shares of Company Common Stock who would
otherwise be entitled to receive a fractional share of A&S Common Stock shall
receive from the Depositary an amount in cash (the "Fractional Share Payment")
equal to the product obtained by multiplying (i) the fractional share interest
to which such holder (after taking into account all shares of Company Common
Stock held at the Effective Time by such holder) would otherwise be entitled by
(ii) the mean between the high and low trading prices of A&S Common Stock on the
first full day of trading following the Closing (as defined in Section 3.7
below) (the "Trading Value").
(c) If any portion of the Cash Consideration and Split-Off Consideration is
to be paid to a Person other than the registered holder of the shares of Company
Common Stock represented by the certificate or certificates surrendered in
exchange therefor, it shall be a condition to such payment that the certificate
or certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the Person requesting such payment shall pay
to the Depositary any transfer or other taxes required as a result of such
payment to a Person other than the registered holder of such shares of Company
Common Stock or establish to the satisfaction of the Depositary that such tax
has been paid or is not payable. For purposes of this Merger Agreement, "Person"
means an individual, a corporation, limited liability company, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or any agency or instrumentality thereof.
(d) After the Effective Time, the stock transfer books of the Company shall
be closed and thereafter there shall be no further registration of transfers of
shares of Company Common Stock. If, after the Effective Time, certificates
representing shares of Company Common Stock are presented to the Surviving
Corporation, they shall be cancelled and exchanged for the consideration
provided for, and in accordance with the procedures set forth, in this Article
III. From and after the Effective Time, holders of certificates theretofore
evidencing shares of Company Common Stock shall cease to have any rights as
shareholders of the Company, except as provided herein or by law.
(e) Any portion of the Cash Consideration paid to the Depositary pursuant
to Section 3.2(a) that remains unclaimed by the holders of shares of Company
Common Stock one year after the Effective Time shall be returned to the
Surviving Corporation, including any interest thereon, and any portion of the
Split-Off Consideration (including, any interest on the cash deposited for
Fractional Share Payments) paid to the Depositary pursuant to Section 3.2(a)
that remains unclaimed by the holders of shares of Company Common Stock one year
after the Effective Time shall be returned to A&S, upon written demand, and any
such holder who has not exchanged his shares of Company Common Stock for the
Cash Consideration and Split-Off Consideration in accordance with this Section
3.2(a) prior to that time shall thereafter look only to the Surviving
Corporation for payment of the Cash Consideration and A&S for payment of the
Split-Off Consideration in respect of his shares of Company Common Stock,
without any interest thereon. Notwithstanding the foregoing, Parent, Sub and the
Surviving Corporation shall not be liable to any holder of shares of Company
Common Stock for any amount paid to a public official pursuant to applicable
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abandoned property laws. Any Cash Consideration or Split-Off Consideration
remaining unclaimed by holders of shares of Company Common Stock on the day
immediately prior to such times as such amounts would otherwise escheat to or
become property of any governmental entity shall, to the extent permitted by
applicable law, in the case of the Cash Consideration become the property of
Parent, and in the case of the Split-Off Consideration become the property of
A&S, free and clear of any claims or interest of any Person previously entitled
thereto.
(f) Any portion of the Cash Consideration and Split-Off Consideration paid
to the Depositary pursuant to Section 3.2(a) hereof to pay for shares of Company
Common Stock for which appraisal rights have been perfected shall be returned to
the Surviving Corporation and A&S, respectively, upon written demand.
Section 3.3 DISSENTING SHARES. Notwithstanding Section 3.1 hereof, shares
of Company Common Stock issued and outstanding immediately prior to the
Effective Time and held by a holder who has properly exercised and perfected
appraisal rights under Section 1701.85 of the OGCL (the "Dissenting Shares"),
shall not be converted into the right to receive the Cash Consideration and
Split-Off Consideration, but the holders of Dissenting Shares shall be entitled
to receive such consideration as shall be determined pursuant to said Section
1701.85; provided, however, that if any such holder shall have failed to perfect
or shall withdraw or lose his right to appraisal and payment under the OGCL,
such holder's shares shall thereupon be deemed to have been converted as of the
Effective Time into the right to receive the Cash Consideration and Split-Off
Consideration, without any interest thereon, and such shares of Company Common
Stock shall no longer be Dissenting Shares. The Company shall give Parent (i)
prompt notice of any written demands for payment, withdrawals of demands for
payment and any other instruments served pursuant to the OGCL received by the
Company and (ii) the opportunity to direct all negotiations and proceedings with
respect to demands for payment under the OGCL. The Company will not voluntarily
make any payment with respect to any demands for payment and will not, except
with the prior written consent of Parent, settle or offer to settle any such
demands.
Section 3.4 STOCK OPTIONS.
(a) Except as provided in Section 3.4(c) below, the Company shall take all
actions (including, but not limited to, obtaining any and all consents from
employees to the matters contemplated by this Section 3.4) necessary to provide
that all outstanding options and other rights to acquire shares ("Stock
Options") granted under any stock option or deferred compensation plan, program
or similar arrangement or any employment agreement of the Company or any
Subsidiaries other than options, if any, of A&S, each as amended (the "Option
Plans"), shall become fully exercisable and vested on the date (the "Vesting
Date") which shall be set by the Company and which, in any event, shall be not
less than thirty (30) days prior to the Effective Time, whether or not otherwise
exercisable and vested. All Stock Options which are outstanding immediately
prior to the Effective Time shall be cancelled as of the Effective Time and the
holders thereof shall be entitled to receive from the Company, for each share of
Company Common Stock subject to such Stock Option, (i) an amount in cash equal
to the difference between the Cash Consideration and the exercise price per
share of such Stock Option, which amount shall be payable at the Effective Time,
plus (ii) 0.25 shares of A&S Common Stock (and in the case of fractional shares,
the Fractional Share Payment), which shall be held by the Depositary pending
delivery after the Effective Time. All applicable withholding taxes attributable
to the payments made hereunder or to
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distributions contemplated hereby shall be deducted from the amounts payable
under clauses (i) and (ii) above and all such taxes attributable to the exercise
of Stock Options on or after the Vesting Date shall be withheld from the
proceeds received in the Merger, in respect of the shares of Company Common
Stock issuable on such exercise.
(b) Except as provided herein or as otherwise agreed to by the parties and
to the extent permitted by the Option Plans, (i) the Option Plans shall
terminate as of the Effective Time and the provisions in any other plan, program
or arrangement, providing for the issuance or grant by the Company or any of its
Subsidiaries of any interest in respect of the capital stock of the Company or
any of its Subsidiaries shall be deleted as of the Effective Time and (ii) the
Company shall use all reasonable efforts to ensure that following the Effective
Time no holder of Stock Options or any participant in the Option Plans or any
other such plans, programs or arrangements shall have any right thereunder to
acquire any equity securities of the Company, the Surviving Corporation or any
subsidiary thereof.
(c) (i) With respect to the employees identified on Schedule 3.4(c) of the
Company Disclosure Schedule who will remain as employees or directors of A&S
(the "Optionees" and individually an "Optionee"), the Company agrees to take all
actions (including, but not limited to, obtaining any and all consents from the
Optionees to the matters contemplated by this Section 3.4(c) and causing A&S to
take such actions as are necessary to accomplish the matters contemplated by
this Section 3.4(c)) necessary to provide that (A) the Stock Options identified
on Schedule 3.4(c) of the Company Disclosure Schedule are amended in such a
fashion that each Optionee has the right under such options to purchase
(subsequent to the Merger) that number of shares of Company Common Stock that
represents the same proportionate interest in the Company that such Optionee had
the right to purchase prior to the Merger (such option hereafter referred to as
the "Post-Merger Company Option") with appropriate adjustments (if necessary as
specified below) in the exercise price of such Option and (B) such Optionee is
granted a stock option (with terms equivalent to the terms in the Optionee's
option to purchase Company Common Stock and with an exercise price as specified
in this Section 3.4(c)) to purchase that number of shares of A&S Common Stock
that represents a proportionate interest in A&S equal to the proportionate
interest in the Company that the Optionee's option to purchase Company Common
Stock represented (the "A&S Option").
(ii) (A) The amendment contemplated by Section 3.4(c)(i)(A) shall be
accomplished by reducing the option price of the Post-Merger Company Option to a
price equal to the option price (immediately before the Merger) multiplied by a
fraction, the numerator of which is the aggregate value of Company Common Stock
immediately subsequent to the Merger (utilizing $19.09 as the per share value of
such Common Stock) and the denominator of which is the sum of such aggregate
value of the Company Common Stock and the aggregate value of A&S Common Stock
immediately subsequent to the Merger (based on the value of A&S Common Stock as
determined pursuant to Section 5 of the Tax Sharing Agreement) and (B) the A&S
Option shall have a per-share exercise price that bears the same relation to the
per-share value of A&S Common Stock as the per-share exercise price of the
Post-Merger Company Option (adjusted as provided in clause (A)) bears to $19.09.
(iii) Immediately after the amendment contemplated in Section 3.4(c)(i)(A),
all Post-Merger Company Options shall be cancelled and the holders thereof shall
be entitled to receive from the Company for each share of Company Common Stock
subject to such Post-
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Merger Company Option an amount in cash equal to the difference between the Cash
Consideration and the exercise price of such Post-Merger Company Option.
(iv) For all purposes of this Section 3.4(c), the term "proportionate
interest" shall be determined on the basis of the percentage interest of Company
or A&S Common Stock (as the case may be) that such Optionee would own after the
exercise of all Stock Options (as defined in Section 3.4(a)) in the case of the
Company and all A&S Options in the case of A&S.
Section 3.5 SHAREHOLDERS' MEETINGS. (a) In order to consummate the
Merger, the Company, acting through its board of directors, shall, in accordance
with applicable law, the Company's Third Amended Articles of Incorporation and
its Regulations:
(i) duly call, give notice of, convene and hold a special meeting of
its shareholders for the purpose of considering and taking action upon this
Merger Agreement (the "Shareholders' Meeting");
(ii) subject to its fiduciary duties under applicable laws as advised
by counsel, include in the proxy statement or information statement
prepared by the Company for distribution to shareholders of the Company in
advance of the Shareholders' Meeting in accordance with Regulation 14A
promulgated under the Exchange Act (the "Company Proxy Statement") the
recommendation of its board of directors; and
(iii) use its best efforts to (A) obtain and furnish the information
required to be included by it in the Company Proxy Statement, and, after
consultation with Parent, respond promptly to any comments made by the
Commission with respect to the Company Proxy Statement and any preliminary
version thereof and cause the Company Proxy Statement to be mailed to its
shareholders and (B) obtain the necessary approvals of this Merger
Agreement by its shareholders.
(b) Parent will provide the Company with information concerning Parent and
Sub required to be included in the Company Proxy Statement and will vote, or
cause to be voted, all shares of Company Common Stock owned by it or its
Subsidiaries in favor of approval and adoption of this Merger Agreement.
Section 3.6 ASSISTANCE IN CONSUMMATION OF THE MERGER. Each of Parent, Sub
and the Company shall provide all reasonable assistance to, and shall cooperate
with, each other to bring about the consummation of the Merger as soon as
possible in accordance with the terms and conditions of this Merger Agreement.
Parent shall cause Sub to perform all of its obligations in connection with this
Merger Agreement.
Section 3.7 CLOSING. The closing (the "Closing") of the transactions
contemplated by this Merger Agreement shall take place (i) at the offices of
Squire, Sanders & Dempsey L.L.P., 4900 Key Tower, 127 Public Square, Cleveland,
Ohio 44114-1304, at 9:00 A.M. local time on the second business day after the
day on which the last of the conditions set forth in Article VII is fulfilled or
waived, provided, however, that the closing shall take place on or within 10
days after the last day of a month, or (ii) at such other time and place as
Parent and the Company shall agree in writing (the "Closing Date").
Section 3.8 FILING OF CERTIFICATE OF MERGER. Upon the terms and subject
to the conditions hereof as soon as practicable following the Closing, the
Company shall execute and file a certificate of merger in the manner required by
the OGCL and the parties hereto
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shall take all such other and further actions as may be required by applicable
law to make the Merger effective.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company, except as set forth in
a disclosure schedule delivered by Parent and Sub concurrently herewith (the
"Parent and Sub Disclosure Schedule"), as follows:
Section 4.1 ORGANIZATION AND QUALIFICATION. Each of Parent and Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and carry on its business as
it is now being conducted or currently proposed to be conducted.
Section 4.2 AUTHORITY RELATIVE TO THIS MERGER AGREEMENT. Each of Parent
and Sub has the corporate power to enter into this Merger Agreement and to carry
out its obligations hereunder. The execution and delivery of this Merger
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the boards of directors of Parent and Sub. This Merger
Agreement constitutes a valid and binding obligation of each of Parent and Sub
enforceable in accordance with its terms except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought. No other corporate
proceedings on the part of Parent or Sub are necessary to authorize the Merger
Agreement and the transactions contemplated hereby.
Section 4.3 CONSENTS AND APPROVALS; NO VIOLATIONS. Neither Parent nor Sub
is subject to or obligated under (i) any charter, by-law, indenture or other
loan document provision or (ii) any other contract, license, franchise, permit,
order, decree, concession, lease, instrument, judgment, statute, law, ordinance,
rule or regulation applicable to either of them or any of Parent's Subsidiaries
or their respective properties or assets, which would be breached or violated,
or under which there would be a default (with or without notice or lapse of
time, or both), or under which there would arise a right of termination,
cancellation or acceleration of any obligation or the loss of a material
benefit, by its executing and carrying out this Merger Agreement other than, in
the case of clause (ii) only, the laws and regulations referred to in the next
sentence. Except as referred to herein or in connection, or in compliance, with
the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934 (the "Exchange Act"), and other
governmental approvals required under the applicable laws of any foreign
jurisdiction ("Foreign Laws") and the environmental, corporation, securities or
blue sky laws or regulations of the various states ("State Laws") (all of which
required consents and approvals under Foreign Laws and State Laws are identified
in Schedule 4.3 to the Parent and Sub Disclosure Schedule), no filing by Parent
or Sub or registration by Parent with any public body or authority is necessary
for, nor is any authorization, consent or approval of any public body or
authority required to be obtained by Parent or Sub for, the consummation of the
Merger or the other transactions contemplated by this Merger Agreement.
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Section 4.4 FINANCIAL ADVISOR. Except for Credit Suisse First Boston
Corporation, financial advisor to Parent and Sub ("Credit Suisse First Boston"),
no broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the transactions
contemplated by this Merger Agreement based upon arrangements made by or on
behalf of Parent and Sub.
Section 4.5 FINANCING. Sub currently has sufficient funds, or has a firm
written commitment from one or more financial institutions and/or from Parent
(copies of all of which have been delivered to the Company), to enable it to
finance the consummation of the Merger.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub, except as set forth
in a disclosure schedule delivered by the Company concurrently herewith (the
"Company Disclosure Schedule"), as follows:
Section 5.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Ohio and has all requisite corporate power and authority to own, lease
and operate its properties and carry on its business as it is now being
conducted or currently proposed to be conducted. The Company is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to so qualify would not have a Company Material Adverse Effect (as
defined in Section 10.6). Complete and correct copies as of the date hereof of
the articles of incorporation and regulations of the Company and each of its
Subsidiaries have, to the extent requested, been delivered to Parent as part of
the Company Disclosure Schedule.
Section 5.2 CAPITALIZATION. The authorized capital stock of the Company
consists of 40,000,000 shares of Company Common Stock and 1,000,000 shares of
Preferred Stock, without par value ("Company Preferred Stock"). As of February
28, 1999 and as adjusted to reflect the stock dividend paid by the Company on
March 10, 1999 to the shareholders of record on February 19, 1999 (the "Stock
Dividend"), 13,062,741 shares of Company Common Stock were validly issued and
outstanding, fully paid and nonassessable, 618,127 shares of Company Common
Stock were held in treasury, no shares of Preferred Stock had been issued, and
there have been no material changes (other than as a result of the Stock
Dividend) in such numbers of shares through the date hereof. Except for Stock
Option exercises, no shares of Company Common Stock have been issued since
February 28, 1999. Schedule 5.2 of the Company Disclosure Schedule sets forth as
of the date of this Merger Agreement each outstanding Stock Option issued under
the Option Plans, including the holder, date of grant, exercise price and number
of shares of Company Common Stock subject thereto. Except for such Stock
Options, there are no outstanding options, warrants, calls or other rights,
agreements or commitments obligating the Company to issue, deliver or sell
shares of its capital stock or debt securities or obligating the Company to
grant, extend or enter into any such option, warrant, call or other such right,
agreement or commitment.
Section 5.3 SUBSIDIARIES. Schedule 5.3 of the Company Disclosure Schedule
lists each Subsidiary of the Company. Each of such Subsidiaries is a corporation
duly organized,
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validly existing and in good standing under the laws of its jurisdiction of
incorporation and has the corporate power to carry on its business as it is now
being conducted or currently proposed to be conducted. Each of such Subsidiaries
is duly qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to so qualify would not have a Company
Material Adverse Effect. All the outstanding shares of capital stock of each of
such Subsidiaries are validly issued, fully paid and nonassessable and those
owned by the Company or by a Subsidiary of the Company are owned free and clear
of any liens, claims or encumbrances. There are no existing options, warrants,
calls or other rights, agreements or commitments of any character relating to
the issued or unissued capital stock or other securities of any of the
Subsidiaries of the Company other than A&S. Except as set forth in Schedule 5.3
of the Company Disclosure Schedule, the Company does not directly or indirectly
own any interest in any other corporation, partnership, joint venture or other
business association or entity.
Section 5.4 AUTHORITY RELATIVE TO THIS MERGER AGREEMENT. The Company has
the corporate power to enter into this Merger Agreement, subject to the
requisite approval of this Merger Agreement by the holders of Company Common
Stock, and to carry out its obligations hereunder. The execution and delivery of
this Merger Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by the board of directors of the Company and to
the extent necessary by the board of directors of A&S. This Merger Agreement
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. Except for the requisite approval of the
holders of Company Common Stock, no other corporate proceedings on the part of
the Company are necessary to authorize this Merger Agreement and the
transactions contemplated hereby.
Section 5.5 CONSENTS AND APPROVALS; NO VIOLATIONS. The Company is not
subject to or obligated under (i) any charter, by-law, indenture or other loan
document provision or (ii) any other contract, license, franchise, permit,
order, decree, concession, lease, instrument, judgment, statute, law, ordinance,
rule or regulation applicable to the Company or any of its Subsidiaries or their
respective properties or assets which would be breached or violated, or under
which there would be a default (with or without notice or lapse of time, or
both), or under which there would arise a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit, by its
executing and carrying out this Merger Agreement, other than, in the case of
clause (ii) only, the laws and regulations referred to in the next sentence.
Except as referred to herein or, with respect to the Merger or the transactions
contemplated thereby, in connection, or in compliance, with the provisions of
the HSR Act, the Securities Act, the Exchange Act, the Foreign Laws and the
State Laws (all of which required consents and approvals under Foreign Laws and
State Laws are identified in Schedule 5.5 to the Company Disclosure Schedule),
no filing by the Company or registration by the Company with any public body or
authority is necessary for, nor is any authorization, consent or approval of any
public body or authority required to be obtained by the Company for, the
consummation of the Merger or the other transactions contemplated hereby.
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Section 5.6 REPORTS AND FINANCIAL STATEMENTS. The Company has previously
furnished Parent with true and complete copies of its (i) Annual Reports on Form
10-K for the three years ended September 30, 1996, 1997, and 1998, as filed with
the Commission, (ii) Quarterly Reports on Form 10-Q for the quarters ended March
30, 1998, June 30, 1998, and December 31, 1998 as filed with the Commission,
(iii) proxy statements related to all meetings of its shareholders (whether
annual or special) since December 31, 1996 and (iv) all other reports or
registration statements filed by the Company with the Commission since December
31, 1996 which are all the documents (other than preliminary materials) that the
Company was required to file with the Commission since that date (such documents
identified in clauses (i) through (iv) (except registration statements on Form
S-8 relating to employee benefit plans and the Form S-1 (as defined in the
Transition Agreement (or any other registration statement contemplated to be
filed pursuant to the terms of the Transition Agreement)) being referred to
herein collectively as the "Company SEC Reports")). As of their respective
dates, the Company SEC Reports complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the Commission thereunder applicable to such
Company SEC Reports, and did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of the Company included in the Company
SEC Reports comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
Commission with respect thereto, and the financial statements included in the
Company SEC Reports have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent basis
(except as may be indicated therein or in the notes thereto) and fairly present
the financial position of the Company and its Subsidiaries as at the dates
thereof and the results of their operations and changes in financial position
for the periods then ended subject, in the case of the unaudited interim
financial statements, to normal year-end audit adjustments and any other
adjustments described therein.
Section 5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Company SEC Reports, since December 31, 1998, there has not been (i) any
event, condition, transaction, commitment, dispute or other circumstance
(financial or otherwise) of any character (whether or not in the ordinary course
of business) individually or in the aggregate having a Company Material Adverse
Effect; (ii) any damage, destruction or loss, whether or not covered by
insurance, which, insofar as reasonably can be foreseen, in the future would
have a Company Material Adverse Effect; (iii) any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to the capital stock of the Company; or (iv) any entry
into any commitment or transaction material to the Company and its Subsidiaries
taken as a whole (including, without limitation, any borrowing or sale of
assets) except in the ordinary course of business consistent with past practice.
Section 5.8 LITIGATION.
(a) Except as disclosed in the Company SEC Reports, there is no suit,
action or proceeding pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries which, either alone
or in the aggregate, has, or is reasonably likely to have, a Company Material
Adverse Effect or would prevent, delay or otherwise interfere with any of the
transactions contemplated by this Merger Agreement, nor
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is there any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or arbitrator
outstanding against the Company or any of its Subsidiaries having, or reasonably
likely to have, either alone or in the aggregate, a Company Material Adverse
Effect or would prevent, delay or otherwise interfere with any of the
transactions contemplated by this Merger Agreement. Schedule 5.8 of the Company
Disclosure Schedule sets forth all claims with respect to the Company or any of
its Subsidiaries, whether or not accrued for or covered by insurance, where the
amount in controversy exceeds $200,000. Schedule 5.8 of the Company Disclosure
Schedule sets forth all claims with respect to Products (as defined in 5.8(b)(i)
below) liability that have not been accrued for by the Company in its
consolidated financial statements or are not covered by the Company's insurance
policies. There has not been any adverse change in the number, type or severity
of claims with respect to Products during the last three years. To the knowledge
of the Company, none of the Products is the subject of any Recall Campaign (as
defined in 5.8(b)(ii) below) and no facts or conditions exist which could
reasonably be expected to result in such a Recall Campaign, in each case, where
the costs of such a Campaign would exceed $200,000.
(b) For purposes of this Section 5.8, capitalized terms have the following
meanings:
(i) "Products" shall mean any and all products currently or at any
time previously designed, manufactured, distributed or sold by the Company
or its Subsidiaries, or by any predecessor of the Company or its
Subsidiaries.
(ii) "Recall Campaign" shall mean any formal action by the Company or
its Subsidiaries to order the return of any Product from all known
customers for such Product for repair, substitution or replacement.
Section 5.9 INFORMATION IN DISCLOSURE DOCUMENTS. None of the information
with respect to the Company or its Subsidiaries to be included or incorporated
by reference in the Company Proxy Statement or the Form S-1 (or any other
registration statement contemplated to be filed pursuant to the terms of the
Transition Agreement) will, in the case of the Company Proxy Statement or any
amendments or supplements thereto, and at the time of the Shareholders' Meeting
to be held in connection with the Merger, or in the case of Form S-1 (or any
other registration statement contemplated to be filed pursuant to the terms of
the Transition Agreement), at the time it becomes effective and at the Effective
Time 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 are made, not
misleading. The Company Proxy Statement and the Form S-1 (or any other
registration statement contemplated to be filed pursuant to the terms of the
Transition Agreement) will comply in all material respects with the Exchange Act
(and the rules and regulations promulgated thereunder) and the Securities Act
(and the rules and regulations promulgated thereunder).
Section 5.10 EMPLOYEE BENEFIT PLANS. Except as disclosed in the Company
SEC Reports or as set forth in Schedule 5.10 of the Company Disclosure Schedule,
there are no employee benefit, compensation or severance plans, agreements or
arrangements, including "employee benefit plans," as defined in Section 3(3) of
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
including, but not limited to, plans, agreements or arrangements relating to
former employees, including, but not limited to, retiree medical plans or
post-employment life insurance plans, maintained by the Company or any of its
Subsidiaries or collective bargaining agreements to which the Company or any of
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its Subsidiaries is a party (together, the "Company Benefit Plans"). To the
knowledge of the Company, no default exists with respect to the obligations of
the Company or any of its Subsidiaries under such Company Benefit Plans. Since
December 31, 1998, there have been no disputes or grievances subject to any
grievance procedure, unfair labor practice proceedings, arbitration or
litigation occurring or threatened under such Company Benefit Plans, which have
not been finally resolved, settled or otherwise disposed of, nor is there any
default, or any condition which, with notice or lapse of time or both, would
constitute such a default, under any such Company Benefit Plans, by the Company
or its Subsidiaries or, to the knowledge of the Company and its Subsidiaries,
any other party thereto. Since December 31, 1998, there have been no strikes,
lockouts or work stoppages or slowdowns, or to the knowledge of the Company and
its Subsidiaries, jurisdictional disputes or organizing activity occurring or
threatened with respect to the business or operations of the Company or its
Subsidiaries. Except as disclosed in the Company SEC Reports or as set forth in
Schedule 5.10 of the Company Disclosure Schedule, neither the execution of the
Merger Agreement nor the consummation of the transactions contemplated hereby
will (either alone or upon the occurrence of additional events or acts) result
in, cause the accelerated vesting or delivery of, or increase the amount or
value of, any payment or benefit to any employee of the Company or any of its
Subsidiaries. Notwithstanding anything stated in this Section 5.10 to the
contrary, with respect to the severance plans or arrangements for the officers
of the Company and its Subsidiaries, Schedule 5.10 of the Disclosure Schedule
sets forth to the knowledge of the Company only such plans or arrangements for
which the costs will exceed $100,000 per individual plan or arrangement or
$500,000 in the aggregate for all such plans or arrangements.
Section 5.11 ERISA. The Company Benefit Plans have been administered in
compliance in all material respects with applicable laws and regulations such
that no condition exists with respect to the Company Benefit Plans that could
have a Company Material Adverse Effect. Each of the Company Benefit Plans which
is intended to meet the requirements of Section 401(a) of the Code has been
determined by the Internal Revenue Service to be "qualified," within the meaning
of such section of the Code, and the Company knows of no fact which is likely to
have a material adverse effect on the qualified status of such plans. To the
knowledge of the Company, there are not now nor have there been any non-exempt
"prohibited transactions," as such term is defined in Section 4975 of the Code
or Section 406 of ERISA, involving the Company Benefit Plans which could subject
the Company, its Subsidiaries or Parent to the penalty or tax imposed under
Section 502(i) of ERISA or Section 4975 of the Code. Except as set forth in
Schedule 5.11 of the Company Disclosure Schedule, no Company Benefit Plan which
is subject to Title IV of ERISA has been completely or partially terminated, no
proceedings to completely or partially terminate any Company Benefit Plan have
been instituted within the meaning of Subtitle C of said Title IV of ERISA; and
no reportable event, within the meaning of Section 4043(c) of said Subtitle C
for which the 30-day notice requirement of ERISA has not been waived, has
occurred with respect to any Company Benefit Plan. Neither the Company nor any
of its Subsidiaries has made a complete or partial withdrawal, within the
meaning of Section 4201 of ERISA, from any multiemployer plan which has resulted
in, or is reasonably expected to result in, any withdrawal liability to the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries has engaged in any transaction described in Section 4069 of ERISA
within the last five (5) years. To the knowledge of the Company, there does not
now exist, nor do any circumstances exist that could result in, any material
liability of the Company or any of its Subsidiaries (or any entity, trade or
business that is or
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was at any time required to be aggregated with the Company or any of its
Subsidiaries under Section 414(b), (c), (m) or (o) of the Code) under Title IV
of ERISA, Section 302 of ERISA, Sections 412 and 4971 of the Code, the
continuation coverage requirements of Section 601 et seq. of ERISA and Section
4980B of the Code, and similar provisions of foreign laws or regulations, other
than such liabilities that arise solely out of, or relate solely to, the Company
Benefit Plans, that would have a Company Material Adverse Effect or a Parent
Material Adverse Effect (as defined in Section 10.6) following the Effective
Time.
Section 5.12 COMPANY ACTION. The board of directors of the Company (at a
meeting duly called and held) has by the requisite vote of directors (a)
determined that the Merger is advisable and fair and in the best interests of
the Company and its shareholders, (b) approved the Merger in accordance with the
provisions of Section 1701.78 of the OGCL, and (c) recommended the approval of
this Merger Agreement and the Merger by the holders of the Company Common Stock
and directed that the Merger be submitted for consideration by the Company's
shareholders entitled to vote thereon at the Shareholders' Meeting.
Section 5.13 FAIRNESS OPINION. The Company has received the opinion of
Rhone Group LLC, financial advisor to the Company ("Rhone Group"), dated the
date hereof, to the effect that the Cash Consideration and Split-Off
Consideration to be received by the holders of shares of Company Common Stock
pursuant to the terms of this Merger Agreement are fair from a financial point
of view to such holders, a copy of which has been or will be delivered to
Parent.
Section 5.14 FINANCIAL ADVISOR. Except for Rhone Group, no broker, finder
or investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Merger Agreement and the Transition Agreement based upon arrangements made
by or on behalf of the Company. Schedule 5.14 of the Company Disclosure Schedule
contains a true and correct copy of the Company's engagement letter with Rhone
Group.
Section 5.15 COMPLIANCE WITH APPLICABLE LAWS. (i) The Company and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals (the "Company Permits") of all courts, administrative agencies or
commissions or other governmental authorities or instrumentalities, domestic or
foreign (each, a "Governmental Entity") necessary for the operation of the
businesses of the Company and its Subsidiaries; (ii) to the knowledge of the
Company, the Company and its Subsidiaries are in compliance with the terms of
the Company Permits; (iii) except as disclosed in the Company SEC Reports, the
businesses of the Company and its Subsidiaries are not being conducted in
violation of any law, ordinance or regulation of any Governmental Entity; and
(iv) no investigation or review by any Governmental Entity with respect to the
Company or any of its Subsidiaries is pending, or threatened, nor has any
Governmental Entity indicated an intention to conduct the same.
Section 5.16 LIABILITIES. As of December 31, 1998, neither the Company
nor any of its Subsidiaries had any liabilities or obligations (absolute,
accrued, contingent or otherwise) of a nature required to be disclosed on a
balance sheet or in the related notes to the consolidated financial statements
prepared in accordance with GAAP which are not disclosed or provided for in the
most recent Company SEC Reports or which could result in a Company Material
Adverse Effect. To the knowledge of the Company, there was no basis, as of
December 31, 1998, for any claim or liability (absolute, accrued, contingent or
otherwise) of a nature required to be disclosed on a balance sheet or in the
related notes to the
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consolidated financial statements prepared in accordance with GAAP which is not
reflected in the Company SEC Reports.
Section 5.17 TAXES. Except as otherwise disclosed in Schedule 5.17 of the
Company Disclosure Schedule or as reflected in the Company SEC Reports and
except for those matters which, either individually or in the aggregate, would
not result in a Company Material Adverse Effect:
(a) The Company and each of its Subsidiaries have filed (or have had
filed on their behalf) or will file or cause to be filed, all Tax Returns
(as defined in Section 5.17(h)(iii) hereof) required by applicable law to
be filed by any of them prior to the Effective Time.
(b) The Company and each of its Subsidiaries have paid (or have had
paid on their behalf) all Taxes (as defined in Section 5.17(h)(ii) hereof)
due with respect to any period ending prior to or as of the Effective
Time), or where payment of Taxes is not yet due, have established (or have
had established on their behalf and for their sole benefit and recourse),
or will establish or cause to be established before the consummation of the
Merger, an adequate accrual for the payment of all such Taxes which have
accrued prior to the Effective Time other than Taxes directly attributable
to the transactions contemplated by the Transition Agreement.
(c) No Audit (as defined in Section 5.17(h)(i)) is pending with
respect to any Taxes due from the Company or any Subsidiary. There are no
outstanding waivers extending the statutory period of limitations relating
to the payment of Taxes due from the Company or any Subsidiary for any
taxable period ending prior to the Effective Time which are expected to be
outstanding as of the Effective Time.
(d) Neither the Company nor any Subsidiary is a party to, is bound by,
or has any obligation under, a tax sharing contract or other agreement or
arrangement for the allocation, apportionment, sharing, indemnification, or
payment of Taxes, other than the Tax Sharing Agreement.
(e) Neither the Company nor any of its Subsidiaries has made an
election under Section 341(f) of the Code.
(f) Neither the Company nor any of its Subsidiaries has received any
written notice of deficiency, assessment or adjustment from the Internal
Revenue Service or any other domestic or foreign governmental taxing
authority that has not been fully paid or finally settled, and any such
deficiency, adjustment or assessment shown on such schedule is being
contested in good faith through appropriate proceedings and adequate
reserves have been established on the Company's financial statements
therefor. To the knowledge of the Company, there are no other deficiencies,
assessments or adjustments threatened, pending or assessed with respect to
the Company or any of its Subsidiaries.
(g) Except as contemplated by this Agreement and the Ancillary
Documents or as disclosed in the Company SEC Reports, neither the Company
nor any of its Subsidiaries is a party to any agreement, contract or other
arrangement that would result, separately or in the aggregate, in the
requirement to pay any "excess parachute payments" within the meaning of
Section 280G of the Code or any gross-up in connection with such an
agreement, contract or arrangement. Schedule 5.17 of the Company Disclosure
Schedule lists any agreement, contract or other arrangement in which the
Company or any
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Retained Subsidiary is a party providing for any such "excess parachute
payments" or gross-ups.
(h) For purposes of this Section 5.17, capitalized terms have the
following meanings:
(i) "Audit" shall mean any audit, assessment or other examination
of Taxes or Tax Returns by the Internal Revenue Service or any other
domestic or foreign governmental authority responsible for the
administration of any Taxes, proceedings or appeal of such proceedings
relating to Taxes.
(ii) "Taxes" shall mean all federal, state, local and foreign
income, profits, franchise, gross receipts, payroll, sales, employment,
use, property, withholding, excise and other taxes, duties and
assessments, charges, or other fees imposed by a governmental authority,
together with any interest, additions to tax, or penalties imposed with
respect thereto.
(iii) "Tax Returns" shall mean all federal, state, local and
foreign tax returns, declarations, statements, reports, schedules, forms
and information returns and any amended Tax Return relating to Taxes.
Section 5.18 CERTAIN AGREEMENTS. Except as filed as an exhibit to the
Company SEC Reports, neither the Company nor any of its Subsidiaries is a party
to or bound by any contract, agreement, arrangement, commitment or understanding
(whether written or oral) which as of the date hereof, is a "material contract"
(as defined in Item 601(b)(10) of Regulation S-K of the Commission). Schedule
5.18 to the Company Disclosure Schedule contains true and correct copies of all
indemnification agreements between the Company and officers, directors and
employees of the Company and its Subsidiaries.
Section 5.19 PATENTS, TRADEMARK, ETC. The Company and its Subsidiaries
owns or possesses adequate licenses or other valid rights to use all patents,
trademarks, trade names, service marks, trade secrets, copyrights and licenses
and other proprietary intellectual property rights and licenses ("Intellectual
Property Rights") as are necessary in connection with the conduct of the
businesses of the Company and its Subsidiaries. The Company does not have any
knowledge of any infringement by any other person of the Company's or its
Subsidiaries' Intellectual Property Rights and, to the knowledge of the Company,
the Company and its Subsidiaries are not infringing the Intellectual Property
Rights of another person.
Section 5.20 TITLE TO ASSETS; LIENS. The Company has good and marketable
title to all of its inventory, accounts receivable, property, equipment and
other assets, and except as disclosed in the Company's SEC Reports such assets
are free and clear of any mortgages, liens, charges, encumbrances, or title
defects of any nature whatsoever. The Company and its Subsidiaries have valid
and enforceable leases for the premises and the equipment, furniture and
fixtures purported to be leased by them.
Section 5.21 REQUIRED VOTE. The affirmative vote of the holders of shares
of Company Common Stock representing at least two-thirds of the votes entitled
to be cast at the Shareholders' Meeting is required to approve this Merger
Agreement. No other vote of any class or series of stock of the Company is
required by law, the Third Amended Articles of Incorporation or Regulations of
the Company or otherwise in order for the Company to consummate the Merger and
the transactions contemplated hereby.
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Section 5.22 INSURANCE. The Company has previously delivered to Parent a
schedule of all policies of property, casualty, worker's compensation, product
liability, general liability and other insurance as maintained by the Company
and its Subsidiaries. All such policies are valid, outstanding and enforceable
and no notice of cancellation or termination has been received with respect to
any such policy.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. Prior
to the Effective Time and except as provided in Section 7.10 or the Transition
Agreement, unless Parent shall otherwise agree in writing after written notice
provided by the Company specifying in reasonable detail the basis for any action
by the Company or its Subsidiaries outside the scope of agreed upon activities
set forth in this Section 6.1 and at Parent's election, a meeting with officials
from the Company or its Subsidiaries, as the case may be, to discuss the basis
for such action:
(i) the Company shall, and shall cause its Subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
the same manner as heretofore conducted, and shall, and shall cause its
Subsidiaries to, use their diligent efforts to preserve intact their
present business organizations, keep available the services of their
present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and ongoing businesses shall be unimpaired at the
Effective Time. The Company shall, and shall cause its Subsidiaries to (A)
maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (B) comply in all material
respects with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its Subsidiaries; (C) maintain and keep its
properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted; and (D) perform in all material respects
its obligations under all contracts and commitments to which it is a party
or by which it is bound, in each case other than where the failure to so
maintain, comply or perform, either individually or in the aggregate, would
not reasonably be expected to result in a Company Material Adverse Effect;
(ii) the Company shall not and shall not propose to (A) sell or pledge
or agree to sell or pledge any capital stock owned by it in any of its
Subsidiaries, (B) amend its Third Amended Articles of Incorporation or
Regulations, (C) split, combine or reclassify its outstanding capital stock
or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of
the Company, or declare, set aside or pay any dividend or other
distribution payable in cash, stock or property (other than dividends
declared, set aside or paid in a manner consistent with the Company's past
practice), or (D) directly or indirectly redeem, purchase or otherwise
acquire or agree to redeem, purchase or otherwise acquire any shares of
Company capital stock;
(iii) the Company shall not, nor shall it permit any of its
Subsidiaries to, (A) issue, deliver or sell or agree to issue, deliver or
sell any additional shares of, or rights of any kind to acquire any shares
of, its capital stock of any class, or any option, rights or warrants to
acquire, or securities convertible into, shares of capital stock other than
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issuances of Company Common Stock pursuant to the exercise of Stock
Options, (B) except as provided for in the Company's capital expenditure
budget for the fiscal year ending September 30, 1999 (the "Capital
Expenditure Budget"), acquire, lease or dispose or agree to acquire, lease
or dispose of any capital assets in excess of $1,000,000 or any other
assets other than in the ordinary course of business, (C) incur additional
indebtedness other than in the ordinary course of business for working
capital purposes or as provided for in the Capital Expenditure Budget or
encumber or grant a security interest in any asset in connection with such
indebtedness; or (D) enter into any binding contract, agreement, commitment
or arrangement with respect to any of the foregoing;
(iv) the Company shall not, nor shall it permit any of its
Subsidiaries to, acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof; provided, however, that if after
notice provided by the Company to Parent, Parent fails to agree to any such
merger, consolidation or acquisition and this Agreement is later
terminated, Parent and its respective Affiliates shall be precluded from
undertaking such merger, consolidation or acquisition for a period of three
(3) years following the date of such termination;
(v) except as set forth in Schedule 6.1 of the Company Disclosure
Schedule, the Company shall not, nor shall it permit, any of its
Subsidiaries to, except as required to comply with applicable law and
except as provided in Section 7.4 hereof, (A) adopt, enter into, terminate,
expand the applicability of or amend any bonus, profit sharing,
compensation, severance, termination, stock option, pension, retirement,
deferred compensation, employment or other Company Benefit Plan, agreement,
trust, fund or other arrangement for the benefit or welfare of any
director, officer or current or former employee, (B) increase in any manner
the compensation or fringe benefit of any director, officer or employee
(except for normal increases in the ordinary course of business that are
consistent with past practice and that, in the aggregate, do not result in
a material increase in benefits or compensation expense to the Company and
its Subsidiaries relative to the level in effect prior to such amendment),
(C) pay any benefit not provided under any existing plan or arrangement,
(D) grant any awards under any bonus, incentive, performance or other
compensation plan or arrangement or Company Benefit Plan (including,
without limitation, the grant of stock options, stock appreciation rights,
stock based or stock related awards, performance units or restricted stock,
or the removal of existing restrictions in any benefit plans or agreements
or awards made thereunder) except in the ordinary course of business or in
a manner consistent with past practice, (E) take any action to fund or in
any other way secure the payment of compensation or benefits under any
employee plan, agreement, contract or arrangement or Company Benefit Plan
other than in the ordinary course of business consistent with past
practice, or (F) adopt, enter into, amend or terminate any binding
contract, agreement, commitment or arrangement to do any of the foregoing;
and
(vi) the Company shall not, nor shall it permit any of its
Subsidiaries to, make any investments in non-investment grade securities;
provided, however, that the Company will be permitted to create new wholly
owned Subsidiaries in the ordinary course of business.
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Section 6.2 NOTICE OF BREACH. Each party shall promptly give written
notice to the other party upon becoming aware of the occurrence or, to its
knowledge, impending or threatened occurrence, of any event which would cause or
constitute a breach of any of its representations, warranties or covenants
contained or referenced in this Merger Agreement and will use its best efforts
to prevent or promptly remedy the same. Any such notification shall not be
deemed an amendment of the Company Disclosure Schedule or the Parent and Sub
Disclosure Schedule.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 ACCESS AND INFORMATION; ENVIRONMENTAL AND YEAR 2000
COMPLIANCE.
(a) Upon reasonable notice delivered to and at reasonable times scheduled
as soon as practicable following such notice by the Company's Vice
President-Finance all in a manner that will minimize disruptions of the business
and operations of the Company and its Subsidiaries and that is sensitive to time
and resource demands of the peak business periods of the Company's pool
equipment segment, (i) between the date of this Agreement and the Cut-Off Date
(as defined in Section 7.1(b) below), the Company will give Parent and its
authorized representatives, including Dames & Moore Group or another mutually
agreed upon nationally recognized environmental consultant ("Parent's
Environmental Consultant") and Deloitte & Touche LLP or another mutually agreed
upon nationally recognized year 2000 consultant ("Parent's Year 2000
Consultant"), access to all offices and other facilities and to senior
management of it and its Subsidiaries, and will cause its officers and those of
its Subsidiaries to furnish Parent with (A) such financial, environmental and
operating data and other information with respect to the Company and its
Subsidiaries as Parent may from time to time reasonably request, or (B) any
other financial, environmental and operating data which materially impacts the
Company and its Subsidiaries and (ii) between the period beginning on the
Cut-Off Date and continuing through the Effective Time, the Company will give
Parent full and complete access to the Company's continuing businesses,
personnel and records, including, without limitation, a review of business
plans, major customers and suppliers, potential synergies and cost savings,
post-acquisition management and organizational configuration, key employees, and
capital plans. Notwithstanding the foregoing if during the period beginning on
the date of this Agreement and ending on the Cut-Off Date, the parties
reasonably believe that the Established Claims (as determined in Section 7.1(b)
below) will not exceed the Claim Basket (as defined and determined in Section
7.1(b) below), then the Company will accommodate (subject to the notice
requirements and sensitivities described above) increased due diligence as
contemplated in clause (ii) above by the Parent prior to the Cut-Off Date.
Without limiting the foregoing, between the date of this Merger Agreement and
the Effective Time, the Company promptly will provide Parent with monthly
management reports, including interim financial statements of the Company, and
such other management reports as and when they are available.
(b) In connection with the performance of its due diligence, Parent shall
have the right at any time prior to the thirtieth day following the date of this
Agreement (the "Cut-Off Date") to deliver to the Company a written claim (the
"Claim Notice") specifying an amount reasonably determined to be necessary to
indemnify Parent for (i) the Company's Environmental Non-Compliance Costs (as
defined in Section 7.1(c)(ii) below), or (ii) the Company's Year 2000
Non-Compliance Costs (as defined in Section 7.1(c)(iv) below);
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provided, however, that if Parent's Environmental Consultant, based on its
initial environmental investigation, reasonably determines that additional
environmental investigation is required to assess the Company's Environmental
Non-Compliance Conditions (as defined in Section 7.1(c)(i) below), then Parent
shall have an additional fifteen (15) day period in which to deliver to the
Company a Claim Notice with respect to the Company's Environmental
Non-Compliance Conditions and the "Cut-Off Date" shall mean the forty-fifth day
following the date of this Agreement. The Claim Notice must set forth in
reasonable detail the nature of the claim and be accompanied by reports of
Parent's Environmental Consultant and Parent's Year 2000 Consultant with respect
to the Company's Environmental Non-Compliance Conditions and Year 2000
Non-Compliance Conditions (as defined in Section 7.1(c)(iii) below) providing
reasonable backup for such claims. If the cost of any claim resulting from the
Environmental Non-Compliance Conditions at a Company property or location is
equal to or exceeds $1,000,000 (an "Extraordinary Claim"), then the Company
shall have five (5) days after the Company's receipt of the Claim Notice to
provide Parent with a written notice disputing such Extraordinary Claims (a
"Counter Notice"). After providing a Counter Notice to Parent, the Company shall
have the right to retain Earth Sciences Consultants, Inc. ("Company's
Environmental Consultant") to consult, for a period of (15) days after the
Company's receipt of the Claim Notice, with Parent's Environmental Consultant as
to the appropriateness of, and the amount of costs of remediation associated
with, such Extraordinary Claims as set forth in Parent's Environmental
Consultant's Report. Within five (5) days after the end of such fifteen (15) day
period, Parent shall provide to the Company a revised Claim Notice (the "Final
Claim Notice") reflecting any modifications Parent's Environmental Consultant
have made, in their sole discretion, to their report after taking into account
such consultation with Company's Environmental Consultant. The dollar amount of
damages with respect to claims for the Company's Environmental Non-Compliance
Conditions and Year 2000 Non-Compliance Conditions (each, an "Established
Claim") shall be (i) the dollar amount of damages claimed by Parent as set forth
in its Claim Notice in the case of claims for the Company's Year 2000
Non-Compliance Conditions and (ii) the dollar amount of damages claimed by
Parent as set forth in its Claim Notice, or if such Claim Notice is disputed by
the Company, as set forth in the Final Claim Notice, in the case of claims for
the Company's Environmental Non-Compliance Conditions. If, as of ten (10) days
after delivery of the Final Claim Notice to the Company, the sum of all
Established Claims is less than the amount (the "Claim Basket") equal to (x)
$5,000,000 less (y) any Excess Transaction Costs (as determined pursuant to
Section 10.3(c)), then Parent agrees to absorb all such costs without further
remedy. If, on the other hand, as of ten (10) days after delivery of the Final
Claim Notice to the Company, the sum of all Established Claims equals or exceeds
the Claim Basket, then each of the Parent and the Company shall have the right
to terminate this Agreement pursuant to Sections 9.1(d)(ii) and 9.1(e)(ii),
respectively. Notwithstanding the foregoing, if the dollar amount of damages
with respect to claims relating to the Company's Environmental Non-Compliance
Conditions and Year 2000 Non-Compliance Conditions, as set forth in either the
Claim Notice, or if such Claim Notice is disputed by the Company the Final Claim
Notice, equals or exceeds the Claim Basket, then the Company shall have the
right to terminate this Agreement pursuant to Section 9.1(d)(ii) immediately
upon receipt of such a Claim Notice. This Section 7.1(b) shall constitute
Parent's sole and exclusive remedy with regard to the Company's Environmental
Non-Compliance Conditions and Year 2000 Non-Compliance Conditions and the
Company's sole and exclusive remedy with respect to disputes relating to claims
with respect to the
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Company's Environmental Non-Compliance Conditions and Year 2000 Non-Compliance
Conditions.
(c) For purposes of this Section 7.1, capitalized terms have the following
meanings:
(i) "Environmental Non-Compliance Condition" shall mean (A) the
presence of a hazardous substance discharge at any property owned, leased
or previously owned or leased by the Company or its Subsidiaries or their
predecessors in interest or at any location where the Company or its
Subsidiaries could be held responsible for investigation or cleanup
activities resulting from actual or alleged offsite disposal of hazardous
substances or (B) non-compliance with any federal, state, local or foreign
statute, regulation, administrative order, rule, law, license, permit or
ordinance concerning human health or safety or pollution or protection of
the environment, including, without limitation, all those relating to the
presence, use, production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, testing, processing, emission,
reporting, notification, discharge, release, threatened release, control,
or clean-up of any hazardous materials, substances or wastes, including,
for the purposes of this Section 7.1(c)(i), actual and reasonably
anticipated fines, penalties and forfeitures related to such Environmental
Non-Compliance, as such statutes, regulations and ordinances are enacted
and in effect on or prior to the Cut-Off Date.
(ii) "Environmental Non-Compliance Costs" shall mean an amount
reasonably determined based on good faith estimates and assumptions by
Parent and Parent's Environmental Consultant to be necessary to indemnify
Parent for any known or reasonably anticipated claims, losses, damages,
costs (including attorneys' and consultants' fees and expenses) associated
with any action that would need to be taken to evaluate, defend a
proceeding, investigate, remediate or otherwise respond to, or liabilities
resulting from, an Environmental Non-Compliance Condition, that (i) is the
subject of an environmental claim by a third party, (ii) in the opinion of
Parent's environmental counsel, imposes upon the Company or its
Subsidiaries a duty to act, or (iii) in the opinion of Parent's
Environmental Consultant or environmental counsel, is of a nature or
severity that it is proper environmental compliance practice or necessary
to act to avoid the risk of either non-compliance with environmental law or
for the avoidance or mitigation of any environmental claims.
(iii) "Year 2000 Non-Compliance Condition" shall mean (A) with respect
to Date Data (as defined below), the failure of such data to be in proper
format for all dates in the twentieth and twenty-first centuries, and (B)
with respect to Date Sensitive Systems (as defined below), the inability of
each such system to accurately process all Date Data, including for the
twentieth and twenty-first centuries, without loss of any functionality or
performance, including but not limited to calculating, comparing,
sequencing, storing and displaying such Date Data, when used as a
stand-alone system or in combination with other software or hardware. As
used herein, (x) "Date Data" means any data of the Company of any type that
includes date information or which is otherwise derived from, dependent on
or related to date information, and (y) "Date Sensitive System" means any
software, microcode or hardware system or component or other personal
property or equipment, including any electric or electronically controlled
system or component, that processes any Date Data and that is installed, in
development or on order by the Company or any Subsidiary of the Company for
their internal use, or which the
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Company or any Subsidiary of the Company sells, leases, licenses, assigns
or otherwise provides, or the provision or operation of which the Company
and any Subsidiary of the Company provides the benefit, to its customers,
vendors, suppliers, affiliates or any other third party.
(iv) "Year 2000 Non-Compliance Cost" shall mean an amount reasonably
determined to be necessary based on good faith estimates and assumptions by
Parent or Parent's Year 2000 Consultant to be necessary to indemnify Parent
for any known or reasonably anticipated claims, losses, damages, costs
(including attorneys' and consultants' fees and expenses) associated with
any actions to avoid disruption of the Company's or its Subsidiaries'
business as a result of, or liabilities resulting from a Year 2000
Non-Compliance Condition; except as provided for in, or demonstrated by the
Company to be part of, the Capital Expenditure Budget.
Section 7.2 SHAREHOLDERS' MEETING; FILINGS. (a) In connection with the
Shareholders' Meeting, the Company shall (i) use its reasonable efforts to
obtain the necessary approval by its shareholders of this Merger Agreement and
the transactions contemplated hereby and (ii) otherwise comply in all material
respects with all legal requirements applicable to such meeting.
(b) Parent and the Company shall make all necessary filings with respect to
the Merger, under the Securities Act and the Exchange Act and the rules and
regulations thereunder, under applicable blue sky or similar securities laws and
shall use all reasonable efforts to obtain required approvals and clearances
with respect thereto.
Section 7.3 EMPLOYMENT ARRANGEMENTS. After the Effective Time, Parent
shall, or shall cause the Surviving Corporation to, honor in accordance with
their terms, all written or announced employment, severance, consulting and
other compensation contracts between the Company or any of its Subsidiaries and
any current or former director, officer or employee thereof, and all provisions
for vested benefits or other vested amounts earned or accrued through the
Effective Time under any Company Benefit Plan, each as of the date hereof except
for changes thereto which are (i) not material, (ii) permitted by this Merger
Agreement, or (iii) otherwise agreed to by the parties hereto.
Section 7.4 EMPLOYEE BENEFITS. Until December 31, 2000, Parent shall
provide, or shall cause the Surviving Corporation to provide, generally to the
officers and employees of the Surviving Corporation and its Subsidiaries,
employee benefits, including, without limitation, pension benefits, health and
welfare benefits, severance arrangements, stock option plans and other executive
compensation arrangements, on terms and conditions in the aggregate that are at
least as favorable to employees as those provided under the Company Benefit
Plans as of the date hereof. To the extent Parent provides employee benefit
plans or arrangements maintained by the Parent to employees of the Surviving
Corporation and its Subsidiaries, Parent will give full credit for purposes of
eligibility and vesting under such employee benefit plans or arrangements for
such employees' service with the Company or its Subsidiaries.
Section 7.5 INDEMNIFICATION. (a) From and after the Effective Time,
Parent shall indemnify, defend and hold harmless the officers, directors and
employees of the Company and its Subsidiaries (the "Indemnified Parties")
against all losses, expenses, claims, damages or liabilities (i) arising out of
the transactions contemplated by this Merger Agreement or arising as a result
thereof or (ii) otherwise arising prior to the Effective Time to the fullest
extent, in the case of (i) or (ii), permitted or required under (A) applicable
law, (B) any
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indemnification agreements between the Company and any such person and (C) the
Company's Third Amended Articles of Incorporation and Regulations as filed in
the Company SEC Reports as of the Effective Time. Notwithstanding the foregoing,
Parent shall have no responsibility to indemnify, defend or hold harmless the
Indemnified Parties against any losses, expenses, claims, damages or liabilities
(x) arising out of the transactions contemplated by the Split-Off and the
Transition Agreement (including, without limitation, any liability with respect
to the Form S-1 (or any other registration statement filed pursuant to the terms
of the Transition Agreement) under the Securities Act) or (y) arising out of the
Company Proxy Statement.
(b) From and after the Effective Time, A&S shall indemnify, defend and hold
harmless Parent, the Company and their Subsidiaries, officers, directors,
employees, agents and representatives against all losses, expenses, claims,
damages or liabilities (i) arising out of the Split-Off and the Transition
Agreement (including, without limitation, any liability with respect to the Form
S-1 (or any other registration statement filed pursuant to the terms of the
Transition Agreement) under the Securities Act) or (ii) arising out of the
Company Proxy Statement, except, in each case, for materials contained in the
Form S-1 (or such other registration statement) or the Company Proxy Statement
provided in writing by the Parent to the Company. Notwithstanding the foregoing,
A&S shall have no responsibility to indemnify, defend, or hold harmless the
Company, its Subsidiaries, the Sub, Parent and each of their respective
directors, officers, employees, representatives, advisors, agents and Affiliates
with respect to any claims for Taxes arising out of the Split-Off and the
Transition Agreement, except to the extent otherwise provided in the Tax Sharing
Agreement.
(c) For a period of three (3) years after the Effective Time, Parent agrees
to cause the Surviving Corporation to maintain in effect the current policies of
directors and officers liability insurance maintained by the Company (provided
that Parent may substitute therefor policies with reputable and financially
sound carriers of at least the same coverage and amounts containing terms and
conditions which are no less advantageous) with respect to claims arising from
or related to facts or events which occurred at or before the Effective Time.
(d) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Merger Agreement is
commenced, whether before or after the Effective Time, the parties hereto agree
to cooperate and use their respective reasonable efforts to vigorously defend
against and respond thereto.
(e) The provisions of this Section 7.5 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
Section 7.6 CONSENTS. Each of the parties shall cooperate and use its
reasonable best efforts to make all filings and obtain as promptly as
practicable all consents of any Governmental Entity or any other person required
in connection with, and waivers of any violations or rights of termination that
may be caused by, the consummation of the transactions contemplated by this
Agreement. Each of the parties hereto will furnish to the other party such
necessary information and reasonable assistance as such other persons may
reasonably request in connection with the foregoing.
Section 7.7 ANTITRUST FILINGS.
(a) In addition to and without limiting the agreements of Parent and Sub
contained in Section 7.6 hereof, Parent, Sub and the Company will (i) take
promptly all actions necessary
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to make the filings required of Parent, Sub or any of their affiliates under the
applicable Antitrust Laws (as defined in Section 7.7(d) hereof), (ii) comply at
the earliest practicable date with any request for additional information or
documentary material received by Parent, Sub or any of their affiliates from the
Federal Trade Commission or the Antitrust Division of the Department of Justice
pursuant to the HSR Act and from the Commission or any other Governmental Entity
pursuant to Antitrust Laws, and (iii) cooperate with the Company in connection
with any filing of the Company under applicable Antitrust Laws and in connection
with resolving any investigation or other inquiry concerning the transactions
contemplated by this Agreement or the Ancillary Agreements commenced by any of
the Federal Trade Commission, the Antitrust Division of the Department of
Justice, state attorneys general, the Commission, or any other Governmental
Entity.
(b) In furtherance and not in limitation of the covenants of Parent and Sub
contained in Section 7.6 and Section 7.7(a) hereof, Parent, Sub and the Company
shall each use all reasonable efforts to resolve such objections, if any, as may
be asserted with respect to the Split-Off, the Merger or any other transactions
contemplated by this Agreement or the Ancillary Agreements under any Antitrust
Law. If any administrative, judicial or legislative action or proceeding is
instituted (or threatened to be instituted) challenging the Split-Off, the
Merger or any other transactions contemplated by this Agreement or the Ancillary
Agreements as violative of any Antitrust Law, Parent, Sub and the Company shall
each cooperate to contest and resist any such action or proceeding.
(c) Each of the Company, Parent and Sub shall promptly inform the other
party of any material communication received by such party from the Federal
Trade Commission, the Antitrust Division of the Department of Justice, the
Commission, any state attorney general or any other Governmental Entity
regarding any of the transactions contemplated hereby. Parent and/or Sub will
promptly advise the Company with respect to any understanding, undertaking or
agreement (whether oral or written) which it proposes to make or enter into with
any of the foregoing parties with regard to any of the transactions contemplated
hereby.
(d) "Antitrust Law" means the Sherman Act, as amended, the Clayton Act, as
amended, the HSR Act, the Federal Trade Commission Act, as amended, and all
other federal, state and foreign statutes, rules, regulations, orders, decrees,
administrative and judicial doctrines, and other laws that are designed or
intended to prohibit, restrict or regulate actions having the purpose or effect
of monopolization or restraint of trade.
Section 7.8 ADDITIONAL AGREEMENTS. (a) Subject to the terms and
conditions herein provided (including, without limitation, Section 7.6), each of
the parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Merger Agreement, including,
without limitation, (i) cooperating in the preparation and filing of the Company
Proxy Statement and any amendments thereof and (ii) using all reasonable efforts
to obtain all necessary waivers, consents and approvals, to effect all necessary
registrations and filings (including, but not limited to, filings with all
applicable Governmental Entities) and to lift any injunction or other legal bar
to the Merger (and, in such case, to proceed with the Merger as expeditiously as
possible), and the Split-Off. Notwithstanding the foregoing, but subject to
Section 7.6, there shall be no action required to be taken and no action will be
taken in order to consummate and make effective the transactions contemplated by
this Merger Agreement or the Transition Agreement if such action, either alone
or together with
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another action, would be reasonably likely to result in a Company Material
Adverse Effect or a Parent Material Adverse Effect.
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Merger Agreement, the
proper officers and/or directors of Parent, the Company and the Surviving
Corporation shall take all such necessary action.
Section 7.9 NO SOLICITATION. (a) Neither the Company nor any of its
Subsidiaries shall, directly or indirectly, take (nor shall the Company
authorize or permit its Subsidiaries, officers, directors, employees,
representatives, investment bankers, attorneys, accountants or other agents or
affiliates, to take) any action to (i) encourage, solicit or initiate the
submission of any Acquisition Proposal (as defined below), (ii) enter into any
agreement with respect to any Acquisition Proposal or (iii) participate in any
way in discussions or negotiations with, or furnish any information to, any
person in connection with, or take any other action to facilitate any inquiries
or the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Acquisition Proposal. The Company will promptly communicate to
Parent that such a solicitation or an inquiry has been received by the Company,
or that any such information has been requested from it or that such
negotiations or discussions have been sought to be initiated with it and will
keep Parent reasonably informed of the status and terms of any Acquisition
Proposal. As used herein, "Acquisition Proposal" shall mean any proposed (A)
merger, consolidation, share exchange or similar transaction involving the
Company or its Subsidiaries, (B) sale, lease or other disposition, directly or
indirectly, by merger, consolidation, share exchange or otherwise of assets of
the Company or its Subsidiaries representing 20% or more of the consolidated
assets of the Company and its Subsidiaries (other than A&S), (C) issue, sale or
other disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 20% or
more of the voting power of the Company, or (D) transaction (including a tender
offer or exchange offer) in which any person would acquire beneficial ownership
(as such term is defined in Rule 13d-3 under the Exchange Act) of, or the right
to acquire beneficial ownership, of (whether itself, as a member of any "group"
(as such term is defined under the Exchange Act) or otherwise) 20% or more of
any class of equity securities of the Company or its Subsidiaries.
(b) Notwithstanding anything in this Merger Agreement to the contrary
(including without limitation clause (a) of this Section 7.9), the Company's
board of directors may engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any Person
relating to, or otherwise facilitate any effort or attempt to make or implement,
a written Acquisition Proposal which was not solicited by the Company or which
did not otherwise result in a breach of Section 7.9(a), if and only to the
extent that (i) the Company's board of directors determines in good faith after
consultation with outside counsel that it is necessary to do so to avoid a
breach of its fiduciary duties to the Company or its shareholders under
applicable laws, (ii) the Company's board of directors determines in good faith,
after consultation with its financial advisors and outside counsel, that such
written proposal or indication of interest constitutes a Superior Proposal (as
defined below), (iii) the Shareholders' Meeting shall not have occurred and (iv)
the Company's board of directors provides prior written notice to Parent of the
information referred to in the second sentence of Section 7.9(a). Prior to
furnishing nonpublic information to, or entering into discussions or
negotiations with, any other Persons, the Company shall obtain from such
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person or entity an executed confidentiality agreement with terms no less
favorable, taken as a whole, to the Company than those contained in the
Confidentiality Agreement, dated as of October 21, 1998, between Parent and the
Company (the "Confidentiality Agreement"), but which confidentiality agreement
shall not include any provision calling for an exclusive right to negotiate with
the Company, and the Company shall advise Parent of the nature of such nonpublic
information delivered to such person reasonably promptly following its delivery
to the requesting party. Nothing in this Section 7.9 shall (x) permit either
Parent or the Company to terminate this Merger Agreement (except as specifically
provided in Article IX hereof) or (y) affect any other obligation of Parent or
the Company under this Merger Agreement.
(c) A "Superior Proposal" means a bona fide written Acquisition Proposal
which the Company's board of directors concludes in good faith (after
consultation with its financial advisors and outside counsel), taking into
account all legal, financial, regulatory and other aspects of the proposal and
the person making the proposal, (i) would, if consummated, result in a
transaction that is more favorable to the shareholders of the Company than the
transactions contemplated by this Merger Agreement and (ii) is reasonably
capable of being completed (provided that for purposes of this definition, the
term Acquisition Proposal shall have the meaning assigned to such term in
Section 7.9(a) except that the references to "20%" shall be deemed references to
"50%").
Section 7.10 SPLIT-OFF OF A&S.
(a) Simultaneously with the execution hereof, the Company and A&S are
entering into the Transition Agreement. Immediately prior to the Closing Date,
the Company, A&S and certain other parties will enter into the Tax Sharing
Agreement. From and after the Effective Time, Parent shall cause the Surviving
Corporation to perform any and all obligations and agreements of the Company set
forth herein or in the Ancillary Agreements or in any other agreements
contemplated herein or therein.
(b) The Company, as promptly as practicable, shall use its best efforts to
cause the shares of A&S to be registered pursuant to the Securities Act and
thereafter effect the Split-Off in accordance with the terms of the Transition
Agreement including, without limitation, by preparing and filing a registration
statement on Form S-1 (or any other registration statement contemplated to be
filed pursuant to the terms of the Transition Agreement) and using its
respective best efforts to cause such registration statement to be declared
effective and preparing and making such other filings as may be required under
applicable state securities laws. The Company shall promptly provide to Parent
copies of all filings made with the Commission in connection with the Split-Off,
including, without limitation, the Form S-1 (or any other registration statement
contemplated to be filed pursuant to the terms of the Transition Agreement) and
any amendments thereto, all comments made by the Commission with respect to such
filings and all Company responses to such Commission comments. Prior to making
such filings with the Commission or entering into any other agreement with A&S
other than the Transition Agreement, the Company shall consult with Parent with
respect to such filings and other agreements and provide Parent with a
reasonable opportunity to comment on such filings and other agreements.
(c) Parent shall, and shall cause the Surviving Corporation to, treat the
Split-Off for purposes of all federal and state taxes as an integral part of the
Merger and thus report the Split-Off as a redemption, for purposes of Section
302(a) of the Code, of a number of shares
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of Company Common Stock equal in value to the value of the A&S Common Stock
distributed in the Split-Off.
(d) The treatment of any decrease in the net tax benefit expected to be
received by Parent in this Merger as a result of the Split-Off is set forth in
Section 4 of the Tax Sharing Agreement and the treatment of any increase in the
net tax benefit expected to be received by Parent in this Merger as a result of
the Split-Off is set forth in Section 4.1 of the Transition Agreement.
(e) Prior to the Effective Time, the Company and A&S may elect to form a
holding company for the ownership of the A&S Common Stock. In such event, (i)
the Company shall transfer the shares of A&S Common Stock to the holding company
and shares of common stock of the holding company will be issued in substitution
of the shares of A&S Common Stock in the Split-Off and (ii) the benefits and
obligations of A&S from the transactions contemplated by the Transition
Agreement and Tax Sharing Agreement shall inure to and be binding upon the
holding company; provided that A&S shall not be released from its obligations
under such Agreements.
Section 7.11 CONFIDENTIALITY. Parent, Sub and the Company agree that the
provisions of the Confidentiality Agreement shall remain binding and in full
force and effect (subject, however, to the provisions of Section 7.9(b) hereof)
and that the terms of the Confidentiality Agreement are incorporated herein by
reference.
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) This Merger Agreement and the transactions contemplated hereby
shall have been approved and adopted by the requisite vote of the holders
of the Company Common Stock.
(b) No statute, rule, regulation, order or decree shall have been
enacted, entered, promulgated or enforced by any court or governmental
authority which prohibits or materially restricts the consummation of the
Merger.
(c) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated and any
authorization, consent or approval required under any Antitrust Law shall
have been obtained or any waiting period applicable to the review of the
transactions contemplated hereby shall have expired or been terminated.
(d) The Split-Off Consideration shall have been deposited with the
Depositary.
(e) No preliminary or permanent injunction or other order by any court
or other judicial or administrative body of competent jurisdiction which
prohibits or prevents the consummation of the Merger shall have been issued
and remain in effect (each party, subject to Section 7.6, agreeing to use
its best efforts to have any such injunction lifted).
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Section 8.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the additional following
conditions, unless waived by the Company:
(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Merger Agreement and the Transition Agreement
required to be performed on or prior to the Effective Time.
(b) The representations and warranties of Parent and Sub contained in
this Merger Agreement shall be true in all material respects (except that
representations and warranties that expressly include a standard of
materiality shall be true in all respects) when made and on and as of the
Effective Time as if made on and as of such date, except for
representations and warranties which are by their express provisions made
as of a specific date or dates, which were or will be true in all material
respects (except that representations and warranties that expressly include
a standard of materiality were or will be true in all respects) at such
time or times as stated therein.
(c) The Company shall have received a certificate of the President or
Chief Executive Officer or a Vice President of Parent to the effect that
each of the conditions specified above in Sections 8.2(a) and (b) is
satisfied in all respects.
(d) The Cash Consideration shall have been deposited with the
Depositary.
Section 8.3 CONDITIONS TO OBLIGATION OF PARENT AND SUB TO EFFECT THE
MERGER. The obligation of Parent and Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the additional following
conditions, unless waived by Parent:
(a) The Company and A&S shall have performed in all material respects
their agreements contained in this Merger Agreement and the Transition
Agreement required to be performed on or prior to the Effective Time.
(b) The representations and warranties of the Company contained in
this Merger Agreement shall be true in all material respects (except that
representations and warranties that expressly include a standard of
materiality shall be true in all respects) when made and on and as of the
Effective Time as if made on and as of such date, except for
representations and warranties which are by their express provisions made
as of a specific date or dates which were or will be true in all material
respects (except that representations and warranties that expressly include
a standard of materiality were or will be true in all respects) at such
date or dates.
(c) Parent and Sub shall have received a certificate of the President
and Chief Executive Officer or the Chief Financial Officer of the Company
to the effect that each of the conditions specified in Sections 8.3(a) and
(b) is satisfied in all respects.
(d) Parent shall be reasonably satisfied with the final form of
promissory note referred to in Section 4(b)(v) of the Tax Sharing
Agreement, which promissory note shall be prepared by Parent and A&S in a
manner consistent with the terms set forth in Exhibit A to the Tax Sharing
Agreement.
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ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER,
Section 9.1 TERMINATION. This Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after approval by the shareholders of the Company:
(a) by mutual consent of the board of directors of Parent and the
board of directors of the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before September 30, 1999; provided, that the terminating
party is not otherwise in material breach of its representations,
warranties or obligations under this Merger Agreement;
(c) by Parent or the Company if any court of competent jurisdiction in
the United States or other United States governmental body shall have
issued a final order, decree or ruling or taken any other final action
restraining, enjoining or otherwise prohibiting the consummation of the
Split-Off or the Merger and such order, decree, ruling or other action is
or shall have become nonappealable;
(d) by the Company (i) if any of the conditions specified in Sections
8.1 and 8.2 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction or (ii) if the sum of
Established Claims exceeds the Claim Basket, provided, however, that prior
to the exercise of this right of termination by the Company, Parent shall
have the right to waive the Claim Basket and elect to proceed with the
transactions contemplated by this Agreement without any adjustment to the
Cash Consideration; provided, further, that it shall be a condition to
termination by the Company pursuant to this Section 9.1(d)(ii) that the
Company shall have made all payments to Parent required by Section
10.3(b)(iii)(y);
(e) by Parent (i) if any of the conditions specified in Sections 8.1
and 8.3 have not been met or waived by Parent at such time as such
condition is no longer capable of satisfaction or (ii) if the sum of
Established Claims exceeds the Claim Basket, provided, however, that prior
to the exercise of this right of termination by the Parent, the Company
shall have the right to elect to make a financial adjustment to the Cash
Consideration in an amount equal to the difference between the sum of
Established Claims and the Claim Basket;
(f) by Parent if the Company's board of directors shall have
withdrawn, modified in a manner adverse to Parent, or refrained from making
its recommendation concerning the Merger referred to in Section 3.5 hereof,
or shall have disclosed its intention to change such recommendation;
provided, that (i) Parent is not otherwise in material breach of its
representations, warranties or obligations under this Merger Agreement and
(ii) Parent has sufficient funds to enable it to finance the consummation
of the Merger;
(g) by Parent, if there has been a Company Material Adverse Change
other than as a result of the Company's Environmental Non-Compliance
Conditions or Year 2000 Non-Compliance Conditions.
(h) by Parent, upon becoming aware that the Company has entered into a
definitive agreement (other than a confidentiality agreement) providing
for, or if the Company's board of directors approves or recommends, a
Superior Proposal pursuant to Section 7.9;
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(i) by the Company, at any time prior to the Shareholders' Meeting,
upon three business days' notice to Parent, if the Company's Board of
Directors shall approve a Superior Proposal; provided, however, that (i)
the Company shall have complied with Section 7.9 and (ii) prior to any such
termination, the Company shall, and shall cause its financial and legal
advisors to, negotiate with Parent to make such adjustments in the terms
and conditions of this Merger Agreement as would enable Parent to match or
exceed the consideration offered pursuant to such Superior Proposal, net of
amounts payable by the Company under Section 10.3(b), in order to proceed
with the transactions contemplated hereby; provided, further, that it shall
be a condition to termination by the Company pursuant to this Section
9.1(i) that the Company shall have made all payments to Parent required by
Section 10.3(b); or
(j) by either Parent or the Company, if the Shareholders' Meeting
shall have been concluded without having obtained votes of the Company's
shareholders sufficient for the requisite shareholder approval of this
Merger Agreement (provided that the terminating party is not otherwise in
material breach of its obligations under this Merger Agreement).
Section 9.2 EFFECT OF TERMINATION. In the event of termination of this
Merger Agreement by either Parent or the Company, as provided above, this Merger
Agreement shall forthwith become void and (except for the willful breach of this
Merger Agreement by any party hereto) there shall be no liability on the part of
either the Company, Parent or Sub or their respective officers, directors or
shareholders; provided that Sections 6.1(iv), 7.11, 9.2, 10.3, 10.7 and 10.8
shall survive the termination.
Section 9.3 AMENDMENT. This Merger Agreement may be amended by the
parties hereto, by or pursuant to action taken by their respective boards of
directors, at any time before or after approval hereof by the shareholders of
the Company, but, after such approval, no amendment shall be made which (i)
changes the consideration to be received by any class of capital stock of the
Company as provided in Section 3.1(c), (ii) alters or changes any term of the
Articles of Incorporation of the Surviving Corporation (except for such changes
that could otherwise be adopted by the directors of the Surviving Corporation),
or (iii) in any way materially adversely affects the rights of such
shareholders, without the further approval of such shareholders. This Merger
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
Section 9.4 WAIVER. At any time prior to the Effective Time, the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
may (i) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any documents delivered
pursuant hereto, and (iii) waive compliance with any of the agreements or
conditions contained herein; provided, however, that if such waiver shall
materially adversely affect the rights of the shareholders of the Company, then
no such waiver shall be made without the approval of such shareholders. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid if set forth in an instrument in writing signed on behalf of such party.
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ARTICLE X
GENERAL PROVISIONS
Section 10.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. No representations, warranties or agreements in this Merger
Agreement shall survive the Merger, except for the agreements contained in
Sections 3.3, 3.4, 3.8, 7.3, 7.4, 7.5, 7.6, 7.11, 10.1, 10.3, 10.7 and 10.8.
Section 10.2 NOTICES. All notices or other communications under this
Merger Agreement shall be in writing and shall be given (and shall be deemed to
have been duly given upon receipt) by delivery in person, by cable, telegram,
telex, telecopy or other standard form of telecommunications, or by registered
or certified mail, postage prepaid, return receipt requested, addressed as
follows:
(a) If to the Company, to:
Essef Corporation
c/o Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, Ohio 44024
Facsimile No.: (440) 286-2206
Attention: Mark E. Brody
with a copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114
Facsimile No.: (216) 479-8776
Attention: Mary Ann Jorgenson, Esq.
(b) If to Parent or Purchaser, to:
Pentair, Inc.
Waters Edge Plaza
1500 County Road B2 West
Saint Paul, Minnesota 55113-3105
Facsimile No.: (651) 639-5203
Attention: Richard J. Cathcart
with a copy to:
Pentair, Inc.
Waters Edge Plaza
1500 County Road B2 West
Saint Paul, Minnesota 55113-3105
Facsimile No.: (651) 639-5203
Attention: Louis L. Ainsworth, Esq.
with a copy to:
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5367
Facsimile No.: (414) 297-4900
Attention: Benjamin F. Garmer, III, Esq.
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or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section 10.2.
Section 10.3 FEES AND EXPENSES. (a) Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Merger
Agreement and the transactions contemplated by this Merger Agreement shall be
paid by the party incurring such expenses.
(b) Parent and the Company agree that (i) if the Company shall terminate
this Merger Agreement pursuant to Section 9.1(i); (ii) if (A) Parent or the
Company shall terminate this Agreement pursuant to Section 9.1(b), (B) at the
time of the event giving rise to such termination the Company shall have
received a solicitation or inquiry giving rise to the disclosure obligation set
forth in the second sentence of Section 7.9(a) and (C) within 12 months of the
termination of this Merger Agreement, the Company enters into a definitive
agreement or consummates a merger, consolidation, sale of substantially all of
the assets of the Company or other change in control transaction in connection
with such solicitation or inquiry; (iii) if (A) Parent or the Company shall
terminate this Agreement pursuant to Section 9.1(f) or (h), (B) at the time of
the event giving rise to such termination the Company shall have received an
Acquisition Proposal and (C) within 12 months of the termination of this Merger
Agreement, the Company enters into a definitive agreement with respect to such
Acquisition Proposal or consummates a transaction pursuant to such Acquisition
Proposal; or (iv) if Parent or the Company shall terminate this Merger Agreement
pursuant to Section 9.1(d)(ii) or (e)(ii), as the case may be, then the Company
shall pay to an account designated by Parent in immediately available funds an
amount equal to (x) 3% of the aggregate Cash Consideration to be paid to holders
of Company Common Stock pursuant to Article III in the case of any termination
referred to in clauses (i) or (iii) above; (y) 1 1/2% of the aggregate Cash
Consideration in the case of any termination referred to in clause (ii) above or
(z) an amount equal to the lesser of (1) the actual out-of-pocket costs and
expenses incurred by Parent in connection with this Merger Agreement and (2)
$500,000 in the case of any termination referred to in clause (iv) above. The
Termination Fee shall be paid prior to, and shall be a condition to the
effectiveness of, any termination referred to in clauses (i) or (iv) above. Any
payment required to be made pursuant to clauses (ii) and (iii) above shall be
made on the next business day after such a transaction pursuant to an
Acquisition Proposal is consummated.
(c) To the extent that the fees and expenses incurred after December 31,
1998 by the Company to Rhone Group, Squire, Sanders & Dempsey L.L.P. and other
advisers and service providers of the Company or its Subsidiaries relating to
the Split-Off and the Merger exceed $4,000,000, the amount of the Claim Basket
(as determined pursuant to Section 7.1(b)) shall be reduced by the amount of the
difference between (i) the sum of (x) the fees and expenses relating to the
Split-Off and the Merger actually incurred after December 31, 1998 and (y) a
good faith estimate of the fees and expenses relating to the Split-Off and the
Merger yet to be incurred, and (ii) $4,000,000 ("Excess Transaction Fees"). Two
business days prior to the Cut-Off Date, the Company shall deliver to Parent a
schedule that sets forth the actual fees and expenses relating to the Split-Off
and Merger incurred to date after December 31, 1998 and an estimate of the
additional fees and expenses to complete the Split-Off and the Merger.
Section 10.4 PUBLICITY. So long as this Merger Agreement is in effect,
Parent, Sub and the Company agree to consult with each other before issuing any
press release or otherwise making any public statement with respect to the
transactions contemplated by this Merger Agreement, and none of them shall issue
any press release or make any public
ANNEXES
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<PAGE> 147
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. The commencement of litigation relating to this Merger Agreement or
the transactions contemplated hereby or any proceedings in connection therewith
shall not be deemed a violation of this Section 10.4.
Section 10.5 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Merger 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 Merger
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.
Section 10.6 INTERPRETATION. (a) When a reference is made in this Merger
Agreement to subsidiaries of Parent or the Company, the word "Subsidiaries"
means corporations more than 50% of whose outstanding voting securities are
directly or indirectly owned by Parent or the Company, as the case may be;
provided, however, that in the case of the Company, A&S shall not be considered
as a Subsidiary. The headings contained in this Merger Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Merger Agreement.
(b) As used in this Merger Agreement, "Parent Material Adverse Effect"
shall mean a material adverse effect on the business, properties, assets,
financial condition, and results of operations of Parent and its subsidiaries
taken as a whole (excluding the effect of a change in general economic
conditions).
(c) As used in this Merger Agreement, "Company Material Adverse Effect"
shall mean a material adverse effect on the business, properties, assets,
financial condition, and results of operations of the Company and its
Subsidiaries (other than A&S) taken as a whole (excluding the effect of a change
in general economic conditions).
(d) As used in this Merger Agreement, "knowledge" shall mean, with respect
to the matter in question, the actual knowledge of such matter by an executive
officer, with respect to Parent, and by Thomas B. Waldin, Stuart D. Neidus or
Mark E. Brody, with respect to the Company, as applicable.
(e) The inclusion of an item on any schedule to this Merger Agreement shall
not be deemed to be indicative of the materiality of such item.
Section 10.7 THIRD PARTY BENEFICIARIES. Except as specifically provided
in Section 7.5, this Merger Agreement is not intended to confer upon any other
person any rights or remedies hereunder.
Section 10.8 MISCELLANEOUS. This Merger Agreement (including the
documents and instruments referred to herein) (a) constitutes the entire
agreement and supersedes all other prior agreements and understandings, both
written and oral, among the parties, or any of them, with respect to the subject
matter hereof; (b) shall not be assigned by operation of law or otherwise,
except that Sub shall have the right to assign to Parent or any direct wholly
owned Subsidiary of Parent any and all rights and obligations of Sub under this
Merger Agreement; and (c) shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of Ohio (without giving
effect to the provisions thereof relating to conflicts of law). This Merger
Agreement may be executed in two or more counterparts which together shall
constitute a single agreement.
ANNEXES
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Section 10.9 CURE PERIOD. No party shall have any rights under this
Merger Agreement for any actual or threatened breach of a representation,
warranty, covenant or agreement contained herein, if such breach is capable of
being cured, until (i) the non-breaching party has notified the breaching party
of its determination of the existence (or threatened existence) of a basis for
termination, and (ii) the breaching party shall have had a reasonable time
(considering the nature of the breach and the actions required for cure, but in
no event longer than 15 days) to cure such breach.
Section 10.10 VALIDITY. (a) The invalidity or unenforceability of any
provision of this Merger Agreement shall not affect the validity or
enforceability of the other provisions of this Merger Agreement, which shall
remain in full force and effect.
(b) In the event any court of competent jurisdiction holds any provision of
this Merger Agreement to be null, void or unenforceable, the parties hereto
shall negotiate in good faith the execution and delivery of an amendment to this
Merger Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision and the economic effects thereof.
(c) Each party agrees that, should any court of competent jurisdiction hold
any provision of this Merger Agreement or part hereof to be null, void or
unenforceable, or order any party to take any action inconsistent herewith, or
not take any action required herein, the other party shall not be entitled to
specific performance of such provision or part hereof or to any other remedy,
including but not limited to money damages, for breach thereof or of any other
provision of this Merger Agreement or part hereof as the result of such holding
or order.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
ANNEXES
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IN WITNESS WHEREOF, the parties hereto have caused this Merger Agreement to
be signed by their respective officers thereunder duly authorized all as of the
date first written above.
PENTAIR, INC.
By: /s/ RICHARD J. CATHCART
-----------------------------------
Name: Richard J. Cathcart
Title: Executive Vice President
NORTHSTAR ACQUISITION COMPANY
By: /s/ RICHARD J. CATHCART
-----------------------------------
Name: Richard J. Cathcart
Title: President
ESSEF CORPORATION
By: /s/ THOMAS B. WALDIN
-----------------------------------
Name: Thomas B. Waldin
Title: President
ANNEXES
A-35
<PAGE> 150
EXHIBIT A TO
AGREEMENT AND
PLAN OF MERGER
TRANSITION AGREEMENT
SEE ANNEX B
ANNEXES
<PAGE> 151
EXHIBIT B TO
AGREEMENT AND
PLAN OF MERGER
TAX SHARING AGREEMENT
SEE ANNEX C
ANNEXES
<PAGE> 152
ANNEX B
TRANSITION AGREEMENT
DATED AS OF
APRIL 30, 1999
AMONG
ESSEF CORPORATION,
ANTHONY & SYLVAN POOLS CORPORATION
AND
PENTAIR, INC.
ANNEXES
B
<PAGE> 153
TABLE OF CONTENTS
<TABLE>
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ARTICLE I
DEFINITIONS
Section 1.1. General................................................... 44
Section 1.2. References to Time........................................ 49
ARTICLE II
THE RELATED TRANSACTIONS
Section 2.1. Transfers of Certain Assets and Liabilities............... 50
Section 2.2. Methods of Transfer and Assumption........................ 50
Section 2.3. Company Approval of Certain A&S Actions................... 50
ARTICLE III
THE SPLIT-OFF
Section 3.1. Cooperation and Actions Prior to the Split-Off............ 50
Section 3.2. Net Asset Adjustment...................................... 52
Section 3.3. Actions of A&S Prior to the Cut-Off Date.................. 52
Section 3.4. Post-Cut-Off Date Operations of A&S....................... 52
Section 3.5. The Split-Off............................................. 53
Section 3.6. Termination of Certain Claims............................. 53
Section 3.7. Post-Closing Procedures................................... 53
ARTICLE IV
INTERCOMPANY TRANSACTIONS AND RELATIONSHIPS
Section 4.1. Cash Dividend............................................. 53
Section 4.2. Intercompany Accounts..................................... 54
Section 4.3. Transition Services....................................... 55
ARTICLE V
SURVIVAL AND INDEMNIFICATION
Section 5.1. Survival of Agreements.................................... 55
Section 5.2. Indemnification by A&S.................................... 56
Section 5.3. Indemnification by the Company............................ 57
Section 5.4. Procedure for Indemnification............................. 58
Section 5.5. Miscellaneous Indemnification Provisions.................. 59
Section 5.6. Pending Litigation........................................ 61
Section 5.7. Construction of Agreements................................ 61
</TABLE>
ANNEXES
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<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE VI
CERTAIN ADDITIONAL MATTERS
Section 6.1. Representations or Warranties; Disclaimers................ 61
Section 6.2. Further Assurances; Subsequent Transfers.................. 62
Section 6.3. Use of Names.............................................. 62
Section 6.4. Litigation Relating to Transaction........................ 63
Section 6.5. Operation Prior to Split-Off.............................. 63
Section 6.6. Restrictions on Post-Split-Off Competitive Activities..... 64
ARTICLE VII
ACCESS TO INFORMATION AND SERVICES
Section 7.1. Provision of Corporate Records............................ 64
Section 7.2. Access to Information..................................... 64
Section 7.3. Production of Witnesses................................... 65
Section 7.4. Retention of Records...................................... 65
Section 7.5. Confidentiality........................................... 65
ARTICLE VIII
EMPLOYEE MATTERS
Section 8.1. Employees................................................. 66
Section 8.2. Employee Benefits......................................... 66
Section 8.3. Other Liabilities and Obligations......................... 67
Section 8.4. Preservation of Rights to Amend or Terminate Plans........ 67
Section 8.5. Reimbursement; Indemnification............................ 68
Section 8.6. Nonsolicitation of Employees.............................. 68
Section 8.7. Actions By A&S............................................ 68
ARTICLE IX
INSURANCE
Section 9.1. General................................................... 68
Section 9.2. Certain Insured Claims.................................... 69
ARTICLE X
CONDITIONS; TERMINATION; AMENDMENTS; WAIVERS
Section 10.1. Conditions to Split-Off................................... 69
Section 10.2. Termination............................................... 70
Section 10.3. Amendments; Waivers....................................... 70
</TABLE>
ANNEXES
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<TABLE>
<CAPTION>
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ARTICLE XI
MISCELLANEOUS
Section 11. 1. Survival of Indemnities; Release.......................... 70
Section 11. 2. Entire Agreement.......................................... 71
Section 11. 3. Fees and Expenses......................................... 71
Section 11. 4. Governing Law............................................. 71
Section 11. 5. Notices................................................... 71
Section 11. 6. Successors and Assigns; No Third Party Beneficiaries...... 72
Section 11. 7. Counterparts.............................................. 73
Section 11. 8. Interpretation............................................ 73
Section 11. 9. Schedules................................................. 73
Section 11.10. Legal Enforceability...................................... 73
Section 11.11. Consent to Jurisdiction................................... 73
Section 11.12. Specific Performance...................................... 74
</TABLE>
ANNEXES
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<PAGE> 156
TRANSITION AGREEMENT
THIS TRANSITION AGREEMENT (this "Agreement"), dated as of April 30, 1999,
by and among ESSEF CORPORATION, an Ohio corporation (the "Company"), ANTHONY &
SYLVAN POOLS CORPORATION, an Ohio corporation and an indirect wholly-owned
subsidiary of the Company ("A&S") and PENTAIR, INC., a Minnesota corporation
("Parent").
RECITALS
WHEREAS, the Board of Directors of the Company has determined to implement
certain of the transfers and other transactions contemplated in connection with
the Merger (as hereafter defined) and the Split-Off (as hereafter defined);
WHEREAS, the Board of Directors of the Company has also determined to cause
the Split-Off of shares of A&S Common Stock (as hereafter defined) to the
holders as of the Effective Time (as hereafter defined) of the Company Common
Stock (as hereafter defined) and to the holders of certain Stock Options (as
hereafter defined) all as part of, and in conjunction with, the Merger;
WHEREAS, the Company and A&S have determined that it is desirable to set
forth the principal corporate transactions required to effect such Merger and
Split-Off and to set forth certain other agreements that will govern certain
other matters prior to or following such Split-Off;
WHEREAS, the Company has entered into an Agreement and Plan of Merger,
dated as of the date hereof (the "Merger Agreement"), with Parent and Northstar
Acquisition Company, an Ohio corporation and a wholly-owned subsidiary of Parent
(the "Purchaser"), providing for the Merger (as hereafter defined), as a result
of which the Company, as the corporation surviving the Merger, will become a
wholly-owned subsidiary of Parent; and
WHEREAS, in order to induce the parties to enter into this Agreement and in
consideration of the Company's willingness to enter into the Merger Agreement,
the parties hereto and certain other parties are entering or will enter into the
Tax Sharing Agreement (as hereafter defined) providing for certain ongoing
relationships among the parties;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. GENERAL. For convenience and brevity, certain terms used in
various parts of this Agreement (including the Disclosure Schedule hereto) are
listed in alphabetical order and defined or referred to below (such terms to be
equally applicable to both singular and plural forms of the terms defined or
referred to):
(a) "Action" means any action, claim, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency or commission or any arbitration tribunal.
(b) "Adjustment Calculation" shall have the meaning set forth in Section
3.2(a) hereof.
ANNEXES
B-1
<PAGE> 157
(c) "Affiliate" of any specified person or entity means (x) any director or
officer of, or any person or entity that beneficially owns at least 50% of the
capital stock or other equity interests of, such specified person or entity, or
(y) any other person or entity directly or indirectly controlling, controlled
by, or under common control with, such specified person or entity, at any time
during the period for which the determination of affiliation is being made;
provided that the Company and the Retained Subsidiaries, on the one hand, and
A&S, on the other hand, shall not, after giving effect to the Split-Off, be
deemed to be Affiliates of each other for purposes of this Agreement.
(d) "Agreement" means this Transition Agreement, together with all exhibits
and schedules hereto, as the same may be amended from time to time in accordance
with the terms hereof.
(e) "Asserted Liability" shall have the meaning set forth in Section 5.4(a)
hereof.
(f) "A&S" shall have the meaning set forth in the preamble to this
Agreement.
(g) "A&S Action" shall have the meaning set forth in Section 5.6 hereof.
(h) "A&S Assets" means (i) the assets of A&S set forth on the A&S Balance
Sheet, as adjusted for transactions occurring in the ordinary course of business
in a manner consistent with past practice between December 31, 1998 and the
Effective Time; (ii) the assets listed on Schedule 2.1(a) of the Disclosure
Schedule; and (iii) all right, title and interest, to the extent held by the
Company and its Subsidiaries immediately prior to the Split-Off, with respect to
each of the following items: (A) the A&S Names and A&S Proprietary Name Rights
(such terms, as defined in Section 6.3 hereof) and (B) any Actions commenced by
A&S the subject matter of which is otherwise an A&S Asset or any Action which
relates primarily to an A&S Asset (to the extent such Actions constitute
assets).
(i) "A&S Balance Sheet" means the unaudited consolidated balance of the A&S
Business as of December 31, 1998 set forth in Schedule 1.1(i) of the Disclosure
Schedule.
(j) "A&S Business" means each business and each former business which is or
was conducted by A&S as of the Effective Time or which is or was included within
the A&S Assets.
(k) "A&S Common Stock" means the common stock, without par value, of A&S.
(l) "A&S Employees" means (i) those persons who are employed as officers or
employees of A&S or otherwise employed by A&S immediately prior to, or effective
as of, the Effective Time, (ii) any person employed at the Company's corporate
level prior to the Effective Time listed in, or added any time prior to the
Effective Time to, Schedule 1.1(l) of the Disclosure Schedule who at the
Effective Time is to become an employee of A&S, and (iii) all former officers
and employees of A&S who, immediately prior to the termination of their
employment, were employed by A&S. In the event any person shall have been
employed by A&S, as well as by the Company or any of the Retained Subsidiaries,
such person shall be considered an A&S Employee if at the Effective Time such
person's primary employment shall be with A&S or the A&S Business.
(m) "A&S 401(k) Plan" shall have the meaning set forth in Section 8.2(a)
hereof.
(n) "A&S Indemnified Parties" shall have the meaning set forth in Section
5.3(a) hereof.
ANNEXES
B-2
<PAGE> 158
(o) "A&S Liabilities" means (i) all of the Liabilities of A&S to third
parties and all Liabilities relating to or arising out of the A&S Assets or the
conduct of the A&S Business (in all cases, whether arising before or after the
Effective Time); (ii) the liabilities set forth in the A&S Balance Sheet, as
adjusted for transactions occurring in the ordinary course of business in a
manner consistent with past practice between December 31, 1998 and the Effective
Time; (iii) the liabilities listed in Schedule 2.1(b) of the Disclosure
Schedule; (iv) any Actions commenced by A&S the subject matter of which is
otherwise an A&S Asset or any Action which relates primarily to an A&S Asset (to
the extent such Actions constitute Liabilities); (v) except as otherwise
provided in Article VIII hereof, the Liabilities of the Company and its
subsidiaries, including, without limitation, A&S, in respect of A&S Employees
(in all cases, whether arising before or after the Effective Time); and (vi) all
Liabilities relating to or arising out of the A&S Assets or the conduct of the
A&S Business (in all cases, whether arising before or after the Effective Time)
with respect to which the Company or any Retained Subsidiary has agreed, prior
to the Effective Time, to indemnify any third party in any manner with respect
thereto or has agreed to otherwise be, or is otherwise, liable with respect
thereto, except to the extent the Liability relates to or arises out of any
product purchased by A&S from the Company or any Retained Subsidiary or is
otherwise covered under any warranty provided by the Company or any Retained
Subsidiary with respect to such product.
(p) "A&S Names" shall have the meaning set forth in Section 6.3 hereof.
(q) "A&S Net Assets" means the total assets of A&S minus the total
liabilities of A&S as set forth in the Interim Balance Sheet (excluding any
indebtedness of A&S to the Company or any of its Subsidiaries other than any
liabilities to the Company or any of its Subsidiaries incurred in connection
with the purchase by A&S of swimming pool equipment).
(r) "A&S Proprietary Name Rights" shall have the meaning set forth in
Section 6.3 hereof.
(s) "A&S Subsequent Hire" shall have the meaning set forth in Section
8.6(b) hereof.
(t) "A&S Transferee" shall have the meaning set forth in Section 11.6
hereof.
(u) "A&S Welfare Plans" shall have the meaning set forth in Section 8.2(b)
hereof.
(v) "Casualty Program" means collectively, the series of programs pursuant
to which various insurance carriers provide insurance coverage to the Company
and its Subsidiaries in respect of claims or occurrences relating to workers'
compensation liability, general liability, products liability, automobile
liability and employer's liability for all periods up to the Effective Time.
(w) "Claim Notice" shall have the meaning set forth in Section 5.4(a)
hereof.
(x) "Closing" shall have the meaning set forth in the Merger Agreement.
(y) "Closing Balance Sheet" shall have the meaning set forth in Section 3.7
hereof.
(z) "Closing Date" shall have the meaning set forth in the Merger
Agreement.
(aa) "Company" shall have the meaning set forth in the preamble to this
Agreement.
(ab) "Company Common Stock" means the common stock of the Company, without
par value.
(ac) "Company Dividend" shall have the meaning set forth in Section 4.1
hereof.
ANNEXES
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<PAGE> 159
(ad) "Company Names" shall have the meaning set forth in Section 6.3
hereof.
(ae) "Company Proprietary Name Rights" shall have the meaning set forth in
Section 6.3 hereof.
(af) "Company Proxy Statement" means the proxy statement or information
statement prepared by the Company for distribution to the holders of the
Company's Common Stock in connection with the Merger and Split-Off.
(ag) "Company Subsequent Hire" shall have the meaning set forth in Section
8.6(a) hereof.
(ah) "Company Welfare Plans" shall have the meaning set forth in Section
8.2(b) hereof.
(ai) "Confidentiality Agreement" means the confidentiality agreement dated
as of October 21, 1998 between Parent and the Company.
(aj) "Confidential Information" shall have the meaning set forth in Section
7.5 hereof.
(ak) "Conveyance and Assumption Instrument" means, collectively, the
various agreements, instruments and other documents to be entered into to effect
the transfer of assets and the assumption of liabilities set forth in Article II
hereof.
(al) "Court Order" means any judgment, decree, injunction, order or ruling
of any Governmental Entity that is binding on any person or its property under
applicable Law.
(am) "Cut-Off Date" shall have the meaning set forth in Section 3.2(a)
hereof.
(an) "Disclosure Schedule" means the disclosure schedule dated as of the
date hereof and attached hereto. References to a particular schedule of the
Disclosure Schedule shall only refer or modify the specific Section of this
Agreement to which such Schedule relates (i.e., Schedule 2.1(b) of the
Disclosure Schedule shall refer to or modify only Section 2.1(b) of this
Agreement), unless otherwise expressly set forth herein.
(ao) "Effective Time" shall have the meaning set forth in the Merger
Agreement.
(ap) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
(aq) "Excess Net Tax Benefit" shall have the meaning set forth in Section
4.1(a) hereof.
(ar) "Form S-1" means the registration statement on Form S-1 to be filed by
A&S with the SEC to effect the registration of the A&S Common Stock pursuant to
the Securities Act.
(as) "Governmental Entity" means any United States or any foreign, federal,
state or local government, court, administrative agency or commission or other
governmental or regulatory body or authority.
(at) "Indemnifiable Losses" means, with respect to any claim by an
Indemnified Party for indemnification pursuant to Articles V, VI or VIII hereof,
any and all damages, losses, deficiencies, Liabilities, obligations, penalties,
judgments, settlements, claims, payments, fines, interest, costs and expenses
(including, without limitation, the costs and expenses of any and all Actions,
demands, assessments, judgments, settlements and compromises relating thereto
and the costs and expenses of attorneys', accountants', consultants' and other
professionals', and fees and expenses incurred in the investigation or defense
thereof or the enforcement of rights hereunder), including direct and
consequential damages, but excluding punitive
ANNEXES
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<PAGE> 160
damages (other than punitive damages awarded to any third party against an
Indemnified Party) suffered by such Indemnified Party with respect to such
claim.
(au) "Indemnified Party" means any party which is seeking indemnification
from an Indemnifying Person pursuant to the provisions of Articles V, VI or VIII
hereof.
(av) "Indemnifying Party" means any party hereto from which any Indemnified
Party is seeking indemnification pursuant to the provisions of Articles V, VI or
VIII hereof.
(aw) "Information" shall have the meaning set forth in Section 7.2 hereof.
(ax) "Intercompany Agreements" means any contracts or agreements between
A&S on the one hand, and the Company or any Retained Subsidiary on the other
hand.
(ay) "Interim Balance Sheet" shall have the meaning set forth in Section
3.2(a) hereof.
(az) "Law" means any statute, law, rule, regulation, ordinance, order,
decree or judgment of any Governmental Entity, including, without limitation,
those covering environmental, energy, safety, health, transportation,
telecommunications, recordkeeping, zoning, antidiscrimination, antitrust, wage
and hour, and price and wage control matters.
(ba) "Liability" means, with respect to any party, except as otherwise
expressly provided herein, any direct or indirect liability (whether absolute,
accrued, contingent, reflected on a balance sheet (or in the notes thereto) or
otherwise, and whether known or unknown), indebtedness, obligation, expense,
claim, deficiency, guarantee or endorsement of or by any person (including,
without limitation, those arising under any Law or Action or under any award of
any court, tribunal or arbitrator of any kind, and those arising under any
contract, commitment or undertaking).
(bb) "Merger" shall have the meaning set forth in the Merger Agreement.
(bc) "Merger Agreement" shall have the meaning set forth in the recitals to
this Agreement.
(bd) "Net Asset Increase Adjustment" shall have the meaning set forth in
Section 3.2(b) hereof.
(be) "Notice Period" shall have the meaning set forth in Section 5.4(a)
hereof.
(bf) "Parent" shall have the meaning set forth in the preamble to this
Agreement.
(bg) "Parent Employee" shall have the meaning set forth in Section 8.6(a)
hereof.
(bh) "Parent Indemnified Parties" shall have the meaning set forth in
Section 5.2(a) hereof.
(bi) "Person" or "person" means and includes any individual, partnership,
joint venture, corporation, association, joint stock company, trust,
unincorporated organization or similar entity and any Governmental Entity.
(bj) "Plan" shall have the meaning set forth in Section 8.2(c) hereof.
(bk) "Purchaser" shall have the meaning set forth in the recitals to this
Agreement.
(bl) "Retained Action" shall have the meaning set forth in Section 5.6
hereof.
(bm) "Retained Business" means all businesses of the Company and the
Retained Subsidiaries and all business included within the assets, or obligated
by the liabilities, of the Company and the Retained Subsidiaries (each as
described in the Company's Annual Report
ANNEXES
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on Form 10-K for the year ended September 30, 1998), as conducted by the Company
and such Subsidiaries as of the Effective Time and all former businesses of the
Company and the Retained Subsidiaries; provided that the term "Retained
Business" shall not include the A&S Business, the A&S Assets or the A&S
Liabilities.
(bn) "Retained Employees" shall mean all current and former officers and
employees of the Company and its Subsidiaries, other than the A&S Employees.
(bo) "Retained Subsidiaries" means all of the Subsidiaries of the Company,
other than A&S.
(bp) "SEC" means the U.S. Securities and Exchange Commission.
(bq) "Securities Act" means the Securities Act of 1933, as amended.
(br) "Split-Off" means the issuance of the shares of A&S Common Stock to
holders of Company Common Stock and to holders of Stock Options in connection
with the Merger pursuant to the provisions of the Merger Agreement.
(bs) "Split-Off Conditions" means each of the conditions set forth in
clauses (i) through (vi) of Section 10.1(a) hereof.
(bt) "Stock Options" shall have the meaning set forth in the Merger
Agreement.
(bu) "Subsidiary" or "subsidiary" of any party means (i) a corporation, a
majority of the voting or capital stock of which is as of the time in question
directly or indirectly owned by such party and (ii) any other partnership, joint
venture, association, joint stock company, trust, unincorporated organization or
similar entity, in which such party, directly or indirectly, owns a majority of
the equity interest thereof or has the power to elect or direct the election of
a majority of the members of the governing body of such entity or otherwise has
control over such entity (e.g., as the managing partner of a partnership).
(bv) "Suit" shall have the meaning set forth in Section 11.11 hereof.
(bw) "Tax Sharing Agreement" means the Tax Sharing Agreement, in the form
of Exhibit B to the Merger Agreement, pursuant to which the Parent, the Company
and A&S have provided for certain tax matters, including, without limitation,
indemnification, allocation of tax benefits and filing of tax returns.
(bx) "Transition Services" shall have the meaning set forth in Section 4.3
hereof.
(by) "Transition Services Period" shall have the meaning set forth in
Section 4.3 hereof.
(bz) "Transition Services Invoice" shall have the meaning set forth in
Section 4.3 hereof.
(ca) "Transaction Suit" shall have the meaning set forth in Section 6.4
hereof.
Section 1.2 REFERENCES TO TIME. All references in this Agreement to times
of the day shall be to Eastern Standard Time.
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ARTICLE II
THE RELATED TRANSACTIONS
Section 2.1. TRANSFER OF CERTAIN ASSETS AND LIABILITIES. Subject to the
terms and conditions of this Agreement, at the Effective Time,
(a) the Company shall transfer to A&S (and the Company shall cause
each of its subsidiaries to transfer to A&S) all of their right, title and
interest in and to the assets listed in Schedule 2.1(a) of the Disclosure
Schedule; and
(b) A&S shall assume and shall in due course pay, perform and
discharge (or shall cause to be assumed and cause in due course to be paid,
performed and discharged), the liabilities listed in Schedule 2.1(b) of the
Disclosure Schedule.
Section 2.2 METHODS OF TRANSFER AND ASSUMPTION. In connection with the
transfers of assets other than capital stock and the assumption of any
liabilities, the Company and A&S shall execute or cause to be executed by the
appropriate entities any necessary Conveyance and Assumption Instruments in such
forms as Parent, the Company and A&S shall reasonably agree.
Section 2.3 COMPANY APPROVAL OF CERTAIN A&S ACTIONS. Unless otherwise
provided in this Agreement, the Company shall cooperate with A&S in effecting,
and if so requested by A&S, the Company shall cause Pac-Fab, Inc., a
wholly-owned subsidiary of the Company and the sole stockholder of A&S, to
ratify any actions that are reasonably necessary or desirable to be taken by A&S
to effectuate the transactions contemplated by this Agreement, in a manner
consistent with the terms of this Agreement, including, without limitation,
adopting, preparing and implementing appropriate plans, agreements and
arrangements for A&S Employees and A&S non-employee directors (including,
without limitation, employee benefit plans, agreements and arrangements (with
such changes thereto as the Board of Directors of the Company may approve in its
reasonable discretion prior to the Effective Time)).
ARTICLE III
THE SPLIT-OFF
Section 3.1 COOPERATION AND ACTIONS PRIOR TO THE SPLIT-OFF. (a) As
promptly as practicable after the date hereof and prior to the Effective Time:
(i) Subject to the provisions of paragraph (ii) below, the Company
shall prepare the Company Proxy Statement (which shall set forth
appropriate disclosure concerning A&S, the A&S Business, the Merger, the
Split-Off and certain other matters) and A&S shall file with the SEC the
Form S-1 (or such other form of registration statement determined by the
Company to be appropriate to effect the registration of the A&S Common
Stock). The Company and A&S shall use their respective reasonable efforts
to cause the Form S-1 to be declared effective under the Securities Act, or
if the Company shall determine that the registration of the A&S Shares may
not be effected pursuant to a Form S-1, the Company and A&S shall use best
efforts to cause the A&S Common Stock to be registered pursuant to the
registration statement or form determined to be appropriate to effect such
registration. As promptly as practicable following the effectiveness of the
Form S-1 (or other registration statement, as the case may be), the
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Company shall mail the Company Proxy Statement to the holders of the
Company Common Stock.
(ii) The Company shall promptly provide to Parent copies of all
filings made with the Commission in connection with the Split-Off,
including, without limitation, the Form S-1 (or any registration statement
referred to in Section 3.1(a) above) and any amendments thereto, all
comments made by the Commission with respect to such filings and all
Company responses to such Commission comments. Prior to making such filings
with the Commission or entering into any other agreement with A&S other
than this Agreement, the Company shall consult with Parent with respect to
such filings and other agreements and provide Parent with a reasonable
opportunity to comment on such filings and other agreements.
(iii) The Company and A&S shall cooperate in preparing, filing with
the SEC and causing to become effective any registration statements or
amendments thereto which are appropriate to reflect the establishment of,
or amendments to, any employee benefit and other plans contemplated by this
Agreement.
(iv) The Company and A&S shall take all such action as may be
necessary or appropriate under state securities or "Blue Sky" Laws in
connection with the transactions contemplated by this Agreement.
(v) The Company and A&S shall prepare, and A&S shall file and seek to
make effective, an application to permit listing of the A&S Common Stock
either on a national securities exchange or national market system as may
be selected by A&S in its sole discretion (to the extent permitted pursuant
to the listing requirements of such exchange or national market system).
(vi) In addition to the actions specifically provided for elsewhere in
this Agreement and except as otherwise expressly set forth in this
Agreement, each of the parties hereto shall use its respective best efforts
to take, or cause to be taken, all actions, and, to execute and deliver, or
cause to be executed and delivered, such additional documents and
instruments, and to do, or cause to be done, all things, reasonably
necessary, proper or advisable under applicable Laws and agreements to
consummate and make effective the transactions contemplated by this
Agreement. Without limiting the generality of the foregoing sentence, each
of the parties hereto shall use its respective best efforts to ensure that
the conditions set forth in Article X hereof are satisfied (insofar as such
matters are within the control of such party). Notwithstanding any other
provisions set forth in this Agreement, neither the Company, nor A&S nor
any of their respective Affiliates shall, without first obtaining the prior
written consent of the Parent, take or commit to take any action, in
connection with obtaining any consent, waiver or approval or effecting any
of the transactions contemplated in connection with the Split-Off or
otherwise, (i) except as otherwise expressly provided in this Agreement,
that would result in the payment of any funds (other than normal and usual
filing fees) or the incurrence of any liability by the Company or any
Retained Subsidiary, (ii) that would result in the divestiture or holding
separate of any assets, businesses or operations of the Company or any of
the Retained Subsidiaries, (iii) that might materially limit or impair
Parent's or the Company's or any Retained Subsidiary's freedom of action
with respect to, or its ability to retain or exercise control over, any
assets, businesses or operations of the Company or any Retained
Subsidiaries (other than any limitations or restrictions expressly set
forth in the Merger Agreement, the Tax Sharing Agreement or any other
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agreement to be entered into pursuant to this Agreement or the Merger
Agreement), or (iv) that might otherwise adversely affect Parent.
(b) Prior to the Effective Time, the Company and A&S may elect to form a
holding company for the ownership of the A&S Common Stock. In such event, (i)
the Company shall transfer the shares of A&S Common Stock to the holding company
and shares of common stock of the holding company will be issued in substitution
of the A&S Common Shares in the Split-Off and (ii) the benefits and obligations
from the transactions contemplated by this Transition Agreement shall inure to
and be binding upon the holding company; provided that A&S shall not be released
from its obligations hereunder.
Section 3.2 NET ASSET ADJUSTMENT.
(a) A&S, in consultation with Parent and the Company, shall prepare and
deliver to Parent within 15 days prior to the Closing Date and no later than
July 31, 1999, a balance sheet ("Interim Balance Sheet") of A&S as of June 30,
1999 ("Cut-Off Date"), together with a calculation of the amount of any
adjustment determined under Section 3.2(b) (the "Adjustment Calculation"). A&S
shall prepare the Interim Balance Sheet in accordance with generally accepted
accounting principles applied on a consistent basis with the accounting
principles applied by A&S in preparation of its year-end 1998 financial
statements. Representatives of Parent's accountants shall be entitled to review,
following execution of mutually agreed upon confidentiality agreements, the work
papers, schedules, memoranda and other documents used in the preparation by A&S
of the Interim Balance Sheet and the Adjustment Calculation.
(b) If the value of the A&S Net Assets, as determined in the Interim
Balance Sheet, shall be greater than $40,836,000, the Company Dividend (as
defined in Section 4.1 below) shall be increased by an amount equal to the
difference between such amounts ("Net Asset Increase Adjustment"). In addition,
if Parent, based on its representatives' review of the Interim Balance Sheet and
Adjustment Calculation, determines that A&S's payment of accounts payable was
not conducted in compliance with Section 6.5 such that the value of A&S Net
Assets (determined assuming compliance with Section 6.5) differs from the value
of A&S Net Assets as reflected in the Interim Balance Sheet, then the parties
shall mutually agree upon an equitable adjustment to the calculation of the
value of A&S Net Assets for purposes of this Section 3.2(b).
Section 3.3 ACTIONS OF A&S PRIOR TO THE CUT-OFF DATE. By the Cut-Off Date
or as soon as practicable thereafter, A&S shall have obtained financing upon
terms and in such amount reasonably acceptable to A&S to allow A&S to carryout
the transactions contemplated by this Agreement, including the payment of the
Company Dividend prior to the Closing Date (as provided in Section 4.1 below),
and to conduct its business in the ordinary course after the Cut-Off Date. In
connection with A&S's obligation to obtain the financing described in the
preceding sentence and in particular financing between the Cut-Off Date and the
Closing Date, the Company agrees to take such action, including issuing an
interim guaranty for such financing, as is necessary to enable A&S to obtain
such financing on terms and a rate substantially similar to financing then
available to the Company for the period ending on the Closing Date, with the
understanding that any such interim guaranty would expire at Closing.
Section 3.4 POST-CUT-OFF DATE OPERATIONS OF A&S. Effective as of the
Cut-Off Date, A&S shall operate its business as a stand alone entity (i)
entitled to all income realized after the Cut-Off Date and (ii) as provided in
the Tax Sharing Agreement, responsible for all taxes
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on income realized from the activities or operations of A&S after the Cut-Off
Date and entitled to any tax benefits attributable to any losses or other tax
attributes resulting from the activities or operations of A&S after the Cut-Off
Date.
Section 3.5 THE SPLIT-OFF. The Split-Off shall be effected pursuant to
the provisions of Article III of the Merger Agreement; provided, however that
such Split-Off shall be conditioned on the satisfaction (or waiver, to the
extent expressly permitted by the provisions of Section 10.1 hereof) of each of
the Split-Off Conditions. All shares of A&S Common Stock issued in the Split-Off
shall be duly authorized, validly issued, fully paid, non-assessable and free of
preemptive rights.
Section 3.6 TERMINATION OF CERTAIN CLAIMS. Following the Effective Time,
A&S shall have no claims against the Company, any Retained Subsidiary or any
Affiliate of either based on any breach by the Company, any Retained Subsidiary
or any of their respective Affiliates of any obligations under this Agreement
that occurred on or prior to the Effective Time, all of such claims being hereby
irrevocably waived and terminated as of the Effective Time; provided that the
foregoing shall not limit the Company's liability for any breach by the Company
or any Retained Subsidiary of any of their respective obligations under this
Agreement that occurs following the Effective Time.
Section 3.7 POST-CLOSING PROCEDURES. After the Closing, Parent shall have
the right to cause its independent auditors to conduct, at its sole expense, a
roll-back audit of A&S's year-end audited financial statements to determine the
accuracy of the balance sheet of A&S as of the Closing Date (the "Closing
Balance Sheet"). Such audit will be conducted in accordance with procedures to
be mutually agreed upon by the auditors of A&S and Parent to verify the
appropriateness at, or as of the Cut-Off Date, of (i) the classification of
assets and non-interest bearing liabilities between A&S and the Company, (ii)
the application of funds by A&S prior to the Cut-Off Date, or (iii) tax
allocations and other accruals. In conducting such activities, Parent shall be
given the opportunity to discuss A&S's year-end audit with A&S's auditors and
review work papers prepared by A&S's auditors in connection with the preparation
of A&S's year-end audited financial statements. If Parent's independent auditors
determine that inaccuracies existed in the Closing Balance Sheet, then
adjustments shall be made to the calculations, allocations and payments made in
connection with the transactions contemplated by this Agreement. If Parent and
A&S fail to agree on the resolution of any of the matters in this Section 3.7,
then such matter shall be referred to the Accountant (as defined in Section 1(b)
of the Tax Sharing Agreement) for a binding determination. Parent and A&S shall
deliver to the Accountant copies of any schedules or documentation that may be
reasonably required by the Accountant to make its determination. Parent and A&S
shall be entitled to make presentations to the Accountant in connection
therewith. Parent and A&S shall use all reasonable efforts to cause the
Accountant to promptly complete such determination.
ARTICLE IV
INTERCOMPANY TRANSACTIONS AND RELATIONSHIPS
Section 4.1 CASH DIVIDEND.
(a) DECLARATION; AMOUNT. After June 30, 1999 and prior to the Effective
Time, A&S shall declare a cash dividend (the "Company Dividend") payable to the
Company in an amount equal to $17,000,000 plus any Net Asset Increase Adjustment
(as determined
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pursuant to Section 3.2(b)) and minus the amount by which the Net Tax Benefit
(as defined in Section 4(b) of the Tax Sharing Agreement) exceeds $4,200,000
(such excess to be referred to herein as the "Excess Net Tax Benefit").
(b) DISTRIBUTION.
(i) Immediately prior to the Effective Time, A&S shall distribute the
Company Dividend in the following manner: (1) by distributing an amount
(the "Initial Distribution") calculated in accordance with the formula
described in Section 4.1(a), and, for purposes of that calculation, by
computing an estimated Excess Net Tax Benefit using as the value of the A&S
Common Stock the Pre-Closing A&S Trading Value (as defined in Section
4.1(d)(i) below) two (2) days prior to the Closing Date; (2) by making the
distribution referred in clause (1) above subject to an obligation by the
Company to return to A&S such part of the Initial Distribution as may
exceed an amount equal to the Company Dividend as computed using the
Closing A&S Trading Value (as defined in Section 4.1(d)(ii) below); and (3)
by distributing to the Company a right to receive an additional
distribution from A&S, as soon as possible after the Closing Date, to the
extent that the Company Dividend computed using the Closing A&S Trading
Value, exceeds the amount of the Initial Distribution.
(ii) Pursuant to the obligation referred to in Section 4.1(b)(i)(2)
above or the right referred to in Section 4.1(b)(i)(3) above, as the case
may be, the Company shall return to A&S a portion of the Initial
Distribution, or A&S shall make an additional distribution to the Company,
such that the Initial Distribution as adjusted by this paragraph equals the
amount of the Company Dividend computed using the Closing A&S Trading
Value. Such amount shall be paid under this Section 4.1 as soon as
practicable following the Closing Date.
(c) EFFECT. Upon payment of the Initial Distribution, any remaining
intercompany liabilities of A&S other than liabilities incurred in connection
with the purchase of swimming pool equipment from the Company and its
Subsidiaries shall be converted, and classified as a contribution, to the
capital of A&S and thereafter, A&S shall have no further obligation with regard
to such liabilities.
(d) DEFINITIONS. As used in this Section 4.1, the capitalized terms used
herein and not otherwise defined have the following meanings:
(i) "Pre-Closing A&S Trading Value" shall mean the excess of the high
and low trading prices of Company Common Stock over $19.09.
(ii) "Closing A&S Trading Value" shall mean the value determined
pursuant to the provisions of Section 5 of the Tax Sharing Agreement.
Section 4.2 INTERCOMPANY ACCOUNTS. Following the date hereof, (i) no
transactions related to intercompany receivables, payables, loans, cash
overdrafts and other accounts in existence as of the date of this Agreement
between A&S, on the one hand, and the Company or any Retained Subsidiary, on the
other hand, shall be entered into except in the ordinary course of business and
in a manner consistent with past practice, and (ii) except with the prior
written consent of the Parent or for Intercompany Agreements which are on their
terms and conditions entered into in the ordinary course of business and in a
manner consistent with past practices, neither the Company, any Retained
Subsidiary or A&S shall enter into any Intercompany Agreement following the date
hereof and prior to the Effective Time.
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Section 4.3 TRANSITION SERVICES.
(a) Following the Effective Time and ending on the one (1) year anniversary
of the Effective Time (such period, the "Transition Services Period"), the
Company shall provide, or make available, to A&S, at such times and in such
amounts as may be reasonably requested by A&S, the following services (the
"Transition Services") and A&S will pay for such Transition Services on a cost
basis as agreed to by the parties:
(i) tax preparation and filing services, including the services of
Robert Brunozzi, the Company's current Director of Taxes; provided such
director is employed by the Parent at the time such services are requested
by A&S;
(ii) legal services, to be provided by the Company's general counsel,
Kevan Langner; provided such counsel is employed by the Parent or the
Company at the time such services are requested by A&S;
(iii) information and technology support services of the types set
forth in Schedule 4.3 of the Disclosure Schedule; and
(iv) such other additional services as may be reasonably requested by
A&S; provided that the scope of any services, as well as the time and the
manner in which such services are to be provided, shall be mutually
agreeable between the parties.
Following the end of the calendar month in which any such Transition
Services are performed, the Company shall provide to A&S an invoice (the
"Transition Services Invoice") setting forth in summary detail the Transition
Services which were provided during such calendar month and the appropriate cost
thereof. A&S shall pay to the Company in immediately available funds, in a
reasonably prompt manner following the delivery by the Company of a Transition
Services Invoice, the amounts due with respect to the Transition Services
reflected on such Transition Services Invoice. Notwithstanding anything herein
to the contrary, neither Parent nor the Company shall have any liability
whatsoever to A&S or A&S's Affiliates or any third party for any loss,
liability, damage, cost or deficiency suffered by any such person resulting
from, caused by or arising out of the Company's performance of the Transition
Services.
(b) In addition to the Transition Services to be provided by the Company,
for a period of two (2) months following the Effective Time A&S shall be
entitled to occupy and use without charge such office space at 220 Park Drive,
Chardon, Ohio 44024 reasonably designated by A&S to be necessary to enable A&S
to continue to run its current operations at such location.
ARTICLE V
SURVIVAL AND INDEMNIFICATION
Section 5.1 SURVIVAL OF AGREEMENTS. The obligations under this Article V
of A&S, on the one hand, and the Company and the Retained Subsidiaries, on the
other hand, shall survive the sale or other transfer by it of any assets or
businesses or the assignment by it of any Liabilities. To the extent that A&S
transfers directly or indirectly to any other person all or substantially all of
the A&S Assets or the A&S Business, A&S will cause the transferee of such A&S
Assets or A&S Business to assume specifically its obligations under this
Agreement with respect thereto and will cause such transferee to fulfill its
obligations related to the A&S Liabilities. Such assumption will not relieve A&S
of its obligations in respect
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thereof. To the extent that the Company or any of the Retained Subsidiaries
transfers directly or indirectly to any other person all or substantially all of
the Retained Business, the Company will cause the transferee of such Retained
Business to assume specifically its obligations under this Agreement with
respect thereto and will cause such transferee to fulfill its obligations
related to the Retained Liabilities. Such assumption will not relieve the
Company of its obligations in respect thereof. A&S, on the one hand, and the
Company, on the other hand, agree that such transferee may exercise all of A&S's
or the Company's rights hereunder, as the case may be, with respect to such
Assets or businesses.
Section 5.2 INDEMNIFICATION BY A&S.
(a) In addition to any indemnification required by Articles VI and VIII
hereof, subject to the terms and conditions set forth in this Agreement, from
and after the Effective Time, A&S shall indemnify, defend and hold harmless the
Company, each Retained Subsidiary, the Purchaser and Parent and each of their
respective directors, officers, employees, representatives, advisors, agents and
Affiliates (collectively, the "Parent Indemnified Parties") from, against and in
respect of any and all Indemnifiable Losses of the Parent Indemnified Parties
arising out of, relating to or resulting from, directly or indirectly, (i) any
misrepresentation or breach of any warranty in this Agreement made by A&S or, on
or prior to the Effective Time, made by the Company, (ii) any breach of any
agreement or covenant under this Agreement by A&S or, on or prior to the
Effective Time, by the Company, (iii) any and all A&S Liabilities, (iv) the
conduct of the A&S Business or any part thereof on or following the Effective
Time, (v) any transfer of A&S Assets to, or assumption of A&S Liabilities by,
A&S in accordance with this Agreement or otherwise in connection with the
Split-Off (other than any costs and expenses which have been expressly assumed
by the Company pursuant to the provisions of this Agreement), (vi) any
Indemnifiable Loss resulting from any claims that any statements or omissions
relating to or describing, directly or indirectly, A&S, the A&S Business, any
A&S Asset or any A&S Liability, and which occur on or prior to the Effective
Time in the Company Proxy Statement or the Form S-1 (in each case other than
with respect to any statements or omissions made in reliance upon and in
conformity with information furnished in writing by Parent, the Purchaser or
their Affiliates, representatives or advisors and other than any statements or
omissions which relate solely to the Merger Agreement and this Agreement and the
transactions contemplated thereby and hereby), which are false or misleading
with respect to any 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, (vii) any
Indemnifiable Loss arising out of or relating to Transaction Suits resulting
from, directly or indirectly, (a) any statement or omission on the part of A&S
or any of their Affiliates in the documents referred to in Section 5.2(a)(vi)
above, (b) the A&S Business, A&S Assets and A&S Liabilities or (c) any holder of
Company Common Stock exercising appraisal rights under the Ohio General
Corporation Law with respect to the value of the Split-Off Consideration (as
defined in the Merger Agreement) and (viii) any Indemnifiable Loss resulting
from actions the Company or Pac-Fab, Inc. take pursuant to Section 2.3 hereof.
(b) Notwithstanding A&S's obligations to indemnify Parent Indemnified
Parties pursuant to Section 5.2(a) hereof, A&S shall be obligated to indemnify
the Parent Indemnified Parties only for those Indemnifiable Losses under clause
(i) of Section 5.2(a) hereof as to which the Parent Indemnified Parties have
given A&S written notice thereof on or prior to the third anniversary of the
Effective Time and under clause (vi) of Section 5.2(a) hereof as to which the
Parent Indemnified Parties have given A&S written notice thereof on or prior to
the
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expiration of any applicable statute of limitations period (it being understood
that there shall be no corresponding time limitation with respect to any
Indemnifiable Losses arising under clauses (ii), (iii), (iv), (v), (vii) or
(viii) of Section 5.2(a) hereof). Notwithstanding the foregoing, if on or before
the expiration of such indemnification period any Parent Indemnified Party has
given notice to A&S pursuant to Section 5.4 hereof of any matter which would be
the basis for a claim of indemnification by such Parent Indemnified Party
pursuant to Section 5.2(a), such Parent Indemnified Party shall have the right
after the expiration of such indemnification period to assert or to continue to
assert such claim and to be indemnified with respect thereto.
Section 5.3 INDEMNIFICATION BY THE COMPANY.
(a) In addition to any indemnification required by Articles VI and VIII
hereof, subject to the terms and conditions set forth in this Agreement, from
and after the Effective Time, the Company shall indemnify, defend and hold
harmless A&S and each of their respective directors, officers, employees,
representatives, advisors, agents and Affiliates (collectively, the "A&S
Indemnified Parties") from, against and in respect of any and all Indemnifiable
Losses of the A&S Indemnified Parties arising out of, relating to or resulting
from, directly or indirectly, (i) any breach of any agreement or covenant under
this Agreement by Parent or Purchaser or, following the Effective Time, by the
Company, (ii) the conduct of the Retained Business or any part thereof on, prior
to or following the Effective Time, and (iii) any Indemnifiable Loss resulting
from any claims that any statements or omissions relating to or describing,
directly or indirectly, Parent or the Purchaser, and which occur on or prior to
the Effective Time in the Company Proxy Statement or the Form S-1 (in each case
only to the extent of any statements or omissions made in reliance upon and in
conformity with information furnished in writing by Parent, the Purchaser or
their Affiliates, representatives or advisors), which are false or misleading
with respect to any 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. Notwithstanding
the foregoing and anything to the contrary in this Agreement or any other
agreement to be entered into pursuant to this Agreement, the Company shall not
be required to indemnify, defend and hold harmless any A&S Indemnified Party
from and against any Indemnifiable Loss resulting from any claims that the
statements included in the Company Proxy Statement and the Form S-1 (in each
case other than statements or omissions made in reliance upon and in conformity
with information furnished in writing by Parent, the Purchaser or their
Affiliates, representatives or advisors expressly for use therein) are false or
misleading with respect to any 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.
(b) Notwithstanding the Company's obligations to indemnify the A&S
Indemnified Parties pursuant to Section 5.3(a) hereof, the Company shall be
obligated to indemnify the A&S Indemnified Parties only for those Indemnifiable
Losses under clause (iii) of Section 5.3(a) hereof as to which the A&S
Indemnified Parties have given the Company written notice thereof on or prior to
the expiration of any applicable statute of limitations period (it being
understood that there shall be no corresponding time limitation with respect to
any Indemnifiable Losses arising under clause (i) or (ii) of Section 5.3(a)
hereof). Notwithstanding the foregoing, if on or before the expiration of such
indemnification period any A&S Indemnified Party has given notice to the Company
pursuant to Section 5.4 hereof of any matter which would be the basis for a
claim of indemnification by such A&S
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Indemnified Party pursuant to Section 5.3(a), such A&S Indemnified Party shall
have the right after the expiration of such indemnification period to assert or
to continue to assert such claim and to be indemnified with respect thereto.
Section 5.4 PROCEDURE FOR INDEMNIFICATION. All claims for indemnification
under this Article V shall be asserted and resolved as follows:
(a) In the event that any claim or demand, or other circumstance or state
of facts which could give rise to any claim or demand, for which an Indemnifying
Party may be liable to an Indemnified Party hereunder is asserted against or
sought to be collected by a third party (an "Asserted Liability"), the
Indemnified Party shall promptly notify the Indemnifying Party in writing of
such Asserted Liability, specifying the nature of such Asserted Liability and
the amount or the estimated amount thereof to the extent then feasible (which
estimate shall not be conclusive of the final amount of such claim or demand)
(the "Claim Notice"); provided that no delay on the part of the Indemnified
Party in giving any such Claim Notice shall relieve the Indemnifying Party of
any indemnification obligation hereunder unless (and then solely to the extent
that) the Indemnifying Party is materially prejudiced by such delay. The
Indemnifying Party shall have twenty (20) days (or less if the nature of the
Asserted Liability requires) from its receipt of the Claim Notice (the "Notice
Period") to notify the Indemnified Party whether or not the Indemnifying Party
desires, at the Indemnifying Party's sole cost and expense and by counsel of its
own choosing, which shall be reasonably satisfactory to the Indemnified Party,
to defend against such Asserted Liability; provided that if, under applicable
standards of professional conduct a conflict on any significant issue between
the Indemnifying Party and any Indemnified Party exists in respect of such
Asserted Liability, then the Indemnifying Party shall reimburse the Indemnified
Party for the reasonable fees and expenses of one additional counsel to be
retained in order to resolve such conflict, promptly upon presentation by the
Indemnified Party of invoices or other documentation evidencing such amounts to
be reimbursed. If the Indemnifying Party undertakes to defend against such
Asserted Liability, the Indemnifying Party shall control the investigation,
defense and settlement thereof; provided that (i) the Indemnifying Party shall
use its reasonable efforts to defend and protect the interests of the
Indemnified Party with respect to such Asserted Liability, (ii) the Indemnified
Party, prior to or during the period in which the Indemnifying Party assumes
control of such matter, may take such reasonable actions as the Indemnified
Party deems necessary to preserve any and all rights with respect to such
matter, without such actions being construed as a waiver of the Indemnified
Party's rights to defense and indemnification pursuant to this Agreement, and
(iii) the Indemnifying Party shall not, without the prior written consent of the
Indemnified Party, consent to any settlement which (A) imposes any Liabilities
on the Indemnified Party (other than those Liabilities which the Indemnifying
Party agrees to promptly pay or discharge), and (B) with respect to any non-
monetary provision of such settlement, would be likely, in the Indemnified
Party's reasonable judgment, to have an adverse effect on the business
operations, assets, properties or prospects of Parent, the Company or the
Retained Business (in the case of a Parent Indemnified Party), A&S or the A&S
Business (in the case of an A&S Indemnified Party), or such Indemnified Party.
Notwithstanding the foregoing, the Indemnified Party shall have the right to
control, pay or settle any Asserted Liability which the Indemnifying Party shall
have undertaken to defend so long as the Indemnified Party shall also waive any
right to indemnification therefor by the Indemnifying Party. If the Indemnifying
Party undertakes to defend against such Asserted Liability, the Indemnified
Party shall cooperate fully with the Indemnifying Party and its counsel in the
investigation, defense and settlement thereof. If the Indemnified Party
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desires to participate in any such defense it may do so at its sole cost and
expense. If the Indemnifying Party does not undertake within the Notice Period
to defend against such Asserted Liability, then the Indemnifying Party shall
have the right to participate in any such defense at its sole cost and expense,
but the Indemnified Party shall control the investigation, defense and
settlement thereof (provided that the Indemnified Party may not settle any such
Asserted Liability without obtaining the prior written consent of the
Indemnifying Party (which consent shall not be unreasonably withheld by the
Indemnifying Party; provided that in the event that the Indemnifying Party is in
material breach at such time of the provisions of this Section 5.4, then the
Indemnified Party shall not be obligated to obtain such prior written consent of
the Indemnifying Party) at the reasonable cost and expense of the Indemnifying
Party (which shall be paid by the Indemnifying Party promptly upon presentation
by the Indemnified Party of invoices or other documentation evidencing the
amounts to be indemnified). The Indemnified Party and the Indemnifying Party
agree to make available to each other, their counsel and other representatives,
all information and documents available to them which relate to such claim or
demand (subject to the confidentiality provisions of Section 7.5 hereof);
provided that no party hereto shall be obligated to disclose any information
which would result in the waiver of any attorney-client, attorney work product
or other similar privileges, if the disclosure of such information would be
materially prejudicial to such disclosing party. The Indemnified Party and the
Indemnifying Party and the Company and its employees also agree to render to
each other such assistance and cooperation as may reasonably be required to
ensure the proper and adequate defense of such claim or demand.
(b) In the event that an Indemnified Party should have a claim against the
Indemnifying Party hereunder which does not involve a claim or demand being
asserted against or sought to be collected from it by a third party, the
Indemnified Party shall send a Claim Notice with respect to such claim to the
Indemnifying Party. The Indemnifying Party shall have twenty (20) days from the
date such Claim Notice is delivered during which to notify the Indemnified Party
in writing of any good faith objections it has to the Indemnified Party's Claim
Notice or claims for indemnification, setting forth in reasonable detail each of
the Indemnifying Party's objections thereto. If the Indemnifying Party does not
deliver such written notice of objection within such 20-day period, the
Indemnifying Party shall be deemed to have accepted responsibility for the
prompt payment of the Indemnified Party's claims for indemnification, and shall
have no further right to contest the validity of such indemnification claims. If
the Indemnifying Party does deliver such written notice of objection within such
20-day period, the Indemnifying Party and the Indemnified Party shall attempt in
good faith to resolve any such dispute within thirty (30) days of the delivery
by the Indemnifying Party of such written notice of objection. If the
Indemnifying Party and the Indemnified Party are unable to resolve any such
dispute within such 30-day period, then either the Indemnifying Party or the
Indemnified Party shall be free to pursue any remedies which may be available to
such party under applicable Law.
Section 5.5 MISCELLANEOUS INDEMNIFICATION PROVISIONS.
(a) The Indemnifying Party agrees to indemnify any successors of the
Indemnified Party to the same extent and in the same manner and on the same
terms and conditions as the Indemnified Party is indemnified by the Indemnifying
Party under this Article V. In the event that any claim for indemnification
under either Articles V, VI or VIII hereof meets the criteria of more than one
of the types of claims for which indemnification is provided for under such
provisions, the Indemnified Party, in its sole discretion, shall classify such
claim
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and only be required to include such claim, and the recoveries for
indemnification therefrom, in one of such categories. No investigation made by
any party hereto shall affect any representation or warranty of the other
parties hereto contained in this Agreement, the Disclosure Schedule or any
certificate, document or other instrument delivered in connection herewith. The
consummation by Parent of the Merger pursuant to the terms and conditions of the
Merger Agreement, either with or without knowledge of a breach of warranty or
covenant or misrepresentation by any party hereto, shall not constitute a waiver
of any claim by any Parent Indemnified Party for Indemnifiable Losses with
respect to such breach or misrepresentation. In determining the amount of
Indemnifiable Losses to which a Parent Indemnified Party or A&S Indemnified
Party (as the case may be) is entitled to indemnification hereunder, an
arbitration panel, court or tribunal may take into consideration, where
appropriate and without duplication, any diminution in the aggregate value of
the Retained Business or the A&S Business (as the case may be). Notwithstanding
anything to the contrary contained in this Agreement, the assignment of any
party's rights hereunder to any other person or entity shall not limit, affect
or prejudice the ability of the assigning party to continue to enforce any
rights of indemnification hereunder or other rights hereunder in accordance with
the terms and conditions of this Agreement.
(b) In determining the amount of any indemnity payable under this Article
V, such amount shall be reduced by (x) any related tax benefits if and when
actually realized or received (but only after taking into account any tax
benefits (including, without limitation, any net operating losses or other
deductions) to which the Indemnified Party would be entitled without regard to
such item), except to the extent such recovery has already been taken into
account in determining the amount of any indemnity payable under Articles V, VI
or VIII hereof, and (y) any insurance recovery if and when actually realized or
received, in each case in respect of such Asserted Liability. Any such recovery
shall be promptly repaid by the Indemnified Party to the Indemnifying Party
following the time at which such recovery is realized or received pursuant to
the previous sentence, minus all reasonably allocable costs, charges and
expenses incurred by the Indemnified Party in obtaining such recovery.
Notwithstanding the foregoing, if (x) the amount of Indemnifiable Losses for
which the Indemnifying Party is obligated to indemnify the Indemnified Party is
reduced by any tax benefit or insurance recovery in accordance with the
provisions of the previous sentence, and (y) the Indemnified Party subsequently
is required to repay the amount of any such tax benefit or insurance recovery or
such tax benefit or insurance recovery is disallowed, then the obligation of the
Indemnifying Party to indemnify with respect to such amounts shall be reinstated
immediately and such amounts shall be paid promptly to the Indemnified Party in
accordance with the provisions of this Agreement.
(c) In the event that a dispute between any Indemnifying Party and any
Indemnified Party concerning the existence of a right or obligation to indemnity
under this Agreement is determined by any arbitration panel or any court or
tribunal, the reasonable fees and expenses of the attorneys for the party which
is principally prevailing in such action shall be paid by the party which is not
principally prevailing in such action.
(d) All amounts owing under this Article V shall bear interest at a
fluctuating rate of interest equal to the rate of interest from time to time
announced by KeyBank, N.A. in Cleveland, Ohio as its prime lending rate,
computed from the time such damage, cost or expense was incurred or suffered to
the date of payment therefor.
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(e) The remedies provided by this Article V shall be the parties' sole and
exclusive remedies for the recovery of any Indemnifiable Losses resulting from,
arising out of or related to misrepresentations, breaches of warranties, and
non-fulfillment of obligations under this Agreement, except those arising from,
arising out of or related to fraud; provided that the provisions of this Section
5.5(e) shall not limit the ability of any party to seek injunctive or similar
relief pursuant to Section 11.12 hereof.
Section 5.6 PENDING LITIGATION. Following the Effective Time, (a) A&S
shall have exclusive authority and control over the investigation, prosecution,
defense and appeal of all pending Actions relating primarily to the A&S
Business, the A&S Assets or the A&S Liabilities (each, an "A&S Action"), and may
settle or compromise, or consent to the entry of any judgment with respect to,
any such Action without the consent of the Company, and (b) the Company shall
have exclusive authority and control over the investigation, prosecution,
defense and appeal of all pending Actions relating primarily to the Retained
Business (each, a "Retained Action"), and may settle or compromise, or consent
to the entry of any judgment with respect to, any such Action without the
consent of A&S; provided that if both the Company and A&S are named as parties
to any A&S Action or Retained Action, neither the Company nor A&S (nor any of
their respective Subsidiaries) may settle or compromise, or consent to the entry
of any judgment with respect to, any such Action without the prior written
consent of the other party (which consent may not be unreasonably withheld) if
such settlement, compromise or consent to such judgment includes any form of
injunctive relief binding upon such other party. A&S shall indemnify, defend and
hold harmless each of the Parent Indemnified Parties, and the Company shall
indemnify and hold harmless each of the A&S Indemnified Parties, in the manner
provided in this Article V, from and against all Indemnifiable Losses arising
out of or resulting from each such Action over which such Indemnifying Party has
authority and control pursuant to this Section 5.6.
Section 5.7. CONSTRUCTION OF AGREEMENTS. Notwithstanding any other
provision in this Agreement to the contrary, in the event and to the extent that
there shall be a conflict between the provisions of this Article V and the
provisions of any other part of this Agreement or any exhibit or schedule
hereto, the provisions of this Article V shall control, and in the event and to
the extent that there shall be a conflict between the provisions of this
Agreement (including, without limitation, the provisions of this Article V) and
the provisions of the Tax Sharing Agreement, the provisions of the Tax Sharing
Agreement shall control.
ARTICLE VI
CERTAIN ADDITIONAL MATTERS
Section 6.1 REPRESENTATIONS OR WARRANTIES; DISCLAIMERS.
(a) It is the explicit intent of each party hereto that no party to this
Agreement or to the Merger Agreement is making any representation or warranty
whatsoever, express or implied, in this Agreement or in any other agreement
contemplated hereby, except those representations and warranties expressly set
forth in this Agreement. Each of the parties hereto agrees, to the fullest
extent permitted by Law, that none of them nor any of their Affiliates, agents
or representatives shall have any liability or responsibility whatsoever to any
such other party hereto or such other party's Affiliates, agents or
representatives on any basis (including, without limitation, in contract or
tort, under federal or state securities laws or otherwise) based upon any
information provided or made available, or statements made, to any such other
party or such other party's Affiliates, agents or representatives (or any
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omissions therefrom), including, without limitation, in respect of the specific
representations and warranties set forth in this Agreement and the Merger
Agreement and the covenants and agreements set forth in the Merger Agreement,
except (i) as and only to the extent expressly set forth in the indemnification
provisions of Article V hereof and as otherwise expressly set forth herein
(subject to the limitations and restrictions contained herein), and (ii) with
respect to breaches of the covenants and agreements set forth in this Agreement.
(b) Without limiting the generality of the foregoing, it is understood and
agreed (a) that neither Parent, the Company nor any of the Retained Subsidiaries
is, in this Agreement or in any other agreement or document contemplated by this
Agreement, representing or warranting in any way as to the value or freedom from
encumbrance of, or any other matter concerning, any A&S Assets, (b) that the A&S
Assets are being transferred "as is, where is" and (c) that, subject to the
obligations of the Company set forth in Section 6.2 hereof, A&S shall bear the
risk that any conveyances of the A&S Assets might be insufficient. Similarly, it
is understood and agreed that neither Parent, the Company nor any of the
Retained Subsidiaries is, in this Agreement or in any other agreement or
document contemplated by this Agreement, representing or warranting to A&S or
any A&S Indemnified Party in any way that the obtaining of the consents and
approvals, the execution and delivery of any amendatory agreements and the
making of the filings and applications contemplated by this Agreement shall
satisfy the provisions of any or all applicable agreements or the requirements
of all applicable Laws or judgments.
(c) A&S represents and warrants to the Company that (i) since December 31,
1998, the A&S Business has been conducted in the ordinary course of business
consistent with past practice; (ii) neither the Company nor any of the Retained
Subsidiaries will, after giving effect to the Split-Off, be liable directly or
indirectly, as borrower, surety, guarantor, indemnitor or otherwise, with
respect to any of the A&S Liabilities; (iii) except as set forth in Schedule
6.1(c)(iii) of the Disclosure Schedule, there are no Intercompany Agreements in
effect as of the date hereof; (iv) there are no A&S Assets which have been used
within the Retained Business since December 31, 1998, other than those A&S
Assets which are listed on Schedule 6.1(c)(iv) of the Disclosure Schedule; (v)
except as set forth in Schedule 6.1(c)(v) of the Disclosure Schedule, A&S shall
not immediately after giving effect to the Split-Off, own, hold or lease, in
whole or in part, any of the assets, properties, licenses and rights which are
reasonably necessary to carry on the Retained Business as presently conducted;
and (vi) except as set forth in Schedule 6.1(c)(vi) of the Disclosure Schedule
or as provided in Section 4.2, since December 31, 1998, no other intercompany
transfers, dividends or payments have taken, or will take, place outside the
ordinary course of business between A&S, on the one hand, and the Company or any
Retained Subsidiary, on the other hand.
Section 6.2 FURTHER ASSURANCES; SUBSEQUENT TRANSFERS. Each of the parties
hereto will execute and deliver such further instruments of transfer and
distribution and will take such other actions as any party hereto may reasonably
request in order to effectuate the purposes of this Agreement and to carry out
the terms hereof.
Section 6.3 USE OF NAMES. Following the Effective Time, A&S shall have
the sole and exclusive ownership of and right to use, as between the Company and
each of the Retained Subsidiaries, on the one hand, and A&S, on the other hand,
the "Anthony & Sylvan Pools Corporation" name and each of the names used (or
formerly used) in the A&S Business (the "A&S Names"), and each of the trade
marks, trade names, service marks and
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other proprietary rights exclusively related to such A&S Names (the "A&S
Proprietary Name Rights") and any trade marks, trade names, service marks or
other proprietary rights mutually agreed among the Parties prior to the
Effective Time. Following the Effective Time, the Company and each of the
Retained Subsidiaries shall have the sole and exclusive ownership of and right
to use, as between A&S, on the one hand, and the Company and each of the
Retained Subsidiaries, on the other hand, all names used (or formerly used) by
the Company or any of the Retained Subsidiaries as of such date other than the
A&S Names (the "Company Names"), and all other trade marks, trade names, service
marks and other proprietary rights owned or used by the Company or any of the
Retained Subsidiaries as of such date other than the A&S Proprietary Name Rights
(the "Company Proprietary Name Rights"). Notwithstanding the foregoing,
following the Effective Time, (x) the Company shall, and shall cause its
Subsidiaries and other Affiliates to, take all action reasonably necessary to
cease using, and change as soon as commercially practicable (including by
amending any charter documents), any corporate or other names which are the same
as or confusingly similar to any of the A&S Names or any of the A&S Proprietary
Name Rights, and (y) A&S shall, and shall cause its Subsidiaries and other
Affiliates to, take all action reasonably necessary to cease using, and change
as soon as commercially practicable (including by amending any charter
documents), any corporate or other names which are the same as or confusingly
similar to any of the Company Names or any of the Company Proprietary Name
Rights.
Section 6.4 LITIGATION RELATING TO TRANSACTION.
(a) Following the date hereof until the Effective Time, in the event that
any Action is commenced against the Company or any of its Subsidiaries
(including A&S) challenging either the Merger Agreement, this Agreement or the
Tax Sharing Agreement or any of the transactions contemplated therein or herein
(any such Action, a "Transaction Suit"), then the Company shall provide promptly
to Parent copies of all material pleadings sent or received after the date
hereof by the Company or its counsel with respect to any such Transaction Suits.
Parent shall be entitled to participate in the defense of each Transaction Suit
and to employ counsel at its own expense to assist in the handling of each such
Transaction Suit. Neither the Company nor any of its Subsidiaries (including
A&S) shall settle or compromise any Transaction Suit or consent to the entry of
any judgment with respect to any such Transaction Suit, without the prior
written consent of Parent (which consent shall not be unreasonably withheld).
(b) Following the Effective Time, the Company shall provide promptly to A&S
copies of all material pleadings sent or received after the Effective Time by
the Company or its counsel with respect to any Transaction Suits to which A&S or
any of its Affiliates is a party. A&S shall be entitled to participate in the
defense of each Transaction Suit to which it or any of its Affiliates is a
party, and to employ counsel at its own expense to assist in the handling of
each such Transaction Suit. Following the Effective Time, neither the Parent nor
the Company nor any of their respective Subsidiaries shall settle or compromise
any Transaction Suit to which A&S or any of its Affiliates is a party or consent
to the entry of any judgment with respect to any such Transaction Suit, without
the prior written consent of A&S (which consent shall not be unreasonably
withheld).
Section 6.5 OPERATION PRIOR TO SPLIT-OFF. Prior to the Effective Time,
A&S and Company agree to operate their respective businesses in the ordinary
course of business and in a manner consistent with past practice. In addition,
during the period prior to the Cut-Off
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Date, A&S shall (i) continue to sweep cash from its various accounts to the
Company in the ordinary course of its business in a manner consistent with past
practices and (ii) pay its accounts payable and take payment discounts on such
accounts payable in the ordinary course of its business in a manner consistent
with past practices.
Section 6.6 RESTRICTIONS ON POST-SPLIT-OFF COMPETITIVE ACTIVITIES. As an
inducement to the parties hereto to execute this Agreement and complete the
transactions contemplated hereby, and in order to preserve the goodwill
associated with the A&S Business and the Retained Business, Parent and the
Company, on one hand, and A&S, on the other hand, hereby covenant and agree that
for a period of three (3) years from the Effective Time, they will not, directly
or indirectly: (i) enter, engage in, continue in or carry on (x) in the case of
Parent and the Company, the swimming pool installation business, or (y) in the
case of A&S, the business of manufacturing water pressure vessels or swimming
pool and spa equipment, which as of the date of this Agreement are manufactured
by the Company or any Retained Subsidiary; or (ii) engage in any practice the
purpose of which is to evade the provisions of this covenant not to compete;
provided, however, that the foregoing shall not prohibit the ownership of
securities of corporations engaged in the prohibited businesses which are listed
on a national securities exchange or traded in the national over-the-counter
market in an amount which shall not exceed 5% of the outstanding shares of any
such corporation. The parties agree that the geographic scope of this covenant
not to compete shall extend throughout the world. In the event a court of
competent jurisdiction determines that the provisions of this covenant not to
compete are excessively broad as to duration, geographical scope or activity, it
is expressly agreed that this covenant not to compete shall be construed so that
the remaining provisions shall not be affected, but shall remain in full force
and effect, and any such excessively broad provisions shall be deemed, without
further action on the part of any person, to be modified, amended and/or
limited, but only to the extent necessary to render the same valid and
enforceable in such jurisdiction.
ARTICLE VII
ACCESS TO INFORMATION AND SERVICES
Section 7.1 PROVISION OF CORPORATE RECORDS. Except as provided in the
following sentence, on or about the Effective Time, the Company shall deliver to
A&S all corporate books and records, in its possession, (including all active
agreements, active litigation files and government filings) which are corporate
records of A&S, including, without limitation, original corporate minute books,
stock ledgers and certificates and corporate seals of A&S. Notwithstanding the
foregoing and subject to the confidentiality provisions of Section 7.5 hereof,
the Company shall have the right to retain copies of any such documents which
also relate to the Retained Business.
Section 7.2 ACCESS TO INFORMATION. Subject to the confidentiality
provisions of Section 7.5 hereof, from and after the Effective Time (i) A&S
shall afford to the Company and its authorized accountants, counsel and other
designated representatives reasonable access (including, without limitation,
using reasonable efforts to give access to persons or firms possessing
Information (as defined below)), subject to any access, disclosure, copying,
time or other limitations imposed by applicable law or A&S, to all records,
books, contracts, instruments, computer data and other data and information
(collectively, "Information") within A&S's possession relating to the A&S
Business, insofar as such access is reasonably required by the Company in
connection with the operation of the Retained Business, and
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(ii) the Company shall afford to A&S and its authorized accountants, counsel and
other designated representatives reasonable access (including, without
limitation, using reasonable efforts to give access to persons or firms
possessing Information), subject to any access, disclosure, copying, time or
other limitations imposed by applicable law or the Company, to all Information
within the Company's possession relating to the Retained Business, insofar as
such access is reasonably required by A&S in connection with the operation of
the A&S Business. Information may be requested under this Article VII for,
without limitation, audit, accounting, claims, litigation and tax purposes, as
well as for purposes of fulfilling disclosure and reporting obligations.
Section 7.3 PRODUCTION OF WITNESSES. From and after the Effective Time,
each party shall use reasonable efforts to make available to the other party,
upon written request, its officers, directors, employees and agents as witnesses
to the extent that any such person may reasonably be required in connection with
any legal, administrative or other proceedings in which the requesting party may
from time to time be involved.
Section 7.4 RETENTION OF RECORDS. Except as otherwise required by Law or
agreed to in writing, A&S and the Company shall each retain, for a period of at
least seven (7) years following the Effective Time, all significant Information
relating to (i) in the case of the Company, the A&S Business and (ii) in the
case of A&S, the Retained Business. Notwithstanding the foregoing, either A&S or
the Company may destroy or otherwise dispose of any of such Information at any
time, provided that, prior to such destruction or disposal, (a) A&S or the
Company, as the case may be, shall provide no less than ninety (90) or more than
one hundred twenty (120) days' prior written notice to the other party,
specifying the Information proposed to be destroyed or disposed of and (b) if
the other party shall request in writing prior to the scheduled date for such
destruction or disposal that any of the Information proposed to be destroyed or
disposed of be delivered to the other party, A&S or the Company, as the case may
be, shall promptly arrange for the delivery of such of the Information as was
requested, at the expense of the requesting party.
Section 7.5 CONFIDENTIALITY.
(a) Each party shall hold, and shall cause its officers, employees, agents,
consultants and advisors to hold, in strict confidence, unless compelled to
disclose by judicial or administrative process or, in the reasonable opinion of
its counsel, by other requirements of Law, all confidential, proprietary or
other non-public information or trade secrets concerning the other party (or
such other party's business operations or the business operations of such other
party's Affiliates) which is furnished it by such other party or its
representatives (collectively, the "Confidential Information"). None of the
parties hereto nor any of their respective Affiliates shall release or disclose
to any other person or entity, any such Confidential Information (except, to the
extent reasonably required, for disclosure to those of such party's auditors,
attorneys and other representatives who agree to be bound by the provisions of
this Section 7.5). Notwithstanding the foregoing, in the event any party hereto
is requested to disclose any Confidential Information to any third party
pursuant to any judicial or administrative process or, in the reasonable opinion
of its counsel, any other requirements of Law, the party from whom such
disclosure is sought shall (x) notify the other parties hereto as soon as
reasonably practicable of such request for disclosure, (y) disclose only that
portion of the Confidential Information which it reasonably believes, following
the advice of counsel, is necessary in order to comply with such judicial or
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administrative process or other requirements of Law, and (z) cooperate with the
other parties hereto in seeking to narrow the scope of any such third party
request for disclosure).
(b) Notwithstanding the foregoing, the term "Confidential Information"
shall not include information (i) which is or becomes generally available to the
public other than as a result of disclosure of such information by the
disclosing party or any of its Affiliates or representatives, (ii) becomes
available to the recipient of such information on a non-confidential basis from
a source which is not, to the recipient's knowledge, bound by a confidentiality
or other similar agreement, or by any other legal, contractual or fiduciary
obligation which prohibits disclosure of such information to the other party
hereto, or (iii) which can be demonstrated to have been developed independently
by the representatives of such recipient which representatives have not had any
access to any information which would otherwise be deemed to be "Confidential
Information" pursuant to the provisions of this Section 7.5.
ARTICLE VIII
EMPLOYEE MATTERS
Section 8.1 EMPLOYEES. Effective as of the Effective Time, all A&S
Employees shall remain or become employees of A&S in the same capacities as then
held by such employees (or in such other capacities as A&S shall determine in
its sole discretion), and the employment of any A&S Employee by the Company or
the Retained Subsidiaries shall cease.
Section 8.2 EMPLOYEE BENEFITS.
(a) A&S 401(k) PLAN. A&S maintains a defined contribution plan and trust
intended to qualify under Sections 401(a), 401(k) and 501(a) of the Internal
Revenue Code of 1986, as amended (the "A&S 401(k) Plan"), for the benefit of A&S
Employees. A&S agrees to indemnify and hold harmless the Company, its officers,
directors, employees, agents and affiliates from and against any and all
Indemnifiable Losses arising out of or relating to the A&S 401(k) Plan,
including all benefits accrued by A&S Employees thereunder prior to the
Effective Time.
(b) WELFARE BENEFIT PLANS. As of the Effective Time, A&S Employees shall
cease to participate in the employee welfare benefit plans (as such term in
defined in ERISA) maintained or sponsored by the Company (the "Company Welfare
Plans") and shall commence to participate in welfare benefit plans of A&S (the
"A&S Welfare Plans"). On and after the Effective Time, the Company shall only be
responsible for any claims by A&S Employees for benefits relating to claims
incurred prior to the Effective Time. The Company shall use its best efforts to
ensure that, except as provided otherwise in the Merger Agreement or this
Agreement, the consummation of the transactions contemplated by this Agreement
shall not entitle any employee to severance benefits under any severance plan or
arrangement of the Company or any of its Subsidiaries. Notwithstanding the
foregoing, the Company agrees to permit A&S Employees (and their beneficiaries
and dependents) to continue to participate from the Effective Time to and
including December 31, 1999 in the Company's group medical plan maintained by
the Company in which such persons were participating prior to the Effective
Time. A&S agrees to be responsible for the actual costs incurred to provide such
continuation of participation and coverage and will promptly reimburse the
Company for any costs advanced by it.
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(c) DEFERRED COMPENSATION PLANS. A&S agrees to assume the Company's
responsibilities under the Company's Deferred Compensation Plan ("Plan") with
respect to those employees or directors identified on Schedule 8.2(c) of the
Disclosure Schedule and to make all payments required under the terms of such
Plan. In consideration for such assumption, the Company agrees to contribute to
A&S, immediately prior to the Effective Time, an amount of money equal to the
accrued liability of the Company under such Plan as of the Effective Time,
reduced by the tax benefit that the Company would otherwise receive as a result
of deducting such accrued liability. For purposes of this Agreement, such tax
benefit will be deemed to equal 39% of such accrued liability.
(d) CERTAIN LIABILITIES. The Company hereby agrees to indemnify A&S
against, and agrees to hold it harmless from any and all Indemnifiable Losses
incurred or suffered as a result of any claim by any Retained Employee which
arises under federal, state or local statute (including, without limitation,
Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age
Discrimination in Employment Act of 1990, the Equal Pay Act, the Americans with
Disabilities Act of 1990, ERISA and all other statutes regulating the terms and
conditions of employment), regulation or ordinance, under the common law or in
equity (including any claims for wrongful discharge or otherwise), or under any
policy, agreement, understanding or promise, written or oral, formal or
informal, between the Company and the Retained Employee, arising out of actions,
events or omissions that occurred (or, in the case of omissions, failed to
occur) prior to, or after, the Effective Time. A&S hereby agrees to indemnify
the Company against and agrees to hold the Company harmless from any and all
Indemnifiable Losses incurred or suffered as a result of any claim by any A&S
Employee which arises under federal, state or local statute (including, without
limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1991, the Age Discrimination in Employment Act of 1990, the Equal Pay Act, the
Americans with Disabilities Act of 1990, ERISA and all other statutes regulating
the terms and conditions of employment), regulation or ordinance, under the
common law or in equity (including any claims for wrongful discharge or
otherwise), or under any policy, agreement, understanding or promise, written or
oral, formal or informal, between the Company and/or A&S, on the one hand, and
the A&S Employee, on the other hand, arising out of actions, events or omissions
that occurred (or, in the case of omissions, failed to occur) prior to, or
after, the Effective Time. The indemnification provided for in this Section 8.2
shall be subject to the terms and conditions of the indemnification provisions
of Article V hereof.
Section 8.3 OTHER LIABILITIES AND OBLIGATIONS. As of the Effective Time,
with respect to claims relating to any employee liability or obligation not
otherwise provided for in this Agreement or the Merger Agreement, including,
without limitation, accrued holiday, vacation and sick day benefits, (a) the
Company shall assume and be solely responsible for all liabilities and
obligations whatsoever of both the Retained Business and the A&S Business for
all such claims made by Retained Employees and (b) A&S shall assume and be
solely responsible for all liabilities and obligations whatsoever of both the
Retained Business and the A&S Business for all such claims made by all A&S
Employees.
Section 8.4 PRESERVATION OF RIGHTS TO AMEND OR TERMINATE PLANS. No
provision of this Agreement, shall be construed as a limitation on the right of
the Company or A&S to amend any plan or terminate its participation therein
which the Company or A&S would otherwise have under the terms of such plan or
otherwise, and no provision of this Agreement shall be construed to create a
right in any employee or beneficiary of such
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employee under a plan that such employee or beneficiary would not otherwise have
under the terms of such plan itself.
Section 8.5 REIMBURSEMENT; INDEMNIFICATION. A&S and the Company
acknowledge that the Company, on the one hand, and A&S, on the other hand, may
incur costs and expenses (including, without limitation, contributions to plans
and the payment of insurance premiums) pursuant to any of the employee benefit
or compensation plans, programs or arrangements which are, as set forth in this
Agreement, the responsibility of the other party. Accordingly, the Company and
A&S agree to reimburse each other, as soon as practicable but in any event
within thirty (30) days of receipt from the other party of appropriate
verification, for all such costs and expenses reduced by the amount of any tax
reduction or recovery of tax benefit realized by the Company or A&S, as the case
may be, in respect of the corresponding payment made by it. All liabilities
retained, assumed or indemnified by A&S pursuant to this Article VIII shall in
each case be deemed to be liabilities of A&S, and all liabilities retained,
assumed or indemnified by the Company pursuant to this Article VIII shall in
each case be deemed to be liabilities of the Company, and, in each case, shall
be subject to the indemnification provisions set forth in Article V hereof.
Section 8.6 NONSOLICITATION OF EMPLOYEES. For a period ending two (2)
years after the date of this Agreement,
(a) A&S shall not, directly, or indirectly, (i) solicit or induce, or
attempt to solicit or induce, any Retained Employee (other than a Retained
Employee employed prior to the Effective Time at the Company's corporate
level), any employee of the Company or any Retained Subsidiary hired after
the date of this Agreement ("Company Subsequent Hire") or any employee of
the Parent or its Subsidiaries ("Parent Employee") to leave the employ of
the Company, the Parent or any of their Subsidiaries for any reason
whatsoever, or (ii) hire any Retained Employee, any Company Subsequent Hire
or Parent Employee; provided however, that the prohibition imposed by this
subparagraph (ii) shall not apply to any person whose employment by the
Company, Parent or any of their Subsidiaries is terminated by such entity;
and
(b) Neither the Company, Parent nor any of their respective
Subsidiaries shall, directly or indirectly, (i) solicit or induce, or
attempt to solicit or induce, any A&S Employee or any employee of A&S or
any subsidiary thereof hired after the date of this Agreement ("A&S
Subsequent Hire") to leave the employ of A&S or any subsidiary thereof for
any reason whatsoever, or (ii) hire any A&S Employee or any A&S Subsequent
Hire; provided however, that the prohibition imposed by this subparagraph
(ii) shall not apply to any person whose employment by A&S or any
subsidiary thereof is terminated by such entity.
Section 8.7 ACTIONS BY A&S. Any action required to be taken under this
Article VIII may be taken by A&S, a Subsidiary of A&S or an entity formed
pursuant to the provisions of Section 3.2(b).
ARTICLE IX
INSURANCE
Section 9.1 GENERAL. Except as otherwise agreed in writing between the
parties, the Company shall maintain until the Effective Time all policies of
liability, fire, extended coverage, fidelity, fiduciary, workers' compensation
and other forms of insurance in effect as
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of the date hereof insuring the products, properties, assets and operations of
A&S; provided, however, that coverage of the products, properties, assets and
operation of A&S under such policies shall cease as of the Effective Time.
Section 9.2 CERTAIN INSURED CLAIMS. The Company shall (a) use reasonable
efforts, upon A&S's written request and at A&S's sole expense, to continue to
maintain and renew for the benefit of A&S the insurance policies under the
Casualty Program with respect to claims having an occurrence date (as the term
"occurrence date" is customarily defined) prior to the Effective Time, relating
to, or arising out of the conduct of, the A&S Business, and (b) use reasonable
efforts and cooperate with A&S, upon A&S's written request and at A&S's sole
expense, to obtain coverage, recoveries and other benefits under such policies
for the benefit of A&S, including, without limitation, by filing and pursuing
claims with respect to obtaining such coverage, recoveries and other benefits;
provided that in no event shall the Company be obligated to litigate or pursue
any other extra-contractual remedies against any insurer; provided further that
all claims pursuant to this Section 9.2 shall be submitted, investigated,
processed and paid in accordance with the claims handling procedures used by the
Company and its Affiliates from time to time with respect to other like claims.
The Company will reimburse A&S for any recovery obtained by it pursuant to such
claims. The Company shall make available to A&S such of its employees as A&S may
reasonably request as witnesses or deponents in connection with A&S's pursuit of
claims.
ARTICLE X
CONDITIONS; TERMINATION; AMENDMENTS; WAIVERS
Section 10.1 CONDITIONS TO SPLIT-OFF.
(a) The obligations of each of the Company and A&S to effect the Split-Off
(other than those obligations which are normally expected to precede the
Split-Off) shall be subject to the satisfaction of the following conditions: (i)
the Purchaser shall have notified the Company that it is prepared to immediately
accept for payment shares of Company Common Stock pursuant to the terms and
conditions of the Merger Agreement, (ii) the Form S-1 (or the registration
statement referred to in Section 3.1(a) hereof) shall have been declared
effective by the SEC, (iii) no Court Order or Law shall have been enacted,
promulgated, issued or entered against any of the parties hereto which (x)
prohibits or materially restricts consummation of any of the transactions
contemplated by this Agreement and (y) remains in effect as of the date on which
the satisfaction of this condition is determined, (iv) the Company and the
Retained Subsidiaries (other than A&S) shall have obtained all consents required
to be obtained by the Company as a result of or in connection with the
transactions contemplated by this Agreement in order to avoid a material default
under any material contract or agreement to or by which the Company or any of
their respective Subsidiaries is a party or may be bound, or otherwise necessary
to permit the Company and each of the Retained Subsidiaries to conduct their
business in a manner consistent with its past practices, (v) A&S shall have
declared the Company Dividend and paid the Initial Distribution, and (vi) all
consents and approvals of, and notices to and filings with, any Governmental
Entity or any other person or entity arising out of or relating to the
consummation of the transactions contemplated by this Agreement, shall have been
obtained or made (as the case may be).
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(b) The parties hereto acknowledge and agree that (x) Parent may waive, on
behalf of all parties hereto, the conditions set forth in clauses (iii), (iv)
and (vi) of Section 10.1(a) above so long as (1) Parent reasonably believes that
consummation of the Split-Off at such time will have no material adverse effect
on A&S or the A&S Business and (2) Parent agrees to indemnify A&S pursuant to
the provisions of Article V hereof with respect to any Indemnifiable Losses
which result from any material adverse effect on A&S or the A&S Business which
results directly from such waiver, and (y) the Company may not waive any of the
conditions set forth in Sections 10.1(a)(i) through 10.1(a)(vi) above without
first obtaining the prior written consent of Parent. The respective obligations
of each party hereto to perform those of its obligations which are to be
performed following consummation of the Split-Off, shall be conditioned on the
consummation of the Split-Off in accordance with the provisions of this
Agreement.
Section 10.2 TERMINATION. This Agreement (i) may be terminated and the
Split-Off abandoned at any time prior to the Effective Time by the mutual
written agreement of each of the parties hereto or (ii) shall be terminated
automatically and the Split-Off abandoned upon any termination of the Merger
Agreement in accordance with the terms and conditions thereof. In the event that
this Agreement shall be terminated pursuant to this Section 10.2, all
obligations of the parties hereto under this Agreement shall terminate without
further liability or obligation of any party hereto to the other parties hereto
under this Agreement or otherwise, except (i) for any breach by such party of
the terms and provisions of this Agreement prior to the date of such termination
and (ii) as stated in Section 11.3 hereof.
Section 10.3 AMENDMENTS; WAIVERS. This Agreement may be amended, modified
or supplemented only by written agreement of each of the parties hereto. Any
term or provision of this Agreement may be waived at any time by the party
entitled to the benefit thereof by a written instrument executed by such party.
Except as provided in the preceding sentence, no action taken pursuant to this
Agreement, including, without limitation, any investigation by or on behalf of
any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representations, warranties, covenants, agreements
or conditions contained herein. The waiver by any party hereto of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any preceding or succeeding breach and no failure by any party to exercise any
right or privilege hereunder shall be deemed a waiver of such party's rights or
privileges hereunder or shall be deemed a waiver of such party's rights to
exercise the same at any subsequent time or times hereunder.
ARTICLE XI
MISCELLANEOUS
Section 11.1 SURVIVAL OF INDEMNITIES; RELEASE. The representations and
warranties made in Section 6.1 of this Agreement shall survive for a period of
three years from the Effective Time, but shall not survive any termination of
this Agreement; provided that claims with respect to breaches of covenants and
agreements set forth in this Agreement shall survive for the applicable statute
of limitations period. Except as otherwise expressly provided in this Agreement
(including, without limitation, the indemnification provisions of Article V
hereof), each of the parties (a) agrees that no claims or causes of action may
be brought against the Company, A&S, Parent or the Purchaser or any of their
Affiliates, agents or representatives based upon, directly or indirectly, any of
the representations and warranties contained in this Agreement after three years
following the Effective Time (other than causes
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of actions commenced after such three-year period to seek recourse for claims
asserted during such three-year period that are not resolved by the parties),
and (b) hereby waives and releases all other claims and causes of action, that
may be asserted or brought against the Company, A&S, Parent or the Purchaser or
any of their Affiliates, agents or representatives directly or indirectly based
upon or arising under this Agreement or the Merger Agreement, or the
transactions contemplated hereby or thereby. Notwithstanding the foregoing, this
Section 11.1 shall not limit any covenant or agreement of the parties in this
Agreement, the Merger Agreement or the Tax Sharing Agreement which contemplates
performance after the Effective Time (including, without limitation, the
covenants and agreements set forth in Sections 2.1(b) and 6.2 hereof), except
for the covenants and agreements in the Merger Agreement to the extent of their
performance prior to the Effective Time.
Section 11.2 ENTIRE AGREEMENT. This Agreement (including the schedules
and exhibits and the agreements and other documents referred to herein,
including, without limitation, the Merger Agreement, the Tax Sharing Agreement
and the Confidentiality Agreement) constitutes the entire agreement among the
parties with respect to the subject matter hereof and supersedes all other prior
negotiations, commitments, agreements and understandings, both written and oral,
between the parties or any of them with respect to the subject matter hereof.
Section 11.3 FEES AND EXPENSES. Except as otherwise provided in this
Agreement, the Merger Agreement or the Tax Sharing Agreement and subject to the
proviso below, all costs and expenses incurred by the Company and each of the
Retained Subsidiaries and by A&S in connection with (x) the preparation,
execution and delivery of this Agreement, the Merger Agreement and the Tax
Sharing Agreement and (y) consummating such party's obligations hereunder and
thereunder (including, without limitation, investment banking, legal,
accounting, audit and printing costs and expenses), shall be paid by the
Company, upon the submission to the Company of appropriate documentation
detailing such costs and expenses.
Section 11.4 GOVERNING LAW. This Agreement shall be governed by and
interpreted and enforced in accordance with the substantive laws of the State of
Ohio, without giving effect to the choice of law principles thereof.
Section 11.5 NOTICES. All notices and other communications hereunder
shall be (and shall be deemed to have been duly given upon receipt) by delivery
in person, by cable, telegram, telex, telecopy or other standard form of
telecommunication, or by registered or certified mail, postage prepaid, return
receipt requested, addressed as follows:
(a) If to the Company, to:
Essef Corporation
c/o Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, Ohio 44024
Facsimile No.: (440) 286-2206
Attention: Mark E. Brody
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with a copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114
Facsimile No.: (216) 479-8776
Attention: Mary Ann Jorgenson, Esq.
(b) If to A&S, to:
Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, Ohio 44024
Facsimile No.: (440) 286-2206
Attention: Stuart D. Neidus
with a copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114
Facsimile No.: (216) 479-8776
Attention: Mary Ann Jorgenson, Esq.
(c) If to Parent or Purchaser, to:
Pentair, Inc.
Waters Edge Plaza
1500 County Road B2 West
Saint Paul, Minnesota 55113-3105
Facsimile No.: (651) 639-5203
Attention: Richard J. Cathcart
with a copy to:
Pentair, Inc.
Waters Edge Plaza
1500 County Road B2 West
Saint Paul, Minnesota 55113-3105
Facsimile No.: (651) 639-5203
Attention: Louis L. Ainsworth, Esq.
with a copy to:
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5367
Facsimile No.: (414) 297-4900
Attention: Benjamin F. Garmer, III, Esq.
Section 11.6 SUCCESSORS AND ASSIGNS; NO THIRD PARTY BENEFICIARIES. This
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties 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 party hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties hereto (which consent may not be unreasonably withheld), except that any
party shall have the right,
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without the consent of any other party hereto, to assign all or a portion of its
rights, interests and obligations hereunder to one or more direct or indirect
subsidiaries, but no such assignment of obligation shall relieve the assigning
party from its responsibility therefor. Notwithstanding the foregoing, A&S shall
be permitted to assign its rights and obligations under this Agreement to one of
its Affiliates (the "A&S Transferee") prior to the Effective Time so long as (x)
such assignment shall not relieve A&S from its joint responsibility therefor and
(y) such assignment does not adversely affect any of the rights, benefits or
obligations of Parent or any of the Parent Indemnified Parties under this
Agreement or the Merger Agreement; provided that in the event of any such
assignment to the A&S Transferee, all references to A&S shall be automatically
deemed to be references to A&S. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and, except for the provisions of
Section 8.1 hereof, nothing in this Agreement, express or implied, is intended
to or shall confer upon any other person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement; provided, however, that
the Indemnified Parties are intended to be third party beneficiaries of the
provisions of Article V hereof, and shall have the right to enforce such
provisions as if they were parties hereto.
Section 11.7 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.
Section 11.8 INTERPRETATION. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
Section 11.9 SCHEDULES. The Disclosure Schedule shall be construed with
and as an integral part of this Agreement to the same extent as if the same had
been set forth verbatim herein.
Section 11.10 LEGAL ENFORCEABILITY. Any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without affecting the validity or enforceability of the
remaining provisions hereof. Any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
Section 11.11 CONSENT TO JURISDICTION. Each of the parties hereto
irrevocably and unconditionally (a) agrees that all suits, actions or other
legal proceedings arising out of this Agreement or any of the transactions
contemplated hereby (a "Suit") shall be brought and adjudicated solely in the
United States District Court for the Northern District of Ohio, or, if such
court will not accept jurisdiction, in any court of competent civil jurisdiction
sitting in Cleveland, Ohio, (b) submits to the non-exclusive jurisdiction of any
such court for the purpose of any such Suit and (c) waives and agrees not to
assert by way of motion, as a defense or otherwise in any such Suit, any claims
that it is not subject to the jurisdiction of the above courts, that such Suit
is brought in an inconvenient forum or that the venue of such Suit is improper.
Each of the parties hereto also irrevocably and unconditionally consents to the
service of any process, summons, pleadings, notices or other papers in a manner
permitted by the notice provisions of Section 11.5 hereof and agrees that any
such form of service shall be effective in connection with any such Suit;
provided that nothing contained in
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this Section 11.11 shall affect the right of any party to serve process,
pleadings, notices or other papers in any other manner permitted by applicable
Law.
Section 11.12 SPECIFIC PERFORMANCE. Each of the parties hereto
acknowledges and agrees that in the event of any breach of this Agreement, each
non-breaching party would be irreparably and immediately harmed and could not be
made whole by monetary damages. It is accordingly agreed that the parties hereto
(a) will waive, in any action for specific performance, the defense of adequacy
of a remedy at law and (b) shall be entitled, in addition to any other remedy to
which they may be entitled at law or in equity, to compel specific performance
of this Agreement in any action instituted in any court referred to in Section
11.11 hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers, all as of the date first
written above.
ESSEF CORPORATION
By: /s/ THOMAS B. WALDIN
-----------------------------------
Name: Thomas B. Waldin
Title: President
ANTHONY & SYLVAN POOLS CORPORATION
By: /s/ STUART D. NEIDUS
-----------------------------------
Name: Stuart D. Neidus
Title: Chief Executive Officer
PENTAIR, INC.
By: /s/ RICHARD J. CATHCART
-----------------------------------
Name: Richard J. Cathcart
Title: Executive Vice President
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ANNEX C
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT is dated as of the 30th day of April, 1999, by
and between Pentair, Inc., a Minnesota corporation ("Pentair"), Essef
Corporation, an Ohio corporation ("Essef"), and Anthony & Sylvan Pools
Corporation, an Ohio corporation ("A&S").
RECITALS
WHEREAS, Essef currently owns 100 percent of the total voting power and
value of the issued and outstanding stock of A&S and is the common parent of an
"affiliated group," as defined in Section 1504(a) of the Internal Revenue Code
of 1986, as amended ("Code"); and
WHEREAS, Pentair and Essef have executed an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which the shareholders of Essef will
receive both cash and shares of A&S in exchange for all of their shares of Essef
and, at the conclusion of the merger, Pentair will own 100 percent of the
outstanding shares of Essef; and
WHEREAS, A&S has heretofore joined with Essef in filing Consolidated Tax
Returns for a consolidated group that includes Essef, A&S, and certain other
corporations (the "Essef Group") for a taxable year that ends on September 30,
and most recently ended on September 30, 1998, and Essef, A&S, and Pentair
consider it in their mutual best interests to provide herein for the allocation
of the federal income tax, and state, local, and foreign income, franchise, and
other tax liabilities (collectively, "Tax Liabilities") of A&S and the remainder
of the Essef Group for taxable years ended prior to the Closing Date of the
Merger Agreement (the "Closing Date") and for the taxable year that includes the
Closing Date;
NOW, THEREFORE, in consideration of the premises, it is agreed as follows:
1. DEFINITIONS. For purposes of this Agreement:
a. "Consolidated return," "consolidated group," "taxable year,"
"carryback," and similar terms used herein and bearing on federal income tax
liability shall have the respective meanings ascribed to them in the Code and
the Treasury Regulations thereunder, and, where applicable, specifically the
provisions thereof relating to consolidated federal income tax returns. For
state, local, or foreign tax purposes, such terms shall be interpreted and
applied in a manner so as to achieve as nearly as possible the intention
reflected herein with respect to the federal income tax.
b. "Accountant" means Ernst & Young LLP, or such other United States of
America accounting firm as A&S and Essef may mutually agree.
c. "Tax" or "Taxes" means any federal, state, local, foreign, or other tax
of any kind whatsoever (together with any interest, penalties, or additions
imposed with respect thereto), including, without limitation, income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
service, premium, windfall profits, environmental, customs duties, capital
stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated,
rental, lease, ad valorem, or other tax.
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d. "Tax Affiliate" means, with respect to any Person, any other Person
who, directly or indirectly, controls, is controlled by, or is under common
control with, such Person; provided, however, that for purposes of this
Agreement, Tax Affiliates of Essef will not include A&S.
e. "Tax Benefit" means a reduction in the amount of Taxes that would
otherwise be payable, whether resulting from a deduction, credit, reduced gain
or increased loss from the disposition of an asset, or otherwise; a person will
be deemed to have recognized a Tax Benefit at the time the amount of Taxes such
person otherwise would pay is reduced;
f. "Tax Returns" means all returns, declarations, reports, claims for
refunds, information returns, statements, and other forms required to be filed
with respect to any Taxes, including any schedule or attachment thereto, and
including any amendments or supplements thereof.
g. "Final Determination" means with respect to any Tax for any period the
later of (i) the date on which the statute of limitations for instituting a
claim for refund of such Tax has expired, or if such claim was filed, the
expiration of the time for instituting suit with respect thereto; and (ii) the
date on which all administrative and judicial proceedings with respect to any
such assessments or refunds have been finally settled through agreement of the
parties to the proceeding or by an administrative or judicial decision from
which no appeal can be taken or the time for taking any such appeal has expired.
h. "Income Taxes" means any Tax based on or measured by or with respect to
gross or net income (including, without limitation, capital gain taxes, minimum
taxes, income taxes collected by withholding and Taxes on Tax preference items)
or receipts (together with any interest, penalties, and additions to Tax imposed
with respect thereto).
i. "Income Tax Return" means any Tax Return with respect to Income Taxes.
j. "Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
association, a limited liability company, a governmental entity (or any
department, agency, or political subdivision thereof), or any other entity.
k. "Split-Off" shall have the same meaning as in the Merger Agreement.
l. "Transition Agreement" means that certain agreement dated April 30,
1999 among Essef, A&S, and Pentair for the purpose of implementing certain of
the transfers and other transactions contemplated by the Merger Agreement, and
particularly the Split-Off.
2. TAXES ALLOCATED TO PENTAIR AND ESSEF. Pentair and Essef will be responsible
for, will pay or cause to be paid, and will indemnify and hold A&S harmless
from and against any and all liability for the following Taxes:
a. all Taxes imposed on or asserted against Essef, Pentair, or any of
their Tax Affiliates (including any obligations for Tax Liabilities of other
Persons that have been assumed, by indemnity or otherwise, by Essef, Pentair, or
any of their Tax Affiliates) with respect to any taxable periods, and, subject
to Section 4(a) hereof, all Taxes imposed on or asserted against A&S (including
any obligations for Tax Liabilities of other Persons that have been assumed, by
indemnity or otherwise, by A&S or any of its Tax Affiliates on or before the
Closing Date) with respect to all taxable periods that end on or prior to the
Closing Date, including any short taxable year of A&S that ends on the Closing
Date either by operation of law or pursuant to an election made as provided in
Section 3(a) hereof;
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b. subject to Section 4(a) hereof, all Taxes imposed on or asserted
against A&S arising out of the inclusion of A&S in any consolidated return filed
by Essef, Pentair, or any of their Tax Affiliates, including, without
limitation, any liability asserted under section 1502-6 of the U.S. Treasury
regulations and any similar provisions relating to state, local, or foreign
Taxes;
c. subject to the provisions of Section 4(b) hereof, all Taxes imposed on
Essef, A&S, or any of their Tax Affiliates as a result of the Split-Off pursuant
to the Merger Agreement;
d. all Taxes arising as a result of any election filed under section 338
of the Code, or any similar provision of state, local, or foreign law, as a
result of Pentair's acquisition of the shares of Essef pursuant to the Merger
Agreement; and
e. all Taxes allocated to Essef, Pentair, or any of their Tax Affiliates
pursuant to Section 3 hereof.
3. STRADDLE PERIODS.
a. With respect to any taxable period of A&S that would (absent an
election) include, but not end until after, the Closing Date (a "Straddle
Period"), Pentair, Essef (including its Tax Affiliates), and A&S will, to the
extent permitted by applicable law, elect with the relevant Tax authority to
close such Straddle Period as of the close of the Closing Date.
b. Pentair and Essef will be responsible for, will pay or cause to be
paid, and will indemnify and hold A&S harmless from and against, any Income
Taxes owed by A&S for the portion of any Straddle Period up to and including
June 30, 1999. For purposes of this Section 3(b), Income Taxes for the portion
of a Straddle Period up to and including June 30, 1999, will be determined based
upon an interim closing of the books of A&S as of June 30, 1999, based upon the
accounting practices and procedures used by A&S in preparing its Tax Returns.
c. As to any Tax other than an Income Tax (a "Non-Income Tax") for any
Straddle Period, Pentair and Essef will be responsible for, will pay or cause to
be paid, and will indemnify and hold A&S harmless from and against, (i) with
respect to any Non-Income Tax that is determined based upon specific
transactions (including, but not limited to, value added, sales and use Taxes),
all Non-Income Taxes applicable to transactions that have occurred during the
period through June 30, 1999, and (ii) with respect to any Non-Income Tax that
is not based upon specific transactions (including, but not limited to, license,
real property, personal property, franchise and doing business Taxes), a portion
of such Non-Income Tax equal to the full amount of such Non-Income Tax
multiplied by a fraction, the numerator of which is the number of days in the
Straddle Period ending on June 30, 1999 and the denominator of which is the
number of days in the entire Straddle Period; provided that Pentair's and
Essef's allocation will be adjusted appropriately to reflect the actual
proportionate period of property ownership or the activity of A&S during the
Straddle Period, as applicable, for any such Non-Income Taxes imposed with
respect to the ownership of specific items of property held by A&S or the
activity of A&S, as applicable, during the Straddle Period.
d. Pentair and Essef will pay to A&S the amount of any Tax Benefit
recognized by Essef that is attributable to any loss or other Tax attribute
that, if the Split-Off had occurred on June 30, 1999, would have been reported
by A&S on its own Tax Returns, or that otherwise results from the activities or
operations of A&S after June 30, 1999.
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4. TAXES ALLOCATED TO A&S.
a. Other than those Taxes for which Pentair or Essef is responsible
pursuant to Sections 2 and 3 hereof, A&S will be responsible for, will pay or
cause to be paid, and will indemnify and hold Pentair and Essef harmless from
and against any and all Taxes imposed on A&S if, in the case of Income Taxes,
the taxable income accrued after June 30, 1999, or if, in the case of other
Taxes, the event giving rise to the Tax occurred after June 30, 1999.
b. Within 30 calendar days of the Closing Date, A&S will pay to Essef the
amount, if any, computed under this subsection, which will be determined as
prescribed below.
i. First, calculate the Tax that Essef will owe on the gain
recognized as a result of the Split-Off of the A&S stock (the "A&S Stock
Tax") pursuant to the Merger Agreement, using (x) an assumed effective tax
rate of 39 percent, (y) the stock value determined under Section 5 hereof,
and (z) the tax basis reflected in Essef's books and records at the
beginning of the Closing Date, as adjusted for the net amount of dividend
distributed by A&S pursuant to Section 4.1 of the Transition Agreement,
after any adjustments required by the Code and the Treasury regulations.
ii. Second, calculate the Tax Benefit that Essef will recognize
because of payments (whether in cash or otherwise) made in satisfaction of
compensatory stock options (including options accelerated in connection
with the Merger), pursuant to the Merger Agreement (the "Essef Stock Option
Tax Benefit"), using an assumed effective tax rate of 39 percent.
iii. Third, calculate the nondeductible cash payments that Essef is
obligated to make as a result of the accelerated vesting of compensatory
stock options (the "Parachute Cost").
iv. Fourth, calculate the surplus (the "Surplus") or shortfall (the
"Shortfall") in the proceeds (the "Proceeds") received by or credited to
Essef upon the exercise of the compensatory stock options referenced in
(ii) above. The Surplus shall be the amount by which the Proceeds exceed
$5.8 million and the Shortfall shall be the amount by which $5.8 million
exceeds the Proceeds. However, there shall be no Shortfall for purposes
hereof unless the Proceeds are less than $5.55 million and there shall be
no Surplus for purposes hereof unless the Proceeds are greater than $6.05
million.
v. To the extent that the excess of (x) the sum of the Essef Stock
Option Tax Benefit plus the Surplus over (y) the sum of the A&S Stock Tax
plus the Parachute Cost plus the Shortfall (which excess is referred to as
the "Net Tax Benefit") is less than $4.2 million, A&S will pay to Essef the
amount by which $4.2 million exceeds the Net Tax Benefit. At A&S's option,
any amount owing to Essef under this subsection may be satisfied and
discharged by A&S's delivering to Essef a promissory note consistent with
the terms set forth in Exhibit A hereto.
vi. To the extent that the Net Tax Benefit exceeds $4.2 million, the
consequences thereof are not the subject of this Agreement but will be
addressed as prescribed in Section 4.1 of the Transition Agreement.
vii. Apart from any amount payable under this Section, A&S will have
no obligation to Essef, Pentair, or any of their Tax Affiliates on account
of the A&S Stock Tax or the Essef Stock Option Tax Benefit.
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viii. The time deadlines prescribed herein will apply notwithstanding
any other timing provisions of this Agreement. The calculations
contemplated by this subsection will be made initially by A&S within 30
calendar days after the Closing Date and will then promptly be presented to
Essef for its review and approval. If Essef disagrees with any of the
calculations, it will notify A&S within 30 calendar days of receiving the
calculations from A&S. In the event of such a disagreement, representatives
of the parties will meet to resolve their differences. If they are unable
to resolve all disagreements within 10 calendar days after Essef has
notified A&S of the disagreement, any remaining disagreements will be
resolved as prescribed in Section 14 hereof. The due date for any payments
required under this subsection will be extended by the period of time
required to resolve any disagreements between Essef and A&S with regard to
the calculations.
5. For purposes of computing the capital gain tax referenced in Sections 2(c)
and 4(b) hereof, the parties agree as follows:
a. The A&S stock is expected to be publicly traded, beginning on the
Closing Date, on the NASDAQ market. The parties will value the A&S stock at the
mean between the high and the low trading prices on the first full day of
trading following the Closing, unless, after reviewing the results of the first
five trading days following the Closing, either Pentair or A&S, each in its sole
discretion, determines that such value does not reflect the value of the A&S
shares for tax purposes on the Closing Date.
b. If either Pentair or A&S makes the determination referenced immediately
above, the parties will commence discussions and attempt to agree on the value
for the A&S stock (the "Value") based upon the trading pattern of the A&S stock
and on other relevant facts and circumstances, including an appraisal obtained
from Rhone Group of the fair market value of the A&S stock on the Closing Date,
which appraisal will reflect in substantial part the trading prices obtained in
the public securities market for the Essef stock in the last several days prior
to the Closing Date.
c. If after 15 calendar days following the commencement of the discussions
referenced above, Pentair and A&S have not agreed on the Value, the question
will be referred to binding arbitration by an arbitrator (the "Arbitrator")
mutually agreeable to both Pentair and A&S. The Arbitrator shall be either a tax
partner in one of the five largest public accounting firms doing business in the
United States or a tax partner in a law firm having at least 20 professionals
listed firm-wide in the most recent edition of The Tax Directory published by
Tax Analysts. In either case, the Arbitrator shall be an individual with
expertise in the issues of law and fact that relate to the valuation of
corporate stock distributed in corporate spin-offs or split-offs. The Arbitrator
shall base his decision on the considerations referenced in Section 5(b).
6. REFUNDS OF INDEMNIFIED TAXES.
a. A&S will promptly remit to Pentair or Essef an amount equal to all
refunds (including interest thereon and any amounts applied against a Tax
Liability for other taxable periods) of any Taxes for which A&S is indemnified
pursuant to this Agreement ("Essef's Refunds").
b. Pentair and Essef will promptly remit (and will cause their Tax
Affiliates to promptly remit) to A&S an amount equal to all refunds (including
interest thereon and any
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amounts applied against a Tax Liability for other taxable periods) of any Taxes
for which Essef is indemnified pursuant to this Agreement ("A&S's Refunds").
c. Upon the request of Essef, A&S will file claims for Essef's Refunds in
such form as Essef may reasonably request. Essef will have the sole right to
prosecute any claims for Essef's Refunds (by suit or otherwise) at Essef's
expense and with counsel of Essef's choice. A&S will cooperate fully with Essef
and its counsel in connection with any claims for Essef's Refunds.
d. Upon the request of A&S, Essef will file claims for A&S's Refunds in
such form as A&S may reasonably request. A&S will have the sole right to
prosecute any claims for A&S's Refunds (by suit or otherwise) at A&S's expense
and with counsel of A&S's choice. Essef will cooperate fully with A&S and its
counsel in connection with any claims for A&S's Refunds.
e. Except as otherwise provided in this Agreement, any refunds of Taxes
other than Essef's Refunds or A&S's Refunds will be the property of the payee of
such refunds and no other party to this Agreement or its Tax Affiliates will
have any right to such refunds.
7. TAX CARRYBACKS
a. If A&S incurs any net operating loss, net capital loss, or other
deduction or credit in any taxable period ending after the Closing Date (a
"Post-Closing Carryback") that may be carried back to any taxable period ending
on or before the Closing Date, Essef and Pentair will cooperate with A&S in
filing an appropriate refund claim or amended Tax Return and will assign and
promptly remit to A&S the amount of any refund of Tax received by, or Tax
Benefit recognized by, Pentair or Essef or any of their Tax Affiliates, as a
result of such Post-Closing Carryback.
b. If Pentair or Essef makes any remittance to A&S under Section 7(a)
hereof and all or part of such Post-Closing Carryback is subsequently
disallowed, then A&S shall promptly pay to Essef or Pentair that portion of the
remittance that relates to the portion of the Post-Closing Carryback that is
disallowed and, in addition thereto, any other costs or expenses incurred by
Pentair or Essef in respect to the disallowed portion of the Post-Closing
Carryback, including any interest attributable thereto that is assessed by the
taxing authority.
8. NO OBLIGATION TO FILE AMENDED TAX RETURNS. Except as otherwise specifically
provided in this Agreement, neither A&S, Pentair, or Essef, nor any of their
respective Tax Affiliates, will be obligated to file any amended Tax Return
or other Tax refund claim.
9. PREPARATION AND FILING OF TAX RETURNS.
a. Pentair or Essef will prepare or cause to be prepared, and file or
cause to be filed (i) all consolidated, combined, or unitary Income Tax Returns
of Essef or any of its Tax Affiliates that include A&S and that are listed in
Schedule 9(a)(i) hereto, and (ii) all Income Tax Returns required to be filed by
or on behalf of A&S for taxable periods ending on or before the Closing Date
(including by reason of any election under Section 3 hereof) and that are listed
in Schedule 9(a)(ii) hereto, and (iii) all other Tax Returns required to be
filed by or on behalf of A&S on or before the Closing Date. Pentair and Essef
covenant that, except for the returns referenced in Schedule 9(a)(i) hereto,
neither they nor any of their Tax Affiliates will file or cause to be filed any
consolidated, combined, or unitary returns that include A&S without giving A&S
at least 30 days notice of their intent to do so and obtaining the prior written
approval of A&S to being so included.
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b. A&S will prepare or cause to be prepared, and file or cause to be
filed, all Tax Returns of A&S other than those set forth in Section 9(a) hereof.
A&S will prepare all A&S Tax Returns for taxable periods including, but ending
after, the Closing Date ("Straddle Period Returns") in a manner consistent with
A&S's past Tax accounting practice and, in the absence thereof, reasonable Tax
accounting practices selected by A&S.
c. Neither Pentair, Essef, nor A&S, nor any of their Tax Affiliates, will
exercise any election available under section 1.1502-76(b)(2) of the U.S.
Treasury regulations or any corresponding provisions of other Tax laws for any
Straddle Period.
d. A&S will assist Pentair or Essef in timely obtaining any required
signatures or other filing requirements in respect of Tax Returns prepared by
Pentair or Essef for A&S pursuant to section 9(a).
e. Upon request of either A&S or Essef, the other party shall make
available prior to filing (and after filing) for inspection and copying all Tax
Returns and related workpapers with respect to Taxes to the extent that (i) such
Tax Return relates to Taxes for which the requesting party may be liable, (ii)
such Tax Return relates to Taxes for which the requesting party may be liable in
whole or in part for any additional Taxes owing as a result of adjustments to
the amount of Taxes reported on such Tax Return, (iii) the requesting party
reasonably determines that it must inspect such Tax Return to confirm compliance
with the terms of this Agreement. A&S and Essef shall attempt in good faith to
resolve any issues arising out of the review of such Tax Returns.
10. PROCEDURES FOR SETTLEMENT OF TAX ALLOCATIONS.
a. This Section 10(a) will govern the settlement as between A&S, on the
one hand, and Essef and Pentair, on the other hand, of all Straddle Period Tax
allocations for Taxes that are reported on a Straddle Period Return. With
respect to each Straddle Period Return that involves Taxes subject to allocation
pursuant to Section 3(b) hereof, A&S will, at least sixty (60) days prior to the
final due date (including extensions) of such Straddle Period Return, provide to
Essef (i) a copy of such Straddle Period Return (including supporting schedules
and workpapers) and (ii) a statement (including supporting schedules and
workpapers) certifying the amount of Tax shown on such Straddle Period Return
that is allocable to Essef pursuant to Section 3(b) hereof reduced by any
payments made by A&S prior to the Closing Date, and by Essef and its Tax
Affiliates at any time, in respect of such Taxes (whether as estimated Taxes or
otherwise) (the "Statement"). Essef and its authorized representatives will have
the right to review the Statement for thirty (30) days following its receipt of
the Statement (the "30-Day Review Period"). If Essef disagrees with the
allocation in the Statement, it will notify A&S in writing of such disagreement
prior to the close of the 30-Day Review Period, and Essef and A&S will consult
and attempt to resolve in good faith the disagreement. In the event, Essef and
A&S are unable to resolve the disagreement within fifteen (15) days following
the end of the 30-Day Review Period, Essef and A&S will jointly request that the
disagreement be resolved pursuant to the procedures prescribed in Section 14
hereof. Not later than five (5) days after the later of (i) the end of the
30-Day Review Period, or (ii) if there is a disagreement, the date notice is
provided to Essef and A&S regarding the resolution of the disagreement pursuant
to Section 14, Essef or Pentair shall pay to A&S or A&S will pay to Essef or
Pentair, as the case may be, an amount equal to the difference between the Taxes
shown on the Statement or in such notice (as the case may be) as being allocable
to Essef pursuant to Section 3(b) hereof, and (ii) any payments made by A&S on
or
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prior to the Closing Date, and by Essef and its Tax Affiliates at any time, in
respect of such Taxes (whether as Estimated Taxes or otherwise).
b. This Section 10(b) will govern the settlement as between A&S, on the
one hand, and Essef and Pentair, on the other hand, of all Straddle Period Tax
allocations for Taxes that are not required to be reported on a Straddle Period
Return (e.g., Taxes that are assessed without the filing of a Tax Return). With
respect to each such Tax subject to allocation pursuant to Section 3(b) hereof,
A&S will, at least thirty (30) days prior to the final due date of such Tax,
provide to Essef (i) a copy of the Tax assessment or other supporting schedules
and workpapers and (ii) a statement (including supporting schedules and
workpapers) certifying the amount of Tax that is allocable to Essef pursuant to
Section 3(b) hereof reduced by any payments made by A&S on or prior to the
Closing Date, and by Essef and its Tax Affiliates at any time, in respect of
such Taxes (whether as estimated Taxes or otherwise) (the "Statement"). Essef
and its authorized representatives will have the right to review the Statement
for ten (10) days following Essef's receipt of the Statement (the "10-Day Review
Period"). If Essef disagrees with the allocation in the Statement, it will
notify A&S in writing of such disagreement prior to close of the 10-Day Review
Period, and Essef and A&S will consult and attempt to resolve in good faith the
disagreement. In the event Essef and A&S are unable to resolve the disagreement
within ten (10) days following the end of the 10-Day Review Period, Essef and
A&S will jointly request to resolve the disagreement pursuant to Section 14. Not
later than five (5) days after the later of (i) the end of the 10-Day Review
Period, or (ii) if there is a disagreement, the date notice is provided to Essef
and A&S regarding the resolution of the disagreement pursuant to Section 14,
Essef or Pentair will pay to A&S or A&S will pay to Essef, as the case may be,
an amount equal to the difference between (i) the Taxes shown on the Statement
or in such notice (as the case may be) as being allocable to Essef pursuant to
Section 3(b) hereof, and (ii) any payments made by the A&S on or prior to the
Closing Date, and by Essef and its Tax Affiliates at any time, in respect of
such Taxes (whether as estimated Taxes or otherwise).
11. COOPERATION; ACCESS TO INFORMATION; TAX RECORDS.
a. Essef and A&S will cooperate fully with each other with respect to, and
will make available to each other, such Tax data and other information as may be
reasonably required for (i) the preparation of any Tax Returns required to be
prepared by Essef or A&S under this Agreement, (ii) determining the liability
for and amount of any Taxes due or the right to and amount of any refund of
Taxes, (iii) examinations of Tax Returns, and (iv) any administrative or
judicial proceeding in respect of Taxes assessed or proposed to be assessed.
Such cooperation shall include making all information and documents in their
possession relating to such Tax Returns, Tax Liabilities or refunds,
examinations, or administrative or judicial proceedings available to the other
party as provided in Section 11(b) hereof. Essef and A&S shall also make
available to the other, as reasonably requested and available, personnel
(including officers, directors, employees and agents of Essef and A&S and their
Tax Affiliates) responsible for preparing, maintaining and interpreting
information and documents relevant to Taxes, and personnel reasonably required
as witnesses or for purposes of providing information or documents in connection
with any administrative or judicial proceedings relating to Taxes. Any
information or documents provided under this Section 11, shall be kept
confidential by the party receiving the information or documents, except as may
otherwise be necessary in connection with the filing of Tax Returns or in
connection with any administrative or judicial proceedings relating to Taxes.
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b. Essef and A&S and their respective Tax Affiliates shall make available
to each other for inspection and copying during normal business hours upon
reasonable notice all Tax records in their possession to the extent reasonably
required by the other party in connection with the preparation of Tax Returns,
audits, litigation, or the resolution of items under this Agreement. Essef, A&S,
and their respective Tax Affiliates shall preserve and keep such Tax records in
their possession until the expiration of any applicable statutes of limitation
and as otherwise required by law, but in any event for a period not less than
eight (8) years after the Closing Date. Notwithstanding the foregoing, a party
or its Tax Affiliates may dispose of records sooner upon ninety (90) days prior
notice to the other party. Such notice shall include a list of the records to be
disposed of describing in reasonable detail each file, book or other record
accumulation being disposed. The notified party shall have the opportunity, at
its cost and expense, to copy or remove, within such ninety (90) day period, all
or any part of such Tax records. For purposes of this Section 11, Tax records
include Tax Returns, journal vouchers, cash vouchers, general ledgers, material
contracts, return workpapers, and any other records pertaining to or used in the
preparation of Tax Returns.
12. AUDITS.
a. A&S or Essef (the "Notifying Party") will promptly notify the other
(the "Notified Party") in writing upon the receipt of notice of any pending or
threatened Tax audits or assessments (i) relating to any taxable period of A&S
ending on, prior to, or including the Closing Date, or (ii) that may affect the
determination of Taxes for which the Notified Party is or may be obligated to
indemnify the Notifying Party pursuant to this Agreement. The notice required
under this Section 12(a) is referred to in this Agreement as the "Audit
Notification."
b. Subject to Section 12(c) hereof, the Notified Party will have the
right, at its election, (i) to represent the Notifying Party and to exclusively
control the handling of any Tax audit or assessment referred to in Section 12(a)
hereof, including in any administrative or court proceeding relating thereto,
(ii) to employ counsel of its choice at its expense and to control the conduct
of such audit, assessment, or proceeding, including settlement or other
disposition thereof and (iii) to settle the contest of any Tax or agree to an
adjustment to any Tax referred to in Section 12(a) (the rights under (i), (ii)
and (iii) are referred to in this Agreement collectively as the "Representation
Right"); PROVIDED, however, that the Representation Right will apply only to any
issues or items (x) relating to any taxable period of A&S ending on, prior to,
or including the Closing Date, or (y) that may affect the determination of Taxes
for which the Notified Party is or may be obligated to indemnify the Notifying
Party pursuant to this Agreement. As reasonably necessary, the Notifying Party
will fully cooperate, and will cause its Tax Affiliates to fully cooperate, at
the Notified Party's expense, with the Notified Party and its counsel in the
defense against or compromise of any claim in any said audit, assessment, or
proceeding, such cooperation to include (but not be limited to) the grant of any
necessary powers of attorney.
c. To exercise the Representation Right, the Notified Party must first,
within a reasonable period following the receipt of the Audit Notification, (i)
notify the Notifying Party in writing that the Notified Party intends to
exercise the Representation Right, and (ii) deliver to the Notifying Party a
written statement acknowledging the Notified Party's obligation to indemnify the
Notifying Party in accordance with the terms of this Agreement with respect to
the Taxes as to which the Notified Party exercises the Representation Right.
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d. The Notifying Party's personnel shall have the right to participate in
any administrative or judicial proceedings for which the Notified Party
exercises its Representation Right (including assisting with field audits,
administrative appeals, and subsequent litigation) in so far as they relate to
the Notifying Party, and such participation shall be reflected by the grant of
appropriate powers of attorney.
e. A&S and Essef shall have exclusive control of all administrative and
judicial proceedings related to their respective Taxes other than those
described in Section 12(a).
f. For so long as the Notified Party is exercising its Representation
Right, it shall not be required to indemnify the Notifying Party pursuant to
Section 13 hereof until there occurs a Final Determination of the liability of
A&S for the Tax.
13. PROCEDURES FOR OBTAINING INDEMNIFICATION.
a. If either Essef or A&S (the "Indemnified Party") determines that it or
any of its Tax Affiliates is or may be entitled to indemnification by the other
party (the "Indemnifying Party") under this Agreement as a result of the
allocations of responsibility for Taxes set forth in Sections 2 through 4, the
Indemnified Party will promptly deliver to the Indemnifying Party a written
notice and demand therefor (the "Notice") specifying the basis for its claim for
indemnification, the nature of the claim, and, if known, the amount for which
the Indemnified Party reasonably believes it or any of its Tax Affiliates is
entitled to be indemnified. The Notice must be received by the Indemnifying
Party no later than thirty (30) days before the expiration of the applicable Tax
statute of limitations; provided, however, that if the Indemnified Party does
not receive notice from the applicable governmental taxing authority
("Government Notice") that an item exists that could give rise to a claim for
indemnification hereunder more than thirty (30) days before the expiration of
the applicable Tax statute of limitations, then the Notice must be received by
the Indemnifying Party immediately after the Indemnified Party receives the
Government Notice. Unless the Indemnifying Party objects to the claim for
indemnification (in the manner set forth in Section 13(b) hereof), and subject
to Section 12(f), the Indemnifying Party will pay the Indemnified Party the
amount set forth in the Notice, in cash or other immediately available funds,
within thirty (30) days after receipt of the Notice; provided, however, that if
the amount for which the Indemnified Party reasonably believes it is entitled to
be indemnified is not known at the time of the Notice, the Indemnified Party
will deliver to the Indemnifying Party a further notice specifying such amount
as soon as reasonably practicable after such amount is known and payment will
then be made as set forth above.
b. The Indemnifying Party may object to the claim for indemnification (or
the amount thereof) set forth in any Notice by giving the Indemnified Party,
within thirty (30) days following receipt of such Notice, written notice setting
forth the Indemnifying Party's grounds for so objecting (the "Objection
Notice"). If the Indemnifying Party does not give the Indemnified Party the
Objection Notice within such thirty (30)-day period, the Indemnifying Party may
exercise any and all of its rights under applicable law to collect such amount.
c. If Essef and A&S are unable to settle any dispute regarding a claim for
indemnification within thirty (30) days after receipt of the Objection Notice,
they will, in accordance with Section 14, jointly request to resolve the dispute
as promptly as possible under the procedures set forth in Section 14.
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d. Failure by the Indemnified Party to promptly deliver to the
Indemnifying Party a Notice in accordance with Section 13(a) hereof will not
relieve the Indemnifying Party of any of its obligations under this Agreement
except to the extent the Indemnifying Party is prejudiced by such failure.
e. The indemnification provisions of this Section 13 shall be the
exclusive remedy following the Closing Date for the allocation of Taxes pursuant
to this Agreement.
14. PROCEDURES FOR RESOLVING DISPUTES. Except as provided in Section 5, if
Essef and A&S fail to mutually agree on the resolution of any of the
matters in this Agreement that require the agreement of the parties, then
such matter shall be referred to the Accountant for a binding
determination. Essef and A&S shall deliver to the Accountant copies of any
schedules or documentation that may be reasonably required by the
Accountant to make its determination. Essef and A&S shall be entitled to
make presentations to the Accountant in connection therewith. Essef and A&S
shall use all reasonable efforts to cause the Accountant to promptly
complete such determination. The determination of the Accountant shall be
final and binding on all parties. The costs incurred in retaining the
Accountant to make a determination shall be shared equally by Essef and
A&S.
15. PAYMENT. If a party (the "Payor") fails to make a payment due and owing
under this Agreement to the other party or any of its Tax Affiliates (the
"Payee") within 10 business days after the parties hereto agree (or there
is a binding determination by the Accountant) that such payment is due and
owing, the Payor will pay to the Payee interest on such payment from and
including the date the parties reach such agreement (or such binding
determination is made) to but excluding the day the Payor makes such
payment, at a rate equal to seven percent (7%) per annum.
16. AMENDMENTS. Any amendment, supplement, variation, alternation, or
modification to this Agreement must be made in writing and duly executed by
an authorized representative or agent of each of the parties hereto.
17. ASSIGNMENT. This Agreement and all the rights and obligations granted
hereby shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns, it being expressly agreed that this
Agreement shall not be assigned nor shall any rights or obligations arising
hereunder be transferred by one party without the prior written consent of
the other parties. Prior to the Closing Date, Essef and A&S may elect to
form a holding company for the ownership of the A&S stock. In that event,
(i) Essef will transfer the shares of A&S stock to the holding company and
shares of common stock of the holding company will be issued in
substitution of the A&S stock in the Split-Off and (ii) the benefits and
obligations contemplated by this Tax Sharing Agreement will be binding upon
and inure to the holding company, provided that A&S will not be released
from its obligations hereunder.
18. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties and supersedes any and all prior or contemporaneous
understandings, negotiations, or agreements between the parties relating to
the transactions contemplated hereby or the subject matter of this
Agreement, and shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives.
19. NO WAIVER. The failure in any one or more instances of a party to insist
upon performance of any of the terms, covenants, or conditions of this
Agreement, to exercise
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<PAGE> 199
any right or privilege conferred in this Agreement, or to waive any breach
of any of the terms, covenants, or conditions of this Agreement, shall not
be construed as a subsequent waiver of any such terms, covenants,
conditions, rights, or privileges, but the same shall continue and remain
in full force and effect as if no such forbearance or waiver had occurred.
No waiver shall be effective unless it is in writing and signed by an
authorized representative of the waiving party.
20. NO DOUBLE RECOVERY. No provision of this Agreement shall be construed to
provide an indemnity or other recovery for any Taxes, costs, damages, or
other amounts for which the damaged person has been fully compensated under
any other provision of this Agreement or under any other agreement or
action at law or in equity.
21. SEVERABILITY. Any provisions of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdictions, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any other jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, each party hereby waives any law that renders
any provision hereof prohibited or unenforceable in any respect.
22. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, and all such counterparts shall be
deemed to constitute one and the same instrument.
23. FEES, COSTS AND EXPENSES. Except as otherwise provided herein, each party
shall be responsible for its own fees, costs, and expenses incurred by it
in connection with this Agreement.
24. THIRD PARTY BENEFICIARIES. Nothing in this Agreement is intended to
create, nor shall anything in this Agreement be deemed to create or have
created, any third party beneficiary rights.
25. CONSTRUCTION. All references to this Agreement shall include all
attachments hereto, and words importing the singular shall include the
plural and vice versa, and words importing a gender shall include other
genders.
26. HEADINGS. The descriptive section headings contained in this Agreement are
for convenience of reference only and shall not control or affect the
meaning or construction of any provision of this Agreement.
27. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when personally
delivered, five (5) business days after mailing when mailed by certified
mail, return receipt requested, or one (1) business day after sending via
Federal Express or similar overnight courier service, or when receipt is
confirmed when sent by facsimile. Such notices or other communications
shall be sent to the following addresses, unless other addresses are
subsequently specified in writing:
a. If to the Essef Corporation:
Essef Corporation
c/o Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, Ohio 44024
ANNEXES
C-12
<PAGE> 200
Facsimile No.: (440) 286-2206
Attention: Mark E. Brody
with a copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114
Facsimile No.: (216) 479-8776
Attention: Mary Ann Jorgenson, Esq.
b. If to A&S, to:
Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, Ohio 44024
Facsimile No.: (440) 286-2206
Attention: Stuart D. Neidus
with a copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114
Facsimile No.: (216) 479-8776
Attention: Mary Ann Jorgenson, Esq.
c. If to Pentair, to:
Pentair, Inc.
Waters Edge Plaza
1500 County Road B2 West
Saint Paul, Minnesota 55113-3105
Facsimile No.: (651) 639-5203
Attention: Richard J. Cathcart
with a copy to:
Pentair, Inc.
Waters Edge Plaza
1500 County Road B2 West
Saint Paul, Minnesota 55113-3105
Facsimile No.: (651) 639-5203
Attention: Louis L. Ainsworth, Esq.
with a copy to:
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5367
Facsimile No.: (414) 297-4900
Attention: Benjamin F. Garmer, III, Esq.
ANNEXES
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<PAGE> 201
28. GOVERNING LAW. This Agreement shall be governed by and controlled as to
its validity, enforcement, interpretation, construction, effect, and in all
other respects by the laws of the State of Ohio (without giving effect to
any choice or conflict of law provision or rule thereof) applicable to
contracts made and to be performed in that State.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
ANNEXES
C-14
<PAGE> 202
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their duly authorized representatives as of the day and year first above
written.
ESSEF CORPORATION
By: /s/ THOMAS B. WALDIN
-----------------------------------
Name: Thomas B. Waldin
Its: President
ANTHONY & SYLVAN POOLS CORPORATION
By: /s/ STUART D. NEIDUS
-----------------------------------
Name: Stuart D. Neidus
Its: Chief Executive Officer
PENTAIR, INC.
By: /s/ RICHARD J. CATHCART
-----------------------------------
Name: Richard J. Cathcart
Its: Executive Vice President
ANNEXES
C-15
<PAGE> 203
EXHIBIT A TO
TAX SHARING
AGREEMENT
SUMMARY TERMS OF ANTHONY & SYLVAN
SENIOR SUBORDINATED DEBT SECURITY
Issue Senior Subordinated Debt Security (the
"Senior Subordinated Debt")
Issuer Anthony & Sylvan
Issue Date Within two business days after the
determination of the calculation of the Net
Tax Benefit (as defined in the Tax Sharing
Agreement).
Principal Amount The Principal Amount will be the amount by
which $4.2 million exceeds the Net Tax
Benefit.
Coupon Rate Interest on the Senior Subordinated Debt
will be at a fixed rate determined on the
Issue Date and will accrue at a per annum
coupon rate (the "Coupon Rate") equal to
Anthony & Sylvan's initial bank agreement
pricing terms (for a comparable 3-year
maturity) plus the basis point spread
(indicated in the table below) based on the
maximum total debt-to-pro forma EBITDA
covenant provided for in Anthony & Sylvan's
initial bank agreement. Interest will be
paid in cash semiannually at the end of each
six-month period commencing on the Closing
Date until the Maturity Date.
<TABLE>
<CAPTION>
BASIS POINT SPREAD
MAXIMUM TOTAL DEBT/LTM EBITDA COVENANT OVER
IN INITIAL BANK AGREEMENT INITIAL BANK RATE
-------------------------------------- ------------------
<S> <C>
less than or equal to 3.50x +225
greater than 3.50x, less than or equal to 3.75x +350
greater than 3.75x, less than or equal to 4.00x +450
greater than 4.00x +550
</TABLE>
Optional Redemption Anthony & Sylvan will have the option to
redeem the Senior Subordinated Debt in cash,
in whole or in part, at par plus accrued
interest, if any, at any time after the
Issue Date.
Mandatory Redemption In the event of sale, merger or other
dispositive transaction involving Anthony &
Sylvan or all or a substantial portion of
Anthony & Sylvan's assets, the Senior
Subordinated Debt will be redeemed at par
plus accrued interest.
Maturity The Senior Subordinated Debt will be repaid
in full at the Maturity Date, which shall be
three years and one day following the
Closing Date.
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<PAGE> 204
Ranking The Senior Subordinated Debt will rank: (a)
junior to all senior bank financing of
Anthony & Sylvan and (b) senior to all other
indebtedness of and all equity interests in
Anthony & Sylvan.
Covenants and Representations The Senior Subordinated Debt will carry the
same financial covenants as Anthony &
Sylvan's initial bank agreement. The
holder(s) of Senior Subordinated Debt shall
receive the same information, reports and
inspection rights provided to senior bank
lenders of Anthony & Sylvan.
Default The Senior Subordinated Debt will contain
default provisions substantially equivalent
to those contained in Anthony & Sylvan's
bank agreement. In addition, the Senior
Subordinated Debt shall contain a
cross-acceleration clause permitting the
holder to accelerate the due date thereof in
the event of any acceleration of the due
date of any other indebtedness of Anthony &
Sylvan in excess of $500,000.
Governing Law The Senior Subordinated Debt and all
documents related to the transactions
contemplated in connection with the issuance
of the Senior Subordinated Debt shall be
governed by and construed in accordance with
the laws of the State of New York. The
Issuer shall agree to submit to the
jurisdiction of federal district courts
sitting in, or state courts of, New York,
Minnesota or Ohio as the holder may
determine in its discretion in connection
with the interpretation or enforcement of
the Senior Subordinated Debt. The Issuer
shall agree to waive its rights to trial by
jury in any proceeding arising out of the
Senior Subordinated Debt.
ANNEXES
C-17
<PAGE> 205
ANNEX D
April 30, 1999
Members of the Board of Directors
220 Park Drive
Chardon, OH 44024
Members of the Board of Directors:
You have requested our opinion as to the fairness to the holders (other
than holders of Dissenting Shares as defined in the Merger Agreement (as defined
below)) of the issued and outstanding common stock, without par value (the
"Shares") of Essef Corporation (the "Company"), from a financial point of view
of the Aggregate Consideration (as defined below) to be received by such holders
pursuant to the Merger Agreement.
We understand that the Aggregate Consideration to be received by the
holders of Shares (other than holders of Dissenting Shares) will be received
pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of April 30, 1999 among Pentair, Inc. ("Acquiror"),
Northstar Acquisition Company, a wholly owned subsidiary of Acquiror ("Merger
Sub") and the Company. Pursuant to the terms of the Merger Agreement, Merger Sub
will be merged into the Company (the "Merger") and at the Effective Time (as
defined in the Merger Agreement) each issued and outstanding Share (other than
Dissenting Shares and Shares held by the Company as treasury stock or Shares
owned by Acquiror, Merger Sub or any other Subsidiary (as defined in the Merger
Agreement) of Acquiror) will be converted into the right to receive an amount of
cash equal to $19.09 (the "Cash Consideration") and 0.25 shares of common stock
(the "A&S Shares"), of Anthony & Sylvan Pools Corporation ("A&S") (the "Other
Consideration" and together with the Cash Consideration, the "Aggregate
Consideration"). We also understand that pursuant to the terms of the Transition
Agreement, dated as April 30, 1999 among the Company, A&S and Acquiror (the
"Transition Agreement"), the Company Dividend (as defined in the Transition
Agreement) will be increased by the amount by which the A&S Net Assets (as
defined in the Transition Agreement) exceed $40.8 million.
In addition, we understand that pursuant to the terms of the Tax Sharing
Agreement (the "Tax Agreement," and together with the Merger Agreement and the
Transition Agreement, the "Agreements"), dated as of the 30th day of April, 1999
between Acquiror, the Company and A&S, to the extent that the Net Tax Benefit
(as defined in the Tax Agreement) is less than $4.2 million, A&S will pay to the
Acquiror the amount by which $4.2 million is in excess of the Net Tax Benefit
and to the extent that the Net Tax Benefit exceeds $4.2 million, the Acquiror
will pay to A&S the amount of such excess. Each transaction contemplated by the
Agreements is more fully described in the applicable Agreement.
ANNEXES
D-1
<PAGE> 206
For purposes of the opinion set forth herein, we have:
<TABLE>
<S> <C>
(i) reviewed the financial terms of the Merger Agreement;
(ii) reviewed the financial terms of the Transition Agreement;
(iii) reviewed the financial terms of the Tax Agreement;
(iv) analyzed certain publicly available historical business and
financial information relating to the Company and pro forma
historical business and financial information provided to us
by the Company for A&S;
(v) reviewed historical stock prices and trading volumes of the
Shares;
(vi) reviewed and discussed with representatives of the senior
management of the Company certain financial forecasts and
other business and financial information, both historical
and forecasted, provided to us by the Company, including pro
forma financial projections for A&S and financial analyses
with respect to the ability of A&S to finance its operating
and capital requirements in the future (all of such
forecasts reviewed and discussed being referred to herein as
the "Forecasts");
(vii) reviewed public information with respect to certain other
public companies in lines of business generally comparable
to the business of the Company;
(viii) reviewed certain publicly available security research
reports regarding the business of the Company and forecasts
for the Company;
(ix) considered the financial terms, to the extent publicly
available, of selected business combinations in the water
treatment industry specifically and in other industries
generally; and
(x) conducted such other studies, analyses, and investigations
as we deemed appropriate.
</TABLE>
In rendering our opinion, we have assumed and relied upon the accuracy and
the completeness of the foregoing financial and other information and have not
assumed any responsibility for independent verification of such information or
any independent valuation or appraisal of any of the assets or liabilities of
the Company. In that regard, we have assumed with your consent, that the
Forecasts have been reasonably prepared on bases reflecting the best currently
available estimates and judgement of management of the Company. We assume no
responsibility for and express no view as to the Forecasts or the assumptions on
which they are based. You have not requested us to act, and we have not acted,
as appraisers and we have not made any independent appraisals or evaluations
with respect to the assets or liabilities, contingent or otherwise, of the
Company or A&S or concerning the solvency or fair value of A&S for any state law
or federal bankruptcy law purposes, and we have not been furnished with any such
appraisals or evaluations. In addition, we are not expressing any opinion herein
as to the prices at which the A&S Shares may trade if and when they are issued.
Furthermore, our opinion is based on economic, monetary, market and other
conditions existing on, and the information made available to us, as of the date
hereof. Our opinion does not address the Company's underlying business decision
to effect the transactions contemplated by the Agreements.
In rendering our opinion, we have also assumed that transactions
contemplated by the Agreements will be consummated pursuant to the terms and
subject to the conditions contained in the Agreements and, in that regard, have
relied on your estimates of the Net Tax Benefits for the purposes of rendering
this opinion. In addition, we have assumed that obtaining the necessary
regulatory and governmental approvals for the consummation of the transactions
contemplated by the Agreements and the waiver, if any, by the Company of any
ANNEXES
D-2
<PAGE> 207
conditions to consummation will not have an adverse effect on A&S, or on the
financial terms of the transactions contemplated by the Agreements.
We have not reviewed any proxy statement, registration statement or similar
documents that have been or may be prepared for use in connection with the
transactions contemplated by the Agreements.
We have acted as financial advisor to the Company in connection with the
Transaction and we will receive fees for such services, a substantial portion of
which are contingent upon consummation of the transactions contemplated by the
Agreements. Our firm has in the past provided investment banking and financial
advisory services to the Company and has received customary investment banking
and financial advisory fees for rendering such services.
Our engagement and the opinion expressed herein are for the benefit of the
Board of Directors of the Company and our opinion is rendered in connection with
its consideration of the transactions contemplated by the Agreements. In that
regard, the opinion expressed herein is directed to the Aggregate Consideration
and not separately to either the Cash Consideration or the Other Consideration.
Furthermore, our opinion does not address the relative merits of the transaction
contemplated pursuant to the Agreements as compared to any alternative business
transaction that might be available to the Company.
This opinion is not intended to and does not constitute a recommendation to
any holder of Shares as to how any such holder should vote with respect to the
transactions contemplated by the Agreements. It is understood that this letter
may not be disclosed to any person or otherwise referred to, quoted or
summarized, without our prior written consent other than in documents filed in
connection with this transaction.
Based upon, and subject to, the foregoing, we are of the opinion that, as
of the date hereof, the Aggregate Consideration to be received by the holders of
the issued and outstanding Shares (other than Dissenting Shareholders) pursuant
to the Merger Agreement is fair, from a financial point of view, to such
holders.
Very truly yours,
RHONE GROUP LLC
By: /s/ M. STEVEN LANGMAN
-----------------------------------
Managing Director
ANNEXES
D-3
<PAGE> 208
ANNEX E
SEC. 1701.85 DISSENTING SHAREHOLDER'S DEMAND FOR FAIR CASH VALUE OF SHARES.
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting
shareholder shall deliver to the corporation a written demand for payment with
the same information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to the dissenting shareholder
within twenty days after the lapse of the fifteen-day period, unless a court for
good cause shown otherwise directs. If shares represented by a certificate on
which such a legend has been endorsed are transferred, each new certificate
issued for them shall bear a similar legend, together with the name of the
original dissenting holder of such shares. Upon receiving a demand for payment
from a dissenting shareholder who is the record holder of uncertificated
securities, the corporation shall make an appropriate notation of the demand for
payment in its shareholder records. If uncertificated shares for which payment
has been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as provided in
this paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has
ANNEXES
E-1
<PAGE> 209
been made, acquires only such rights in the corporation as the original
dissenting holder of such shares had immediately after the service of a demand
for payment of the fair cash value of the shares. A request under this paragraph
by the corporation is not an admission by the corporation that the shareholder
is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing or
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505, of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall by made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
ANNEXES
E-2
<PAGE> 210
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of the
Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller who is under no compulsion to sell would be willing to
accept and that a willing buyer who is under no compulsion to purchase would be
willing to pay, but in no event shall the fair cash value of a share exceed the
amount specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting from
the proposal submitted to the directors or to the shareholders shall be
excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief and the
right and obligation of the corporation to purchase such shares and to pay the
fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section, unless
the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally enjoined or
prevented from carrying it out, or the shareholders rescind their adoption of
the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent of
the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder nor
the corporation has filed or joined in a complaint under division (B) of this
section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
ANNEXES
E-3
<PAGE> 211
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Anthony & Sylvan Pools Corporation
Condensed Financial Statements for the Three Months Ended
March 31, 1998 and 1999................................ F-2
Financial Statements for the Eight Months Ended December
31, 1997 and the Year Ended December 31, 1998.......... F-9
Anthony & Sylvan Pools, Inc.
Financial Statements for the Year Ended December 31, 1996
and the Four Months Ended April 30, 1997............... F-21
</TABLE>
FINANCIAL STATEMENTS
F-1
<PAGE> 212
ANTHONY & SYLVAN POOLS CORPORATION
CONDENSED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS
ENDED MARCH 31, 1998
AND 1999
FINANCIAL STATEMENTS
F-2
<PAGE> 213
ANTHONY & SYLVAN POOLS CORPORATION
UNAUDITED CONDENSED BALANCE SHEET
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999
-------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 709
Contract receivables, net of allowance for doubtful
accounts of $1,082..................................... 7,964
Inventories............................................... 6,718
Prepayments and other..................................... 2,422
Deferred income taxes..................................... 1,948
-------
Total current assets.............................. 19,761
Property, Plant and Equipment, at cost:
Land...................................................... 1,160
Buildings and leasehold improvements...................... 2,214
Machinery and equipment................................... 6,611
-------
Total............................................. 9,985
Less accumulated depreciation............................. 2,451
-------
Net property, plant and equipment................. 7,534
Other Assets:
Goodwill, net of accumulated amortization................. 27,845
Other..................................................... 311
-------
Total other assets................................ 28,156
-------
TOTAL ASSETS................................................ $55,451
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 239
Payable to Essef Corporation.............................. 27,217
Accounts payable.......................................... 8,594
Accrued expenses.......................................... 14,213
-------
Total current liabilities......................... 50,263
Long-Term Debt.............................................. 205
Other Long-Term Liabilities................................. 1,200
Commitments and Contingencies............................... --
Shareholder's Equity
Common shares, no par value; 1,000 shares authorized, 100
shares issued and outstanding.......................... --
Retained earnings......................................... 3,783
-------
Total shareholders' equity........................ 3,783
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $55,451
=======
</TABLE>
See notes to condensed financial statements.
FINANCIAL STATEMENTS
F-3
<PAGE> 214
ANTHONY & SYLVAN POOLS CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Net sales.................................................. $18,040 $26,422
Cost of sales.............................................. 13,669 20,719
------- -------
Gross profit............................................... 4,371 5,703
Operating expenses:
Selling.................................................. 3,857 6,333
Administrative........................................... 2,520 3,172
------- -------
Total operating expenses......................... 6,377 9,505
------- -------
Loss from operations....................................... (2,006) (3,802)
Interest and other expense................................. 479 1,095
------- -------
Loss before income taxes................................... (2,485) (4,897)
Benefit for income taxes................................... (984) (1,939)
------- -------
Net loss................................................... $(1,501) $(2,958)
======= =======
Basic loss per share (Note 4).............................. $ (0.45) $ (0.88)
======= =======
Basic shares outstanding................................... 3,357 3,353
======= =======
</TABLE>
See notes to condensed financial statements.
FINANCIAL STATEMENTS
F-4
<PAGE> 215
ANTHONY & SYLVAN POOLS CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Cash Flows For Operating Activities:
Net loss.................................................. $(1,501) $(2,958)
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................ 475 606
Deferred income taxes................................ (1,344) --
Changes in operating assets and liabilities net of assets
acquired:
Contract receivables................................... 212 (774)
Inventories............................................ (2,892) (2,382)
Prepayments and other.................................. 691 (361)
Accounts payable....................................... 4,829 2,434
Accrued expenses....................................... (3,906) 7,060
------- -------
Cash (used in)/provided by operating activities........... (3,436) 3,625
------- -------
Cash Flows For Investing Activities:
Additions to property, plant and equipment............. (972) (712)
Acquisition payments................................... (2,139) --
------- -------
Cash used in investing activities...................... (3,111) (712)
------- -------
Cash Flows From Financing Activities:
Net transactions with Essef Corporation................ 6,258 (2,144)
Repayments of long-term debt........................... (97) (60)
------- -------
Cash provided by/(used in) financing activities........ 6,161 (2,204)
------- -------
(Decrease)/Increase in cash and cash equivalents............ (386) 709
Cash and Cash Equivalents:
Beginning of period....................................... 703 --
------- -------
End of period............................................. $ 317 $ 709
======= =======
Supplemental Cash Flow Information:
Interest paid............................................. $ 479 $ 1,095
Income taxes refunded, net................................ $ 984 $ 1,939
Non-cash Financing and Investing Activities:
Business acquisition with Essef Corporation stock charged
through intercompany payable........................... $ 744 $ --
</TABLE>
See notes to condensed financial statements.
FINANCIAL STATEMENTS
F-5
<PAGE> 216
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
1. BASIS OF PRESENTATION
Anthony & Sylvan Pools Corporation (the "Company") is among the largest
residential in-ground concrete pool sales and installation business in the
United States operates in the pool installation segment.
The Company is a wholly-owned subsidiary of Essef Corporation and
Subsidiaries (the "Parent"). Company management believes that the financial
statements reflect all material expenses of the Company assuming the Company
were organized as a stand-alone legal entity including specifically identifiable
costs incurred by the Parent on behalf of, and charged to, the Company.
2. INTERIM UNAUDITED FINANCIAL STATEMENTS
The accompanying balance sheet as of March 31, 1999 and statements of
operations and cash flows for the three months ended March 31, 1998 and 1999 are
unaudited. In the opinion of management, these interim unaudited financial
statements have been prepared on the same basis as the audited financial
statements for the year ended December 31, 1998 and include all adjustments,
consisting of only normal and recurring adjustments necessary for fair
presentation of the interim period. The disclosures in the notes related to
these unaudited interim financial statements are also unaudited. The unaudited
condensed statement of income for the three months ended March 31, 1999 is not
necessarily indicative of the results to be expected for the full year.
3. SPLIT-OFF FROM PARENT
In April 1999, the Parent announced its intention to be acquired by a third
party (the "Acquiring Party"). The expected date of the completion of the
acquisition is August 1999, and at that time Parent intends to split-off the
Company to Parent's common shareholders through a taxable distribution of the
Company's shares. The split-off will be accomplished through the distribution of
0.25 shares of Company common stock for every share of Parent common stock held
at the time of the distribution and result in the Company being a stand-alone
public company. Immediately prior to the split-off the Company will amend its
articles of incorporation to provide for the issuance of up to 30,000,000 shares
of common stock. At the time of the split-off, the stock options held by persons
expected to be employees or directors of the Company will also be split-off so
that the potential ownership these employees had in the Parent would remain
consistent with that in the Company. It is expected that stock options
representing an 18.1 percent ownership interest in the Company's shares on a
diluted basis will be outstanding related to these employees at the time of the
split-off. The exercise price of such shares is not determinable at this time as
it is dependent on the trading price of the Company on its first full day of
trading following the split-off. Additionally, prior to the split-off the
Company will establish a long-term incentive plan under which certain employees
and directors will be issued options to purchase common shares of the Company
(the "Long-Term Incentive Plan"). The number of options issued under the
Long-Term Incentive Plan will not exceed 600,000.
FINANCIAL STATEMENTS
F-6
<PAGE> 217
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- CONTINUED
The Company, Parent and the Acquiring Party have entered into various
agreements that will provide for administrative services, tax sharing and
indemnification (the "Agreements"). Among other things, these Agreements also
provide that at the time of the split-off, the Company will pay the Parent
$17,000,000, subject to certain adjustments, and the remaining inter-company
advance will be contributed to capital. Anthony & Sylvan expects to finance the
payment of the dividend through external borrowings. The potential adjustments
to the $17,000,000 payment primarily relate to the amount of net tax benefit
realized by the Parent from the exercise of employee stock options net of the
corporate tax payable from the split-off. If the net tax benefit is greater than
$4,200,000, the $17,000,000 will be reduced by such excess. If the net tax
benefit is lower than $4,200,000, then the Company will issue to Parent a 3 year
senior subordinated note, equal to the shortfall, with interest payable
semi-annually at a rate that is expected to be 225 basis points in excess of the
Company's bank borrowing rate at the time of the split-off. As the final amount
of the net tax benefit is largely dependent on the first day trading price of
the Company following the split-off, it is not determinable at this time. The
Agreements also provide that if the net assets of the Company (defined as total
assets less total liabilities excluding debt to the Parent) exceeds $40,836,000
at June 30, 1999, then the Company is required to pay the Parent the amount of
such excess in cash. At December 31, 1998 the net assets of the Company were
$36,102,000. The Company does not expect to exceed the net asset limitation
under the Agreements.
4. EARNINGS PER SHARE
Earnings per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share is
computed by dividing net income by the number of common shares expected to be
outstanding following the split-off from the Parent. Diluted earnings per share
is based on the combined number of shares outstanding including the assumed
exercise or conversion of options. The treasury stock method is used in
computing diluted earnings per share, however diluted earnings per share has not
been presented as this method requires information with respect to the Company's
stock price and the exercise price for stock options transferred under
arrangements described in note 3, neither of which is presently determinable.
5. RELATED PARTY TRANSACTIONS
With the exception of certain capitalized lease obligations the Company
does not have external sources of borrowings, and, as such relies upon the
Parent as its primary source of funding. The Parent provides funding through an
inter-company debt arrangement under which borrowings available to the Company
are subject to the terms, conditions and covenants of the Parent's credit
agreement, and limited to the availability thereunder. This inter-company
account is used to provide working capital and acquisition funding and to
account for the centralized cash management program. Interest was charged on the
average outstanding payable at an average rate of 6.75 percent for the three
months ended March 31, 1998 and 1999. Total interest charges on the
inter-company account for the three months ended March 31, 1998 and 1999 were
$479,000 and $1,085,000 respectively. The inter-company account is repayable
upon demand.
FINANCIAL STATEMENTS
F-7
<PAGE> 218
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- CONTINUED
6. BUSINESS ACQUISITIONS
In January 1998, the Company acquired the net operating assets of Tango
Pools, an installer of swimming pools in Las Vegas, Nevada, and in August 1998,
it also acquired Pools by Andrews, Inc., an installer of swimming pools in
Florida. Consideration for these transactions of $5,946,000, including
transaction costs, was paid in a combination of cash and the Parent's common
stock. These acquisitions were accounted for as purchases, and thus, the
purchase price has been allocated to the assets and liabilities based on their
estimated fair value. In the case of Pools by Andrews such estimates are
preliminary and may be revised at a later date. The results of operations for
each of the acquired entities have been included in the Company's results since
the date of acquisition.
The following unaudited proforma combined results of operations give effect
to the acquisition of Pools by Andrews as if it were completed at the beginning
of 1998. The pro forma information has been presented for comparative purposes
only and does not purport to be indicative of what would have occurred had the
acquisition been made at the beginning of 1998 or the results which may occur in
the future (dollars in thousands):
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Net sales............................................. $24,384
Net loss.............................................. (1,617)
</TABLE>
7. STOCK OPTION PLANS
At the time of the split-off from the Parent (see note 3) stock options
held by persons expected to be employees or directors of the Company will also
be split-off so that the potential ownership these employees had in the Parent
would remain consistent with that in the Company. This will result in the
allocation to the Company of 741,558 fully vested options. Of these options
652,320 will expire in October 2000, 83,188 in September 2006 and the remaining
6,050 in July 2007. The exercise price for these options will be determined
based upon the first days trading prices following the split-off from the
Parent.
8. SHAREHOLDER'S EQUITY
Shareholder's equity consisted of the following at March 31, 1999 (dollars
in thousands):
<TABLE>
<CAPTION>
COMMON RETAINED
SHARES EARNINGS TOTAL
------- -------- ------
<S> <C> <C> <C>
Balance, January 1, 1999......................... $ -- $ 6,741 $6,741
Net loss for the three months ended March 31,
1999........................................... -- (2,958) (2,958)
------- ------- ------
Balance, March 31, 1999.......................... $ -- $ 3,783 $3,783
======= ======= ======
</TABLE>
9. LITIGATION
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, the results of all such matters will not have a material adverse
effect on the Company's financial position or results of operations and
liquidity.
FINANCIAL STATEMENTS
F-8
<PAGE> 219
ANTHONY & SYLVAN POOLS CORPORATION
FINANCIAL STATEMENTS
FOR THE EIGHT MONTHS
ENDED DECEMBER 31, 1997 AND THE
YEAR ENDED DECEMBER 31, 1998
FINANCIAL STATEMENTS
F-9
<PAGE> 220
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder,
Anthony & Sylvan Pools Corporation
We have audited the accompanying balance sheets of Anthony & Sylvan Pools
Corporation (the "Company") as of December 31, 1997 and 1998 and the related
statements of income and cash flows for the eight months ended December 31, 1997
and the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements, present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and 1998
and the results of its operations and its cash flows for the eight months ended
December 31, 1997 and the year ended December 31, 1998 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Cleveland, Ohio
February 19, 1999
(May 7, 1999 as to Notes 2 and 3)
FINANCIAL STATEMENTS
F-10
<PAGE> 221
ANTHONY & SYLVAN POOLS CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 703 $ --
Contract receivables, net of allowance for doubtful
accounts of $708 and $1,085, respectively,............ 5,912 10,307
Inventories.............................................. 4,144 4,336
Prepayments and other.................................... 506 2,052
Deferred income taxes.................................... 2,000 1,948
------- -------
Total current assets............................. 13,265 18,643
Property, Plant and Equipment, at cost:
Land..................................................... 1,160 1,160
Buildings and leasehold improvements..................... 2,893 2,180
Machinery and equipment.................................. 3,759 5,948
------- -------
Total............................................ 7,812 9,288
Less accumulated depreciation............................ 578 2,030
------- -------
Net property, plant and equipment................ 7,234 7,258
Other Assets:
Goodwill, net of accumulated amortization................ 21,529 28,052
Other.................................................... 592 320
------- -------
Total other assets............................... 22,121 28,372
------- -------
TOTAL ASSETS..................................... $42,620 $54,273
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt..................... $ 403 $ 244
Payable to Essef Corporation............................. 23,780 29,361
Accounts payable......................................... 4,329 6,160
Accrued expenses......................................... 7,970 10,307
------- -------
Total current liabilities........................ 36,482 46,072
Long-Term Debt............................................. 455 260
Other Long-Term Liabilities................................ 1,130 1,200
Commitments and Contingencies.............................. -- --
Shareholders' Equity:
Common shares, no par value; 1,000 shares authorized, 100
shares issued and outstanding (Note 3)................ -- --
Retained earnings........................................ 4,553 6,741
------- -------
Total shareholder's equity....................... 4,553 6,741
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY....... $42,620 $54,273
======= =======
</TABLE>
See notes to financial statements.
FINANCIAL STATEMENTS
F-11
<PAGE> 222
ANTHONY & SYLVAN POOLS CORPORATION
STATEMENTS OF INCOME
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Net sales................................................. $98,829 $155,765
Cost of sales............................................. 70,814 113,873
------- --------
Gross profit.............................................. 28,015 41,892
Operating expenses:
Selling................................................. 13,578 23,342
Administrative.......................................... 5,598 13,012
------- --------
Total operating expenses........................ 19,176 36,354
------- --------
Income from operations.................................... 8,839 5,538
Interest and other expense................................ 1,637 1,916
------- --------
Income before income taxes................................ 7,202 3,622
Provision for income taxes................................ 2,649 1,434
------- --------
Net income................................................ $ 4,553 $ 2,188
======= ========
Basic earnings per share (Note 3)......................... $ 1.36 $ 0.65
======= ========
Basic shares outstanding.................................. 3,353 3,357
======= ========
</TABLE>
See notes to financial statements.
FINANCIAL STATEMENTS
F-12
<PAGE> 223
ANTHONY & SYLVAN POOLS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
-------- ------
<S> <C> <C>
Cash Flows for Operating Activities:
Net income................................................ $ 4,553 $2,188
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,070 2,254
Deferred income taxes.................................. 32 964
Changes in operating assets and liabilities net of assets
acquired:
Contract receivables...................................... (1,931) (2,202)
Inventories............................................... 1,671 100
Prepayments and other..................................... (158) (1,468)
Accounts payable.......................................... (2,079) (520)
Accrued expenses.......................................... (3,845) (297)
-------- ------
Cash (used in)/provided by operating activities............. (687) 1,019
-------- ------
Cash Flows for Investing Activities:
Additions to property, plant and equipment................ (1,019) (2,407)
Proceeds on sale of assets................................ -- 1,404
Acquisition payments...................................... -- (4,747)
Acquisition of the Company................................ (21,065) --
-------- ------
Cash used in investing activities......................... (22,084) (5,750)
-------- ------
Cash Flows from Financing Activities:
Net transactions with Essef Corporation................... 23,780 4,382
Repayments of long-term debt.............................. (351) (354)
-------- ------
Cash provided by financing activities..................... 23,429 4,028
-------- ------
Increase/(Decrease) in Cash and Cash Equivalents............ 658 (703)
Cash and Cash Equivalents:
Beginning of period....................................... 45 703
-------- ------
End of period............................................. $ 703 $ --
======== ======
Supplemental Cash Flow Information:
Interest paid............................................. $ 1,615 $1,916
Income taxes paid......................................... $ 2,617 $1,073
Non-Cash Financing and Investing Activities:
Business acquisitions with Parent stock charged through
intercompany payable................................... $ -- $1,199
</TABLE>
See notes to financial statements.
FINANCIAL STATEMENTS
F-13
<PAGE> 224
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- Anthony & Sylvan Pools Corporation (the "Company")
is among the largest residential in-ground concrete pool sales and installation
business in the United States and operates in the pool installation segment.
On May 1, 1997, substantially all of the Company's operating assets were
acquired and certain of its liabilities were assumed by Essef Corporation and
subsidiaries (the "Parent") through Anthony & Sylvan Pools Corporation as part
of the Parent's acquisition of General Aquatics, Inc. of which Anthony & Sylvan,
Inc. was a subsidiary. The accompanying financial statements include the results
of operations for the Company from the date of acquisition. Company management
believes that the financial statements reflect all material expenses of the
Company assuming the Company were organized as a stand-alone legal entity
including specifically identifiable costs incurred by the Parent on behalf of,
and charged to, the Company.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
short-term investments with initial maturities of three months or less to be
cash equivalents.
FINANCIAL INSTRUMENTS -- The Company has financial instruments which
consist primarily of cash and cash equivalents, receivables, payables and debt
instruments. The Company has determined that the estimated fair value of its
financial instruments approximates carrying value.
The Company is subject to concentrations of credit risk with respect to
contract receivables which is limited due to the large number of customers
comprising the Company's customer base and their geographical dispersion.
INVENTORIES -- Inventories consist of goods purchased for installation in
pools and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. At December 31, 1997 and 1998, the Company has a
reserve on these inventories of $485,000 and $234,000, respectively.
PROPERTY, PLANT AND EQUIPMENT -- Depreciation is computed using the
straight-line method for financial reporting purposes. Accelerated methods are
used for tax reporting purposes. Assets, valued at cost, are generally being
depreciated over their useful lives as follows: buildings 30 years; and
machinery and equipment, 3 to 15 years.
GOODWILL -- Goodwill arising from the acquisition of the Company by the
Parent and from subsequent business acquisitions is amortized using the
straight-line method over forty years. Accumulated amortization at December 31,
1997 and 1998, was $373,000 and $1,043,000, respectively. The Company
continually evaluates the recoverability of goodwill by comparing the book value
of such assets to expected future cash flows of the acquired businesses on an
undiscounted basis, over the remaining amortization period of the asset. At
December 31, 1998, no impairment has been recorded.
WARRANTY -- The Company accrues an estimate of warranty claims based on its
estimate of the aggregate liability for claims based on the Company's historical
experience. The
FINANCIAL STATEMENTS
F-14
<PAGE> 225
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
portion of claims the Company estimates will not be paid within one year is
included in other long-term liabilities.
INCOME TAXES -- The Company is included in the consolidated federal income
tax return of the Parent. All tax amounts have been recorded as if the Company
filed separate federal and state tax returns. The provision for income taxes
included in the statement of income includes federal, state and local taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and has been computed as if the
Company was a stand-alone entity.
REVENUE RECOGNITION -- Revenue from pool installation contracts is
recognized on the percentage-of-completion accounting method based on the
proportion of total costs incurred on the contract as a percentage of total
estimated contract costs. Revisions in cost and revenue estimates are reflected
in the period in which the facts requiring such revisions become known.
Provision is made currently for estimated losses on uncompleted installations.
The majority of the Company's contracts call for progress payments to be made in
advance of completing individual phases of the installation until the final
phases of installation, at which time the remaining portion is recognized as a
contract receivable. Progress payments in excess of revenue recognized are
classified as billings in excess of costs and estimated earnings on uncompleted
contracts and are included in accrued expenses. Unbilled contract receivables
are not material at any point in time. Contract costs include direct material,
labor, subcontract costs and overheads. Selling and administrative expenses are
charged to income as incurred.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1997
financial statements to make the presentation consistent with the current
period.
2. SPLIT-OFF FROM PARENT
In April 1999, the Parent announced its intention to be acquired by a third
party (the "Acquiring Party"). The expected date of the completion of the
acquisition is August 1999, and at that time Parent intends to split-off the
Company to Parent's common shareholders through a taxable distribution of the
Company's shares. The split-off will be accomplished through the distribution of
0.25 shares of Company common stock for every share of Parent common stock held
at the time of the distribution and result in the Company being a stand-alone
public company. Immediately prior to the split-off the Company will amend its
articles of incorporation to provide for the issuance of up to 30,000,000 shares
of common stock. At the time of the split-off, the stock options held by persons
expected to be employees or directors of the Company will also be split-off so
that the potential ownership these employees had in the Parent would remain
consistent with that in the Company. It is expected that stock options
representing an 18.1 percent ownership interest in the Company's shares on a
diluted basis will be outstanding related to these employees at the time of the
FINANCIAL STATEMENTS
F-15
<PAGE> 226
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
split-off. The exercise price of such shares is not determinable at this time as
it is dependent on the trading price of the Company on its first full day of
trading following the split-off. Additionally, prior to the split-off the
Company will establish a long-term incentive plan under which certain employees
and directors will be issued options to purchase common shares of the Company
(the "Long-Term Incentive Plan"). The number of options issued under the
Long-Term Incentive Plan will not exceed 600,000.
The Company, Parent and the Acquiring Party have entered into various
agreements that will provide for administrative services, tax sharing and
indemnification (the "Agreements"). Among other things, these Agreements also
provide that at the time of the split-off, the Company will pay the Parent
$17,000,000, subject to certain adjustments, and the remaining inter-company
advance will be contributed to capital. Anthony & Sylvan expects to finance the
payment of the dividend through external borrowings. The potential adjustments
to the $17,000,000 payment primarily relate to the amount of net tax benefit
realized by the Parent from the exercise of employee stock options net of the
corporate tax payable from the split-off. If the net tax benefit is greater than
$4,200,000, the $17,000,000 will be reduced by such excess. If the net tax
benefit is lower than $4,200,000, then the Company will issue to Parent a 3 year
senior subordinated note, equal to the shortfall, with interest payable
semi-annually at a rate that is expected to be 225 basis points in excess of the
Company's bank borrowing rate at the time of the split-off. As the final amount
of the net tax benefit is largely dependent on the first day trading price of
the Company following the split-off, it is not determinable at this time. The
Agreements also provide that if the net assets of the Company (defined as total
assets less total liabilities excluding debt to the Parent) exceeds $40,836,000
at June 30, 1999, then the Company is required to pay the Parent the amount of
such excess in cash. At December 31, 1998 the net assets of the Company were
$36,102,000. The Company does not expect to exceed the net asset limitation
under the Agreements.
3. EARNINGS PER SHARE
Earnings per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share is
computed by dividing net income by the number of common shares expected to be
outstanding following the split-off from the Parent. Diluted earnings per share
is based on the combined number of shares outstanding including the assumed
exercise or conversion of options. The treasury stock method is used in
computing diluted earnings per share, however diluted earnings per share has not
been presented as this method requires information with respect to the Company's
stock price and the exercise price for stock options transferred under
arrangements described in note 2, neither of which is presently determinable.
4. RELATED PARTY TRANSACTIONS
With the exception of certain capitalized lease obligations the Company
does not have external sources of borrowings, and, as such relies upon the
Parent as its primary source of funding. The Parent provides funding through an
inter-company debt arrangement under which borrowings available to the Company
are subject to the terms, conditions and covenants of the Parent's credit
agreement, and limited to the availability thereunder. This inter-company
account is used to provide working capital and acquisition funding and to
FINANCIAL STATEMENTS
F-16
<PAGE> 227
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
account for the centralized cash management program. Interest was charged on the
average outstanding payable at an average rate of 10.25 percent for the eight
month period ended December 31, 1997 and 6.9 percent for the year ended December
31, 1998. Total interest charges on the inter-company account for the eight
months ended December 31, 1997 were $1,601,000 and for the year ended December
31, 1998 were $1,860,000. The inter-company account is repayable upon demand.
The Parent manages consolidated domestic cash flows. Pursuant to this cash
management program the Company transfers any accumulated cash surplus to the
Parent's accounts and the Parent funds cash disbursements, as needed, to
maintain minimum account balances. Such cash flow activities serve to increase
or decrease the Company's debt with the Parent.
The Company purchases swimming pool and spa equipment used in its swimming
pool installations from other companies who are also wholly-owned subsidiaries
of the Parent. These purchases are made on an arms length basis, on terms
similar to those to which those companies sell to their other customers and are
not subject to any long term supply agreements. Total purchases from related
companies for the eight months ended December 31, 1997, were approximately
$2,030,000 and for the year ended December 31, 1998 were approximately
$10,546,000. Amounts payable by the Company to related companies of $287,000 and
$488,000 are included in accounts payable at December 31, 1997 and 1998,
respectively.
5. BUSINESS ACQUISITIONS
In January 1998, the Company acquired the net operating assets of Tango
Pools, an installer of swimming pools in Las Vegas, Nevada, and in August 1998,
it also acquired Pools by Andrews, Inc., an installer of swimming pools in
Florida. Consideration for these transactions of $5,946,000, including
transaction costs, was paid in a combination of cash and the Parent's common
stock. These acquisitions were accounted for as purchases, and thus, the
purchase price has been allocated to the assets and liabilities based on their
estimated fair value. In the case of Pools by Andrews such estimates are
preliminary and may be revised at a later date. The results of operations for
each of the acquired entities have been included in the Company's results since
the date of acquisition.
On May 1, 1997, substantially all of the Company's assets were acquired and
certain of its liabilities were assumed by the Parent as part of an acquisition
transaction with the Company's former parent, General Aquatics, Inc. The
acquisition was accounted for as a purchase and the results of operations shown
in these statements reflect the Company's results since the date of acquisition.
FINANCIAL STATEMENTS
F-17
<PAGE> 228
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The following table is a summary of these transactions (dollars in
thousands).
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Fair value of identifiable assets acquired................. $19,632 $ 3,808
Costs in excess of net assets acquired..................... 21,902 7,193
Less liabilities assumed................................... (20,469) (5,055)
------- -------
Net consideration paid for acquisitions.................... $21,065 $ 5,946
======= =======
</TABLE>
The following unaudited pro forma combined results of operations give
effect to the acquisition of the Company as if it were completed at the
beginning of 1997 and the Tango Pools and Pools by Andrews acquisitions as if
they were completed at the beginning of 1998. The pro forma information has been
presented for comparative purposes only and does not purport to be indicative of
what would have occurred had the acquisitions been made at the beginning of
1998, or of the results which may occur in the future (dollars in thousands).
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Net sales................................................ $127,712 $173,550
Net income............................................... 1,697 2,574
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... $2,802 $ 5,196
Warranty.................................................... 1,867 1,543
Accrued compensation........................................ 1,787 1,796
Other....................................................... 1,514 1,772
------ -------
Total............................................. $7,970 $10,307
====== =======
</TABLE>
7. LONG-TERM DEBT
Long term debt consists of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Capital lease obligations................................... $ 858 $ 504
Less current maturities..................................... (403) (244)
------ -------
Total............................................. $ 455 $ 260
====== =======
</TABLE>
The Company has capital leases for the purchase of automobiles and other
equipment with a net book value of approximately $494,000 at December 31, 1998.
The leases are collateralized by the automobiles and the equipment purchased. At
December 31, 1998, the total future minimum payments under these leases was
$631,000, with $127,000 representing payments for future interest.
FINANCIAL STATEMENTS
F-18
<PAGE> 229
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Aggregate maturities of long-term debt are the following: 1999, $244,000;
2000, $161,000; 2001, $92,000; and 2002, $7,000.
8. INCOME TAXES
The significant components of the provision for income taxes are as follows
for the eight months ended December 31, 1997 and the year ended December 31,
1998 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Current:
Federal................................................... $2,397 $ 836
State..................................................... 220 190
------ ------
Total current..................................... 2,617 1,026
------ ------
Deferred:
Federal................................................... 30 386
State..................................................... 2 22
------ ------
Total deferred.................................... 32 408
------ ------
Total............................................. $2,649 $1,434
====== ======
</TABLE>
The Company's deferred tax assets at December 31, 1997 and 1998 are
comprised primarily of non-deductible accruals for doubtful accounts, warranty
and inventory obsolescence.
The consolidated tax provision differs from the tax provision computed at
the statutory United States tax rate of 34 percent for 1997 and 1998 as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Tax provision at statutory Federal rate..................... $2,449 $1,231
State income taxes.......................................... 147 140
Other items, net............................................ 53 63
------ ------
Provision for income taxes.................................. $2,649 $1,434
====== ======
</TABLE>
9. STOCK OPTION PLANS
At the time of the split-off from the Parent (see note 2) stock options
held by persons expected to be employees or directors of the Company will also
be split-off so that the potential ownership these employees had in the Parent
would remain consistent with that in the Company. This will result in the
allocation to the Company of 741,558 fully vested options. Of these options
652,320 will expire in October, 2000, 83,188 in September, 2006 and the
remaining 6,050 in July, 2007. The exercise price for these options will be
determined based upon the first day's trading price following the split-off from
the Parent.
FINANCIAL STATEMENTS
F-19
<PAGE> 230
ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDER'S EQUITY
Shareholder's equity consisted of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
COMMON RETAINED
SHARES EARNINGS TOTAL
------ -------- ------
<S> <C> <C> <C>
Balance, May 1, 1997............................... $ -- $ -- $ --
Net income for the eight months ended December
31, 1997...................................... -- 4,553 4,553
------ ------ ------
Balance, December 31, 1997......................... -- 4,553 4,553
Net income for the year ended December 31,
1998.......................................... -- 2,188 2,188
------ ------ ------
Balance, December 31, 1998......................... $ -- $6,741 $6,741
====== ====== ======
</TABLE>
11. OPERATING LEASES
The Company leases certain of its facilities and equipment. Total rental
expenses under operating leases were $1,046,000 for the eight months ended
December 31, 1997 and $1,975,000 for the year ended December 31, 1998. Minimum
annual rental commitments for the next five years under non-cancelable operating
leases are the following: 1999, $1,815,000; 2000, $1,412,000; 2001, $877,000;
2002, $611,000; 2003, $281,000; and $137,000 thereafter.
12. RETIREMENT PLANS
The Company and certain other subsidiaries of the Parent maintain a defined
contribution plan covering substantially all of its employees. Participants are
permitted to make pretax contributions to the plan as a percentage of
compensation. The Company matches participant contributions, up to specified
limits. Total Company contributions were approximately $422,000 for the eight
months ended December 31, 1997 and $791,000 for the year ended December 31,
1998.
13. LITIGATION
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, the results of all such matters will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
14. ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities." SFAS
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities and requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Company is required to adopt SFAS
133 in fiscal 2000. The Company is currently evaluating the requirements of SFAS
133 but, based on its limited use of derivative financial instruments, does not
expect it to have a material effect on the Company.
FINANCIAL STATEMENTS
F-20
<PAGE> 231
ANTHONY & SYLVAN POOLS, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1996 AND
THE FOUR MONTHS ENDED
APRIL 30, 1997
FINANCIAL STATEMENTS
F-21
<PAGE> 232
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors & Shareholders,
Anthony & Sylvan Pools, Inc.
We have audited the statements of operations and cash flows for the year
ended December 31, 1996 and for the four months ended April 30, 1997 of Anthony
& Sylvan Pools, Inc. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
year ended December 31, 1996 and for the four months ended April 30, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
September 15, 1998
FINANCIAL STATEMENTS
F-22
<PAGE> 233
ANTHONY & SYLVAN POOLS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE FOUR MONTHS ENDED APRIL 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
DECEMBER 31 APRIL 30,
1996 1997
----------- -----------
<S> <C> <C>
Net sales............................................ $112,167 $28,883
Cost of sales........................................ 82,018 22,291
-------- -------
Gross profit......................................... 30,149 6,592
Operating expenses:
Selling............................................ $ 18,875 6,073
Administrative..................................... 9,049 3,980
-------- -------
Total operating expenses...................... 27,924 10,053
-------- -------
Income/(loss) from operations........................ 2,225 (3,461)
Interest and other expense........................... 354 303
-------- -------
Income/(loss) before income taxes.................... 1,871 (3,764)
Provision/(benefit) for income taxes................. 704 (1,350)
-------- -------
Net income/(loss).................................... $ 1,167 $(2,414)
======== =======
</TABLE>
See notes to financial statements.
FINANCIAL STATEMENTS
F-23
<PAGE> 234
ANTHONY & SYLVAN POOLS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE FOUR MONTHS ENDED APRIL 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income/(loss)................................. $1,167 $(2,414)
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 1,066 470
Non-cash interest.............................. 426 116
Deferred income taxes.......................... (207) (631)
Changes in operating assets and liabilities net of
assets acquired:
Contract receivables........................... (574) 491
Inventories.................................... (13) (1,031)
Prepayments and other.......................... (462) 218
Accounts payable............................... 1,559 3,251
Accrued expenses............................... 2,499 1,551
------ -------
Cash provided by operating activities........ 5,461 2,021
------ -------
Cash Flows For Investing Activities:
Additions to property, plant and equipment........ (329) (259)
Acquisition costs................................. (223) --
------ -------
Cash used in investing activities............ (552) (259)
------ -------
Cash Flows From Financing Activities:
Net transactions with General Aquatics, Inc....... (7,052) (7,224)
Proceeds from long-term debt...................... 3,379 3,825
Payments on capital lease obligations............. (496) (150)
------ -------
Cash used in financing activities............ (4,169) (3,549)
------ -------
Net increase/(decrease) in cash and cash
equivalents....................................... 740 (1,787)
Cash and Cash Equivalents:
Beginning of period............................... 1,092 1,832
------ -------
End of period..................................... $1,832 $ 45
====== =======
Supplemental Cash Flow Information:
Interest paid..................................... $ 47 $ 272
Income taxes paid, net............................ $ 745 $ --
Purchases of equipment under capital leases....... $ 179 $ 493
Note payable issued for business acquisition...... $5,355 $ --
</TABLE>
See notes to financial statements.
FINANCIAL STATEMENTS
F-24
<PAGE> 235
ANTHONY & SYLVAN POOLS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE FOUR MONTHS ENDED APRIL 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- Anthony & Sylvan Pools, Inc. is the largest
residential in-ground concrete pool sales and installation business in the
United States.
On May 1, 1997, substantially all of Anthony & Sylvan's operating assets
were acquired and certain of its liabilities assumed by Essef Corporation and
subsidiaries as part of an acquisition transaction with General Aquatics, Inc.
(the "Parent"), of which Anthony & Sylvan, Inc. was a subsidiary. The
accompanying financial statements are presented under Anthony & Sylvan's
historical basis of accounting and do not reflect any adjustments which would be
required as a result of the acquisition by Essef Corporation. Separate financial
statements have been issued for the period after the acquisition which
contemplate the adjustments required under the purchase method of accounting.
Company management believes that the financial statements reflect all material
expenses of Anthony & Sylvan assuming Anthony & Sylvan were organized as a
stand-alone legal entity, including specifically identifiable costs incurred by
the Parent on behalf of, and charged to, Anthony & Sylvan.
In March, 1996, Anthony & Sylvan purchased assets and assumed liabilities
of Anthony Pools, a division of Anthony Industries, Inc., a residential
in-ground concrete swimming pool sales and installation business. Subsequent to
the acquisition Anthony & Sylvan changed its name to Anthony & Sylvan Pools,
Inc.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
short-term investments with initial maturities of three months or less to be
cash equivalents.
FINANCIAL INSTRUMENTS -- The Company has financial instruments which
consist primarily of cash and cash equivalents, receivables, payables and debt
instruments. The Company has determined that the estimated fair value of its
financial instruments approximates carrying value.
Financial instruments which subject Anthony & Sylvan to concentrations of
credit risk consist primarily of contract receivables. Concentration with
respect to contract receivables is limited due to the large number of customers
comprising Anthony & Sylvan's customer base and their geographical dispersion.
INVENTORIES -- Inventories consist primarily of goods purchased for
installation in pools and are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
FIXED ASSETS -- Depreciation is computed using the straight-line method for
financial reporting purposes. Accelerated methods are used for tax reporting
purposes. Assets, valued at cost, are generally being depreciated over their
useful lives as follows: buildings 10 to 40 years; and machinery and equipment,
3 to 10 years.
GOODWILL -- Goodwill arising from the acquisition of Anthony Pools is being
amortized using the straight-line method over fifteen years. The Company
periodically evaluates the
FINANCIAL STATEMENTS
F-25
<PAGE> 236
ANTHONY & SYLVAN POOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
recoverability of goodwill by comparing the book value of such assets to
expected future cash flows of the acquired businesses, on an undiscounted basis,
over the remaining amortization period of the asset. At December 31, 1996, no
such impairment has been recorded.
WARRANTY -- The Company accrues an estimate of warranty claims based on its
estimate of the aggregate liability for claims based on Anthony & Sylvan's
historical experience. The portion of claims Anthony & Sylvan estimates will not
be paid within one year is included in other long-term liabilities.
INCOME TAXES -- The Company is included in the consolidated federal income
tax return of the Parent. All tax amounts have been recorded as if Anthony &
Sylvan filed separate federal and state tax returns. The provision for income
taxes included in the statement of operations includes federal, state and local
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and has been computed as
if Anthony & Sylvan was a stand-alone entity. The accompanying balance sheet
includes deferred tax amounts applicable to Anthony & Sylvan.
REVENUE RECOGNITION -- Revenue from pool installation contracts is
recognized on the percentage-of-completion accounting method based on the
proportion of total costs incurred on the contract as a percentage of total
estimated contract costs. Revisions in cost and revenue estimates are reflected
in the period in which the facts requiring such revisions become known.
Provision is made currently for estimated losses on uncompleted installations.
The majority of Anthony & Sylvan's contracts call for progress payments to be
made in advance of completing individual phases of the installation until the
final phases of installation, at which time the remaining portion is recognized
as a contract receivable. Progress payments in excess of revenue recognized are
classified as billings in excess of costs and estimated earnings on uncompleted
contracts, and are included in accrued expenses. Unbilled contract receivables
are not material at any point in time.
Contract costs include direct material, labor, subcontract costs and
overheads. Selling and administrative expenses are charged to income as
incurred.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS
The Parent manages consolidated domestic cash flows. Pursuant to this cash
management program Anthony & Sylvan transfers any accumulated cash surplus to
the Parent's accounts and the Parent funds cash disbursements, as needed, to
maintain minimum account balances. Such cash flow activities serve to increase
or decrease Anthony & Sylvan's debt with the Parent.
The Company purchases swimming pool and spa equipment used in its swimming
pool installations from other companies who are also wholly-owned subsidiaries
of the Parent.
FINANCIAL STATEMENTS
F-26
<PAGE> 237
ANTHONY & SYLVAN POOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
These purchases are made on an arms length basis, on terms similar to those to
which those Companies sell to their other customers and are not subject to any
long-term supply agreements. Total purchases from related Companies for the year
ended December 31, 1996 and the four months ended April 30, 1997 were $3,985,000
and $1,558,000.
3. ACQUISITION OF ANTHONY POOLS
In March, 1996, Anthony & Sylvan purchased assets and assumed liabilities
of Anthony Pools, a division of Anthony Industries, Inc. for $6,253,000. Anthony
Pools was primarily involved in the installation of residential pools.
Subsequent to the acquisition Anthony & Sylvan changed its name to Anthony &
Sylvan Pools, Inc. The purchase price was paid by issuance of subordinated debt
of $6,178,000 (discounted to $5,355,000), warrants to purchase 455,556 shares of
the Parent's common stock (at $13.56 per share), and 100,000 shares of the
Parent's common stock. The acquisition has been accounted for as a purchase, and
thus, the purchase price has been allocated to the assets and liabilities
acquired, based on their estimated fair value as of the date of acquisition. The
results of operations have been included in Anthony & Sylvan's results since the
date of acquisition. The cost in excess of the fair value of the net assets
acquired is being amortized on a straight-line basis over fifteen years.
The following table is a summary of the transaction (dollars in thousands):
<TABLE>
<S> <C>
Fair value of identifiable assets acquired............. $7,510
Costs in excess of net assets acquired................. 3,292
Less liabilities assumed............................... (4,549)
------
Net consideration paid for acquisition................. $6,253
======
</TABLE>
The following unaudited pro-forma combined results of operations give
effect to the acquisition as though it was completed at the beginning of the
period shown. The pro-forma information has been presented for comparative
purposes only and does not purport to be indicative of what would have occurred
had the acquisition been made at the beginning of the period presented, or of
results which may occur in the future (dollars in thousands) (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net sales......................................... $119,480
Net loss.......................................... $ (50)
</TABLE>
4. NOTES PAYABLE
At December 31, 1996, Anthony & Sylvan had $3,379,000 outstanding under a
bank line of credit. These facilities were made available under the Parent's
revolving line of credit agreement which allows for borrowings of up to $20
million, subject to sub-limits based on secured accounts receivable, inventory
and equipment levels of the Parent and its subsidiaries. Interest was payable at
the bank's prime rate (8.25 percent at December 31, 1996) plus
FINANCIAL STATEMENTS
F-27
<PAGE> 238
ANTHONY & SYLVAN POOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
.75 percent or the Eurodollar rate plus 2 percent. The line of credit had an
expiration date of November 30, 1999. On May 1, 1997, the line of credit was
repaid in conjunction with the acquisition of General Aquatics, Inc. by Essef
Corporation (see Note 1).
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 (dollars in
thousands):
<TABLE>
<S> <C>
Acquisition note....................................... $5,781
Capital lease obligations.............................. 630
------
6,411
Less current maturities................................ (531)
------
Total................................................ $5,880
======
</TABLE>
The acquisition note represents a subordinated note payable to Anthony
Industries, Inc. in the amount of $6,178,000 due March 1, 2001. Interest accrues
at 5.61 percent commencing September 1, 1996. Interest charged through March 1,
1997 is to be converted semiannually to notes with similar terms to the original
acquisition note. This note has been discounted to $5,355,000 which represents
its fair market value at a 9 percent interest rate. At December 31, 1996
$426,000 of additional notes had been issued for interest charges.
The Company has capital leases for the purchase of automobiles and other
equipment with a net book value of approximately $830,000 at December 31, 1996.
The leases are collateralized by the automobiles and the equipment purchased. At
December 31, 1996, the total future minimum payments under these leases was
$755,000, with $125,000 representing payments for future interest at an average
interest rate of approximately 10%.
FINANCIAL STATEMENTS
F-28
<PAGE> 239
ANTHONY & SYLVAN POOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Aggregate maturities of long-term debt are the following: 1997, $531,000;
1998, $99,000; and 2001, $5,781,000.
6. INCOME TAXES
The significant components of the provision/(benefit) for income taxes are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Current:
Federal......................................... $836 $ (658)
State........................................... 75 (61)
---- -------
Total current.............................. 911 (719)
---- -------
Deferred:
Federal......................................... (190) (578)
State........................................... (17) (53)
---- -------
Total deferred............................. (207) (631)
---- -------
Total...................................... $704 $(1,350)
==== =======
</TABLE>
The consolidated tax provision/(benefit) differs from the tax
provision/(benefit) computed at the statutory United States tax rate of 34% for
following reasons (dollars in thousands):
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Tax provision/(benefit) at statutory Federal rate... $636 $(1,280)
State income taxes.................................. 38 (75)
Other items, net.................................... 30 5
---- -------
Provision/(benefit) for income taxes................ $704 $(1,350)
==== =======
</TABLE>
7. OPERATING LEASES
The Company leases some of its facilities and equipment. Total rental
expenses under operating leases for the year ended December 31, 1996 and the
four months ended April 30, 1997 were approximately $1,819,000 and $536,000,
respectively. Minimum annual rental commitments for the next five years under
non-cancelable operating leases are the following: 1998, $1,628,000; 1999,
$1,150,000; 2000, $876,000; 2001, $582,000; 2002, $297,000; and $664,000
thereafter.
8. RETIREMENT PLANS
The Company and other subsidiaries of Essef maintain a defined contribution
plan covering substantially all of its employees. Participants are permitted to
make pretax
FINANCIAL STATEMENTS
F-29
<PAGE> 240
ANTHONY & SYLVAN POOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
contributions to the plans as a percentage of compensation. The Company matches
participant contributions, up to specified limits. Total Company contributions
for the year ended December 31, 1996 and for the four months ended April 30,
1997 were approximately $283,000 and $177,000, respectively.
Until April 30, 1997, Anthony & Sylvan maintained noncontributory defined
benefit pension plans covering substantially all of its full-time employees. The
plans provided pension benefits that were based on years of service and the
employee's total compensation. It was Anthony & Sylvan's policy to make annual
contributions required by applicable regulations. The assets and liabilities of
the plans were not acquired by Essef Corporation in conjunction with its
acquisition of General Aquatics, Inc. (See Note 1).
Significant assumptions used in the plans' actuarial valuations were:
<TABLE>
<CAPTION>
FOUR
MONTHS
YEAR ENDED ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Discount rate....................................... 7.25% 7.25%
Long-term rate of investment return................. 9.00% 9.00%
</TABLE>
Net periodic pension cost consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Service cost-benefits earned during the period...... $18 $ 5
Interest cost on projected benefit obligation....... 63 23
Return on plan assets............................... (35) (11)
Net amortization and deferral....................... 42 3
--- ---
Net periodic pension cost........................... $88 $20
=== ===
</TABLE>
9. LITIGATION
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against Anthony & Sylvan. In the opinion
of management, the results of all such matters will not have a material adverse
effect on Anthony & Sylvan's financial position, results of operations or cash
flows.
FINANCIAL STATEMENTS
F-30
<PAGE> 241
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On August 26, 1998, Essef issued 24,042 common shares, with an aggregate
value of $500,000, to Pools By Andrews, Inc. in connection with Essef's
acquisition of Pools By Andrews. This transaction was exempt from registration
pursuant to Rule 504 of Regulation D under the Securities Act.
On June 1, 1998, Essef issued 24,328 common shares, with an aggregate value
of $500,000, to Dennis M. O'Hara and Barbara J. O'Hara 1984 Living Trust in
connection with Essef's acquisition of Cozad & O'Hara, Inc. This transaction was
exempt from registration pursuant to Rule 504 of Regulation D under the
Securities Act.
On January 21, 1998, Essef issued 48,465 common shares, with an aggregate
value of $818,832, to the Tegano Family Trust in connection with Essef's
acquisition of Tango Pools, Inc. This transaction was exempt from registration
pursuant to Rule 504 of Regulation D under the Securities Act.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of Essef's code of regulations provides that Essef will
indemnify any director or officer or any former director or officer of Essef or
any person who is or has served at the request of Essef as a director, officer
or trustee of another corporation, joint venture, trust or other enterprise (and
his heirs, executors and administrators) against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him by reason of the fact that he is or was such director, officer
or trustee in connection with any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative to the
full extent and according to the procedures and requirements set forth in the
Ohio general corporation law as the same may be in effect from time to time.
Article VI further provides that the indemnification shall not be deemed to
restrict the right of Essef to indemnify employees, agents and others as
permitted by such law, and shall be in addition to any other rights granted to
those seeking indemnification under Essef's articles of incorporation and
regulations or any indemnification agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
In addition, Article VI provides that Essef is expressly authorized to
enter into agreements which grant rights of indemnification to any person or
entity. Essef has entered into indemnification agreements with its directors and
executive officers. Pursuant to each indemnification agreement, Essef must
indemnify the indemnitee with respect to his activities as a director or officer
of Essef and/or as a person who is serving or has served on behalf of Essef as a
director, officer or trustee of another corporation, joint venture, trust or
other enterprise, domestic or foreign, in which Essef has a direct or indirect
ownership interest against expenses actually and reasonably incurred by him in
connection with any claim against the indemnitee which is the subject of any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, investigative or otherwise and whether formal or
informal, to which the indemnitee was, is or is threatened to be made a
II-1
<PAGE> 242
party by reason of facts which include the indemnitee's being or having been
such a director, officer or representative, to the extent of the highest and
most advantageous to the indemnitee, as determined by the indemnitee, of one or
any combination of the following:
(a) The benefits provided by Essef's code of regulations as of the
date of the indemnification agreement;
(b) The benefits provided by Essef's articles of incorporation,
regulations or by-laws or their equivalent of Essef in effect at the time
expenses are incurred by the indemnitee;
(c) The benefits allowable under Ohio law in effect as of the date of
the indemnification agreement;
(d) The benefits allowable under the law of the jurisdiction under
which Essef exists at the time expenses are incurred by the indemnitee;
(e) The benefits available under liability insurance obtained by
Essef;
(f) The benefits which would have been available to the indemnitee
under his executive liability insurance policy; and
(g) Such other benefits as are or may be otherwise available to the
indemnitee.
The indemnification agreements provide for the advancement of expenses to
the indemnitee if the indemnitee provides Essef with a written undertaking that:
- the indemnitee has notified Essef of any proceeding;
- the indemnitee believes he should prevail in the proceeding, and
- that the indemnitee will reimburse Essef for all expenses if it is
determined that the indemnitee is not entitled to indemnification.
Article VI also authorizes Essef to purchase and maintain insurance or
furnish similar protection, including but not limited to trust funds, letters of
credit or self-insurance, on behalf of or for any person who is or was a
director, officer, employee or agent of Essef, or is or was serving at the
request of Essef as a director, trustee, officer, employee or agent of another
corporation, joint venture, trust or other enterprise (and his heirs, executors
and administrators), against any liability asserted against him and incurred by
him in such capacity, or arising out of his status as such, regardless of
whether Essef would have indemnified him against such liability under any other
provision of Article VI. It further provides that insurance may be purchased
from or maintained with a person in which Essef has a financial interest.
Essef has obtained director and officer liability insurance covering its
current executive officers and directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following is a list of exhibits included as part of this
Registration Statement. The Registrant agrees to furnish supplementally a copy
of any omitted exhibit or
II-2
<PAGE> 243
schedule to the Commission upon request. Items marked with a + are filed with
this Amendment No. 1 to Registration Statement. Items marked with an asterisk
were previously filed.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1 * Agreement and Plan of Merger dated as of April 30, 1999
among Pentair, Inc., Northstar Acquisition Company and Essef
Corporation (included as Annex A to the proxy
statement/prospectus)
3.1 Third Amended Articles of Incorporation of Essef
(incorporated by reference to Exhibit 3.1 to Essef's Form
10-K for the year ended September 30, 1998)
3.2 Code of Regulations of Essef, as amended (incorporated by
reference to Exhibit 3.2 to Essef's Form 10-K for the year
ended September 30, 1998)
3.3 * Form of Amended and Restated Articles of Incorporation of
Anthony & Sylvan
3.4 * Form of Amended and Restated Code of Regulations of
Anthony & Sylvan
4.1 See Exhibits 3.3 and 3.4 for provisions of the Articles of
Incorporation and Regulations of Anthony & Sylvan defining
the rights of holders of Anthony & Sylvan common shares
5.1 * Opinion of Squire, Sanders & Dempsey L.L.P. as to the
legality of the common shares being registered.
10.1 * 1999 Long-Term Incentive Plan
10.2 * Form of Executive Employment Agreement between Stuart D.
Neidus and Anthony & Sylvan
10.3 * Form of Executive Employment Agreement between Howard P.
Wertman and Anthony & Sylvan
10.4 * Form of Executive Employment Agreement between Richard M.
Kelso and Anthony & Sylvan
10.5 * Form of Executive Employment Agreement between Mark E.
Brody and Anthony & Sylvan
10.6 * Form of Indemnification Agreement with Anthony & Sylvan
10.7 * Form of Transition Agreement (included as Annex B to the
proxy statement/prospectus)
10.8 * Form of Tax Sharing Agreement (included as Annex C to the
proxy statement/prospectus)
21 + List of subsidiaries of Anthony & Sylvan
23.1 + Consent of Deloitte & Touche LLP
23.2 Consent of Squire, Sanders & Dempsey L.L.P. (see Exhibit
5.1)
24.1 + Power of Attorney (included elsewhere in Part II of this
Registration Statement)
99.1 + Proxy Card of Essef Corporation
</TABLE>
II-3
<PAGE> 244
(b) Financial Statement Schedules.
The following financial statement schedules of Anthony & Sylvan are
attached hereto and are filed as part of this Registration Statement:
Schedule II Anthony & Sylvan Pools Corporation Valuation and Qualifying
Accounts.
All other schedules are omitted because the required information is either
presented in the financial statements or notes thereto, or is not applicable,
required or material.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the proxy statement/prospectus any facts or
events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar amount of securities offered would not exceed that
which was restored) and any deviation from the low or high end of the
estimated offering range may be repeated in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement:
provided, however, that paragraphs (i) and (ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Securities and Exchange Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), that are incorporated by reference in
the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section (d) of the Exchange Act) that is
II-4
<PAGE> 245
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes as follows:
(1) that prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of
this Registration Statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other Items of the
applicable form; and
(2) that every prospectus (i) that is filed pursuant to the
paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the proxy
statement/prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form S-4,
within one business day of receipt of such requests, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
requests.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-5
<PAGE> 246
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Chardon, State of Ohio, on June 23, 1999.
ANTHONY & SYLVAN POOLS CORPORATION
By: /s/ STUART D. NEIDUS
----------------------------------------
Stuart D. Neidus
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated on this 23rd day of June, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ STUART D. NEIDUS Chairman of the Board and Chief
- --------------------------------------- Executive Officer (Principal Executive
Stuart D. Neidus Officer)
/s/ MARK E. BRODY* Executive Vice President and Chief
- --------------------------------------- Financial Officer (Principal Financial
Mark E. Brody and Accounting Officer)
/s/ THOMAS B. WALDIN* Director
- ---------------------------------------
Thomas B. Waldin
/s/ MARY ANN JORGENSON* Director
- ---------------------------------------
Mary Ann Jorgenson
</TABLE>
* The undersigned, as attorney-in-fact, does hereby sign this Amendment No. 1 to
Registration Statement on behalf of each of the officers and directors
indicated above.
By: /s/ STUART D. NEIDUS
----------------------------------------
Stuart D. Neidus
II-6
<PAGE> 247
SCHEDULE II
ANTHONY & SYLVAN POOLS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING OF CHARGED TO AT END
DESCRIPTION PERIOD EXPENSE ACQUISITIONS WRITE-OFFS OF PERIOD
----------- ------------ ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
For the year ended
December 31, 1996 $182 $412 $ -- $134 $ 460
For the four months
ended April 30, 1997 460 157 -- 101 516
For the eight months
ended December 31,
1997 516 265 -- 73 708
For the year ended
December 31, 1998 708 447 468 538 1,085
- ------------------------------------------------------------------------------------------------
RESERVE FOR INVENTORY
OBSOLESCENCE
For the year ended
December 31, 1996 100 -- -- -- 100
For the four months
ended April 30, 1997 100 119 -- -- 219
For the eight months
ended December 31,
1997 219 266 -- -- 485
For the year ended
December 31, 1998 485 219 -- 470 234
</TABLE>
II-7
<PAGE> 248
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
2.1 * Agreement and Plan of Merger dated as of April 30, 1999
among Pentair, Inc., Northstar Acquisition Company and Essef
Corporation (included as Annex A to the proxy
statement/prospectus)
3.1 Third Amended Articles of Incorporation of Essef
(incorporated by reference to Exhibit 3.1 to Essef's Form
10-K for the year ended September 30, 1998)
3.2 Code of Regulations of Essef, as amended (incorporated by
reference to Exhibit 3.2 to Essef's Form 10-K for the year
ended September 30, 1998)
3.3 * Form of Amended and Restated Articles of Incorporation of
Anthony & Sylvan
3.4 * Form of Amended and Restated Code of Regulations of
Anthony & Sylvan
4.1 See Exhibit 3.3 and 3.4 for provisions of the Articles of
Incorporation and Registration of Anthony & Sylvan defining
the rights of holders of Anthony & Sylvan common shares
5.1 * Opinion of Squire, Sanders & Dempsey L.L.P. as to the
legality of the common shares being registered
10.1 * 1999 Long-Term Incentive Plan
10.2 *Form of Executive Employment Agreement between Stuart D.
Neidus and Anthony & Sylvan
10.3 * Form of Executive Employment Agreement between Howard P.
Wertman and Anthony & Sylvan
10.4 * Form of Executive Employment Agreement between Richard M.
Kelso and Anthony & Sylvan
10.5 * Form of Executive Employment Agreement between Mark E.
Brody and Anthony & Sylvan
10.6 * Form of Indemnification Agreement with Anthony & Sylvan
10.7 * Form of Transition Agreement (included as Annex B to the
proxy statement/prospectus)
10.8 * Form of Tax Sharing Agreement (included as Annex C to the
proxy statement/prospectus)
21 + List of subsidiaries of Anthony & Sylvan Pools Corporation
23.1 + Consent of Deloitte & Touche LLP
23.2 Consent of Squire, Sanders & Dempsey L.L.P. (see Exhibit
5.1)
24.1 + Power of Attorney
99.1 + Proxy Card of Essef Corporation
</TABLE>
Items marked with a + are filed with this Amendment No. 1 to the
Registration Statement. Items marked with an asterisk were previously filed.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF ANTHONY & SYLVAN
POOLS CORPORATION
None
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
To the Board of Directors and Shareholders of
Essef Corporation
Chardon, Ohio
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-78731 of Anthony & Sylvan Pools Corporation of our reports on Anthony &
Sylvan Pools Corporation dated February 19, 1999 (May 7, 1999 as to Notes 2 and
3) and Anthony & Sylvan Pools, Inc. dated September 15, 1998, appearing in the
Prospectus, which is a part of this Registration Statement, and to the
references to us under the heading "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedules of Anthony & Sylvan Pools
Corporation and Anthony & Sylvan Pools, Inc. listed in Item 21(b). These
financial statement schedules are the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Cleveland, Ohio
June 23, 1999
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders of
Essef Corporation
Chardon, Ohio
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-78731 of Anthony & Sylvan Pools Corporation of
our report on Essef Corporation and Subsidiaries dated November 13, 1998
incorporated by reference in the Annual Report on Form 10-K of Essef Corporation
for the year ended September 30, 1998 and to the reference to us under the
heading "Experts" in the Prospectus, which is part of this Registration
Statement.
Deloitte & Touche LLP
Cleveland, Ohio
June 23, 1999
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Mary
Ann Jorgenson, Stuart D. Neidus and Thomas B. Waldin, or any one of them, as
his or her true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution for him or her and in his or her name, place
and stead in any and all capacities to execute in the name of each such person
who is then an officer or director of the registrant the registration statement
in connection with Essef's merger with Pentair and the split-off of Anthony &
Sylvan, any and all amendments (including post-effective amendments) to the
registration statement, and to file the same with all exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them
full power and authority to do and perform each and every act and thing
required to necessary to be done in and about the premises as fully as he or
she might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, any lawfully do or cause to be done by virtue thereof.
This power of attorney has been signed effective as of June 21, 1999 by
the following persons in the capacities indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ Stuart D. Neidus Chairman of the Board and Chief Executive Officer
- ----------------------------- (Principal Executive Officer)
Stuart D. Neidus
/s/ Mark E. Brody Executive Vice President and Chief Financial Officer
- ----------------------------- (Principal Financial and Accounting Officer)
Mark E. Brody
/s/ Thomas B. Waldin Director
- -----------------------------
Thomas B. Waldin
/s/ Mary Ann Jorgenson Director
- -----------------------------
Mary Ann Jorgenson
</TABLE>
<PAGE> 1
EXHIBIT 99.1
ESSEF CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS - AUGUST 6, 1999
The undersigned hereby appoints Ralph T. King, Thomas B. Waldin and Mary Ann
Jorgenson, and each of them, attorneys and proxies to attend and represent the
undersigned at the special meeting of shareholders of ESSEF Corporation to be
held at the office of the corporation, 220 Park Drive, Chardon, Ohio on Friday,
August 6, 1999 at 10:00 o'clock a.m. eastern standard time and at all
adjournments thereof, with full power of substitution and full authority to
vote all common shares of ESSEF Corporation which the undersigned, if
personally present, would be entitled to vote:
1. FOR the approval and adoption of the Agreement and Plan of Merger by and
among Pentair, Inc., Northstar Acquisition Company and Essef Corporation.
2. At their discretion, on the transaction of any other business or matters
that may properly be brought before the meeting or any postponements or
adjournments thereof.
THIS PROXY WILL BE VOTED ACCORDING TO INSTRUCTIONS AS MARKED. UNLESS A CONTRARY
INSTRUCTION IS MARKED IT WILL BE VOTED FOR ALL PROPOSALS.
---------------------------------------
PLEASE SIGN EXACTLY AS YOUR NAME OR NAMES APPEARD HEREON INDICATING, WHEN
APPROPRIATE, COMPANY AND OFFICIAL POSITION OR REPRESENTATIVE CAPACITY. IF
SHARES ARE HELD IN JOINT NAMES BOTH PARTIES MUST SIGN.
DATE: , 1999.
---------------
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY IN THE
ENVELOPE ENCLOSED.
