<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ESSEF CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
OHIO 3089 34-0777631
(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) 286-2200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STUART D. NEIDUS
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
ESSEF CORPORATION
220 PARK DRIVE
CHARDON, OHIO 44024
(440) 286-2200
(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
<TABLE>
<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; (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 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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. 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 $19.09 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 ,
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., toll free
at (800) 662-5200. The meeting will be held:
[DAY], , 1999
[10:00 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
, 1999 TO ENSURE TIMELY DELIVERY.
See "Where You Can Find More Information" beginning on page 99.
<PAGE> 5
ESSEF CORPORATION
220 PARK DRIVE
CHARDON, OHIO 44024
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1999
A special meeting of the shareholders of Essef Corporation will be held on
[DAY], , 1999 at 10:00 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 $19.09 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 ,
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:
Essef Corporation
c/o Morrow & Co.
445 Park Avenue
5th Floor
New York, NY 10022
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
APPENDICES
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........................................... 43
Termination............................................... 44
Termination Rights................................... 44
Termination Fees; Termination Fee Triggers........... 45
Amendment; Waiver......................................... 46
Conditions to Completion of the Merger.................... 46
Conditions to Pentair's Obligation and Essef's
Obligation to Complete the Merger................... 46
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............................ 47
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
Nasdaq Listing....................................... 75
Dividend Policy........................................... 75
Capitalization............................................ 76
SELECTED CONSOLIDATED FINANCIAL DATA OF ESSEF CORPORATION... 77
SELECTED CONSOLIDATED FINANCIAL DATA OF ANTHONY & SYLVAN.... 78
UNAUDITED PRO FORMA FINANCIAL DATA OF ANTHONY & SYLVAN...... 80
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS THREE MONTHS
ENDED MARCH 31, 1999...................................... 80
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS YEAR ENDED
DECEMBER 31, 1998......................................... 81
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ANTHONY & SYLVAN............. 82
Overview.................................................. 82
Results of Operations..................................... 83
Quarterly Results of Operations........................... 86
Liquidity and Capital Resources........................... 87
Cyclicality and Seasonality............................... 88
Inflation................................................. 88
</TABLE>
TABLE OF CONTENTS
ii
<PAGE> 9
<TABLE>
<S> <C>
Year 2000 Matters......................................... 88
PRINCIPAL SHAREHOLDERS...................................... 90
MARKET PRICES AND DIVIDEND POLICY........................... 93
MATERIAL DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS OF ESSEF
AND ANTHONY & SYLVAN...................................... 94
Authorized Shares......................................... 94
Amendments to Articles of Incorporation or Code of
Regulations............................................ 94
Special Meetings of Shareholders.......................... 95
Number of Directors; Classified Board of Directors........ 95
Removal of Directors...................................... 95
Vote Required to Approve Merger, Consolidation, Sale of
Substantially All Assets............................... 96
OTHER MATTERS............................................... 97
LEGAL MATTERS............................................... 97
EXPERTS..................................................... 97
SHAREHOLDER PROPOSALS....................................... 97
WHERE YOU CAN FIND MORE INFORMATION......................... 99
ANNEX A -- Agreement and Plan of Merger.....................
ANNEX B -- Transition Agreement.............................
ANNEX C -- Tax Sharing Agreement............................
ANNEX D -- Fairness Opinion of Rhone Group LLC..............
ANNEX E -- Section 1701.85 of the Ohio Revised Code.........
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
, 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:
Morrow & Co.
445 Park Avenue
5th Floor
New York, NY 10022
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. We intend to apply for listing of the Anthony & Sylvan shares on the
Nasdaq national market system under the symbol "SWIM."
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 the merger, you should contact:
Morrow & Co.
445 Park Avenue
5th Floor
New York, NY 10022
Phone Number: (800) 662-5200
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 99.
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 99.
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 ,
1999, you are entitled to vote at the special shareholder meeting. As of that
date, a total of 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 $19.09 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 $1,909 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, $19.09 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 $19.09 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 allocable to the Anthony & Sylvan part of the Essef
business.
Formulas describing this process are described on pages 41 and 42.
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 46)
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 44)
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 44.
TERMINATION FEES (SEE PAGE 45)
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 44. The amount of the termination fee is dependent on the
reason for termination. We discuss how the termination fee is determined
beginning on page 45. 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 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
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 $19.09 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 93)
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.
On , 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, $ per share;
- low price, $ per share; and
- closing price, $ per share.
SUMMARY
7
<PAGE> 17
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 49)
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;
- 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.
SUMMARY
8
<PAGE> 18
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.
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 99.
<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 that we have included in this proxy statement/prospectus and
the other financial information we have included in this proxy
statement/prospectus, set forth on pages 77 and 80 through 90.
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) Pro forma for the adjustments in interest expense as the result of the
$17,000,000 payment to Essef funded by external bank financing 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.
WE NEED TO RECEIVE GOVERNMENTAL APPROVALS BEFORE WE COMPLETE THE MERGER.
The Hart-Scott-Rodino Antitrust Act of 1976 and Federal Trade Commission
rules provide that we may not complete the merger unless we submit required
filings to the Antitrust Division of the Justice Department and the Federal
Trade Commission. In addition, waiting periods must expire. We intend to file
the required forms with the Federal Trade Commission and the Antitrust Division
of the Justice Department by the end of May, 1999.
A court could delay or prevent the merger before or after you adopt the
merger. To obtain the authorization and approvals we need or to keep
governmental authorities from seeking to prevent the merger, those governmental
authorities may 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 lines and
has shown us a letter from its lead bank saying that the lead bank will attempt
to put together a group of banks to fund a loan. However, we cannot assure you
that financing will be available. If Pentair is not able to 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
RISK FACTORS
13
<PAGE> 23
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. The calculation of the tax
benefit to Pentair in the merger is discussed beginning on page 54.
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
RISK FACTORS
14
<PAGE> 24
- 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, 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
RISK FACTORS
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<PAGE> 25
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 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 the
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 will apply to have its shares
approved for quotation on the Nasdaq National Market, we cannot guarantee that
Anthony & Sylvan will be eligible for the Nasdaq National Market or that an
active trading market will develop for your shares. Furthermore, we cannot
guarantee that an active trading market will be maintained if one does develop.
Accordingly, you may be required to bear the financial risks of your investment
for an indefinite period of time.
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.
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 a 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.
RISK FACTORS
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<PAGE> 26
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 year 2000
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
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<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 , 1999 at 10:00 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 , 1999,
you are entitled to notice of and to vote at the meeting.
As of , 1999, there were 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., 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., as proxy tabulator, to assist the inspectors of
election.
THE SPECIAL SHAREHOLDER MEETING
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<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 , 1999, our directors and executive officers and the
directors and executive officers of our affiliates beneficially owned an
aggregate of of our shares entitled to vote at the meeting. This
number amounts to 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. to act as our proxy solicitor and have
agreed to pay it $4,500 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. Pentair will make cash available to the
depositary in amounts and at the times necessary to pay the cash portion of the
merger consideration when you
THE SPECIAL SHAREHOLDER MEETING
19
<PAGE> 29
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
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<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 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
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<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 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 $9,376,000 if the
merger agreement is terminated because we accept a superior proposal;
THE MERGER
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<PAGE> 34
- our obligation to pay Pentair a termination fee of $9,376,000 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 $4,688,000 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 ;
- 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.
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 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-
THE MERGER
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<PAGE> 35
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.
For those statements, we claim the protection of the safe harbor for
forward-looking statements contained in The Private Securities Reform Act of
1995.
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 aggregate consideration, which consists of the cash
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. This 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
THE MERGER
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<PAGE> 36
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. 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;
- 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.
THE MERGER
27
<PAGE> 37
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 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
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28
<PAGE> 38
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
MEAN OF MEAN OF COMPARABLE POOL POOL
COMPARABLE COMPARABLE AND RECREATIONAL INSTALLATIONS
ESSEF DIVERSIFIED WATER EQUIPMENT AND HOME
ENTERPRISE VALUE AS A WITHOUT INDUSTRIAL TREATMENT MANUFACTURERS CONSTRUCTION
MULTIPLE OF: A&S(1) ESSEF(2) COMPANIES(3) COMPANIES(4) AND 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
$19.09 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 $19.09 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 $19.09 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
37
<PAGE> 47
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
intend to file a Notification and Report Form for review with the Federal Trade
Commission and the Antitrust Division of the Justice Department by the end of
May 1999. Under the Hart-Scott-Rodino Act, we may not complete the merger until
we satisfy the waiting period requirements. At any time before we complete the
merger, the Department of Justice 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 $19.09 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 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
THE MERGER
38
<PAGE> 48
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
39
<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 $19.09 in cash; and
- we will distribute to you 0.25 of a share of Anthony & Sylvan.
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 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
THE MERGER AGREEMENT
40
<PAGE> 50
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 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 $19.09 and the exercise price per
share of the stock options; and
THE MERGER AGREEMENT
41
<PAGE> 51
- 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>
$19.09
---------------------------
New Essef option = Old Essef option X $19.09 plus 25% of the value
per share exercise price per share exercise price 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> <S> <C> <C> <C>
Anthony & Sylvan option = Old Essef option - New Essef option X 4
per share exercise ( per share exercise price per share exercise price
price )
</TABLE>
After the options are amended, the option to purchase Essef shares will be
converted into the right to receive cash equal to $19.09 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;
- 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.
THE MERGER AGREEMENT
42
<PAGE> 52
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.
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.
THE MERGER AGREEMENT
43
<PAGE> 53
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.
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.
THE MERGER AGREEMENT
44
<PAGE> 54
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.
TERMINATION FEES; TERMINATION FEE TRIGGERS
Pursuant to the merger agreement, we must pay a termination fee to Pentair:
- in the amount of $9,376,000 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 $4,688,000 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.
THE MERGER AGREEMENT
45
<PAGE> 55
- 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
- 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.
THE MERGER AGREEMENT
46
<PAGE> 56
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 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;
THE MERGER AGREEMENT
47
<PAGE> 57
- 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.
THE MERGER AGREEMENT
48
<PAGE> 58
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.
THE SPLIT-OFF
49
<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
$19.09.
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.
THE SPLIT-OFF
50
<PAGE> 60
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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<PAGE> 61
- 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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<PAGE> 62
- 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
THE SPLIT-OFF
54
<PAGE> 64
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.
THE SPLIT-OFF
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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.
ANTHONY & SYLVAN
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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.
ANTHONY & SYLVAN
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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 $ and
performance-based bonuses targeted at % 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 $ and performance-based bonuses targeted at % of
his annual salary. In addition, at the time of the split-off, Mr. Kelso will be
granted options to purchase
ANTHONY & SYLVAN
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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. As compensation
for his service as executive vice president and chief financial officer, Mr.
Brody will receive an annual base salary of $ and performance-based
bonuses targeted at % 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.
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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;
- individual performance; or
ANTHONY & SYLVAN
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- 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
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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 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
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- 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 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
ANTHONY & SYLVAN
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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 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,
ANTHONY & SYLVAN
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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 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>
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- ---------------
(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 has the right to acquire within
60 days of , 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 , 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.
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(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.
(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.
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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.
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.
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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.
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.
NASDAQ LISTING
Anthony & Sylvan intends to apply for listing of its common shares that
Essef will distribute to you in the split-off on the Nasdaq National Market
System under the trading symbol "SWIM." However, we cannot guarantee that
Anthony & Sylvan will be eligible for listing on the Nasdaq National Market
System.
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
75
<PAGE> 85
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
76
<PAGE> 86
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 99.
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
77
<PAGE> 87
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" beginning on page 82.
<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
78
<PAGE> 88
- ---------------
(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 40 and
41 for a further description of these stock options.
FINANCIAL INFORMATION
79
<PAGE> 89
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
80
<PAGE> 90
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 40 and 41 for a further description
of these stock options.
FINANCIAL INFORMATION
81
<PAGE> 91
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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
82
<PAGE> 92
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
83
<PAGE> 93
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
84
<PAGE> 94
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
85
<PAGE> 95
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
86
<PAGE> 96
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
87
<PAGE> 97
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
88
<PAGE> 98
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
89
<PAGE> 99
PRINCIPAL SHAREHOLDERS
The following table gives information about who has beneficial ownership of
our common shares as of May 10, 1999. We have supplied information about:
- each person known by us to own beneficially more than 5% of our voting
stock;
- each of our directors and executive officers; and
- all of our 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 ,
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 , 1999. Unless noted otherwise:
ADDITIONAL INFORMATION
90
<PAGE> 100
- 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 May 10, 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
91
<PAGE> 101
(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
92
<PAGE> 102
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 May 17, 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 , 1999, the high and low sales
prices of our common stock as reported by the Nasdaq National Market were
$ and $ . 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
93
<PAGE> 103
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
94
<PAGE> 104
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
95
<PAGE> 105
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
96
<PAGE> 106
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 our 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. Our
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 our 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, we 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 our 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 , 1999.
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
ADDITIONAL INFORMATION
97
<PAGE> 107
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
98
<PAGE> 108
WHERE YOU CAN FIND MORE INFORMATION
We file 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 we file
at the Securities and Exchange Commission's Public Reference Rooms at the
following locations:
<TABLE>
<S> <C> <C>
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. Our
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>
<CAPTION>
PERIOD OR
SEC FILINGS (FILE NO. ) DATE FILED
----------------------- ----------
<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
99
<PAGE> 109
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
, 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
100
<PAGE> 110
Annex A
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
APRIL 30, 1999
AMONG
PENTAIR, INC.,
NORTHSTAR ACQUISITION COMPANY
AND
ESSEF CORPORATION
<PAGE> 111
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
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ARTICLE I
THE MERGER
<S> <C> <C>
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..............................3
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..................................8
Section 3.7 Closing...................................................................8
Section 3.8 Filing of Certificate of Merger...........................................8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Section 4.1 Organization and Qualification............................................8
Section 4.2 Authority Relative to this Merger Agreemen................................8
Section 4.3 Consents and Approvals; No Violations.....................................9
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...........................................10
Section 5.2 Capitalization...........................................................10
Section 5.3 Subsidiaries.............................................................10
Section 5.4 Authority Relative to this Merger Agreement..............................11
</TABLE>
i
<PAGE> 112
<TABLE>
<S> <C> <C>
Section 5.5 Consents and Approvals; No Violations....................................11
Section 5.6 Reports and Financial Statements.........................................11
Section 5.7 Absence of Certain Changes or Events.....................................12
Section 5.8 Litigation...............................................................12
Section 5.9 Information in Disclosure Documents......................................13
Section 5.10 Employee Benefit Plans...................................................13
Section 5.11 ERISA....................................................................14
Section 5.12 Company Action...........................................................15
Section 5.13 Fairness Opinion.........................................................15
Section 5.14 Financial Advisor........................................................15
Section 5.15 Compliance with Applicable Laws..........................................15
Section 5.16 Liabilities..............................................................15
Section 5.17 Taxes....................................................................15
Section 5.18 Certain Agreements.......................................................17
Section 5.19 Patents, Trademark, Etc..................................................17
Section 5.20 Title to Assets; Liens...................................................17
Section 5.21 Required Vote............................................................17
Section 5.22 Insurance................................................................18
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pending the Merger....................18
Section 6.2 Notice of Breach.........................................................20
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information; Environmental and Year 2000 Compliance...........20
Section 7.2 Shareholders' Meeting; Filings...........................................23
Section 7.3 Employment Arrangements..................................................23
Section 7.4 Employee Benefits........................................................23
Section 7.5 Indemnification..........................................................24
Section 7.6 Consents.................................................................25
Section 7.7 Antitrust Filings........................................................25
Section 7.8 Additional Agreements....................................................26
Section 7.9 No Solicitation..........................................................26
Section 7.10 Split-Off of A&S.........................................................28
Section 7.11 Confidentiality..........................................................29
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger...............29
Section 8.2 Conditions to Obligation of the Company to Effect the Merger.............29
Section 8.3 Conditions to Obligation of Parent and Sub to Effect the Merger..........30
</TABLE>
ii
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<TABLE>
<CAPTION>
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
<S> <C> <C>
Section 9.1 Termination..............................................................30
Section 9.2 Effect of Termination....................................................32
Section 9.3 Amendment................................................................32
Section 9.4 Waiver...................................................................32
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations, Warranties and Agreements...............32
Section 10.2 Notices..................................................................33
Section 10.3 Fees and Expenses........................................................34
Section 10.4 Publicity................................................................35
Section 10.5 Specific Performance.....................................................35
Section 10.6 Interpretation...........................................................35
Section 10.7 Third Party Beneficiaries................................................36
Section 10.8 Miscellaneous............................................................36
Section 10.9 Cure Period..............................................................36
Section 10.10 Validity.................................................................36
</TABLE>
Exhibit A Transition Agreement
Exhibit B Tax Sharing Agreement
iii
<PAGE> 114
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;
<PAGE> 115
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.
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<PAGE> 116
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 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
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<PAGE> 117
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 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
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<PAGE> 118
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 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
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<PAGE> 119
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 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
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<PAGE> 120
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-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
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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 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
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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.
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:
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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, 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.
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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.
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
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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 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
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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
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
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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 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.
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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 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
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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 Retained
Subsidiary is a party providing for any such "excess parachute payments" or
gross-ups.
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(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
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Incorporation or Regulations of the Company or otherwise in order for the
Company to consummate the Merger and the transactions contemplated hereby.
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
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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 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
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(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.
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,
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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); 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)
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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 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,
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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 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,
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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 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
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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 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
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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 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
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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 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%").
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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 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.
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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).
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
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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.
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;
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(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;
(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
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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.
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.
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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
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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.
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)
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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 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).
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(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.
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.
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(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.]
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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
---------------------------
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EXHIBIT A
---------
TRANSITION AGREEMENT
--------------------
<PAGE> 153
EXHIBIT B
---------
TAX SHARING AGREEMENT
---------------------
<PAGE> 154
PARENT AND SUB DISCLOSURE SCHEDULE
----------------------------------
<PAGE> 155
COMPANY DISCLOSURE SCHEDULE
---------------------------
<PAGE> 156
Annex B
TRANSITION AGREEMENT
DATED AS OF
APRIL 30, 1999
AMONG
ESSEF CORPORATION,
ANTHONY & SYLVAN POOLS CORPORATION
AND
PENTAIR, INC.
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TABLE OF CONTENTS
Page
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ARTICLE I
DEFINITIONS
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Section 1.1. General...............................................................1
Section 1.2. References to Time....................................................7
ARTICLE II
THE RELATED TRANSACTIONS
Section 2.1. Transfers of Certain Assets and Liabilities...........................8
Section 2.2. Methods of Transfer and Assumption....................................8
Section 2.3. Company Approval of Certain A&S Actions...............................8
ARTICLE III
THE SPLIT-OFF
Section 3.1. Cooperation and Actions Prior to the Split-Off........................8
Section 3.2. Net Asset Adjustment.................................................10
Section 3.3. Actions of A&S Prior to the Cut-Off Date.............................11
Section 3.4. Post-Cut-Off Date Operations of A&S..................................11
Section 3.5. The Split-Off........................................................11
Section 3.6. Termination of Certain Claims........................................11
Section 3.7. Post-Closing Procedures..............................................11
ARTICLE IV
INTERCOMPANY TRANSACTIONS AND RELATIONSHIPS
Section 4.1. Cash Dividend........................................................12
Section 4.2. Intercompany Accounts................................................13
Section 4.3. Transition Services..................................................13
ARTICLE V
SURVIVAL AND INDEMNIFICATION
Section 5.1. Survival of Agreements...............................................14
Section 5.2. Indemnification by A&S...............................................14
Section 5.3. Indemnification by the Company.......................................16
Section 5.4. Procedure for Indemnification........................................16
Section 5.5. Miscellaneous Indemnification Provisions.............................18
Section 5.6. Pending Litigation...................................................20
Section 5.7. Construction of Agreements...........................................20
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ARTICLE VI
CERTAIN ADDITIONAL MATTERS
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Section 6.1. Representations or Warranties; Disclaimers...........................20
Section 6.2. Further Assurances; Subsequent Transfers.............................21
Section 6.3. Use of Names.........................................................22
Section 6.4. Litigation Relating to Transaction...................................22
Section 6.5. Operation Prior to Split-Off.........................................23
Section 6.6. Restrictions on Post-Split-Off Competitive Activities................23
ARTICLE VII
ACCESS TO INFORMATION AND SERVICES
Section 7.1. Provision of Corporate Records.......................................23
Section 7.2. Access to Information................................................24
Section 7.3. Production of Witnesses..............................................24
Section 7.4. Retention of Records.................................................24
Section 7.5. Confidentiality......................................................24
ARTICLE VIII
EMPLOYEE MATTERS
Section 8.1. Employees............................................................25
Section 8.2. Employee Benefits....................................................25
Section 8.3. Other Liabilities and Obligations....................................27
Section 8.4. Preservation of Rights to Amend or Terminate Plans...................27
Section 8.5. Reimbursement; Indemnification.......................................27
Section 8.6. Nonsolicitation of Employees.........................................27
Section 8.7. Actions By A&S.......................................................28
ARTICLE IX
INSURANCE
Section 9.1. General..............................................................28
Section 9.2. Certain Insured Claims...............................................28
ARTICLE X
CONDITIONS; TERMINATION; AMENDMENTS; WAIVERS
Section 10.1. Conditions to Split-Off.............................................29
Section 10.2. Termination.........................................................29
Section 10.3. Amendments; Waivers.................................................30
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ARTICLE XI
MISCELLANEOUS
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Section 11.1. Survival of Indemnities; Release..................................30
Section 11.2. Entire Agreement..................................................30
Section 11.3. Fees and Expenses.................................................31
Section 11.4. Governing Law.....................................................31
Section 11.5. Notices...........................................................31
Section 11.6. Successors and Assigns; No Third Party Beneficiaries..............32
Section 11.7. Counterparts......................................................33
Section 11.8. Interpretation....................................................33
Section 11.9. Schedules.........................................................33
Section 11.10. Legal Enforceability..............................................33
Section 11.11. Consent to Jurisdiction...........................................33
Section 11.12. Specific Performance..............................................34
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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):
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(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.
(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
<PAGE> 162
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.
(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
<PAGE> 163
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.
(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.
<PAGE> 164
(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 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.
<PAGE> 165
(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 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.
<PAGE> 166
(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.
<PAGE> 167
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
<PAGE> 168
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 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
<PAGE> 169
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
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
<PAGE> 170
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 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
<PAGE> 171
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 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.
<PAGE> 172
(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.
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
<PAGE> 173
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 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
<PAGE> 174
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 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
<PAGE> 175
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 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
<PAGE> 176
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 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.
<PAGE> 177
(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 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
<PAGE> 178
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.
(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
<PAGE> 179
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
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
<PAGE> 180
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 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),
<PAGE> 181
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 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
<PAGE> 182
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 (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
<PAGE> 183
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
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
<PAGE> 184
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.
(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.
<PAGE> 185
(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 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
<PAGE> 186
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 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.
<PAGE> 187
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).
(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
<PAGE> 188
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 of actions commenced after such
three-year period to seek
<PAGE> 189
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
<PAGE> 190
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
<PAGE> 191
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, 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.
<PAGE> 192
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 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.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 193
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
--------------------------
<PAGE> 194
DISCLOSURE SCHEDULE
-------------------
<PAGE> 195
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").
R E C I T A L S
---------------
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,
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<PAGE> 196
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.
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.
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<PAGE> 197
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;
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
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<PAGE> 198
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.
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.
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<PAGE> 199
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.
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
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<PAGE> 200
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 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
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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
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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.
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
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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 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
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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.
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
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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.
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
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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.
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
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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 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.
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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, 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 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
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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.
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.]
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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
--------------------------
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EXHIBIT A
---------
<TABLE>
<CAPTION>
SUMMARY TERMS OF ANTHONY & SYLVAN SENIOR SUBORDINATED DEBT SECURITY
<S> <C>
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.
--------------------------------------------------------------------------
MAXIMUM TOTAL DEBT/LTM EBITDA COVENANT BASIS POINT SPREAD
IN INITIAL BANK AGREEMENT OVER INITIAL BANK RATE
--------------------------------------------------------------------------
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 thanor equal to 4.00x +450
greater than 4.00x +550
--------------------------------------------------------------------------
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.
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
</TABLE>
<PAGE> 213
<TABLE>
<S> <C>
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.
</TABLE>
<PAGE> 214
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.
<PAGE> 215
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.
For purposes of the opinion set forth herein, we have:
(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.
-2-
<PAGE> 216
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
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
-3-
<PAGE> 217
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:
------------------------------
Managing Director
-4-
<PAGE> 218
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
<PAGE> 219
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.
<PAGE> 220
(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.
<PAGE> 221
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> 222
ANTHONY & SYLVAN POOLS CORPORATION
CONDENSED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS
ENDED MARCH 31, 1998
AND 1999
FINANCIAL STATEMENTS
F-2
<PAGE> 223
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..................................... 11,081
Inventories............................................... 6,718
Prepayments and other..................................... 2,422
Deferred income taxes..................................... 1,948
-------
Total current assets.............................. 22,878
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................................................ $58,568
=======
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.......................................... 17,330
-------
Total current liabilities......................... 53,380
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........ $58,568
=======
</TABLE>
See notes to condensed financial statements.
FINANCIAL STATEMENTS
F-3
<PAGE> 224
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> 225
ANTHONY & SYLVAN POOLS CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(DOLLAR 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> 226
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> 227
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> 228
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> 229
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> 230
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> 231
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> 232
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> 233
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> 234
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> 235
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> 236
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> 237
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> 238
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> 239
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> 240
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> 241
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> 242
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> 243
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> 244
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> 245
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> 246
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> 247
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> 248
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> 249
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> 250
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> 251
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> 252
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> 253
schedule to the Commission upon request. Items marked with an asterisk are filed
with this Registration Statement.
<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 Essef (incorporated by reference to
Exhibit 21 to Essef's Form 10-K for the year ended September
30, 1998)
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)
</TABLE>
(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.
II-3
<PAGE> 254
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 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.
II-4
<PAGE> 255
(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> 256
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chardon,
State of Ohio, on May 18, 1999.
ESSEF CORPORATION
By: /s/ STUART D. NEIDUS
----------------------------------------
Stuart D. Neidus
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on this 17th day of May, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ THOMAS B. WALDIN* President and Chief Executive Officer,
- --------------------------------------- Director (Principal Executive Officer)
Thomas B. Waldin
/s/ STUART D. NEIDUS Executive Vice President and Chief
- --------------------------------------- Financial Officer (Principal Financial
Stuart D. Neidus and Accounting Officer)
/s/ RALPH T. KING* Chairman of the Board of Directors
- ---------------------------------------
Ralph T. King
/s/ JAMES M. BIGGAR* Director
- ---------------------------------------
James M. Biggar
/s/ GORDON D. HARNETT* Director
- ---------------------------------------
Gordon D. Harnett
/s/ GEORGE M. HUMPHREY, II* Director
- ---------------------------------------
George M. Humphrey, II
/s/ MARY ANN JORGENSON* Director
- ---------------------------------------
Mary Ann Jorgenson
</TABLE>
* The undersigned, as attorney-in-fact, does hereby sign this Registration
Statement on behalf of each of the officers and directors indicated above.
By: /s/ STUART D. NEIDUS
----------------------------------------
Stuart D. Neidus
II-6
<PAGE> 257
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> 258
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 Essef (incorporated by reference to
Exhibit 21 to Essef's Form 10-K for the year ended September
30, 1998)
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
</TABLE>
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE
OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ANTHONY & SYLVAN POOLS CORPORATION
Stuart D. Neidus, who is Chairman of the Board of Directors,
Chief Executive Officer and Chief Financial Officer, and Kevan Langner, who is
Secretary, of the above-named Ohio corporation for profit with its principal
location at Chardon, Ohio (the "Corporation") do hereby certify that the
following Amended and Restated Articles of Incorporation were adopted by the
Board of Directors of the Corporation to supersede and take the place of the
existing Articles of Incorporation at a meeting duly called on September __,
1998, and further that such Amended and Restated Articles of Incorporation were
approved by the sole shareholder of the Corporation in a writing signed by such
shareholder and dated September __, 1998, all in accordance with the applicable
provisions of the Ohio Revised Code, including Section 1701.69 thereof.
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ANTHONY & SYLVAN POOLS CORPORATION
The undersigned, desiring to form a corporation for profit
under Chapter 1701 of the Ohio Revised Code, does hereby certify:
FIRST: The name of the Corporation shall be "Anthony & Sylvan
Pools Corporation."
SECOND: The place in the State of Ohio where the principal
office of the Corporation will be located is Chardon, Ohio, in Geauga County, or
such other location as the Board of Directors may from time to time determine.
THIRD: The purposes for which the Corporation is formed are
(i) to engage in any lawful act or activity for which corporations may be formed
under Chapter 1701 of the Ohio Revised Code, as now in effect or hereinafter
amended, in furtherance of such long-term plans and strategies as the Board of
Directors may from time to time establish for the Corporation and (ii) to
preserve for the Corporation, its shareholders and such other constituencies as
the Board of Directors may from time to time identify, the benefits expected to
be derived from such long-term plans and strategies.
<PAGE> 2
FOURTH: The total number of shares of all classes of stock
which the Corporation shall have authority to issue is Fifty Million
(50,000,000), all without par value, divided into two classes as follows:
1,000,000 serial preferred shares (hereinafter called the "Serial Shares"); and
49,000,000 common shares (hereinafter called the "Common Shares").
The voting powers and such designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions of each class of shares which are
fixed by these Articles of Incorporation, and the express grant of authority to
the Board of Directors to fix by resolutions the voting powers, designations,
preferences and relative, participating, optional or other rights, if any, or
the qualifications, limitations or restrictions, if any, of the Serial Shares
which are not fixed by these Articles of Incorporation, are as follows:
SECTION 1. PROVISIONS APPLICABLE ONLY TO THE SERIAL SHARES
A. The Serial Shares may be issued from time to time in any
amount, not exceeding in the aggregate (including all shares of any and all
series thereof theretofore issued and not theretofore retired) the total number
of Serial Shares hereinabove authorized, as Serial Shares of one or more series,
as hereinafter provided. All shares of any one series of the Serial Shares shall
be identical in all respects, each series thereof shall be distinctively
designated by letter or descriptive words, and, except as permitted by the
provisions of this Article FOURTH, all series of the Serial Shares shall rank
equally and be identical in all respects.
B. Authority is hereby expressly granted to the Board of
Directors from time to time to issue the Serial Shares in any series and in
connection with the creation of such series to fix by the resolution or
resolutions providing for the issue of shares thereof the voting powers and
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions of such series, to the
fullest extent now or hereafter permitted by the laws of the State of Ohio, in
respect of the matters set forth in the following subdivisions (1) to (7),
inclusive:
(1) The designation of such series;
(2) The voting powers, if any, of the holders of such
series;
(3) The rate and the times and conditions upon which
the holders of such series shall be entitled to receive dividends, and whether
such dividends shall be cumulative or non-cumulative;
(4) The price or prices and the time or times and the
manner in which such series shall be redeemable, if such Serial Shares are made
redeemable;
(5) Whether the shares of such series shall be
entitled to the benefit of a sinking fund or purchase fund to be applied to the
redemption or purchase of such series and, if so entitled, the amount of such
fund and the manner of its application;
2
<PAGE> 3
(6) Whether the shares of such series shall be
convertible into, or exchangeable for, shares of any other class or classes or
of any other series of the same or any other class of the Corporation or any
other security, and, if so convertible or exchangeable, the conversion price or
prices or rate or rates, or the rate or rates of exchange, and the adjustments,
if any, in the price or prices or rate or rates at which such conversion or
exchange may be made; and
(7) Any other designations, preferences and relative
participating, or other special rights, and qualifications, limitations or
restrictions thereof, so far as they are not inconsistent with the provisions of
these Articles of Incorporation, as from time to time amended.
C. Shares of any such series which have been issued and
reacquired in any manner by the Corporation (excluding, until the Corporation
elects to retire them, shares which are held as treasury shares but including
shares redeemed, shares purchased and retired, whether through the operation of
a retirement or purchase fund or otherwise, and shares which, if convertible or
exchangeable, have been converted into or exchanged for shares of any other
class or classes) shall have the status of authorized and unissued shares and
may be reissued as a part of the series of which they were originally a part or
may be reissued as part of a new series to be created by resolution or
resolutions of the Board of Directors or as part of any other series, all
subject to the conditions or restrictions on issuance set forth herein or in any
resolution or resolutions adopted by the Board of Directors providing for the
issue of any series of Serial Shares.
SECTION 2. PROVISIONS APPLICABLE TO ALL CLASSES OF SHARES
A. Except to the extent that the resolution or resolutions
providing for the issuance of a series of Serial Shares may otherwise provide
with respect to such series, the preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of the Serial Shares of all series are as follows:
(1) Out of the unreserved and unrestricted surplus
of the Corporation legally available for dividends, the holders of Serial Shares
shall be entitled to receive, when and as declared by the Board of Directors,
dividends at the rate per annum determined as in this Article FOURTH, provided
therefor, and no more, payable quarterly in each year on such dates as may be
fixed as in this Article FOURTH provided therefor to holders of record on the
respective dates not exceeding forty days preceding such dividend payment dates
as may be determined by the Board of Directors in advance of the payment of each
such dividend (each such payment day being hereinafter called a dividend date
and each quarterly period ending with a dividend date being hereinafter called a
dividend period), before any dividends (other than dividends payable in shares
ranking junior to Serial Shares) on any class or classes of shares of the
Corporation ranking junior to Serial Shares as to dividends or on liquidation
shall be declared or paid or set apart for payment. With respect to each issue
on which dividends are cumulative, such dividends shall accrue and be cumulative
from the "Date of Cumulation." The term "Date of Cumulation" as used in this
Section 2A.(1) with reference to the Serial Shares shall be deemed to mean the
date on which shares of such series are first issued. In the event of the issue
of additional shares of any then existing series, all dividends paid on the
shares of such series prior to the issue of such additional shares, and all
dividends declared and payable to holders of record of shares of such series on
any date prior to the
3
<PAGE> 4
issue of such additional shares, shall be deemed to have been paid on such
additional shares. No dividends shall be declared in respect of any dividend
period unless there shall likewise be or have been declared on all shares of
each other issue at the time outstanding like dividends for all dividend periods
coinciding with or ending before such dividend period, ratably in proportion to
the respective annual dividend rates per annum fixed therefor as hereinbefore
provided. Accruals of dividends shall not bear interest.
(2) The Serial Shares of all issues shall be
preferred over the Common Shares as to assets in the event of any liquidation or
dissolution or winding up of the Corporation, and in that event the holders of
each series shall be entitled to receive, out of the assets of the Corporation
available for distribution to its shareholders the amount payable upon such
liquidation or dissolution or winding up as fixed by the Board of Directors,
plus an amount equal to all dividends accrued and unpaid thereon to the date of
final distribution to such holders, before any distribution of the assets shall
be made to the holders of the Common Shares; and, if in the event of any such
liquidation or dissolution or winding up of the Corporation, the holders of all
issues of the Serial Shares shall have received all the amounts to which they
shall be entitled as aforesaid, the holders of the Common Shares shall be
entitled, to the exclusion of the holders of the Serial Shares, to share ratably
in all the assets of the Corporation available for distribution to the
shareholders then remaining according to the number of shares of the Common
Shares held by them respectively. If, upon any liquidation or dissolution or
winding up of the Corporation, the amounts payable on or with respect to the
Serial Shares are not paid in full, the holders of shares of the Serial Shares
of all issues shall share ratably in any distribution of assets according to the
respective amounts which would be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to the Serial
Shares of all series were paid in full. For the purposes of this Section 2A.(2),
the voluntary sale, lease, exchange or transfer (for cash, shares, securities,
or other consideration) of all or substantially all of its property or assets
to, or a consolidation or merger of the Corporation with, one or more
corporations shall not be deemed to be a liquidation, dissolution or winding up,
voluntary or involuntary.
(3) The Serial Shares, or any series or issue
thereof, or any part of any series or issue thereof, which are outstanding and
which are by resolution or resolutions of the Board of Directors creating any
such series, then redeemable, may be redeemed by the Corporation at its election
expressed by resolution of the Board of Directors, upon not less than thirty
(30) nor more than sixty (60) days' previous notice to the holders of record of
the Serial Shares to be redeemed, given by mail or by publication in such manner
as may be prescribed by resolution of the Board of Directors, at the applicable
redemption price, determined as provided in this Article FOURTH, of the Serial
Shares to be redeemed. If less than all the outstanding Serial Shares of any
issue or series is to be redeemed, the redemption may be made either by lot or
pro rata as may be prescribed by resolution of the Board of Directors. From and
after the date fixed in any such notice as the date of redemption (unless
default shall be made by the Corporation in providing moneys for the payment of
the redemption price pursuant to such notice), or, if the Corporation shall so
elect, from and after a date, prior to the date fixed as the date of redemption,
on which the Corporation shall provide moneys for the payment of the redemption
price by depositing the amount thereof for the account of the holders of the
Serial Shares entitled thereto with a bank or trust company and having a capital
and surplus of at least fifty million dollars ($50,000,000), pursuant to notice
of such election included in the notice of redemption specifying the date on
which such deposit will be
4
<PAGE> 5
made, all dividends on the Serial Shares called for redemption shall cease to
accrue and all rights of the holders thereof as shareholders of the Corporation,
except the right to receive the redemption price as hereinafter provided and, in
the case of such deposit, any conversion rights not theretofore expired, shall
cease and terminate. After the deposit of such amount with such bank or trust
company, the respective holders of record of the Serial Shares to be redeemed
shall be entitled to receive the redemption price at any time upon actual
delivery to such bank or trust company of certificates for the number of shares
to be redeemed, duly endorsed in blank or accompanied by proper instruments of
assignment and transfer thereof duly endorsed in blank. Any moneys so deposited
which shall remain unclaimed by the holders of such Serial Shares at the end of
six (6) years after the redemption date, together with any interest thereon
which shall be allowed by the bank or trust company with which the deposit shall
have been made, shall be repaid by such bank or trust company to the Corporation
upon its request expressed in a resolution of its Board of Directors, free of
any trust theretofore impressed upon them by the Corporation.
(4) If at the time of any annual meeting of
shareholders of the Corporation for the election of directors a default in
preference dividends, as the term "default in preference dividends" is
hereinafter defined, shall exist, the holders of the Serial Shares voting
separately as a class and without regard to series, shall have the right to
elect two members of the Board of Directors; and the holders of the Common
Shares shall not be entitled to vote in the election of the directors of the
Corporation to be elected by the holders of Serial Shares, as provided above.
Whenever a default in preference dividends shall commence to exist, the
Corporation, upon the written request of the holders of five percent (5%) or
more of the outstanding Serial Shares, shall call a special meeting of the
holders of the Serial Shares, such special meeting or meetings to be held within
one hundred twenty (120) days after the date on which such request is received
by the Corporation, for the purpose of enabling such holders to elect members of
the Board of Directors as provided above; provided, however, that such special
meeting or meetings need not be called if an annual meeting of shareholders of
the Corporation for the election of directors shall be scheduled to be held
within such 120 days. Prior to any such special or annual meeting or meetings,
the number of directors of the Corporation shall be increased to the extent
necessary to provide as additional places on the Board of Directors the
directorships to be filled by the directors to be elected thereat. Any director
elected as aforesaid by the holders of Serial Shares shall cease to serve as
such director whenever a default in preference dividends shall cease to exist.
If, prior to the end of the term of any director elected as aforesaid by the
holders of Serial Shares, or elected by the holders of Serial Shares and Common
Shares, a vacancy in the office of such director shall occur by reason of death,
resignation, removal or disability, or for any other cause, such vacancy shall
be filled for the unexpired term in the manner provided in these Articles of
Incorporation and the Regulations of the Corporation; provided, however, that if
such vacancy shall be filled by election by the shareholders at a meeting
thereof, the right to fill such vacancy shall be vested in the holders of that
class of shares or series thereof which elected the director the vacancy in the
office of whom is so to be filled, unless, in any such case, no default in
preference dividends shall exist at the time of such meeting. For the purposes
of this Section 2A.(4), a "default in preference dividends" shall be deemed to
have occurred whenever the amount of cumulative dividends accrued and unpaid
upon any series of the Serial Shares and the amount of non-cumulative dividends
unpaid upon any series of the Serial Shares shall be equivalent to six (6) full
quarter-yearly dividends or more, and, having so occurred, such default in
preference dividends shall be deemed to exist thereafter until, but only until,
all cumulative dividends accrued and unpaid
5
<PAGE> 6
on all Serial Shares then outstanding, of each and every class and series, shall
have been paid in full, or declared and funds set aside for their payment, and
until non-cumulative dividends on all Serial Shares then outstanding, of each
and every series, shall have been paid regularly for at least one year. Nothing
herein contained shall be deemed to prevent an increase in the number of
directors of the Corporation pursuant to its Regulations so as to provide as
additional places on the Board of Directors the directorships to be filled by
the directors so to be elected by the holders of the Serial Shares or of any
class or series thereof, or to prevent any other change in the number of
directors of the Corporation. At any meeting held for the purpose of electing
directors at which the holders of the Serial Shares shall have the special
right, voting separately as a group, to elect directors as provided in this
Section 2A.(4), the presence, in person or by proxy, of the holders of one-third
of the aggregate number of Serial Shares of all series at the time outstanding
shall be required to constitute a quorum of such group for the election of any
director by the holders of the Serial Shares as a group. At any such meeting or
adjournment thereof, (a) the absence of a quorum of the holders of the Serial
Shares shall not prevent the election of directors other than those to be
elected by the holders of the Serial Shares voting as a group and the absence of
a quorum for the election of such other directors shall not prevent the election
of the directors to be elected by the holders of the Serial Shares voting as a
group, and (b) in the absence of either or both such quorums, a majority of the
holders present in person or by proxy of the shares which lack a quorum shall
have power to adjourn the meeting for the election of directors which they are
entitled to elect from time to time without notice other than announcement at
the meeting until a quorum shall be present.
(5) So long as any shares of any series shall be
outstanding, (a) the Corporation shall not, without the affirmative vote or
written consent of the holders of at least two-thirds of the aggregate number of
shares of all series at the time outstanding, considered as a single class
without regard to series,
(i) alter or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions of the Serial Shares as
provided in these Articles of Incorporation or by the resolution or resolutions
so fixing the same, so as to affect the Serial Shares adversely, or
(ii) authorize or create any class of shares
ranking, either as to dividends or upon liquidation, prior to the Serial Shares;
or
(b) the Corporation shall not, without the
affirmative vote or written consent of the holders of a majority of the
aggregate number of shares of all series at the time outstanding, considered as
a single class, increase the authorized amount of Serial Shares or authorize or
create any class ranking, either as to dividends or upon liquidation, on a
parity with Serial Shares; or (c) the Corporation shall not, without the
affirmative vote or written consent of the holders of at least two-thirds of the
aggregate number of shares of any series at the time outstanding, the holders of
such series consenting or voting separately as a series, alter or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions
specifically applicable to such series, as provided in these Articles of
Incorporation or in the resolution or resolutions adopted by the Board of
Directors providing for the issue of such series, so as to affect such series
adversely; or (d) the
6
<PAGE> 7
Corporation shall not (i) declare, or pay, or set apart for payment, any
dividends (other than dividends payable in shares ranking junior to the Serial
Shares) or make any distribution, on any class or classes of shares of the
Corporation ranking junior to the Serial Shares in any respect, or (ii) redeem,
purchase or otherwise acquire, or permit any subsidiary to purchase or otherwise
acquire, any shares of any such junior class, if at the time of making such
declaration, payment, distribution, redemption, purchase or acquisition, the
Corporation shall be in default with respect to any dividend payable on, or any
obligation to retire, shares of Serial Shares, provided that, notwithstanding
the foregoing, the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior class in exchange for, or out of the net cash
proceeds from the sale of, other shares of any junior class; provided, however,
that any vote or consent required by Section 2A.(5)(a)(i) above may be given and
made effective by the filing of an appropriate amendment of these Articles of
Incorporation without obtaining the vote or consent of the holders of the Common
Shares, the right to give such vote or consent being expressly waived by all
holders of such Common Shares unless the action to be taken would substantially
adversely affect the rights or powers of the Common Shares; and provided,
further, that any vote or consent required by Section 2A.(5)(c) above may be
given and made effective by the filing of an appropriate amendment of these
Articles of Incorporation without obtaining the vote or consent of the holders
of any other series of the Serial Shares or of the holders of the Common Shares,
the right to give such vote or consent being expressly waived by all holders of
such other series of Serial Shares and Common Shares, unless the action to be
taken would substantially adversely affect the rights or powers of such other
series of Serial Shares or Common Shares, as the case may be.
(6) If at any time the Corporation shall have failed
to pay dividends in full on the Serial Shares, thereafter and until dividends in
full, including all accrued and unpaid dividends on the Serial Shares
outstanding, shall have been declared and set apart for payment or paid (a) the
Corporation shall not, without the affirmative vote or written consent of the
holders of at least two-thirds of the aggregate number of shares of all series
at the time outstanding, redeem less than all of the Serial Shares at such time
outstanding other than in accordance with Section 2A.(7), and (b) neither the
Corporation nor any subsidiary shall purchase any Serial Shares except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of Serial Shares of all
series upon such terms as the Board of Directors, in its sole discretion after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series, shall determine (which determination
shall be final and conclusive) will result in fair and equitable treatment among
the respective series; provided, that (i) unless prohibited by the provisions
applicable to any series, the Corporation, to meet the requirements of any
retirement or sinking fund provisions with respect to any series, may use shares
of such series acquired by it prior to such failure and then held by it as
treasury shares and (ii) nothing shall prevent the Corporation from completing
the purchase or redemption of Serial Shares for which a purchase contract was
entered into for any retirement or sinking fund purposes, or the notice of
redemption of which was initially published, prior to such failure.
(7) If in any case the amounts payable with respect
to any obligations to retire shares of the Serial Shares are not paid in full in
the case of all series as to which such obligations exist, the number of shares
of the various series to be retired shall be in proportion to the respective
amounts which would be payable on account of such obligations if all amounts
which would be payable on account of such obligations were discharged in full.
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B. For the purposes of this Article FOURTH and of any
resolution or resolutions of the Board of Directors adopted pursuant to this
Article FOURTH or of any certificate filed with the Secretary of State of Ohio
(unless otherwise provided in any such resolution or certificate):
(1) The term "outstanding," when used in reference to
shares, shall mean issued shares, excluding shares held by the Corporation or a
subsidiary and shares called for redemption, funds for the redemption of which
shall have been deposited in trust;
(2) The amount of dividends "accrued and unpaid" on
any Serial Shares of any series as at any quarterly dividend date shall be
deemed (whether or not in any dividend period in respect of which such term is
used there shall have been unreserved and unrestricted surplus legally available
for the payment of dividends) to be the amount of any unpaid dividends
accumulated thereon to and including such quarterly dividend date, whether or
not earned or declared, and the amount of dividends "accrued and unpaid" on any
shares of any series as at any date other than a quarterly dividend date shall
be calculated as the amount of any unpaid dividends accumulated thereon to and
including the last preceding quarterly dividend date, whether or not earned or
declared, plus an amount calculated on the basis of the annual dividend rate
fixed for the shares of such series for the period after such last preceding
quarterly dividend date to, and including, the date as of which the calculation
is made, based on a 360-day year of twelve 30-day months;
(3) Any class or classes of shares of the Corporation
shall be deemed to rank:
(a) prior to the Serial Shares either as to
dividends or upon liquidation, if the holders of such class or classes shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of any Serial Shares;
(b) on a parity with the Serial Shares either
as to dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates, or redemption or liquidation prices per share thereof be
different from those of any Serial Shares, if the holders of such class or
classes shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in proportion to their respective dividend rates or liquidation prices, without
preference or priority one over the other as between the holders of such class
or classes of shares and the holders of any Serial Shares; and
(c) junior to the Serial Shares if the rights
of the holders of such class or classes shall be subject or subordinate to the
rights of the holders of the Serial Shares in respect of either the receipt of
dividends or the amounts distributable upon liquidation, dissolution or winding
up.
C. Except as otherwise provided by law or by these Articles of
Incorporation and except to the extent that the resolution or resolutions of the
Board of Directors providing for the
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issuance of a series of Serial Shares may otherwise provide with respect to such
series, the holder (or holders) of each outstanding share of the Corporation,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders or submitted to shareholders for their consent
without a meeting.
D. No shareholder of the Corporation shall by reason of his
holding shares of any class have any preemptive or preferential right to
purchase or subscribe to any shares of any class of the Corporation now or
hereafter to be authorized, or any notes, debentures, bonds, or other securities
convertible into or carrying options or warrants to purchase shares of any
class, now or hereafter to be authorized, whether or not the issuance of any
such shares, or such notes, debentures, bonds or other securities, would
adversely affect the dividend or voting rights of such shareholder, other than
such rights, if any, as the Board of Directors, in its discretion from time to
time may grant and at such price as the Board of Directors in its discretion may
fix; and the Board of Directors may issue shares of any class of the
Corporation, or any notes, debentures, bonds, or other securities convertible
into or carrying options or warrants to purchase shares of any class, without
offering any such shares of any class, either in whole or in part, to the
existing shareholders of any class.
FIFTH: The provisions of Section 1701.831 of the Ohio Revised
Code, as in effect on August 31, 1998, shall not apply to this Corporation.
SIXTH: No Person shall make a Control Share Acquisition
without the prior authorization of the Corporation's shareholders.
SECTION 1. PROCEDURE. In order to obtain authorization of a
Control Share Acquisition by the Corporation's shareholders, a Person shall
deliver a notice (the "Notice") to the Corporation at its principal place of
business that sets forth all of the following information:
A. The identity of the Person who is giving the Notice;
B. A statement that the Notice is given pursuant to this
Article SIXTH;
C. The number and class of shares of the Corporation owned,
directly or indirectly, by the Person who gives the Notice;
D. The range of voting power under which the proposed Control
Share Acquisition would, if consummated, fall;
E. A description in reasonable detail of the terms of the
proposed Control Share Acquisition; and
F. Reasonable evidence that the proposed Control Share
Acquisition, if consummated, would not be contrary to law and that the Person
who is giving the Notice has the financial capacity to make the proposed Control
Share Acquisition.
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SECTION 2. CALL OF SPECIAL MEETING OF SHAREHOLDERS. The Board
of Directors of the Corporation shall, within ten days after receipt of such
Notice by the Corporation, call a special meeting of shareholders to be held not
later than fifty (50) days after receipt of the Notice by the Corporation,
unless the Person who delivered the Notice agrees to a later date, to consider
the proposed Control Share Acquisition; provided that the Board of Directors
shall have no obligation to call such meeting if they make a determination
within ten days after receipt of the Notice (i) that the Notice was not given in
good faith, (ii) that the proposed Control Share Acquisition would not be in the
best interests of the Corporation or (iii) that the proposed Control Share
Acquisition could not be consummated for financial or legal reasons. The Board
of Directors may adjourn such meeting if, prior to such meeting, the Corporation
has received a Notice from any other Person and the Board of Directors has
determined that the Control Share Acquisition proposed by such other Person or a
merger, consolidation or sale of assets of the Corporation should be presented
to shareholders at an adjourned meeting or at a special meeting held at a later
date.
For purposes of this Section 2, a director, in determining
whether the proposed Control Share Acquisition would be in the best interests of
the Corporation, shall consider the interests of the Corporation's shareholders
and, in his discretion, may consider any of the following: the interests of the
Corporation's employees, suppliers, creditors and customers; the economy of the
state and nation; community and societal considerations; and the long term as
well as short term interests of the Corporation and its shareholders, including
the possibility that these interests may be best served by the continued
independence of the Corporation.
For purposes of making a determination that a special meeting
of shareholders should not be called pursuant to this Section 2, no such
determination shall be deemed void or voidable with respect to the Corporation
merely because one or more of its directors or officers who participated in
making such determination may be deemed to be other than disinterested, if in
any such case the material facts of the relationship giving rise to a basis for
self-interest are known to the directors and the directors, in good faith
reasonably justified by the facts, make such determination by the affirmative
vote of a majority of the disinterested directors, even though the disinterested
directors constitute less than a quorum. For purposes of this paragraph,
"disinterested directors" shall mean directors whose material contacts with the
Corporation are limited principally to activities as a director or shareholder.
Persons who have substantial, recurring business or professional contacts with
the Corporation shall not be deemed to be "disinterested directors" for purposes
of this provision. A director shall not be deemed to be other than a
"disinterested director" merely because he or she would no longer be a director
if the proposed Control Share Acquisition were approved and consummated.
SECTION 3. NOTICE OF SPECIAL MEETING. The Corporation shall
give notice of such special meeting to all shareholders of record as of the
record date set for such meeting as promptly as practicable. Such notice shall
include or be accompanied by a copy of the Notice and by a statement of the
Corporation, authorized by the Board of Directors, of its position or
recommendation, or that it is taking no position or making no recommendation,
with respect to the proposed Control Share Acquisition.
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SECTION 4. REQUIREMENTS FOR APPROVAL. The Person who delivered
the Notice may make the proposed Control Share Acquisition if both of the
following occur: (i) the shareholders of the Corporation authorize such
acquisition at the special meeting called by the Board of Directors at which a
quorum is present and held for that purpose by an affirmative vote of a majority
of the Voting Shares represented at such meeting in person or by proxy and by a
majority of the portion of such Voting Shares represented at such meeting in
person or by proxy excluding the votes of Interested Shares; and (ii) such
acquisition is consummated, in accordance with the terms so authorized, not
later than 360 days following shareholder authorization of the Control Share
Acquisition. For purposes of these Articles of Incorporation, "Voting Shares"
shall mean all outstanding shares of the Corporation entitled, at the time of
the meeting, to vote in the election of directors.
SECTION 5. VIOLATIONS OF RESTRICTION. Shares issued or
transferred to any Person in violation of this Article SIXTH shall be valid only
with respect to such number of shares as does not result in a violation of this
Article SIXTH, and such issuance or transfer shall be null and void with respect
to the remainder of such shares, any such remainder of shares being hereinafter
called "Excess Shares." If the last clause of the foregoing sentence is
determined to be invalid by virtue of any legal decision, statute, rule or
regulation, the Person who holds Excess Shares shall be conclusively deemed to
have acted as an agent on behalf of the Corporation in acquiring the Excess
Shares and to hold such Excess Shares on behalf of the Corporation. As the
equivalent of treasury securities for such purposes, the Excess Shares shall not
be entitled to any voting rights, shall not be considered to be outstanding for
quorum or voting purposes, and shall not be entitled to receive dividends,
interest or any other distribution with respect to the Excess Shares. Any person
who receives dividends, interest or any other distribution in respect to Excess
Shares shall hold the same as agent for the Corporation and, following a
permitted transfer, for the transferee thereof. Notwithstanding the foregoing,
any holder of Excess Shares may transfer the same (together with any
distributions thereon) to any person who, following such transfer, would not own
shares in violation of this Article SIXTH. Upon such permitted transfer, the
Corporation shall pay or distribute to the transferee any distributions on the
Excess Shares not previously paid or distributed.
SECTION 6. DEFINITIONS. As used in this Article SIXTH:
A. "Person" includes, without limitation, an individual, a
corporation (whether nonprofit or for profit), a partnership, a limited
liability company, an unincorporated society or association, and two or more
persons having a joint or common interest.
B. (1) "Control Share Acquisition" means the acquisition,
directly or indirectly, by any Person, of shares of the Corporation that, when
added to all other shares of the Corporation in respect of which such Person may
exercise or direct the exercise of voting power as provided in this Section
6B.(1), would entitle such Person, immediately after such acquisition, directly
or
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indirectly, to exercise or direct the exercise of the voting power of the
Corporation in the election of directors within any of the following ranges of
such voting power:
(a) One-fifth or more but less than one-third
of Voting Shares;
(b) One-third or more but less than a
majority of Voting Shares;
(c) A majority or more of Voting Shares.
A bank, broker, nominee, trustee, or other person who acquires
shares in the ordinary course of business for the benefit of others in good
faith and not for the purpose of circumventing this Article SIXTH shall,
however, be deemed to have voting power only of shares in respect of which such
person would be able to exercise or direct the exercise of votes without further
instruction from others at a meeting of shareholders called under this Article
SIXTH. For purposes of this Article SIXTH, the acquisition of securities
immediately convertible into shares of the Corporation with voting power in the
election of directors shall be treated as an acquisition of such shares.
(2) The acquisition by any Person of any shares of
the Corporation does not constitute a Control Share Acquisition for the purpose
of this Article SIXTH if the acquisition is consummated in any of the following
circumstances:
(a) Pursuant to a spin-off or other
distribution of all or any portion of Essef Corporation's ownership interest in
the Corporation or pursuant to the exercise of options obtained pursuant to
agreements in place prior to spin-off or distribution;
(b) By underwriters in good faith and not for
the purpose of circumventing this Article SIXTH in connection with an offering
of the securities of the Corporation to the public;
(c) By bequest or inheritance, by operation
of law upon the death of any individual, or by any other transfer without
valuable consideration, including a gift, that is made in good faith and not for
the purpose of circumventing this Article SIXTH;
(d) Pursuant to the satisfaction of a pledge
or other security interest created in good faith and not for the purpose of
circumventing this Article SIXTH;
(e) Pursuant to a merger or consolidation
adopted, or a combination or majority share acquisition authorized by
shareholder vote in compliance with Sections 1701.78 or 1701.83 or Chapter 1704
of the Ohio Revised Code if the Corporation is the surviving or new corporation
in the merger or consolidation or is the acquiring corporation in the
combination or majority share acquisition and if the vote of shareholders of the
surviving, new, or acquiring corporation is required by the provisions of
Sections 1701.78 or 1701.83 or Chapter 1704 of the Ohio Revised Code; or
(f) The Person's being entitled, immediately
thereafter, to exercise or direct the exercise of voting power of the
Corporation in the election of directors within
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the same range theretofore attained by that person either in compliance with
the provisions of this Article SIXTH or as a result solely of the Corporation's
purchase of shares issued by it. Any shareholder whose ownership of shares of
the Corporation as of the date of any spin-off of Essef Corporation's interest
in the Corporation would be in one of the ranges of voting power described under
Section 6B(1)(a), (b) or (c) shall not be required to obtain any shareholder
approval for ownership within such range but would be required to obtain
shareholder approval for acquisitions of shares that would cause such
shareholder's holdings to move to a greater range.
The acquisition by any Person of shares of the Corporation in
a manner described under this Section 6B.(2) shall be deemed to be a Control
Share Acquisition authorized pursuant to this Article SIXTH within the range of
voting power under Section 6B.(1)(a), (b) or (c) of this Article SIXTH that such
Person is entitled to exercise after such acquisition, provided that, in the
case of an acquisition in a manner described under Section 6B.(2)(c) or (d), the
transferor of shares to such Person had previously obtained any authorization of
shareholders required under this Article SIXTH in connection with such
transferor's acquisition of shares of the Corporation.
(3) The acquisition of shares of the Corporation in
good faith and not for the purpose of circumventing this Article SIXTH the
acquisition of which (a) had previously been authorized by shareholders in
compliance with this Article SIXTH or (b) would have constituted a Control Share
Acquisition but for Section 6B.(2), does not constitute a Control Share
Acquisition for the purpose of this Article SIXTH unless such acquisition
entitles any Person, directly or indirectly, to exercise or direct the exercise
of voting power of the Corporation in the election of directors in excess of the
range of such voting power authorized pursuant to this Article SIXTH, or deemed
to be so authorized under Section 6B.(2).
C. "Interested Shares" means Voting Shares with respect to
which any of the following persons may exercise or direct the exercise of the
voting power:
(1) any Person whose Notice prompted the calling of
the meeting of shareholders;
(2) any officer of the Corporation elected or
appointed by the directors of the Corporation; provided, however, that Voting
Shares which, as of the record date of any special meeting held pursuant to this
Article SIXTH, have been beneficially owned by such person for three or more
years (including, for this purpose, the holding period of shares of Essef
Corporation to the extent Voting Shares were obtained by such officer in a
spin-off by Essef of shares of the Corporation) shall not be deemed to be
"Interested Shares" for purposes of any vote at such meeting; and
(3) any employee of the Corporation who is also a
director of the Corporation; provided, however, that Voting Shares which, as of
the record date of any special meeting held pursuant to this Article SIXTH, have
been beneficially owned by such person for three or more years (including, for
this purpose, the holding period of shares of Essef Corporation to the extent
Voting Shares were obtained by such officer in a spin-off by Essef of shares of
the Corporation) shall not be deemed to be "Interested Shares" for purposes of
any vote at such meeting;
(4) any Person that acquires such Voting Shares for a
valuable consideration during the period beginning with the date of the first
public disclosure of a proposed Control Share Acquisition or any proposed
merger, consolidation or other transaction which would result in a change of
control of the Corporation or all or substantially all of its assets, and ending
on
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the record date of any special meeting held thereafter pursuant to this Article
SIXTH for the purpose of voting on a Control Share Acquisition proposed by any
Person who has delivered a Notice pursuant to Section 1 of this Article SIXTH if
either of the following applies:
(a) the aggregate consideration paid or given
by the Person who acquired the Voting Shares, and other persons acting in
concert with such Person, for all such Voting Shares exceeds Two Hundred Fifty
Thousand Dollars ($250,000.00); or
(b) the number of Voting Shares acquired by
the Person who acquired the Voting Shares, and other persons acting in concert
with such Person, for all such Voting Shares exceeds one half of one percent of
all Voting Shares; and
(5) any Person that transfers such Voting Shares for
valuable consideration after the record date of any special meeting described in
Section 6(C)(4) of this Article SIXTH as to shares so transferred, if
accompanied by the voting power in the form of a blank proxy, an agreement to
vote as instructed by the transferee, or otherwise.
SECTION 7. PROXIES. No proxy appointed for or in connection
with the shareholder authorization of a Control Share Acquisition pursuant to
this Article SIXTH is valid if it provides that it is irrevocable. No such proxy
is valid unless it is sought, appointed, and received both:
A. In accordance with all applicable requirements of law; and
B. Separate and apart from the sale or purchase, contract or
tender for sale or purchase, or request or invitation for tender for sale or
purchase, of shares of the Corporation.
SECTION 8. REVOCABILITY OF PROXIES. Proxies appointed for or
in connection with the shareholder authorization of a Control Share Acquisition
pursuant to this Article SIXTH shall be revocable at all times prior to the
obtaining of such shareholder authorization, whether or not coupled with an
interest.
SECTION 9. AMENDMENTS. Notwithstanding any other provisions of
these Articles of Incorporation or the Regulations of the Corporation, as the
same may be in effect from time to time, or any provision of law that might
otherwise permit a lesser vote of the directors or shareholders, but in addition
to any affirmative vote of the directors or the holders of any particular class
or series of shares required by law, the Articles of Incorporation or the
Regulations of the Corporation, as the same may be in effect from time to time,
the affirmative vote of at least eighty percent (80%) of the Voting Shares shall
be required to alter, amend or repeal this Article SIXTH or adopt any provisions
in the Articles of Incorporation or Regulations of the Corporation, as the same
may be in effect from time to time, which are inconsistent with the provisions
of this Article SIXTH.
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SECTION 10. LEGEND ON SHARE CERTIFICATES. Each certificate
representing shares of the Corporation shall contain the following legend:
"Transfer of the shares represented by this Certificate is subject to the
provisions of Article SIXTH of the Corporation's Articles of Incorporation as
the same may be in effect from time to time. Upon written request delivered to
the Secretary of the Corporation at its principal place of business, the
Corporation will mail to the holder of this Certificate a copy of such
provisions without charge within five (5) days after receipt of written request
therefor. By accepting this Certificate the holder hereof acknowledges that it
is accepting same subject to the provisions of said Article SIXTH as the same
may be in effect from time to time and covenants with the Corporation and each
shareholder thereof from time to time to comply with the provisions of said
Article SIXTH as the same may be in effect from time to time."
SEVENTH: Except as otherwise provided in these Articles of
Incorporation or in the Regulations of the Corporation, the holders of a
majority of the outstanding Voting Shares of the Corporation present in person
or by proxy at any meeting of the shareholders of the Corporation are authorized
to act on any matter which may properly come before such meeting.
EIGHTH: Except to the extent that Articles FOURTH and SIXTH
otherwise provide with respect to certain matters therein set forth, the
Corporation reserves the right to amend, alter, change or repeal any provision
contained in these Articles of Incorporation and to add new provisions, in the
manner now or hereafter prescribed by statute, upon the affirmative vote of a
majority of the outstanding shares of the Corporation, voting as a Class; and
all rights, privileges and preferences of whatsoever nature conferred upon
shareholders, directors and officers pursuant to these Articles of Incorporation
in their present form or as hereafter amended are granted subject to this
reservation. Notwithstanding the foregoing, the adoption of any amendment,
alteration, change or repeal to these Articles of Incorporation as the same may
be in effect from time to time which is inconsistent with or would have the
effect of amending, altering, changing or repealing the provisions of Sections
7, 9 or 10 of the Regulations of the Corporation as the same may be in effect
from time to time shall require the same affirmative vote of shareholders as
would be required under such Regulations to adopt any amendment, alteration,
change or repeal of said Sections 7, 9 or 10 or to adopt any provisions
inconsistent therewith.
NINTH: Without derogation from any other power to purchase
shares of the Corporation, the Corporation may, by action of its Board of
Directors and to the extent not prohibited by law, purchase outstanding shares
of any class.
TENTH: No holder of shares of any class shall have the right
to cumulate his voting power in the election of the Board of Directors, and the
right to cumulative voting described in Ohio Revised Code Section 1701.55 is
hereby specifically denied to the holders of any class of shares of the
Corporation.
ELEVENTH: Except where the law or the Articles of
Incorporation or Regulations of the Corporation require action to be authorized
or taken by shareholders, all of the authority of the Corporation shall be
exercised by or under the direction of the Board of Directors.
No contract or arrangement between the Corporation and Essef Corporation or
its successor ("Essef"), or between the Corporation and any director or
officer of the Corporation or Essef, will be void or voidable by the Corporation
solely because: (a) Essef or such officer or director is a party; or (b) such
officer or director participated in, or voted with respect to, the authorization
of such contract or arrangement. The Corporation and its shareholders shall have
no right to recover any amounts or seek any judgment against Essef or any
director or officer of Essef for breach of fiduciary duty or duty of loyalty,
failure to act in the best interests of the Corporation, or the derivation of
any improper personal benefit; provided, that such officer or director of Essef
acts in good faith in taking action or exercising rights in connection with any
contract or arrangement between the Corporation and Essef.
<PAGE> 16
IN WITNESS WHEREOF, the above-named officers, acting for and
on behalf of the Corporation, have subscribed their names this ___ day of
_________, 1998.
--------------------------------------
Chairman of the Board, Chief Executive
Officer and Chief Financial Officer
--------------------------------------
Secretary
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EXHIBIT 3.4
AMENDED AND RESTATED REGULATIONS
OF
ANTHONY & SYLVAN POOLS CORPORATION
MEETINGS OF SHAREHOLDERS
SECTION 1. ANNUAL MEETING.
The annual meeting of shareholders of the Corporation shall be
held at such time and on such business day as the directors may determine each
year. The annual meeting shall be held at the principal office of the
Corporation or at such other place within or without the State of Ohio as the
directors may determine.
SECTION 2. SPECIAL MEETINGS.
Special meetings of the shareholders may be called at any time
by (i) the Chairman of the Board, (ii) the President, (iii) the directors, by
action at a meeting or a majority of the directors acting without a meeting, or
(iv) the holders of 50% or more of the outstanding shares entitled to vote
thereat. Such meetings may be held within or without the State of Ohio at such
time and place as may be specified in the notice thereof.
SECTION 3. NOTICE OF MEETINGS.
Written notice of every annual or special meeting of the
shareholders stating the time, place and purposes thereof shall be given to each
shareholder entitled to notice as provided by law, not less than seven nor more
than ninety days before the date of the meeting. Such notice may be given by or
at the direction of the Chairman of the Board, the President or the Secretary by
personal delivery or by mail addressed to the shareholder at his last address as
it appears on the records of the Corporation. Any shareholder may waive in
writing notice of any meeting, either before or after the holding of such
meeting, and, by attending any meeting without protesting the lack of proper
notice, shall be deemed to have waived notice thereof.
SECTION 4. PERSONS BECOMING ENTITLED BY OPERATION OF LAW OR TRANSFER.
Every person who, by operation of law, transfer or any other
means whatsoever, shall become entitled to any shares, shall be bound by every
notice in respect of such share or shares which previously to the entering of
his name and address on the records of the Corporation shall have been duly
given to the person from whom he derives his title to such shares.
<PAGE> 2
SECTION 5. QUORUM AND ADJOURNMENTS.
Except as may be otherwise required by law or by the Articles
of Incorporation or these Regulations, the holders of a majority of the
then-outstanding shares entitled to vote in an election of directors, taken
together as a single class ("Voting Shares"), present in person or by proxy,
shall constitute a quorum; provided that any meeting duly called, whether a
quorum is present or otherwise may, by order of the chair of such meeting or by
vote of the holders of the majority of the Voting Shares represented thereat,
adjourn from time to time, in which case no further notice of any such adjourned
meeting need be given.
SECTION 6. BUSINESS TO BE CONDUCTED AT MEETINGS.
No business shall be conducted at a meeting of shareholders
except in accordance with the procedures set forth in this Section 6. To be
properly brought before a meeting of shareholders, business must be specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the directors, otherwise properly brought before the meeting by or at the
direction of the directors or otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before a meeting of
shareholders by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than sixty (60) days nor
more than ninety (90) days prior to the meeting; provided, however, that in the
event that less than seventy-five (75) days' notice or prior public disclosure
of the date of the meeting is given or made to the shareholders, notice by the
shareholder to be timely must be so received not later than the close of
business on the fifteenth (15th) day following the earlier of the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. A shareholder's notice to the Secretary shall set forth as to each matter
the shareholder proposes to bring before the meeting: (i) a brief description of
the proposal desired to be brought before the meeting and a statement of the
reasons for making such proposal at the meeting; (iii) the name and record
address of, and the class and number of shares of the Corporation beneficially
owned by (A) the shareholder offering such proposal, (B) any other beneficial
owner of the shares registered in such shareholder's name and (C) any other
shareholder (or beneficial owner of shares) known by such shareholder to be
supporting such proposal on the date of such shareholder's notice; and (iv) any
financial or other material interest of the shareholder (or any such beneficial
owner) in such proposal.
If the Board of Directors, or a designated committee thereof,
determines that any shareholder proposal was not timely made in accordance with
the provisions of this Section 6, or that any proposal conflicts with or
violates a provision of the Articles of Incorporation or Regulations of the
Corporation, then such proposal shall not be presented for action at the meeting
in question. If the Board of Directors, or a designated committee thereof,
determines that the information provided in the shareholder's notice does not
satisfy the informational requirements of this Section 6 in any material
respect, the Secretary of the Corporation shall promptly notify such shareholder
of the deficiency in the notice. Such shareholder shall have the opportunity to
cure such deficiency by providing additional information to the Secretary within
the period of time, not to exceed five (5) days from the date such deficiency
notice is given such shareholder, determined by the Board of Directors or such
committee. If the deficiency is not cured within such period, or if the Board of
Directors or such committee determines that the additional information provided
by the shareholder, together with the information
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previously provided, does not satisfy the requirements of this Section 6 in any
material respect, then such proposal shall not be presented for action at the
meeting in question.
If neither the Board of Directors nor such committee makes a
determination as to the compliance of any shareholder proposal with the
provisions of this Section 6, as set forth above, the chair of the meeting of
shareholders shall determine and declare to the meeting, if the facts warrant,
that such proposal was not made in accordance with the provisions of this
Section 6, and if so determined, the defective proposal shall be disregarded.
DIRECTORS
SECTION 7. NUMBER.
The number of directors of the Corporation shall be not fewer
than three (3) nor more than nine (9), as may be determined from time to time
upon the recommendation of a majority of the Continuing Directors (as
hereinafter defined) by the holders of a majority of the outstanding Voting
Shares represented at any annual meeting or special meeting called for the
purpose of electing directors, and when so fixed such number shall continue to
be the authorized number of directors until changed by the shareholders by vote
as aforesaid or by the directors as hereinafter provided. In addition to the
authority of the shareholders to fix or change the number of directors as
described above, the directors, by majority vote of the Continuing Directors,
may change the number of directors and may fill any vacancy that is created by
an increase in the number of directors. In exercising the foregoing authority,
the directors may not change the number of directors by more than two (2) from
the number authorized by the shareholders at the last annual or special meeting
of the shareholders at which the number of directors was fixed and in no event
may the directors fix the number of directors at fewer than three (3) nor more
than nine (9). As used herein, the term "Continuing Director" shall mean, as of
any date of determination, any member of the Board of Directors of the
Corporation who (i) was a member of such Board of Directors on the date of the
initial adoption of these Regulations by the shareholder(s) of the Corporation
or (ii) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members of such
Board of Directors at the time of such nomination or election.
SECTION 8. NOMINATIONS.
Only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors. Nominations of
persons for election as directors of the Corporation may be made at a meeting of
shareholders by or at the direction of the directors by any nominating committee
or person appointed by the directors or by any shareholder of the Corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 8. Such nominations, other than
those made by or at the direction of the directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than sixty (60) days nor
more than ninety (90) days prior to the meeting; provided, however, that in the
event that less than seventy-five (75) days' notice or prior public disclosure
of the date of the meeting is given or made to shareholders, notice by the
shareholder to be
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timely must be so received not later than the close of business on the fifteenth
(15th) day following the earlier of the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such shareholder's
notice shall set forth as to each nomination: (i) the name, age and business
address or residence address of any proposed nominee, the nominee's principal
employment or occupation and the other information which is required to be
disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended; (ii) the
name and record address of, and the class and number of shares of the
Corporation beneficially owned by (A) the shareholder offering such nomination,
(B) any other beneficial owner of the shares registered in such shareholder's
name and (C) any other shareholder (or beneficial owner of shares) known by such
shareholder to be supporting such nomination on the date of such shareholder's
notice; and (iii) any financial or other material interest of the shareholder
(or any such beneficial owner) in such nomination. Such notice shall be
accompanied by the written consent of each proposed nominee to serve as a
director of the Corporation, if elected. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 8.
If the Board of Directors, or a designated committee thereof,
determines that any shareholder nomination was not timely made in accordance
with the provisions of this Section 8, or that any nomination conflicts with or
violates a provision of the Articles of Incorporation or Regulations of the
Corporation, then such nomination shall not be presented for action at the
meeting in question. If the Board of Directors, or a designated committee
thereof, determines that the information provided in the shareholder's notice
does not satisfy the informational requirements of this Section 8 in any
material respect, the Secretary of the Corporation shall promptly notify such
shareholder of the deficiency in the notice. Such shareholder shall have the
opportunity to cure such deficiency by providing additional information to the
Secretary within the period of time, not to exceed five (5) days from the date
such deficiency notice is given such shareholder, determined by the Board of
Directors or such committee. If the deficiency is not cured within such period,
or if the Board of Directors or such committee determines that the additional
information provided by the shareholder, together with the information
previously provided, does not satisfy the requirements of this Section 8 in any
material respect, then such nomination shall not be presented for action at the
meeting in question.
If neither the Board of Directors nor such committee makes a
determination as to the compliance of any shareholder nomination with the
provisions of this Section 8, as set forth above, the chair of the meeting of
shareholders shall determine and declare to the meeting, if the facts warrant,
that such nomination was not properly brought before the meeting in accordance
with the provisions of this Section 8, and if so determined, the defective
nomination shall be disregarded.
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SECTION 9. CLASSIFICATION, ELECTION AND TERM OF OFFICE OF DIRECTORS.
Subject to the remaining provisions of this Section 9, the
directors shall be divided into two (2) classes, designated Class I and Class
II. The classes shall be as nearly equal in number as possible, and the
directors as initially classified shall hold office for terms as follows: the
Class I directors shall hold office until the 2001 annual meeting of
shareholders and until their respective successors are elected and qualified;
and the Class II directors shall hold office until the 2002 annual meeting of
shareholders and until their respective successors are elected and qualified, in
all cases, subject to prior death, resignation or removal from office.
Thereafter, at each annual meeting of shareholders in which the terms of any
directors are due to expire, the successors of the directors whose terms are
expiring at such annual meeting shall be elected to hold office until the third
succeeding annual meeting of shareholders and until their respective successors
are elected and qualified, subject to prior death, resignation or removal from
office. If the number of directors is changed, any increase or decrease shall be
apportioned between the classes so as to maintain the number of directors in
each class as nearly equal as possible, and any additional director of any class
elected to fill a vacancy resulting from an increase in such class shall hold
office for a term that shall coincide with the remaining term of such class, but
in no case will a decrease in the number of directors shorten the term of any
incumbent director. Election of directors shall be by ballot whenever requested
by any person entitled to vote at the meeting; but unless so requested such
election may be conducted in any way approved at such meeting.
SECTION 10. REMOVAL.
Except as otherwise provided by law, all the directors or all
the directors of a particular class, or any individual director, may be removed
from office without assigning any cause, by the affirmative vote of at least
eighty percent (80%) of the Voting Shares at an annual meeting or at any special
meeting duly called.
SECTION 11. VACANCIES.
Whenever any vacancy shall occur among the directors, the
remaining directors shall constitute the directors of the Corporation until such
vacancy is filled or until the number of directors is changed pursuant to
Section 7 hereof. Except in cases where a director is removed as provided by law
and these Regulations and his successor is elected by the shareholders, the
remaining directors may, by a vote of a majority of their number, fill any
vacancy for the unexpired term. A majority of the directors then in office may
also fill any vacancy that results from an increase in the number of directors.
SECTION 12. QUORUM AND ADJOURNMENTS.
A majority of the directors in office at the time shall
constitute a quorum, provided that any meeting duly called, whether a quorum is
present or otherwise, may, by vote of a majority of the directors present,
adjourn from time to time and place to place within or without the State of
Ohio, in which case no further notice of the adjourned meeting need be given. At
any meeting at which a quorum is present, all questions and business shall be
determined by the affirmative vote of not less
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than a majority of the directors present, except as is otherwise provided in
the Articles of Incorporation or these Regulations or is otherwise authorized
by Section 1701.60(A)(1) of the Ohio Revised Code.
SECTION 13. ORGANIZATION MEETING.
Immediately after each annual meeting of the shareholders at
which directors are elected, or each special meeting held in lieu thereof, the
directors, including those newly elected, if a quorum of all such directors is
present, shall hold an organization meeting at the same place or at such other
time and place as may be fixed by the shareholders at such meeting, for the
purpose of electing officers and transacting any other business. Notice of such
meeting need not be given. If for any reason such organization meeting is not
held at such time, a special meeting for such purpose shall be held as soon
thereafter as practicable.
SECTION 14. REGULAR MEETINGS.
Regular meetings of the directors may be held at such times
and places within or without the State of Ohio as may be provided for in by-laws
or resolutions adopted by the directors and upon such notice, if any, as shall
be so provided for.
SECTION 15. SPECIAL MEETINGS.
Special meetings of the directors may be held at any time
within or without the State of Ohio upon call by the Chairman of the Board or a
majority of the directors. Written notice of each such meeting shall be given to
each director by personal delivery or by mail, cablegram or telegram not less
than two days prior to such meeting or such shorter notice as the directors
shall deem necessary and warranted under the circumstances. Any directors may
waive in writing notice of any meeting, and, by attending any meeting without
protesting the lack of proper notice, shall be deemed to have waived notice
thereof. Unless otherwise limited in the notice thereof, any business may be
transacted at any organization, regular or special meeting.
SECTION 16. COMPENSATION.
The directors are authorized to fix reasonable compensation,
which may include pension, disability, and death benefits for services to the
Corporation by directors or a reasonable fee for attendance at any meeting of
the directors, the Executive Committee, or other committees elected under
Section 20 hereof, or any combination of general and attendance fee, and may be
paid in cash, shares or rights to shares of the Corporation or other property.
In addition to such compensation provided for directors, they shall be
reimbursed for any expenses incurred by them in traveling to and from such
meetings.
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EXECUTIVE COMMITTEE AND OTHER COMMITTEES
SECTION 17. MEMBERSHIP AND ORGANIZATION.
(a) The directors, at any time, may elect from their number an
Executive Committee which shall consist of three or more directors of the
Corporation, each of whom shall hold office during the pleasure of the directors
and may be removed at any time, with or without cause, by vote thereof.
(b) Vacancies occurring in the Committee may be filled by the
directors.
(c) In the event the directors have not designated a Chairman,
the Committee shall appoint one of its own number as chair who shall preside at
all meetings and may also appoint a secretary (who need not be a member of the
Committee) who shall keep its records and who shall hold office during the
pleasure of the Committee.
SECTION 18. MEETINGS.
(a) Regular meetings of the Committee may be held without
notice of the time, place or purposes thereof and shall be held at such times
and places within or without the State of Ohio as the Committee may from time to
time determine.
(b) Special meetings may be held upon notice of the time,
place and purposes thereof at any place within or without the State of Ohio and
until otherwise ordered by the Committee shall be held at any time and place at
the call of the chair or any two members of the Committee.
(c) At any regular or special meeting the Committee may
exercise any or all of its powers, and any business which shall come before any
regular or special meeting may be transacted thereat, provided a majority of the
Committee is present, but in every case the affirmative vote of a majority of
all of the members of the Committee present shall be necessary to take any
action.
(d) Any authorized action by the Committee may be taken
without a meeting by a writing signed by all the members of the Committee.
SECTION 19. POWERS.
Except as its powers, duties and functions may be limited or
prescribed by the directors, during the intervals between the meetings of the
directors, the Committee shall possess and may exercise all the powers of the
directors provided that the Committee shall not be empowered to declare
dividends, elect or remove officers, fill vacancies among the directors or
Executive Committee, adopt an agreement of merger or consolidation, recommend to
the shareholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, nor recommend to the shareholders a
dissolution of the Corporation or revocation of a dissolution. All actions of
the Committee shall be reported to the directors at their meeting next
succeeding such action and shall be subject to revision or alteration by the
directors, provided that no rights of any third person shall be affected
thereby.
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SECTION 20. OTHER COMMITTEES.
The directors may elect other committees from among the
directors in addition to or in lieu of an Executive Committee and give to them
any of the powers which under the foregoing provisions could be vested in an
Executive Committee. Sections 17 and 18 shall be applicable to such other
committees.
OFFICERS
SECTION 21. OFFICES DESIGNATED.
The offices of the Corporation shall be a Chairman of the
Board, a President, a Secretary, a Treasurer and such other officers as the
Board of Directors may from time to time deem appropriate. The Chairman of the
Board shall be, and the other officers may, but need not be, chosen from among
the directors. Any two or more of such offices other than that of President or
Chief Executive Officer and Vice President, Secretary and Assistant Secretary
and Chief Financial Officer and other financial officer, may be held by the same
person, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity if such instrument is required by law, the Articles of
Incorporation, these Regulations or any by-laws to be executed, acknowledged, or
verified by two or more officers.
SECTION 22. ELECTION OF OFFICERS; TENURE OF OFFICE.
All officers shall be elected by the Board of Directors. The
Board of Directors may remove any officer at any time with or without cause by a
majority vote of the directors in office at the time. A vacancy, however
created, in any office may be filled by election by the directors.
SECTION 23. CHAIRMAN OF THE BOARD.
The Chairman of the Board shall preside at meetings of the
shareholders and directors and shall have such other powers and duties as may be
prescribed by the directors. Except where the signature of the President or
Chief Executive Officer is required by law, the Chairman of the Board shall
possess the same power as the President or Chief Executive Officer to execute
all authorized deeds, mortgages, bonds, contracts and other instruments and
obligations in the name of the Corporation.
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SECTION 24. PRESIDENT.
The President or Chief Executive Officer may be the chief
operating officer of the Corporation and shall have general supervision over its
property, business and affairs, subject to the directions of the Chairman of the
Board and/or the directors. Unless otherwise determined by the directors, the
President or Chief Executive Officer shall have authority to execute all
authorized deeds, mortgages, bonds, contracts and other instruments and
obligations in the name of the Corporation, and, in the absence of the Chairman
of the Board, shall preside at meetings of the shareholders and the directors
and shall have such other powers and duties as may be prescribed by the
directors.
SECTION 25. VICE PRESIDENTS.
The Vice Presidents shall have such powers and duties as may
be prescribed by the directors or as may be delegated by the Chairman of the
Board or the President.
SECTION 26. SECRETARY.
The Secretary shall attend and keep the minutes of all
meetings of the shareholders and of the directors, shall keep such books as may
be required by the directors, shall have charge of the seal of the Corporation
and shall give all notices of meetings of shareholders and directors, and shall
have such other powers and duties as may be prescribed by the directors.
SECTION 27. TREASURER OR CHIEF FINANCIAL OFFICER.
The Treasurer or Financial Officer shall receive and have in
charge all money, bills, notes, bonds, stocks in other corporations and similar
property belonging to the Corporation and shall do with the same as shall be
ordered by the directors, shall keep accurate financial accounts and hold the
same open for inspection and examination of the directors, and shall have such
other powers and duties as may be prescribed by the directors.
SECTION 28. OTHER OFFICERS.
The Assistant Secretaries, Assistant Treasurers, if any, and
the other officers, if any, shall have such powers and duties as the directors
may prescribe.
SECTION 29. DELEGATION OF DUTIES.
The directors are authorized to delegate the duties of any
officers to any other officer and generally to control the action of the
officers and to require the performance of duties in addition to those mentioned
herein.
SECTION 30. COMPENSATION.
The directors are authorized to determine or to provide the
method of determining the compensation of all officers.
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SECTION 31. BOND.
Any officer or employee, if required by the directors, shall
give bond in such sum and with such security as the directors may require for
the faithful performance of his or her duties.
SECTION 32. SIGNING CHECKS AND OTHER INSTRUMENTS.
The directors are authorized to determine or provide the
method of determining how checks, notes, bills of exchange and similar
instruments shall be signed, countersigned or endorsed.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 33. INDEMNIFICATION.
The Corporation shall indemnify any director or officer or any
former director or officer of the Corporation or any person who is or has served
at the request of the Corporation 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 or
her by reason of the fact that he or she 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. The
indemnification provided for herein shall not be deemed to restrict the right of
the Corporation to indemnify employees, agents and others as permitted by such
Law.
The indemnification authorized by the foregoing paragraph
shall not be exclusive of, and shall be in addition to any other rights granted
to those seeking indemnification under the Articles of Incorporation or these
Regulations or any Indemnification Agreement (as hereinafter defined), vote of
shareholders or disinterested directors, or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
Without derogation to the power of the Corporation from time
to time to enter into, or assume the obligations of any affiliate of the
Corporation under, any agreement granting rights of indemnification to any
person or entity ("Indemnification Agreement"), the Corporation is hereby
expressly authorized to assume the obligations of Essef Corporation under any
Indemnification Agreement existing on the date of the adoption of these
Regulations by the Board of Directors and Shareholders of the Corporation, and
any obligations so assumed shall be binding upon the Corporation with the same
force and effect as if the Corporation had been an original party to such
Indemnification Agreement. The Corporation is further authorized to enter into
Indemnification Agreements in substantially the same form as the Indemnification
Agreements of Essef Corporation existing on the effective date of these
Regulations.
The Corporation may 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
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who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, trustee,
officer, employee or agent of another corporation, joint venture, trust or other
enterprise (and his or her heirs, executors and administrators), against any
liability asserted against and incurred by him or her in such capacity, or
arising out of his or her status as such, regardless of whether the Corporation
would have provided indemnity against such liability under the foregoing
provisions of this Section 33. Insurance may be purchased from or maintained
with a person in which the Corporation has a financial interest.
CORPORATE SEAL
SECTION 34. CORPORATE SEAL.
The corporate seal of the Corporation shall be circular in
form and shall contain the name of the Corporation.
PROVISIONS IN ARTICLES OF INCORPORATION
SECTION 35. PROVISIONS IN ARTICLES OF INCORPORATION.
These Regulations are at all times subject to the provisions
of the Articles of Incorporation of the Corporation as the same may be in effect
from time to time, including without limitation, the provisions of Article
FOURTH thereof authorizing the Board of Directors to fix by resolution or
resolutions providing for the issuance of Serial Shares, the voting powers and
designation, preferences and relative rights, qualifications, limitations or
restrictions of such Serial Shares to the fullest extent permitted by the laws
of the State of Ohio.
LOST CERTIFICATES
SECTION 36. LOST CERTIFICATES.
The directors may direct a new certificate to be issued in
place of any certificate theretofore issued by the Corporation alleged to have
been lost, stolen or destroyed, upon such terms and conditions as they may deem
advisable upon satisfactory proof of loss or destruction thereof. When
authorizing such issue of a new certificate, the directors may, as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or such owner's legal representative, to advertise the
same in such manner as the directors shall require and/or to give the
Corporation a suitable bond or indemnity against loss by reason of the issuance
of a new certificate.
RECORD DATES
SECTION 37. RECORD DATES.
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For any lawful purpose, including, without limitation, the
determination of the shareholders who are entitled to: (i) receive notice of or
to vote at a meeting of shareholders; (ii) receive payment of any dividend or
distribution; (iii) receive or exercise rights of purchase of or subscription
for, or exchange or conversion of, shares or other securities, subject to
contract rights with respect thereto; or (iv) participate in the execution of
written consents, waivers, or releases, the directors may fix a record date
which shall not be a date earlier than the date on which the record date is
fixed and, in the cases provided for in clauses (i), (ii) and (iii) above, shall
not be more than sixty (60) nor fewer than ten (10) days, unless the Articles of
Incorporation specify a shorter or a longer period for such purpose, preceding
the date of the meeting of the shareholders, or the date fixed for the payment
of any dividend or distribution, or the date fixed for the receipt or the
exercise of rights, as the case may be.
AMENDMENTS
SECTION 38. AMENDMENTS.
(a) These Regulations may be altered, changed or amended in
any respect or superseded by new Regulations in whole or in part, by the
affirmative vote of the holders of two-thirds of the outstanding Voting Shares,
unless such alteration, change, amendment or adoption has been recommended by at
least two-thirds of the Board of Directors of the Corporation then in office, in
which event such alteration, change, amendment or adoption may be approved by
the affirmative vote of the holders of a majority of the outstanding Voting
Shares. No alteration, change or amendment of these Regulations or adoption of
new Regulations in whole or part may be adopted by the shareholders other than
pursuant to a vote of shareholders at an annual or special meeting or pursuant
to a writing or writings signed by the holders of all of the Voting Shares
entitled to notice of a meeting of the shareholders held for such purpose.
(b) Notwithstanding the provisions of Section 38(a) hereof and
notwithstanding the fact that a lesser percentage may be specified by law or in
any agreement with any national securities exchange or any other provision of
these Regulations, the amendment, alteration, change or repeal of, or adoption
of any provisions inconsistent with, Sections 7, 9 or 10 of these Regulations
shall require the affirmative vote of at least eighty percent (80%) of the
outstanding Voting Shares, unless such amendment, alteration, change, repeal or
adoption has been recommended by at least two-thirds of the Continuing Directors
(as defined in Section 7 of these Regulations), in which event the provisions of
Section 38(a) hereof shall apply.
<PAGE> 1
EXHIBIT 5
[SQUIRE, SANDERS & DEMPSEY L.L.P. LETTERHEAD]
May , 1999
Essef Corporation
220 Park Drive
Chardon, Ohio 44024
Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, Ohio 44024
Ladies and Gentlemen:
Reference is made to the Registration Statement on Form S-4 ("Registration
Statement") to be filed by Essef Corporation ("Essef") in connection with its
merger with a subsidiary of Pentair, Inc. and the concurrent split-off of shares
of Anthony & Sylvan Pools Corporation ("Common Shares"). The Common Shares are
to be issued upon the terms and conditions set forth in the Agreement and Plan
of Merger dated as of April 30, 1999 among Pentair, Inc., Northstar Acquisition
Company and Essef (the "Merger Agreement") and the Transition Agreement among
Pentair, Inc., Anthony & Sylvan and Essef (the "Transition Agreement"). We have
examined such documents and matters of law as we have deemed necessary or
appropriate for the purpose of rendering this opinion.
Based upon the foregoing, we are of the opinion that the Common Shares,
when issued by Anthony & Sylvan as contemplated in the Registration Statement,
the Merger Agreement and the Transition Agreement will be legally issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference of our firm under the caption
"Legal Matters" in the prospectus contained therein.
Respectfully submitted,
SQUIRE, SANDERS & DEMPSEY L.L.P.
<PAGE> 1
Exhibit 10.1
ANTHONY & SYLVAN POOLS CORPORATION
1999 LONG-TERM INCENTIVE PLAN
1. PURPOSES
The purpose of the Anthony & Sylvan Pools Corporation 1999 Long-Term
Incentive Plan (the "Plan") is to promote the long-term growth and performance
of Anthony & Sylvan Pools Corporation (the "Company"). The Plan provides an
opportunity for employees and directors of the Company to participate through
share ownership in the long-term growth and success of the Company, enhances the
Company's ability to attract and retain persons with desired abilities, provides
additional incentives for such persons and identifies interests of employees,
directors and shareholders of the Company.
2. DEFINITIONS
(a) "Award" means any form of stock option, stock appreciation right,
restricted shares, share or share-based award or performance share granted to a
Participant under the Plan.
(b) "Award Agreement" means a written agreement between the Company and
a Participant setting forth the terms, conditions and limitations applicable to
an Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(e) "Committee" means the Compensation Committee of the Company's
Board, or such other committee of the Board that is designated by the Board to
administer the Plan, provided that the Committee shall be constituted so as to
satisfy any applicable legal requirements, including the requirements of Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Section 162(m) of the Code or any respective successor
rule.
(f) "Fair Market Value" means the average of the closing prices of
Shares as reported on the Nasdaq Stock Market for the preceding ten (10) days on
which sales of Shares were made on the Nasdaq Stock Market.
(g) "Participant" means (i) any employee of the Company, (ii) any
employee of any direct or indirect subsidiary of the Company, (iii) any director
of the Company, or (iv) any other person whose selection the Committee
determines to be in the best interests of the Company, to whom an Award is made
under the Plan.
(h) "Shares" means the common stock, without par value, of the Company.
3. SHARES AVAILABLE FOR AWARDS
Subject to adjustment as provided in Section 11 below, the aggregate
number of Shares which may be awarded under the Plan shall be five hundred
thousand (500,000) Shares. No more than
<PAGE> 2
one hundred and twenty thousand (120,000) Shares shall be the subject of Awards
to any individual Participant in any one calendar year. Shares issuable under
the Plan may consist of authorized and unissued Shares or treasury Shares.
Any Shares issued by the Company through the assumption or substitution
of outstanding grants previously made by an acquired corporation or entity shall
not reduce the number of Shares available for Awards under the Plan. Any Shares
issued by the Company through the conversion or substitution of outstanding
grants previously made by Essef Corporation shall not reduce the number of
Shares available for Awards under the Plan. If any Shares subject to any Award
granted under the Plan are forfeited or if such Award otherwise terminates
without the issuance of such Shares or payment of other consideration in lieu of
such Shares, the Shares subject to such Award, to the extent of any such
forfeiture or termination, shall again be available for grant under the Plan as
if such Shares had not been subject to an Award.
4. ADMINISTRATION
The Plan shall be administered by the Committee, which shall have full
power and authority to interpret the Plan, to grant waivers of Plan restrictions
and to adopt such rules, regulations and policies for carrying out the Plan as
it may deem necessary or proper in order to further the purposes of the Plan. In
particular, the Committee shall have the authority to (i) select Participants to
receive Awards, (ii) determine the number and type of Awards to be granted,
(iii) determine the terms and conditions, not inconsistent with the terms
hereof, of any Award granted, (iv) interpret the terms and provisions of the
Plan and any Award granted, (v) prescribe the form of any agreement or
instrument executed in connection with any Award, and (vi) establish, amend and
rescind such rules, regulations and policies for the administration of the Plan
as it may deem advisable from time to time.
5. AWARDS
The Committee shall determine the type(s) of Award(s) to be made to
each Participant and shall set forth in the related Award Agreement the terms,
conditions and limitations applicable to each Award. Awards may include but are
not limited to those listed in this Section 5. Awards may be made singly, in
combination, in tandem or in exchange for a previously granted Award, and also
may be made in combination or in tandem with, in replacement of, or as
alternatives to, grants or rights under any other employee plan of the Company,
including the plan of any acquired entity.
(a) STOCK OPTIONS. Awards may be made in the form of stock options,
which may be incentive stock options within the meaning of Section 422 of the
Code or nonstatutory stock options not intended to qualify under Section 422 of
the Code. Incentive stock options may be granted only to employees. The
aggregate Fair Market Value (determined at the time the option is granted) of
Shares as to which incentive stock options are exercisable for the first time by
a Participant during any calendar year (under the Plan and any other plan of the
Company) shall not exceed $100,000 (or such other limit as may be required by
the Code from time to time). The exercise price of stock options granted under
the Plan to employees shall be not less than 100% of Fair Market Value on the
date of the grant. A stock option granted under the Plan shall be exercisable in
whole or in such installments and at such times and upon such terms as may be
determined by the Committee, provided that no
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<PAGE> 3
stock option shall be exercisable more than ten years after the date of grant. A
participant may pay the exercise price of a stock option in cash, Shares or a
combination of cash and Shares. The Committee shall establish appropriate
procedures for accepting Shares in payment of the exercise price of a stock
option and may impose such conditions as it deems appropriate on such use of
Shares.
(b) STOCK APPRECIATION RIGHTS. Awards may be granted in the form of
stock appreciation rights ("SARs"). SARs shall entitle the recipient to receive
a payment, in cash or Shares, equal to the appreciation in market value of a
stated number of Shares from the price stated in the Award Agreement to the Fair
Market Value on the date of exercise or surrender. SARs may be granted either
separately or in conjunction with other Awards granted under the Plan. Any SAR
related to a nonstatutory stock option may be granted at the same time such
option is granted or any time thereafter before exercise or expiration of such
option. Any SAR related to an incentive stock option must be granted at the same
time such option is granted. Any SAR related to an option shall be exercisable
only to the extent the related option is exercisable. In the case of any SAR
related to any option, the SAR or applicable portion thereof shall terminate and
no longer be exercisable upon the termination or exercise of the related option.
Similarly, upon exercise of an SAR as to some or all of the Shares covered by a
related option, the related option shall be canceled automatically to the extent
of the SARs exercised, and such Shares shall not thereafter be eligible for
grant. The Committee may impose such conditions or restrictions upon the
exercise of any SAR as it shall deem appropriate.
(c) RESTRICTED SHARES. Awards may be granted in the form of restricted
Shares in such numbers and at such times as the Committee shall determine.
Awards of restricted Shares shall be subject to such terms, conditions or
restrictions as the Committee deems appropriate including, but not limited to,
restrictions on transferability, requirements of continued employment,
individual performance or financial performance of the Company. The period of
vesting and forfeiture restrictions shall be established by the Committee at the
time of grant, except that no restriction period shall be less than 12 months.
During the period in which any restricted Shares are subject to forfeiture
restrictions, the Committee may, in its discretion, grant to the Participant to
whom such restricted Shares have been awarded, all or any of the rights of a
shareholder with respect to such restricted Shares, including the right to vote
such Shares and to receive dividends with respect to such Shares.
(d) PERFORMANCE SHARES. Awards may be made in the form of Shares that
are earned only after the attainment of predetermined performance targets as
established by the Committee at the time an Award is made ("Performance
Shares"). A performance target shall be based upon one or any combination of the
following: (i) revenues of the Company; (ii) operating income of the Company;
(iii) net income of the Company; (iv) earnings per Share; (v) the Company's
return on equity; (vi) cash flow of the Company; (vii) Company shareholder total
return; (viii) return on assets; (ix) return on investment; (x) asset turnover;
(xi) liquidity; (xii) capitalization; (xiii) stock price; (xiv) expenses; (xv)
operating profit and margin; (xvi) retained earnings; (xvii) market share;
(xviii) sales to targeted customers; (xix) customer satisfaction; (xx) quality
measures; (xxi) productivity; (xxii) safety measures; or (xxiii) educational and
technical skills of employees. Performance targets may also be based on the
attainment of levels of performance of the Company and/or any of its affiliates
or divisions under one or more of the measures described above relative
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<PAGE> 4
to the performance of other businesses. The Committee shall be permitted to make
adjustments when determining the attainment of a performance target to reflect
extraordinary or nonrecurring items or events, or unusual nonrecurring gains or
losses identified in the Company's financial statements, as long as any such
adjustments are made in a manner consistent with Section 162(m) of the Code to
the extent applicable. Awards of Performance Shares made to Participants subject
to Section 162(m) of the Code are intended to qualify under Section 162(m) and
provisions of such Awards shall be interpreted in a manner consistent with that
intent to the extent appropriate. The foregoing provisions of this Section 5(d)
also shall be applicable to Awards of restricted Shares made under Section 5(c)
to the extent such Awards of restricted Shares are subject to the financial
performance of the Company. At the end of the applicable performance period,
Performance Shares shall be converted into Shares (or cash or a combination of
Shares and cash, as set forth in the Award Agreement) and distributed to
Participants based upon the applicable performance entitlement. Award payments
made in cash rather than the issuance of Shares shall not, by reason of such
payment in cash, result in additional Shares being available under the Plan.
(e) STOCK AWARDS. Awards may be made in Shares or on a basis valued in
whole or in part by reference to, or otherwise based upon, Shares. Share awards
shall be subject to conditions established by the Committee and set forth in the
Award Agreement.
(f) AWARDS TO DIRECTORS. Each new non-employee director shall be
granted options for 2,000 shares, one-third of which shall become exercisable on
the date of the first three Annual Meetings of shareholders following his or her
election or appointment as a director. The exercise price for all such options
granted in 1999 shall be the higher of Fair Market Value on the date of grant
and $16.00 per share. Thereafter, the exercise price shall be Fair Market Value
on the grant date. In addition stock options shall be granted annually to each
non-employee director of the Company on the date of the Company's Annual
Meeting; each such option shall be immediately exercisable, shall relate to
1,000 shares, and shall have a per-share exercise price equal to Fair Market
Value.
6. PAYMENT OF AWARDS; DEFERRALS
Payment of Awards may be made in the form of Shares, cash or a
combination of Shares and cash and may include such restrictions as the
Committee shall determine, including restrictions on transfer and forfeiture
provisions. With Committee approval, payments may be deferred, either in the
form of installments or a future lump sum payment. The Committee may permit
Participants to elect to defer payments of some or all types of Awards in
accordance with procedures established by the Committee to assure that such
deferrals comply with applicable requirements of the Code including the
capability to make further deferrals for payment after retirement. The Committee
may also establish rules and procedures for the crediting of interest on
deferred cash payments and dividend equivalents for deferred payments
denominated in Shares.
7. TAX WITHHOLDING
The Company shall have the authority to withhold, or to require a
Participant to remit to the Company, prior to issuance or delivery of any Shares
or cash relating to an Award made under the Plan, an amount sufficient to
satisfy federal, state and local tax withholding requirements associated with
any Award. In addition, the Company may, in its sole discretion, permit a
Participant to satisfy any tax withholding requirements, in whole or in part, by
(i) delivering to the Company Shares held by such Participant having a Fair
Market Value equal to the amount of the tax or (ii) directing the Company to
retain Shares having such Fair Market Value and otherwise issuable to the
Participant under the Plan.
8. TERMINATION OF EMPLOYMENT OR SERVICE AS A DIRECTOR
If the employment of a Participant (or such Participant's service as a
director) terminates for any reason, all unexercised, deferred and unpaid Awards
shall be exercisable or paid in accordance with the applicable Award Agreement,
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<PAGE> 5
which may provide that the Committee may authorize, as it deems appropriate, the
acceleration and/or continuation of all or any part of Awards granted prior to
such termination.
9. NONASSIGNABILITY
Except as may be otherwise provided in the relevant Award Agreement, no
Award or any benefit under the Plan shall be assignable or transferable, or
payable to or exercisable by, anyone other than the Participant to whom it was
granted.
10. CHANGE IN CONTROL
(a) In the event of a Change in Control (as defined below) of the
Company, and except as the Board may expressly provide otherwise, (i) all stock
options or SARs then outstanding shall become fully exercisable as of the date
of the Change in Control, whether or not then otherwise exercisable, (ii) 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 (iii) all
Awards of Performance Shares shall be deemed to have been fully earned as of the
date of the Change in Control.
(b) A "Change in Control" of the Company shall have occurred when any
of the following events shall occur:
(i) The Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and immediately after such
merger, consolidation or reorganization less than a majority of the
combined voting power of the then-outstanding securities of such
corporation or person immediately after such transaction are held in
the aggregate by the holders of Voting Stock (as that term is hereafter
defined) of the Company immediately prior to such transaction;
(ii) The Company sells all or substantially all of its assets to any
other corporation or other legal person, less than a majority of the
combined voting power of the then-outstanding securities of such
corporation or person immediately after such sale are held in the
aggregate by the holders of Voting Stock of the Company immediately
prior to such sale;
(iii) There is a report filed or required to be filed on Schedule 13D
on Schedule 14D-1 (or any successor schedule, form or report), each as
promulgated pursuant to the Exchange Act, disclosing that any person
(as the term "person" is used in Section 13(d)(3) or Section 14(d)(2)
of the Exchange Act) has become the beneficial owner (as the term
"beneficial owner, is defined under Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act) of securities
representing more than 50% of the combined voting power of the
then-outstanding securities entitled to vote generally in the election
of directors of the Company ("Voting Stock"); or
(iv) The Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) that a change in control of
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<PAGE> 6
the Company has or may have occurred or will or may occur in the future
pursuant to any then-existing contract or transaction.
Notwithstanding the foregoing provisions of Section 10 (b)(iii) or (iv)
hereof, unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for purposes
of the Plan solely because (i) the Company, (ii) an entity in which the Company
directly or indirectly beneficially owns 50% or more of the voting securities or
interest, or (iii) any Company-sponsored employee stock ownership plan or any
other employee benefit plan of the Company, either files or becomes obligated to
file a report or a proxy statement under or in response to Schedule 13D,
Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or
report or item therein) under the Exchange Act, disclosing beneficial ownership
by it of shares of Voting Stock, whether in excess of 50% or otherwise, or
because the Company reports that a change in control of the Company has or may
have occurred or will or may occur in the future by reason of such beneficial
ownership. Further, a "Change of Control" shall not be deemed to have occurred
by reason of any change resulting from the Company's bankruptcy, insolvency or
otherwise for the benefit of the Company's creditors.
11. ADJUSTMENTS UPON CHANGES OF CAPITALIZATION
In the event of any change in the 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 Shares of the Company, the number of Shares as to which Awards may
be granted under the Plan, including limitations relating to incentive stock
option Awards and maximum Awards to individual Participants, the number of
Shares issuable pursuant to then outstanding Awards, and/or, if appropriate, the
prices of Shares related to outstanding Awards, shall be appropriately and
proportionately adjusted.
12. RIGHTS OF EMPLOYEES
Nothing in the Plan shall interfere with or limit in any way the right
of the Company or any subsidiary of the Company to terminate any Participant's
employment at any time, nor confer upon any Participant any right to continued
employment with the Company or any subsidiary of the Company.
13. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN AND AWARDS
The Board may amend, suspend or terminate the Plan at any time,
provided that no such action shall be taken that would impair the rights under
an outstanding Award without the Participant's consent.
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The Board may amend the terms of any outstanding Award, prospectively
or retroactively, but no such amendment shall impair the rights of any
Participant without the Participant's consent and no such amendment shall have
the effect, with respect to any employee subject to Section 162(m) of the Code,
of increasing the amount of any Award from the amount that would otherwise be
payable pursuant to the formula and/or goals previously established for such
Participant.
14. GOVERNING LAW
The Plan, together with all determinations and actions made or taken in
connection therewith, to the extent not otherwise governed by the Code or other
laws of the United States, shall be governed by the laws of the State of Ohio.
15. EFFECTIVE AND TERMINATION DATES
The Plan shall become effective on the date it is approved by the
shareholders of the Company. The Plan shall continue in effect until terminated
by the Board, at which time all outstanding Awards shall remain outstanding in
accordance with their applicable terms and conditions.
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<PAGE> 1
Exhibit 10.2
EMPLOYMENT AGREEMENT
Anthony & Sylvan Pools Corporation, an Ohio corporation (the "Company")
and Stuart D. Neidus (the "Executive") agree as follows:
1. EMPLOYMENT AND DUTIES.
(a) The Company agrees to employ the Executive, and the
Executive agrees to serve the Company, as the Company's Chief Executive Officer.
The Executive shall report to the Company's Board of Directors and shall have
such powers and duties as are customarily performed by Chief Executive Officers
of companies similar in size to the Company, together with such other duties,
consistent with his position as Chief Executive Officer, as may be reasonably
requested by the Board of Directors.
(b) On a day-to-day basis, the Executive shall (i) devote
substantially all of his working time to the business and affairs of the
Company. So long as it does not unreasonably interfere with his employment
obligations to the Company hereunder, the Executive shall be entitled to attend
to outside investments, and subject to prior approval of the Board of Directors,
serve as a director of a corporation which does not compete with the Company (as
provided in Section 10 hereof) or as a director, trustee or officer of or
otherwise participate in educational, welfare, social, religious, charitable and
civic organizations, and (ii) use his good faith efforts to advance the
interests of the Company and to improve the value of the Company to its
shareholders.
2. TERM. The Company's employment of the Executive shall commence on
May 14, 1999 and expire on December 31, 2000. Unless terminated as
provided in
<PAGE> 2
Section 7 hereof, this Agreement shall be extended automatically as of each
December 31 thereafter for one (1) additional year period with such modified
terms as mutually agreed.
3. COMPENSATION.
(a) The Executive's annual base salary ("base salary") during
the term of this Agreement shall be at least Two Hundred Twenty-Nine Thousand
Dollars (USD $229,000), such base salary to be reviewed annually by the
Compensation Committee of the Board of Directors or an authorized subcommittee
thereof (the "Committee").
(b) In addition to the base salary, the Company shall pay the
Executive a bonus targeted at sixty (60%) of his base salary for each year
("Target Bonus"), and the Committee shall determine the appropriate target
earnings per share ("Targeted Earnings Per Share") or other performance measure
for bonus purposes. There shall be no cap on bonus potential. Such bonus shall
be determined and paid within thirty (30) days after the Company's audited
financial statements become available.
(c) INITIAL OPTIONS.
(i) concurrently with the split-off of the
Company and distribution of its shares to the public and subject to the
limitation in (iii) below, the Company hereby agrees to grant to the Executive
options (the "Initial Options") to purchase 75,000 shares of the Company's
common stock (the "Shares") at the price and subject to the following terms and
conditions. The Initial Options shall vest as of the split-off date (the
"Commencement Date").
(ii) The exercise price per Share for the Initial
Options shall be $16.00 per share.
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(iii) Regardless of the fact that the Initial Options
are deemed to vest in the Executive on the Commencement Date, the Executive may
exercise Initial Options only in the percentages and at the times set forth
below:
0% prior to the second anniversary of the Commencement Date;
25% at any time after the second anniversary of the
Commencement Date;
50% at any time after the third anniversary of the
Commencement Date;
75% at any time after the fourth anniversary of the
Commencement Date;
100% at any time after the fifth anniversary of the
Commencement Date;
(d) TAXES. If all or any of the amounts payable to the
Executive under this Agreement (together with all other payments of cash or
property, whether pursuant to this Agreement or otherwise, including, without
limitation, the issuance of shares or options) constitutes "excess parachute
payments" within the meaning of Section 280G of the Code that are subject to the
excise tax imposed by Section 4999 of the Code (or any similar tax or
assessment), the amounts payable hereunder shall be increased to the extent
necessary to place the Executive in the same after-tax position as he would have
been in had no such tax assessment been imposed on any such payment paid or
payable to the Executive under this Agreement or any other payment that the
Executive may receive in connection therewith. The determination of the amount
of any such tax or assessment and the incremental payment required hereby in
connection therewith shall be made by the accounting firm employed by the
Executive within thirty (30) calendar days after such payment and said
incremental payment shall be made within five (5) calendar days after
determination has been made. If, after the date upon which the payment required
by this Section 3(d) has been made, it is determined (pursuant to final
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<PAGE> 4
regulations or published rulings of the Internal Revenue Service, final judgment
of a court of competent jurisdiction, Internal Revenue Service audit assessment,
or otherwise) that the amount of excise or other similar taxes or assessments
payable by the Executive is greater than the amount initially so determined,
then the Company shall pay the Executive an amount equal to the sum of: (i) such
additional excise or other taxes, plus (ii) any interest, fines and penalties
resulting from such underpayment, plus (iii) an amount necessary to reimburse
the Executive for any income, excise or other tax assessment payable by the
Executive with respect to the amounts specified in (i) and (ii) above, and the
reimbursement provided by this clause (iii), in the manner described above in
this Section 3(c). Payment thereof shall be made within five (5) calendar days
after the date of such subsequent determination. If, after the date upon which
the payment required by this Section 3(c) has been made to the Executive, it is
determined that the Executive is entitled to receive a refund of all or part of
such payment, then the Executive shall pay to the Company all amounts received
by the Executive as a refund of any such overpayment of excise or other taxes.
4. BENEFITS. During the term of this Agreement, the Executive and his
eligible dependents shall be entitled to participate in and receive benefits
under any stock option or profit-sharing plan, health, disability, medical
insurance or other employee welfare or benefit plan or arrangement made
generally available by the Company during the term of this Agreement to its
executives and key management employees.
5. CAR. During the term of this Agreement, the Company shall provide
the Executive with an automobile and shall pay for operating expenses incurred
in connection with the use of the automobile, including the costs of insurance,
gas, maintenance and car phone.
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6. VACATION. The Executive shall be entitled to the number of paid
vacation days in each calendar year determined by the Board from time to time.
7. DISABILITY OR DEATH; RESIGNATION; TERMINATION FOR CAUSE; OTHER
TERMINATIONS.
(a) Disability or Death. If the Executive is incapacitated
for a period of six (6) consecutive months so that he cannot perform his duties
hereunder on a full-time basis, then either the Company or the Executive may
give written notice to the other terminating the Executive's employment
effective thirty (30) days thereafter (the "Disability Termination Date"). The
Company shall continue to provide salary, medical coverage, disability and group
life insurance to the Executive for one (1) year after the earlier of the
Disability Termination Date or the date of the Executive's death. In the event
of the Executive's disability or death any stock options that are not yet
exercisable shall immediately become exercisable. The Executive or his estate
may exercise any options held at the date of death or the Disability Termination
Date for up to one (1) year after such date. In the event of death or
disability, the Company shall pay to the Executive the prorated portion (through
the applicable termination date) of the Executive's Target Bonus that would have
been paid had the Executive been employed by the Company at the end of the
fiscal year in which the applicable termination date occurred. Such Target Bonus
shall be calculated according to actual Company results for the respective
fiscal year and paid at the same time other Company bonuses are paid. (b)
RESIGNATION. If the Executive's employment is terminated by reason of his
voluntary resignation, all of the Company's obligations hereunder shall
terminate as of the termination date. All unexercised options for shares, if
any, then outstanding ("Options"), both vested and unvested, shall be
automatically forfeited and canceled by the Company.
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(c) TERMINATION FOR CAUSE. If the Company terminates the
Executive's employment for cause (as defined below), all of the Company's
obligations hereunder shall immediately terminate as of the termination date.
All unexercised Options, both vested and unvested, shall be automatically
forfeited and canceled by the Company. As used herein, "for cause" shall mean
(i) gross misconduct by the Executive that is materially inconsistent with the
terms hereof, or (ii) material failure by the Executive to perform his duties,
either of which continues after written notice thereof and a fifteen (15) day
chance to cure or (iii) the Executive's conviction for committing a felony.
(d) OTHER TERMINATIONS. If the Company terminates the
Executive's employment other than for cause (including failing to extend the
term at the end of any year), both the Company's and the Executive's obligations
hereunder shall immediately terminate as of the termination date; provided,
however, that (i) any stock options that are not yet exercisable shall
immediately become exercisable and the Executive may exercise within one (1)
year from the date the Company delivers notice of termination (the "Termination
Date") any Options held by him on the Termination Date and (ii) the Company
shall continue to provide salary and medical, group life and disability
insurance (collectively, "insurance benefits") to the Executive until the later
of December 31, 2000 or one (1) year after the Termination Date. In addition the
Company shall pay the prorated portion (through the Termination Date) of the
Executive's Target Bonus that would have been paid had the Executive been
employed by the Company at the end of the year in which the Termination Date
occurred. Such Target Bonus will be calculated according to actual Company
results for the year and paid at the same time other Company bonuses are paid.
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<PAGE> 7
If (i) the Company materially changes the Executive's duties and
responsibilities as set forth in Section 1 without his consent; or (ii) there
occurs a "change in control" (as hereinafter defined) of the Company, then in
any such event the Executive shall have the right to terminate his employment
with the Company, but such termination shall not be considered a voluntary
resignation or termination of such employment or of this Agreement by the
Executive but rather a discharge of the Executive by the Company without "cause"
under this Section 7(d).
The term "change in control" means the first to occur of the following
events:
(i) when any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof, including
a "group" as defined in Section 13(d) of the Exchange Act, but
excluding the Company and any employee benefit plan sponsored or
maintained by the Company (including any trustee of such plan acting as
trustee), directly or indirectly, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing more than fifty
percent (50%) of the combined voting power of the Company's then
outstanding securities; or
(ii) The completion of a transaction requiring shareholder
approval for the acquisition of substantially all of the stock or
assets of the Company by an entity other than the Company or any merger
of the Company into another company and the Company is not the
surviving company.
Notwithstanding anything else in this Agreement, "Change in control" shall not
include any change for reasons of bankruptcy, insolvency or otherwise for the
benefit of the Company's creditors.
Notwithstanding anything to the contrary contained in this Agreement, upon the
occurrence of a "change of control" of the Company any Options granted to the
Executive shall immediately become exercisable by the Executive at any time.
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<PAGE> 8
8. TRADE SECRETS: CONFIDENTIAL AND PROPRIETARY INFORMATION. The
Executive shall not at any time or in any manner, either directly or indirectly,
divulge, disclose or communicate to any person, firm, company, corporation or
business in any manner whatsoever any confidential information relating to the
business of the Company, including without limitation, the Company's customer
list, pricing policies, trade secrets, know-how, product designs, strategic
plans and similar types of information. This Section 8 shall be interpreted with
the Executive's role as Chief Executive and the investing public in general in
mind. The foregoing restrictions shall not apply to the extent that such
information (a) is obtainable in the public domain, (b) becomes obtainable in
the public domain, except by reason of the breach by the Executive of the terms
hereof, or (c) is required to be disclosed by rule of law or by order of a court
or governmental body or agency. This Section 8 shall remain in full force and
effect for a period of ten (10) years after expiration or termination of this
Agreement for any reason.
9. COVENANT NOT TO COMPETE. During the term of this Agreement and for a
period of five (5) years thereafter the Executive will not, without the
Company's prior written consent, directly or indirectly engage in, make any
investment in or have any interest in any business in competition with the
business of the Company; and the Executive will not advise, assist or render
services either directly or indirectly to any person, firm, company, corporation
or business other than the Company with reference to any business in competition
with the business engaged in by the Company during the Executive's employment by
the Company. The Executive also will not employ or offer employment to any
employee or solicit, directly or indirectly, any employee to leave the Company.
Notwithstanding the foregoing, the ownership of securities of any business
competing with the Company, if such securities are publicly traded on a national
securities market and constitute less than five percent (5%) of the outstanding
stock thereof, shall not constitute a violation of this provision. For purposes
of this Section 9, a business in competition with the Company shall mean any
business
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<PAGE> 9
engaged in the manufacture, design, installation, processing, sale or
distribution of products that are the same as or similar to those of the Company
at any time during the term of this Agreement.
10. NOTICES. All notices, requests, demands and other communications
made or given in connection with this Agreement shall be in writing and shall be
deemed to have been duly given (a) if delivered, at the time delivered or (b) if
mailed, at the time mailed at any general or branch United States Post Office
enclosed in a registered or certified postage paid envelope addressed to the
address of the respective parties as follows:
To the Company: Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, OH 44024
To the Executive: Stuart D. Neidus
7860 Sugarbush Lane
Gates Mills, OH 44040
or to such other addresses as the party to whom notice is to be given may have
previously furnished to the other party in writing in the manner set forth
above, provided that notices of changes of address shall only be effective upon
receipt.
11. MODIFICATION AND WAIVERS. No provisions of this Agreement may be
modified or discharged unless such modification or discharge is authorized by
the Board of Directors and is agreed to in writing, signed by the Executive and
by another executive officer of the Company. No waiver by either party hereto of
any breach by the other party hereto or any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
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<PAGE> 10
12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties hereto relating to the subject matter hereof, and there are no
written or oral terms or representations made by either party other than those
contained herein.
13. GOVERNING LAW. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the laws of
the State of Ohio.
14. INVALIDITY. The unenforceability or invalidity of any provision of
this Agreement shall not affect the enforceability or validity of the balance of
the Agreement. In the event that any such provision should be or becomes invalid
for any reason, such provision shall remain effective to the maximum extent
permissible, and the parties shall consult and agree on a legally acceptable
modification giving effect to the commercial objectives of the unenforceable or
invalid provision, and every other provision of this Agreement shall remain in
full force and effect.
15. SUCCESSORS. This Agreement shall inure to the benefit of, and be
enforceable by, the parties' successors, representatives, executors,
administrators or assignees.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
May 14, 1999.
ANTHONY & SYLVAN POOLS CORPORATION
________________________________ By:________________________________
Stuart D. Neidus
10
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
AGREEMENT effective as of May 14, 1999, between ANTHONY & SYLVAN
POOLS CORPORATION (the "Company"), its successors and assigns, and HOWARD P.
WERTMAN (the "Employee").
The Company agrees to employ the Employee as President of the Company,
and the Employee agrees to serve the Company as President, all in accordance
with the terms and conditions set forth below.
1. EMPLOYMENT
(a) The Employee shall have such powers and duties as are customarily
performed by similar officers of companies of similar size as the Company or
such other titles, duties and powers as the board of directors shall reasonabley
determine.
(b) The term of this Agreement (the "Term") shall commence on the date
hereof and terminate on December 31, 2000. Unless, at least thirty days prior to
the end of the Term (whether the initial Term or as theretofore extended), the
Company shall have given written notice to the Employee of its intention not to
renew this Agreement, or the Employee shall have given written notice to the
Company of his unwillingness to renew this Agreement or the employment of the
Employee has otherwise been terminated during the Term, the Term shall
automatically be extended for an additional year.
2. COMPENSATION
The Employee will receive a base salary of $175,000.00 with annual
review for so long as this Agreement is continued, at which times increases will
be considered in good faith. In addition to the base salary, the Company shall
pay the Employee a bonus targeted at fifty percent (50%) of his base salary each
year ("Target Bonus"), and the Compensation Committee of the Company's Board of
Directors shall determine the appropriate target measures or goals in connection
with bonus compensation. Such bonus shall be determined and paid within thirty
(30) days after the Company's audited financial statements become available.
3. INITIAL OPTIONS
(a) concurrently with the split-off of the Company and distribution of its
shares to the public and subject to the limitation in (c) below, the Company
hereby agrees to grant to the Employee options (the "Initial Options") to
purchase 30,000 shares of the Company's common stock (the "Shares") at the price
and subject to the following terms and conditions. The Initial Options shall
vest as of the split-off date (the "Commencement Date").
(b) The exercise price per Share for the Initial Options shall be $16.00
per share.
(c) Regardless of the fact that the Initial Options are deemed to vest in
the Executive on the Commencement Date, the Executive may exercise Initial
Options only in the percentages and at the times set forth below:
0% prior to the second anniversary of the Commencement Date;
25% at any time after the second anniversary of the
Commencement Date;
50% at any time after the third anniversary of the
Commencement Date;
75% at any time after the fourth anniversary of the
Commencement Date;
100% at any time after the fifth anniversary of the
Commencement Date;
<PAGE> 2
4. BENEFITS
During the term of this Agreement, the Employee and his eligible
dependents shall be entitled to participate in and receive benefits under any
stock option or profit-sharing plan, health, disability, medical insurance or
other employee welfare or benefit plan or arrangement made generally available
by the Company during the term of this Agreement to its executives and key
management employees.
5. CAR
During the term of this Agreement, the Company shall provide the
Employee with an automobile of a type customary for executives in similar
positions and shall pay for operating expenses incurred in connection with the
use of the automobile, including the costs of insurance, gas, maintenance and
car phone.
6. TRADE SECRETS: CONFIDENTIAL AND PROPRIETARY INFORMATION
The Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm, company,
corporation or business in any manner whatsoever any confidential information
relating to the business of the Company, including without limitation, the
Company's customer list, pricing policies, trade secrets, know-how, product
designs, strategic plans and similar types of information. The foregoing
restrictions shall not apply to the extent that such information (a) is
obtainable in the public domain, (b) becomes obtainable in the public domain,
except by reason of the breach by the Employee of the terms hereof, or (c) is
required to be disclosed by rule of law or by order of a court or governmental
body or agency. This Section 6 shall remain in full force and effect for a
period of ten (10) years after expiration or termination of this Agreement for
any reason.
7. COVENANT NOT TO COMPETE
During the term of this Agreement and for a period of two (2) years
thereafter, the Employee will not, without the Company's prior written consent,
directly or indirectly engage in, make any investment in or have any interest in
any business in competition with the business of the Company; the Employee will
not advise, assist or render services either directly or indirectly to any
person, firm, company, corporation or business other than the Company with
reference to any business in competition with the business engaged in by the
Company during the Employee's employment by the Company; and the Employee will
not employ or offer employment to any employee or solicit, directly or
indirectly, any employee to leave the Company. Notwithstanding the foregoing,
the ownership of securities of any business competing with the Company, if such
securities are publicly traded on a national securities market and constitute
less than five percent (5%) of the outstanding stock thereof, shall not
constitute a violation of this provision. For purposes of this Section 7, a
business in competition with the Company shall mean any business engaged in the
manufacture, design, installation, processing, sale or distribution of products
that are the same as or similar to those of the Company at any time during the
term of this Agreement.
-2-
<PAGE> 3
8. TERMINATION OF CONTRACT
It is agreed that subject to the provisions of Section 9 below, the
Company may terminate the employment of the Employee at any time with or without
cause by prior written notice to the Employee.
9. SEVERANCE AND ENTITLEMENT
In the event the Company decides to terminate the employment of the
Employee under the section entitled "TERMINATION OF CONTRACT" for any reason
and/or at any time, for reasons other than "Good Cause" (as hereinafter
defined), or determines not to renew this Agreement at the end of the Term
(whether the initial Term or as theretofore extended), the Employee will be
entitled to, in lieu of any and all other payments that may otherwise be due
under this Agreement, (i) a termination allowance in an amount equal to (a)
twelve months' salary at the then current rate of the Employee's pay and (b) the
annual Target Bonus to which the Employee would be entitled if his targeted
goals were attained for the fiscal year during which such termination occurs and
the Employee were employed during such entire year, multiplied by a fraction the
numerator of which is the number of days elapsed during the year through such
date of termination and the denominator of which is 365, and (ii) a continuation
of all medical and other employee benefits for the shorter of (a) twelve months
following the effective date of the termination and (b) the effective date of
coverage by similar plans of another employer. The termination allowance shall
be paid by the Company in twelve equal monthly installments beginning on the
first day of the first month following the effective date of termination;
provided, however, that the Employee continues to be in compliance with Sections
6 and 7 above. Any stock options vested and exercisable as of the date of such
termination may be exercised by the Employee for up to three (3) months after
the date that the Company delivers notice of such termination. In the event the
Company terminates this Agreement for "Good Cause," which will be defined as the
failure or refusal by the Employee to perform his assigned duties, failure to
adhere to Company policy and/or the engaging by the Employee in misconduct
injurious to the Company, the Employee will not be entitled to receive any
termination allowance, continuation of benefits, or any other payments provided
for in this Agreement, and any and all unexercised stock options held by the
Employee, both exercisable and non-exercisable and unvested, shall be
automatically forfeited and cancelled by the Company.
10. NOTICE OF TERMINATION
Any intended termination of the employment of the Employee by the
Company or by the Employee shall be communicated by written notice of
termination ("Notice of Termination") to the other party hereto in accordance
with the section entitled "NOTICES" and shall state the grounds for termination.
Any purported termination of the Employee's employment which is not effected
pursuant to a Notice of Termination shall not be effective in discharging the
Employee.
11. DEATH OR DISABILITY; RESIGNATION
(a) Disability or Death. If the Employee is incapacitated for a period
of three (3) consecutive months so that he cannot perform his duties hereunder
-3-
<PAGE> 4
on a full-time basis, then either the Company or the Employee may give written
notice to the other terminating the Employee's employment effective thirty (30)
days thereafter (the "Disability Termination Date"). The Company shall continue
to provide salary, medical coverage, disability and group life insurance to the
Employee for six (6) months after the earlier of the Disability Termination Date
or date of death. In the event of death or disability any stock options that are
not yet exercisable shall immediately become exercisable. In the event of the
Employee's death or disability, his estate or the Employee may exercise any
options held for up to one (1) year after such date. Except as set forth herein,
if the Employee dies prior to the termination of his employment or if notice of
termination for disability is given as provided above, the Company's obligations
hereunder shall terminate as of the earlier of the Employee's death or the
Disability Termination Date.
(b) Resignation. If the Employee's employment is terminated by reason
of his voluntary resignation, all of the Company's obligations hereunder shall
terminate as of the termination date. All unexercised options, both vested and
unvested, shall be automatically forfeited and cancelled by the Company.
12. CHANGE IN CONTROL
If there occurs a "change in control" (as hereinafter defined) of the
Company, any options granted to the Employee shall immediately become
exercisable by the Employee at any time.
The term "change in control" means the first to occur of the following
events: (i) when any "person" as defined in Section 3(a)(9) of the Exchange Act
and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined
in Section 13(d) of the Exchange Act, but excluding the Company and any employee
benefit plan sponsored or maintained by the Company (including any trustee of
such plan acting as trustee), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing more than fifty percent (50%)
of the combined voting power of the Company's then outstanding securities; or
(ii) The completion of a transaction requiring shareholder approval for the
acquisition of substantially all of the stock or assets of the Company by an
entity other than the Company or any merger of the Company into another company
and the Company is not the surviving company. Notwithstanding anything else in
this agreement, "change in control" shall not include any change for reasons of
bankruptcy, insolvency or otherwise for the benefit of the Company's creditors.
13. TAXES
If all or any of the amounts payable to the Executive under this Agreement
(together with all other payments of cash or property, whether pursuant to this
Agreement or otherwise, including, without limitation, the issuance of shares
or options) constitutes "excess parachute payments" within the meaning of
Section 280G of the Code that are subject to the excise tax imposed by Section
4999 of the Code (or any similar tax or assessment), the amounts payable
hereunder shall be increased to the extent necessary to place the Executive in
the same after-tax position as he would have been in had no such tax assessment
been imposed on any such payment paid or payable to the Executive under this
Agreement or any other payment that the Executive may receive in connection
therewith. The determination of the amount of any such tax or assessment and
the incremental payment required hereby in connection therewith shall be made
by the accounting firm employed by the Executive within thirty (30) calendar
days after such payment and said incremental payment shall be made within five
(5) calendar days after determination has been made. If, after the date upon
which the payment required by this Section 3(d) has been made, it is determined
(pursuant to final regulations or published rulings of the Internal Revenue
Service, final judgment of a court of competent jurisdiction, Internal Revenue
Service audit assessment, or otherwise) that the amount of excise or other
similar taxes or assessments payable by the executive is greater than the
amount initially so determined, then the Company shall pay the Executive an
amount equal to the sum of: (i) such additional excise or other taxes, PLUS
(ii) any interest, fines and penalties resulting from such underpayment, PLUS
(iii) an amount necessary to reimburse the Executive for any income, excise or
other tax assessment payable by the Executive with respect to the amounts
specified in (i) and (ii) above, and the reimbursement provided by this clause
(iii), in the manner described above in this Section 3(c). Payment thereof
shall be made within five (5) calendar days after the date of such subsequent
determination. If, after the date upon which the payment required by this
Section 3(c) has been made to the Executive, it is determined that the
Executive is entitled to receive a refund of all or part of such payment, then
the Executive shall pay to the Company all amounts received by the Executive as
a refund of any such overpayment of excise or other taxes.
14. AMENDMENT
This Agreement may be amended at any time by a written agreement signed
by the Company and the Employee.
15. WAIVERS
The voluntary waiver by the Company or the Employee of any provision of
this Agreement or any breach thereof does not entail a waiver of any other
portion of this Agreement or this Agreement as a whole, or any subsequent breach
of the same provision, and does not affect the validity of this Agreement.
-4-
<PAGE> 5
16. GOVERNING LAW
This Agreement, and all rights, duties and remedies hereunder shall be
governed by and construed and interpreted in accordance with the procedural and
substantive laws of the State of Ohio.
17. SEVERABILITY
Should any portion of this Agreement be declared by a court of law
having competent jurisdiction over the persons and subject matter of this
Agreement to be invalid or unenforceable, the remainder of this Agreement shall
remain enforceable and in full effect. In the event that any provision of this
Agreement should be or becomes invalid for any reason, such provision shall
remain effective to the maximum extent permissible, and the parties shall
consult and agree on a legally acceptable modification giving effect to the
commercial objectives of the unenforceable or invalid provision, and every other
provision of this Agreement shall remain in full force and effect.
18. SUCCESSORS
This Agreement shall inure to the benefit of, and be enforceable by, the
parties' successors, representatives, executors, administrators or assignees.
19. NOTICES
All notices or other communications hereunder shall be in writing and
shall be made by hand delivery, facsimile or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to the Company, to: Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, OH 44024
Attention: Chief Executive Officer
If to the Employee, to: Howard P. Wertman
Anthony & Sylvan Pools Corporation
Doylestown, PA 18901
or at such other addresses as shall be furnished by the parties by like notice,
and such notice or communication shall be deemed to have been given or made as
of the date so delivered, if
-5-
<PAGE> 6
delivered personally; when receipt is acknowledged, if sent by facsimile; and
five calendar days after so mailed, if sent by registered or certified mail.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
ANTHONY & SYLVAN POOLS CORPORATION
By:____________________________________
Stuart D. Neidus
Its: Chief Executive Officer
------------------------------------------
Howard P. Wertman
-6-
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
AGREEMENT effective as of May 14, 1999, between ANTHONY & SYLVAN
POOLS CORPORATION (the "Company"), its successors and assigns, and Richard M.
Kelso (the "Employee").
The Company agrees to employ the Employee as Executive Vice President
of the Company, and the Employee agrees to serve the Company as Executive Vice
President, all in accordance with the terms and conditions set forth below.
1. EMPLOYMENT
(a) The Employee shall have such powers and duties as are customarily
performed by similar officers of companies of similar size as the Company or
such other titles, duties and powers as the board of directors shall reasonably
determine.
(b) The term of this Agreement (the "Term") shall commence on the date
hereof and terminate on December 31, 2000. Unless, at least thirty days
prior to the end of the Term (whether the initial Term or as theretofore
extended), the Company shall have given written notice to the Employee of its
intention not to renew this Agreement, or the Employee shall have given written
notice to the Company of his unwillingness to renew this Agreement or the
employment of the Employee has otherwise been terminated during the Term, the
Term shall automatically be extended for an additional year.
2. COMPENSATION
The Employee will receive a base salary of $137,000.00 with annual
review for so long as this Agreement is continued, at which times increases will
be considered in good faith. In addition to the base salary, the Company shall
pay the Employee a bonus targeted at fifty percent 50% of his base salary each
year ("Target Bonus"), and the Compensation Committee of the Company's Board of
Directors shall determine the appropriate target measures or goals in connection
with bonus compensation. Such bonus shall be determined and paid within thirty
(30) days after the Company's audited financial statements become available.
3. INITIAL OPTIONS
(a) concurrently with the split-off of the Company and distribution of
its shares to the public and subject to the limitation in (c) below, the Company
hereby agrees to grant to the Employee options (the "Initial Options") to
purchase 25,000 shares of the Company's common stock (the "Shares") at the price
and subject to the following terms and conditions. The Initial Options shall
vest as of the split-off date (the "Commencement Date").
(b) The exercise price per Share for the Initial Options shall be $16.00 per
share.
(c) Regardless of the fact that the Initial Options are deemed to vest in
the Executive on the Commencement Date, the Executive may exercise Initial
Options only in the percentages and at the times set forth below:
0% prior to the second anniversary of the
Commencement Date;
25% at any time after the second anniversary of the
Commencement Date;
50% at any time after the third anniversary of the
Commencement Date;
75% at any time after the fourth anniversary of the
Commencement Date;
100% at any time after the fifth anniversary of the
Commencement Date;
<PAGE> 2
4. BENEFITS
During the term of this Agreement, the Employee and his eligible
dependents shall be entitled to participate in and receive benefits under any
stock option or profit-sharing plan, health, disability, medical insurance or
other employee welfare or benefit plan or arrangement made generally available
by the Company during the term of this Agreement to its executives and key
management employees.
5. CAR
During the term of this Agreement, the Company shall provide the
Employee with an automobile of a type customary for executives in similar
positions and shall pay for operating expenses incurred in connection with the
use of the automobile, including the costs of insurance, gas, maintenance and
car phone.
6. TRADE SECRETS: CONFIDENTIAL AND PROPRIETARY INFORMATION
The Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm, company,
corporation or business in any manner whatsoever any confidential information
relating to the business of the Company, including without limitation, the
Company's customer list, pricing policies, trade secrets, know-how, product
designs, strategic plans and similar types of information. The foregoing
restrictions shall not apply to the extent that such information (a) is
obtainable in the public domain, (b) becomes obtainable in the public domain,
except by reason of the breach by the Employee of the terms hereof, or (c) is
required to be disclosed by rule of law or by order of a court or governmental
body or agency. This Section 6 shall remain in full force and effect for a
period of ten (10) years after expiration or termination of this Agreement for
any reason.
7. COVENANT NOT TO COMPETE
During the term of this Agreement and for a period of two (2) years
thereafter, the Employee will not, without the Company's prior written consent,
directly or indirectly engage in, make any investment in or have any interest in
any business in competition with the business of the Company; the Employee will
not advise, assist or render services either directly or indirectly to any
person, firm, company, corporation or business other than the Company with
reference to any business in competition with the business engaged in by the
Company during the Employee's employment by the Company; and the Employee will
not employ or offer employment to any employee or solicit, directly or
indirectly, any employee to leave the Company. Notwithstanding the foregoing,
the ownership of securities of any business competing with the Company, if such
securities are publicly traded on a national securities market and constitute
less than five percent (5%) of the outstanding stock thereof, shall not
constitute a violation of this provision. For purposes of this Section 7, a
business in competition with the Company shall mean any business engaged in the
manufacture, design, installation, processing, sale or distribution of products
that are the same as or similar to those of the Company at any time during the
term of this Agreement.
-2-
<PAGE> 3
8. TERMINATION OF CONTRACT
It is agreed that subject to the provisions of Section 9 below, the
Company may terminate the employment of the Employee at any time with or without
cause by prior written notice to the Employee.
9. SEVERANCE AND ENTITLEMENT
In the event the Company decides to terminate the employment of the
Employee under the section entitled "TERMINATION OF CONTRACT" for any reason
and/or at any time, for reasons other than "Good Cause" (as hereinafter
defined), or determines not to renew this Agreement at the end of the Term
(whether the initial Term or as theretofore extended), the Employee will be
entitled to, in lieu of any and all other payments that may otherwise be due
under this Agreement, (i) a termination allowance in an amount equal to (a)
twelve months' salary at the then current rate of the Employee's pay and (b) the
annual Target Bonus to which the Employee would be entitled if his targeted
goals were attained for the fiscal year during which such termination occurs and
the Employee were employed during such entire year, multiplied by a fraction the
numerator of which is the number of days elapsed during the year through such
date of termination and the denominator of which is 365, and (ii) a continuation
of all medical and other employee benefits for the shorter of (a) twelve months
following the effective date of the termination and (b) the effective date of
coverage by similar plans of another employer. The termination allowance shall
be paid by the Company in twelve equal monthly installments beginning on the
first day of the first month following the effective date of termination;
provided, however, that the Employee continues to be in compliance with Sections
6 and 7 above. Any stock options vested and exercisable as of the date of such
termination may be exercised by the Employee for up to three (3) months after
the date that the Company delivers notice of such termination. In the event the
Company terminates this Agreement for "Good Cause," which will be defined as the
failure or refusal by the Employee to perform his assigned duties, failure to
adhere to Company policy and/or the engaging by the Employee in misconduct
injurious to the Company, the Employee will not be entitled to receive any
termination allowance, continuation of benefits, or any other payments provided
for in this Agreement, and any and all unexercised stock options held by the
Employee, both exercisable and non-exercisable and unvested, shall be
automatically forfeited and cancelled by the Company.
10. NOTICE OF TERMINATION
Any intended termination of the employment of the Employee by the
Company or by the Employee shall be communicated by written notice of
termination ("Notice of Termination") to the other party hereto in accordance
with the section entitled "NOTICES" and shall state the grounds for termination.
Any purported termination of the Employee's employment which is not effected
pursuant to a Notice of Termination shall not be effective in discharging the
Employee.
11. DEATH OR DISABILITY; RESIGNATION
(a) Disability or Death. If the Employee is incapacitated for a period
of three (3) consecutive months so that he cannot perform his duties hereunder
-3-
<PAGE> 4
on a full-time basis, then either the Company or the Employee may give written
notice to the other terminating the Employee's employment effective thirty (30)
days thereafter (the "Disability Termination Date"). The Company shall continue
to provide salary, medical coverage, disability and group life insurance to the
Employee for six (6) months after the earlier of the Disability Termination Date
or date of death. In the event of death or disability any stock options that are
not yet exercisable shall immediately become exercisable. In the event of the
Employee's death or disability, his estate or the Employee may exercise any
options held for up to one (1) year after such date. Except as set forth herein,
if the Employee dies prior to the termination of his employment or if notice of
termination for disability is given as provided above, the Company's obligations
hereunder shall terminate as of the earlier of the Employee's death or the
Disability Termination Date.
(b) Resignation. If the Employee's employment is terminated by reason
of his voluntary resignation, all of the Company's obligations hereunder shall
terminate as of the termination date. All unexercised options, both vested and
unvested, shall be automatically forfeited and cancelled by the Company.
12. CHANGE IN CONTROL
If there occurs a "change in control" (as hereinafter defined) of the
Company, any options granted to the Employee shall immediately become
exercisable by the Employee at any time.
The term "change in control" means the first to occur of the following
events: (i) when any "person" as defined in Section 3(a)(9) of the Exchange Act
and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined
in Section 13(d) of the Exchange Act, but excluding the Company and any employee
benefit plan sponsored or maintained by the Company (including any trustee of
such plan acting as trustee), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing more than fifty percent (50%)
of the combined voting power of the Company's then outstanding securities; or
(ii) The completion of a transaction requiring shareholder approval for the
acquisition of substantially all of the stock or assets of the Company by an
entity other than the Company or any merger of the Company into another company
and the Company is not the surviving company. Notwithstanding anything else in
this agreement, "change in control" shall not include any change for reasons of
bankruptcy, insolvency or otherwise for the benefit of the Company's creditors.
13. TAXES
If all or any of the amounts payable to the Executive under this Agreement
(together with all other payments of cash or property, whether pursuant to this
Agreement or otherwise, including, without limitation, the issuance of shares
or options) constitutes "excess parachute payments" within the meaning of
Section 280G of the Code that are subject to the excise tax imposed by Section
4999 of the Code (or any similar tax or assessment), the amounts payable
hereunder shall be increased to the extent necessary to place the Executive in
the same after-tax position as he would have been in had no such tax assessment
been imposed on any such payment paid or payable to the Executive under this
Agreement or any other payment that the Executive may receive in connection
therewith. The determination of the amount of any such tax or assessment and
the incremental payment required hereby in connection therewith shall be made
by the accounting firm employed by the Executive within thirty (30) calendar
days after such payment and said incremental payment shall be made within five
(5) calendar days after determination has been made. If, after the date upon
which the payment required by this Section 3(d) has been made, it is determined
(pursuant to final regulations or published rulings of the Internal Revenue
Service, final judgment of a court of competent jurisdiction, Internal Revenue
Service audit assessment, or otherwise) that the amount of excise or other
similar taxes or assessments payable by the executive is greater than the
amount initially so determined, then the Company shall pay the Executive an
amount equal to the sum of: (i) such additional excise or other taxes, PLUS
(ii) any interest, fines and penalties resulting from such underpayment, PLUS
(iii) an amount necessary to reimburse the Executive for any income, excise or
other tax assessment payable by the Executive with respect to the amounts
specified in (i) and (ii) above, and the reimbursement provided by this clause
(iii), in the manner described above in this Section 3(c). Payment thereof
shall be made within five (5) calendar days after the date of such subsequent
determination. If, after the date upon which the payment required by this
Section 3(c) has been made to the Executive, it is determined that the
Executive is entitled to receive a refund of all or part of such payment, then
the Executive shall pay to the Company all amounts received by the Executive as
a refund of any such overpayment of excise or other taxes.
14. AMENDMENT
This Agreement may be amended at any time by a written agreement signed
by the Company and the Employee.
15. WAIVERS
The voluntary waiver by the Company or the Employee of any provision of
this Agreement or any breach thereof does not entail a waiver of any other
portion of this Agreement or this Agreement as a whole, or any subsequent breach
of the same provision, and does not affect the validity of this Agreement.
-4-
<PAGE> 5
16. GOVERNING LAW
This Agreement, and all rights, duties and remedies hereunder shall be
governed by and construed and interpreted in accordance with the procedural and
substantive laws of the State of Ohio.
17. SEVERABILITY
Should any portion of this Agreement be declared by a court of law
having competent jurisdiction over the persons and subject matter of this
Agreement to be invalid or unenforceable, the remainder of this Agreement shall
remain enforceable and in full effect. In the event that any provision of this
Agreement should be or becomes invalid for any reason, such provision shall
remain effective to the maximum extent permissible, and the parties shall
consult and agree on a legally acceptable modification giving effect to the
commercial objectives of the unenforceable or invalid provision, and every other
provision of this Agreement shall remain in full force and effect.
18. SUCCESSORS
This Agreement shall inure to the benefit of, and be enforceable by, the
parties' successors, representatives, executors, administrators or assignees.
19. NOTICES
All notices or other communications hereunder shall be in writing and
shall be made by hand delivery, facsimile or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to the Company, to: Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, OH 44024
Attention: Chief Executive Officer
If to the Employee, to: Richard M. Kelso
Anthony & Sylvan Pools Corporation
Doylestown, PA 18901
or at such other addresses as shall be furnished by the parties by like notice,
and such notice or communication shall be deemed to have been given or made as
of the date so delivered, if
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delivered personally; when receipt is acknowledged, if sent by facsimile; and
five calendar days after so mailed, if sent by registered or certified mail.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
ANTHONY & SYLVAN POOLS CORPORATION
By:____________________________________
Stuart D. Neidus
Its: Chief Executive Officer
------------------------------------------
Richard M. Kelso
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<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
AGREEMENT effective as of May 14, 1999, between ANTHONY & SYLVAN
POOLS CORPORATION (the "Company"), its successors and assigns, and Mark E. Brody
(the "Employee").
The Company agrees to employ the Employee as Executive Vice-President
and Chief Financial Officer of the Company, and the Employee agrees to serve the
Company as Executive Vice-President and Chief Financial Officer, all in
accordance with the terms and conditions set forth below.
1. EMPLOYMENT
(a) The Employee shall have such powers and duties as are customarily
performed by similar officers of companies of similar size as the Company or
such other titles, duties and powers as the board of directors shall reasonably
determine.
(b) The term of this Agreement (the "Term") shall commence on the date
hereof and terminate on December 31, 2000. Unless, at least thirty days prior to
the end of the Term (whether the initial Term or as theretofore extended), the
Company shall have given written notice to the Employee of its intention not to
renew this Agreement, or the Employee shall have given written notice to the
Company of his unwillingness to renew this Agreement or the employment of the
Employee has otherwise been terminated during the Term, the Term shall
automatically be extended for an additional year.
2. COMPENSATION
The Employee will receive a base salary of $140,000.00 with annual
review for so long as this Agreement is continued, at which times increases will
be considered in good faith. In addition to the base salary, the Company shall
pay the Employee a bonus targeted at thirty-five percent (35%) of his base
salary each year ("Target Bonus"), and the Compensation Committee of the
Company's Board of Directors shall determine the appropriate target measures or
goals in connection with bonus compensation. Such bonus shall be determined and
paid within thirty (30) days after the Company's audited financial statements
become available.
3. INITIAL OPTIONS
(a) concurrently with the split-off of the Company and distribution
of its shares to the public and subject to the limitation in (c) below, the
Company hereby agrees to grant to the Employee options (the "Initial Options")
to purchase 25,000 shares of the Company's common stock (the "Shares") at the
price and subject to the following terms and conditions. The Initial Options
shall vest as of the split-off date (the "Commencement Date").
(b) The exercise price per Share for the Initial Options shall be
$16.00 per share.
(c) Regardless of the fact that the Initial Options are deemed to vest
in the Executive on the Commencement Date, the Executive may exercise Initial
Options only in the percentages and at the times set forth below: 0% prior to
the second anniversary of the Commencement Date;
25% at any time after the second anniversary of the
Commencement Date;
50% at any time after the third anniversary of the
Commencement Date;
75% at any time after the fourth anniversary of the
Commencement Date;
100% at any time after the fifth anniversary of the
Commencement Date;
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4. BENEFITS
During the term of this Agreement, the Employee and his eligible
dependents shall be entitled to participate in and receive benefits under any
stock option or profit-sharing plan, health, disability, medical insurance or
other employee welfare or benefit plan or arrangement made generally available
by the Company during the term of this Agreement to its executives and key
management employees.
5. CAR
During the term of this Agreement, the Company shall provide the
Employee with an automobile of a type customary for executives in similar
positions and shall pay for operating expenses incurred in connection with the
use of the automobile, including the costs of insurance, gas, maintenance and
car phone.
6. TRADE SECRETS: CONFIDENTIAL AND PROPRIETARY INFORMATION
The Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm, company,
corporation or business in any manner whatsoever any confidential information
relating to the business of the Company, including without limitation, the
Company's customer list, pricing policies, trade secrets, know-how, product
designs, strategic plans and similar types of information. The foregoing
restrictions shall not apply to the extent that such information (a) is
obtainable in the public domain, (b) becomes obtainable in the public domain,
except by reason of the breach by the Employee of the terms hereof, or (c) is
required to be disclosed by rule of law or by order of a court or governmental
body or agency. This Section 6 shall remain in full force and effect for a
period of ten (10) years after expiration or termination of this Agreement for
any reason.
7. COVENANT NOT TO COMPETE
During the term of this Agreement and for a period of two (2) years
thereafter, the Employee will not, without the Company's prior written consent,
directly or indirectly engage in, make any investment in or have any interest in
any business in competition with the business of the Company; the Employee will
not advise, assist or render services either directly or indirectly to any
person, firm, company, corporation or business other than the Company with
reference to any business in competition with the business engaged in by the
Company during the Employee's employment by the Company; and the Employee will
not employ or offer employment to any employee or solicit, directly or
indirectly, any employee to leave the Company. Notwithstanding the foregoing,
the ownership of securities of any business competing with the Company, if such
securities are publicly traded on a national securities market and constitute
less than five percent (5%) of the outstanding stock thereof, shall not
constitute a violation of this provision. For purposes of this Section 7, a
business in competition with the Company shall mean any business engaged in the
manufacture, design, installation, processing, sale or distribution of products
that are the same as or similar to those of the Company at any time during the
term of this Agreement.
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<PAGE> 3
8. TERMINATION OF CONTRACT
It is agreed that subject to the provisions of Section 9 below, the
Company may terminate the employment of the Employee at any time with or without
cause by prior written notice to the Employee.
9. SEVERANCE AND ENTITLEMENT
In the event the Company decides to terminate the employment of the
Employee under the section entitled "TERMINATION OF CONTRACT" for any reason
and/or at any time, for reasons other than "Good Cause" (as hereinafter
defined), or determines not to renew this Agreement at the end of the Term
(whether the initial Term or as theretofore extended), the Employee will be
entitled to, in lieu of any and all other payments that may otherwise be due
under this Agreement, (i) a termination allowance in an amount equal to (a)
twelve months' salary at the then current rate of the Employee's pay and (b) the
annual Target Bonus to which the Employee would be entitled if his targeted
goals were attained for the fiscal year during which such termination occurs and
the Employee were employed during such entire year, multiplied by a fraction the
numerator of which is the number of days elapsed during the year through such
date of termination and the denominator of which is 365, and (ii) a continuation
of all medical and other employee benefits for the shorter of (a) twelve months
following the effective date of the termination and (b) the effective date of
coverage by similar plans of another employer. The termination allowance shall
be paid by the Company in twelve equal monthly installments beginning on the
first day of the first month following the effective date of termination;
provided, however, that the Employee continues to be in compliance with Sections
6 and 7 above. Any stock options vested and exercisable as of the date of such
termination may be exercised by the Employee for up to three (3) months after
the date that the Company delivers notice of such termination. In the event the
Company terminates this Agreement for "Good Cause," which will be defined as the
failure or refusal by the Employee to perform his assigned duties, failure to
adhere to Company policy and/or the engaging by the Employee in misconduct
injurious to the Company, the Employee will not be entitled to receive any
termination allowance, continuation of benefits, or any other payments provided
for in this Agreement, and any and all unexercised stock options held by the
Employee, both exercisable and non-exercisable and unvested, shall be
automatically forfeited and cancelled by the Company.
10. NOTICE OF TERMINATION
Any intended termination of the employment of the Employee by the
Company or by the Employee shall be communicated by written notice of
termination ("Notice of Termination") to the other party hereto in accordance
with the section entitled "NOTICES" and shall state the grounds for termination.
Any purported termination of the Employee's employment which is not effected
pursuant to a Notice of Termination shall not be effective in discharging the
Employee.
11. DEATH OR DISABILITY; RESIGNATION
(a) Disability or Death. If the Employee is incapacitated for a period
of three (3) consecutive months so that he cannot perform his duties hereunder
on a full-time basis, then move forward
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<PAGE> 4
either the Company or the Employee may give written notice to the other
terminating the Employee's employment effective thirty (30) days thereafter
(the "Disability Termination Date"). The Company shall continue to provide
salary, medical coverage, disability and group life insurance to the Employee
for six (6) months after the earlier of the Disability Termination Date or date
of death. In the event of death or disability any stock options that are not yet
exercisable shall immediately become exercisable. In the event of the Employee's
death or disability, his estate or the Employee may exercise any options held
for up to one (1) year after such date. Except as set forth herein, if the
Employee dies prior to the termination of his employment or if notice of
termination for up to disability is given as provided above, the Company's
obligations hereunder shall terminate as of the earlier of the Employee's death
or the Disability Termination Date.
(b) Resignation. If the Employee's employment is terminated by reason
of his voluntary resignation, all of the Company's obligations hereunder shall
terminate as of the termination date. All unexercised options, both vested and
unvested, shall be automatically forfeited and cancelled by the Company.
12. CHANGE IN CONTROL
If there occurs a "change in control" (as hereinafter defined) of the
Company, any options granted to the Employee shall immediately become
exercisable by the Employee at any time.
The term "change in control" means the first to occur of the following
events: (i) when any "person" as defined in Section 3(a)(9) of the Exchange Act
and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined
in Section 13(d) of the Exchange Act, but excluding the Company and any employee
benefit plan sponsored or maintained by the Company (including any trustee of
such plan acting as trustee), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing more than fifty percent (50%)
of the combined voting power of the Company's then outstanding securities; or
(ii) The completion of a transaction requiring shareholder approval for the
acquisition of substantially all of the stock or assets of the Company by an
entity other than the Company or any merger of the Company into another company
and the Company is not the surviving company. Notwithstanding anything else in
this agreement, "Change in control" shall not include any change for reasons of
bankruptcy, insolvency or otherwise for the benefit of the Company's creditors.
13. TAXES
If all or any of the amounts payable to the Executive under this Agreement
(together with all other payments of cash or property, whether pursuant to this
Agreement or otherwise, including, without limitation, the issuance of shares
or options) constitutes "excess parachute payments" within the meaning of
Section 280G of the Code that are subject to the excise tax imposed by Section
4999 of the Code (or any similar tax or assessment), the amounts payable
hereunder shall be increased to the extent necessary to place the Executive in
the same after-tax position as he would have been in had no such tax assessment
been imposed on any such payment paid or payable to the Executive under this
Agreement or any other payment that the Executive may receive in connection
therewith. The determination of the amount of any such tax or assessment and
the incremental payment required hereby in connection therewith shall be made
by the accounting firm employed by the Executive within thirty (30) calendar
days after such payment and said incremental payment shall be made within five
(5) calendar days after determination has been made. If, after the date upon
which the payment required by this Section 3(d) has been made, it is determined
(pursuant to final regulations or published rulings of the Internal Revenue
Service, final judgment of a court of competent jurisdiction, Internal Revenue
Service audit assessment, or otherwise) that the amount of excise or other
similar taxes or assessments payable by the executive is greater than the
amount initially so determined, then the Company shall pay the Executive an
amount equal to the sum of: (i) such additional excise or other taxes, PLUS
(ii) any interest, fines and penalties resulting from such underpayment, PLUS
(iii) an amount necessary to reimburse the Executive for any income, excise or
other tax assessment payable by the Executive with respect to the amounts
specified in (i) and (ii) above, and the reimbursement provided by this clause
(iii), in the manner described above in this Section 3(c). Payment thereof
shall be made within five (5) calendar days after the date of such subsequent
determination. If, after the date upon which the payment required by this
Section 3(c) has been made to the Executive, it is determined that the
Executive is entitled to receive a refund of all or part of such payment, then
the Executive shall pay to the Company all amounts received by the Executive as
a refund of any such overpayment of excise or other taxes.
14. AMENDMENT
This Agreement may be amended at any time by a written agreement signed
by the Company and the Employee.
15. WAIVERS
The voluntary waiver by the Company or the Employee of any provision of
this Agreement or any breach thereof does not entail a waiver of any other
portion of this Agreement or this Agreement as a whole, or any subsequent breach
of the same provision, and does not affect the validity of this Agreement.
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16. GOVERNING LAW
This Agreement, and all rights, duties and remedies hereunder shall be
governed by and construed and interpreted in accordance with the procedural and
substantive laws of the State of Ohio.
17. SEVERABILITY
Should any portion of this Agreement be declared by a court of law
having competent jurisdiction over the persons and subject matter of this
Agreement to be invalid or unenforceable, the remainder of this Agreement shall
remain enforceable and in full effect. In the event that any provision of this
Agreement should be or becomes invalid for any reason, such provision shall
remain effective to the maximum extent permissible, and the parties shall
consult and agree on a legally acceptable modification giving effect to the
commercial objectives of the unenforceable or invalid provision, and every other
provision of this Agreement shall remain in full force and effect.
18. SUCCESSORS
This Agreement shall inure to the benefit of, and be enforceable by, the
parties' successors, representatives, executors, administrators or assignees.
19. NOTICES
All notices or other communications hereunder shall be in writing and
shall be made by hand delivery, facsimile or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to the Company, to: Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, OH 44024
Attention: Chief Executive Officer
If to the Employee, to: Mark E. Brody
Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, OH 44024
or at such other addresses as shall be furnished by the parties by like notice,
and such notice or communication shall be deemed to have been given or made as
of the date so delivered, if
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delivered personally; when receipt is acknowledged, if sent by facsimile; and
five calendar days after so mailed, if sent by registered or certified mail.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
ANTHONY & SYLVAN POOLS CORPORATION
By:____________________________________
Stuart D. Neidus
Its: Chief Executive Officer
------------------------------------------
Mark E. Brody
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<PAGE> 1
Exhibit 10.6
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement, made as of this _____ day of __________, 1999, between
Anthony & Sylvan Pools Corporation, an Ohio corporation, (the "Company") and
[____________________], a director, officer or representative (as hereinafter
defined) of the Company (the "Indemnitee");
The Company and the Indemnitee are each aware of the exposure to
litigation of officers, directors and representatives of the Company as such
persons exercise their duties to the Company;
The Company and the Indemnitee are also aware of conditions in the
insurance industry that have affected and may continue to affect the Company's
ability to obtain appropriate directors' and officers' liability insurance on an
economically acceptable basis;
The Company desires to continue to benefit from the services of highly
qualified, experienced and otherwise competent persons such as the Indemnitee;
and
The Indemnitee desires to serve or to continue to serve the Company as
a director or an officer, or as a director, officer or trustee of another
corporation, joint venture, trust or other enterprise in which the Company has a
direct or indirect ownership interest, for so long as the Company continues to
provide on an acceptable basis adequate and reliable indemnification against
certain liabilities and expenses that may be incurred by the Indemnitee.
In consideration of the foregoing premises and the mutual covenants
herein contained, the parties hereto agree as follows:
1. INDEMNIFICATION
Subject to the terms of this Agreement, the Company shall indemnify the
Indemnitee with respect to his activities as a director or officer of the
Company and/or as a person who is serving or has served on behalf of the Company
("representative") as a director, officer, or trustee of another corporation,
joint venture, trust or other enterprise, domestic or foreign, in which the
Company has a direct or indirect ownership interest (an "affiliated entity")
against expenses (including, without limitation, attorneys' fees, judgments,
fines, and amounts paid in settlement) actually and reasonably incurred by him
or her ("Expenses") in connection with any claim against 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 (a "Proceeding"), to which Indemnitee was, is, or is
threatened to be made a party by reason of facts which include 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 the Company's Regulations in effect
on the date hereof, a copy of the relevant portions of which
are attached hereto as Exhibit I;
<PAGE> 2
(b) The benefits provided by the Articles of Incorporation,
Regulations, or Bylaws or their equivalent of the Company in
effect at the time Expenses are incurred by Indemnitee;
(c) The benefits allowable under Ohio law in effect at the date
hereof;
(d) The benefits allowable under the law of the jurisdiction under
which the Company exists at the time Expenses are incurred by
the Indemnitee;
(e) The benefits available under liability insurance obtained by
the Company;
(f) The benefits which would have been available to the Indemnitee
under the [policy name] issued by [name of insurance company]
on __________________, 1998, which is designated as policy
number [___________], a copy of which is attached as Exhibit
II hereto; had such policy continued in effect and unamended
at the time Expenses are incurred by the Indemnitee; and
(g) Such other benefits as are or may be otherwise available to
Indemnitee.
Combination of two or more of the benefits provided by (a) through (g) shall be
available to the extent that the Applicable Document, as hereafter defined, does
not require that the benefits provided therein be exclusive of other benefits.
The document or law providing for the benefits listed in items (a) through (g)
above is called the "Applicable Document" in this Agreement. Company hereby
undertakes to use its best efforts to assist Indemnitee, in all proper and legal
ways, to obtain the benefits selected by Indemnitee under items (a) through (g)
above.
For purposes of this Agreement, references to "other enterprises" shall
include employee benefit plans for employees of the Company or of any affiliated
entity without regard to ownership of such plans; references to "fines" shall
include any excise taxes assessed on the Indemnitee with respect to any employee
benefit plan. References to "serving on behalf of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, the Indemnitee with respect to an employee
benefit plan, its participants or beneficiaries. References to the masculine
shall include the feminine; references to the singular shall include the plural
and vice versa. If the Indemnitee acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan, he shall be deemed to have acted in a manner
consistent with the standards required for indemnification by the Company under
the Applicable Documents.
2. INSURANCE
The Company shall maintain directors' and officers' liability insurance
for so long as Indemnitee's services are covered hereunder, provided and only to
the extent that such insurance is available in amounts and on terms and
conditions determined by the Company to be acceptable. However, the Company
agrees that the provisions of this agreement shall remain in
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<PAGE> 3
effect regardless of whether liability or other insurance coverage is at any
time obtained or retained by the Company, except that any payments in fact made
to Indemnitee under an insurance policy obtained or retained by the Company
shall reduce the obligation of the Company to make payments hereunder by the
amount of the payments made under any such insurance policy.
3. PAYMENT OF EXPENSES
At Indemnitee's request, the Company shall pay the Expenses as and when
incurred by Indemnitee, but only after receipt of written notice pursuant to
Section 5 of this agreement and an undertaking in the form of Exhibit III
attached hereto by or on behalf of Indemnitee to repay such amounts so paid on
Indemnitee's behalf if it shall ultimately be determined under the Applicable
Document that Indemnitee is not entitled to be indemnified by the Company for
such Expenses. The portion of Expenses that represents attorneys' fees and other
costs incurred in defending any Proceeding shall be paid by the Company within
thirty (30) days of the Company's receipt of such request, together with
reasonable documentation (consistent, in the case of attorneys' fees, with
Company practice in payment of legal fees for outside counsel generally)
evidencing the amount and nature of such Expenses, subject to its having
received such a notice and undertaking.
4. ADDITIONAL RIGHTS
The indemnification provided in this Agreement shall not be exclusive
of any other indemnification or right to which Indemnitee may be entitled and
shall continue after Indemnitee has ceased to occupy a position as an officer,
director or representative as described in Paragraph 1 above with respect to
Proceedings relating to or arising out of Indemnitee's acts or omissions during
his service in such position.
5. NOTICE TO COMPANY
Indemnitee shall provide to the Company prompt written notice of any
Proceeding brought, threatened, asserted or commenced against Indemnitee with
respect to which Indemnitee may assert a right to indemnification hereunder,
provided that failure to provide such notice shall not in any way limit
Indemnitee's rights under this Agreement.
6. COOPERATION IN DEFENSE AND SETTLEMENT
Indemnitee shall not make any admission or effect any settlement of any
Proceeding without the Company's written consent unless Indemnitee shall have
determined to undertake his own defense in such matter and has waived the
benefits of this Agreement. The Company shall not settle any Proceeding to which
Indemnitee is a party in any manner which would impose any Expense on Indemnitee
without his written consent. Neither Indemnitee nor the Company will
unreasonably withhold consent to any proposed settlement. Indemnitee and the
Company shall cooperate to the extent reasonably possible with each other and
with the Company's insurers, in attempts to defend and/or settle such
Proceeding.
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<PAGE> 4
7. ASSUMPTION OF DEFENSE
Except as otherwise provided below, to the extent that it may wish, the
Company jointly with any other indemnifying party similarly notified will be
entitled to assume Indemnitee's defense in any Proceeding, with counsel mutually
satisfactory to Indemnitee and the Company. After notice from the Company to
Indemnitee of the Company's election to assume such defense, the Company will
not be liable to Indemnitee under this Agreement for Expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ counsel in such Proceeding, but the fees and
expenses of such counsel incurred after notice from the Company of its
assumption of the defense thereof shall be at Indemnitee's expense unless:
(a) The employment of counsel by Indemnitee has been authorized by
the Company;
(b) Counsel employed by the Company initially is unacceptable or
later becomes unacceptable to Indemnitee and such
unacceptability is reasonable under then existing
circumstances;
(c) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between Indemnitee and the Company in the
conduct of the defense of such Proceeding; or
(d) The Company shall not have employed counsel promptly to assume
the defense of such Proceeding.
In each of these cases the fees and expenses of counsel shall be at the expense
of the Company and subject to payment pursuant to this Agreement. The Company
shall not be entitled to assume the defense of Indemnitee in any Proceeding
brought by or on behalf of the Company or as to which Indemnitee shall have made
either of the conclusions provided for in clauses (b) or (c) above.
8. ENFORCEMENT
In the event that any dispute or controversy shall arise under this
Agreement between Indemnitee and the Company with respect to whether the
Indemnitee is entitled to indemnification in connection with any Proceeding or
with respect to the amount of Expenses incurred, then with respect to each such
dispute or controversy Indemnitee may seek to enforce the Agreement through
legal action or, at Indemnitee's sole option and written request, through
arbitration. If arbitration is requested, such dispute or controversy shall be
submitted by the parties to binding arbitration in the City of Cleveland, State
of Ohio, before a single arbitrator agreeable to both parties. If the parties
cannot agree on a designated arbitrator within 15 days after arbitration is
requested in writing by Indemnitee, the arbitration shall proceed in the City of
Cleveland, State of Ohio, before an arbitrator appointed by the American
Arbitration Association. In either case, the arbitration proceeding shall
commence promptly under the rules then in effect of that Association. The
arbitrator agreed to by the parties or appointed by that
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<PAGE> 5
Association shall be an attorney other than an attorney who has been or is
associated with a firm having associated with it an attorney who has been
retained by or performed services for the Company or Indemnitee at any time
during the five years preceding the commencement of arbitration. The award shall
be rendered in such form that judgment may be entered thereon in any court
having jurisdiction thereof. The prevailing party shall be entitled to prompt
reimbursement of any costs and expenses (including, without limitation,
reasonable attorneys' fees) incurred in connection with such legal action or
arbitration; provided that Indemnitee shall not be obligated to reimburse the
Company unless the arbitrator or court which resolves the dispute determines
that Indemnitee acted in bad faith in bringing such action or arbitration.
9. EXCLUSIONS
Notwithstanding the scope of indemnification which may be available to
Indemnitee from time to time under any Applicable Document, no indemnification,
reimbursement or payment shall be required of the Company hereunder with respect
to:
(a) Any claim or any part thereof as to which Indemnitee shall
have been adjudged by a court of competent jurisdiction from
which no appeal is or can be taken to have acted in willful
misfeasance, or willful disregard of his duties, except to the
extent that such court shall determine upon application that,
despite the adjudication of liability, but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such expenses as the court shall
deem proper;
(b) Any claim or any part thereof arising under Section 16(b) of
the Securities Exchange Act of 1934 pursuant to which
Indemnitee shall be obligated to pay any penalty, fine,
settlement or judgment;
(c) Any obligation of Indemnitee based upon or attributable to the
Indemnitee gaining in fact any personal gain, profit or
advantage to which he was not entitled; or
(d) Any Proceeding initiated by Indemnitee without the consent or
authorization of the Board of Directors of the Company,
provided that this exclusion shall not apply with respect to
any claims brought by Indemnitee to enforce his rights under
this Agreement or in any Proceeding initiated by another
person or entity whether or not such claims were brought by
Indemnitee against a person or entity who was otherwise a
party to such Proceeding.
Nothing in this Section 9 shall eliminate or diminish the Company's obligations
to advance that portion of Indemnitee's Expenses which represent attorneys' fees
and other costs incurred in defending any Proceeding pursuant to Section 3 of
this Agreement.
10. EXTRAORDINARY TRANSACTIONS
The Company covenants and agrees that, in the event of any merger,
consolidation or reorganization in which the Company is not the surviving
entity, any sale of all or substantially
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<PAGE> 6
all of the assets of the Company or any liquidation of the Company (each such
event is hereinafter referred to as an "extraordinary transaction"), the Company
shall:
(a) Have the obligations of the Company under this Agreement
expressly assumed by the survivor, purchaser or successor, as
the case may be, in such extraordinary transaction; or
(b) Otherwise adequately provide for the satisfaction of the
Company's obligations under this Agreement, in a manner
acceptable to Indemnitee.
11. NO PERSONAL LIABILITY
Indemnitee agrees that neither the directors nor any officer, employee,
representative or agent of the Company shall be personally liable for the
satisfaction of the Company's obligations under this Agreement, and Indemnitee
shall look solely to the assets of the Company for satisfaction of any claims
hereunder.
12. SEVERABILITY
If any provision, phrase, or other portion of this Agreement should be
determined by any court of competent jurisdiction to be invalid, illegal or
unenforceable, in whole or in part, and such determination should become final,
such provision, phrase or other portion shall be deemed to be severed or
limited, but only to the extent required to render the remaining provisions and
portions of the Agreement enforceable, and the Agreement as thus amended shall
be enforced to give effect to the intention of the parties insofar as that is
possible.
13. SUBROGATION
In the event of any payment under this Agreement, the Company shall be
subrogated to the extent thereof to all rights to indemnification or
reimbursement against any insurer or other entity or person vested in the
Indemnitee, who shall execute all instruments and take all other actions as
shall be reasonably necessary for the Company to enforce such rights.
14. GOVERNING LAW
The parties hereto agree that this Agreement shall be construed and
enforced in accordance with and governed by the laws of the State of Ohio.
15. NOTICES
All notices, requests, demands and other communications hereunder shall
be in writing and shall be considered to have been duly given if delivered by
hand and receipted for by the party to whom the notice, request, demand or other
communication shall have been directed, or mailed by certified mail, return
receipt requested, with postage prepaid:
6
<PAGE> 7
(a) If to Company, to: Anthony & Sylvan Pools Corporation
c/o Essef Corporation
220 Park Drive
Chardon, Ohio 44024
Attention: Chief Executive Officer
(b) If to Indemnitee, to: [ ]
----------------------------------
[ ]
----------------------------------
[ ]
----------------------------------
or to such other or further address as shall be designated from time to time by
the Indemnitee or the Company to the other.
16. TERMINATION
This Agreement may be terminated by either party upon not less than
sixty (60) days prior written notice delivered to the other party, but
termination shall not in any way diminish the obligations of Company hereunder
with respect to Indemnitee's activities prior to the effective date of
termination, provided that this Agreement shall terminate automatically and be
void ab initio if the shareholders of the Company have not by
_____________________ voted to grant the Company the authority to enter into and
perform its obligations hereunder.
17. AMENDMENTS AND BINDING EFFECT
This Agreement and the rights and duties of Indemnitee and the Company
hereunder may not be amended, modified or terminated except by written
instrument signed and delivered by the parties hereto. This Agreement is and
shall be binding upon and shall inure to the benefits of the parties thereto and
their respective heirs, executors, administrators, successors and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement in
triplicate as of the date first above written.
INDEMNITEE Anthony & Sylvan Pools Corporation
By:
- -------------------------------------- -----------------------------
[ ] Name:
-------------------------- ----------------------------
Title: Director, [ ] Title:
-------------------- ---------------------------
7
<PAGE> 8
EXHIBIT I
FROM THE CODE OF REGULATIONS FOR ANTHONY & SYLVAN POOLS CORPORATION:
Section 33. Indemnification
The Corporation shall indemnify any director or officer or any former
director or officer of the Corporation or any person who is or has served at the
request of the Corporation as a director, officer or trustee of another
corporation, joint venture, trust or other enterprise (and his or her heirs,
executors and administrators) against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him or her by reason of the fact that he or she 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. The indemnification provided for herein shall not be
deemed to restrict the right of the Corporation to indemnify employees, agents
and others as permitted by such Law.
8
<PAGE> 9
EXHIBIT II
[ATTACH COPY OF DIRECTOR AND OFFICER INSURANCE POLICY]
9
<PAGE> 10
EXHIBIT III
[UNDERTAKING]
___[date]___
Anthony & Sylvan Pools Corporation
C/o Essef Corporation
220 Park Drive
Chardon, Ohio 44024
Re: Indemnification Agreement Undertaking
-------------------------------------
- ---------------------:
As required by Section 3 of the Indemnification Agreement dated
__________, 1998 that I entered into with Anthony & Sylvan Pools Corporation
(the "Company"), I hereby agree to repay to the Company any and all amounts paid
by it on my behalf if it shall ultimately be determined under the Applicable
Documents (as defined in the Indemnification Agreement) that I am not entitled
to be indemnified by the Company for such amounts.
----------------------
[Name of Director]
10
<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 Registration Statement of Essef Corporation
on Form S-4 of our reports on Anthony & Sylvan Pools Corporation dated February
19, 1999 (May 7, 1999 as to Note 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
May 17, 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 Registration Statement
of Essef Corporation on Form S-4 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
May 17, 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 the 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 May 18, 1999 by the
following persons in the capacities indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ THOMAS B. WALDIN President and Chief Executive Officer,
- --------------------------------------- Director (Principal Executive Officer)
Thomas B. Waldin
/s/ STUART D. NEIDUS Executive Vice President and Chief
- --------------------------------------- Financial Officer (Principal Financial
Stuart D. Neidus and Accounting Officer)
/s/ RALPH T. KING Chairman of the Board of Directors
- ---------------------------------------
Ralph T. King
/s/ JAMES M. BIGGAR Director
- ---------------------------------------
James M. Biggar
/s/ GORDON D. HARNETT Director
- ---------------------------------------
Gordon D. Harnett
/s/ GEORGE M. HUMPHREY, II Director
- ---------------------------------------
George M. Humphrey, II
/s/ MARY ANN JORGENSON Director
- ---------------------------------------
Mary Ann Jorgenson
</TABLE>
