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SCHEDULE 14A
(Rule 14a-101)
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule
14a-12
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ASAHI/AMERICA, INC.
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(Name of Registrant as Specified In Its Charter)
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Payment of Filing Fee (Check the appropriate box):
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/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
Common Stock plus outstanding options.
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(2) Aggregate number of securities to which transaction
applies:
2,446,277 shares of Common Stock plus outstanding
options.
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how
it was determined):
Approximate Value of Transaction: $24,331,661, which
includes consideration to be paid to outstanding option
holders,
based upon the stated consideration in the Agreement and
Plan of Merger dated August 9, 1999.
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(4) Proposed maximum aggregate value of transaction:
(See line 3 above).
----------------------------------------------------------
(5) Total fee paid:
$4,866.34, per Exchange Act Rule 0-11(c)(2).
----------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------
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ASAHI/AMERICA, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOVEMBER 29, 1999--1:00 P.M.
You are hereby notified that a Special Meeting of Stockholders of
Asahi/America, Inc. will be held on November 29, 1999 at 1:00 p.m., at the
offices of Gadsby & Hannah LLP, 225 Franklin Street, Boston, Massachusetts, to
consider and act upon the following matters:
1. To approve a proposal to adopt the Agreement and Plan of Merger dated
August 9, 1999 as amended by Amendment dated October 21, 1999, among
Asahi/America, Inc., Midnight Acquisition Holdings, Inc. and Midnight
Acquisition Corp., a wholly owned subsidiary of Midnight Acquisition
Holdings, Inc., both of which were created by Asahi Organic Chemicals
Industry Co., Ltd. to complete the merger, and to approve the merger and
other transactions described in the Agreement and Plan of Merger; and
2. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
IF YOU ARE UNABLE TO ATTEND THE MEETING PERSONALLY, PLEASE BE SURE TO DATE,
SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED TO: BOSTON
EQUISERVE LIMITED PARTNERSHIP, 150 ROYALL STREET, CANTON, MASSACHUSETTS 02021.
Only stockholders of record on the books of Asahi/America, Inc. at the close
of business on October 19, 1999, are entitled to notice of and to vote at the
meeting and any adjournment or postponement thereof.
By Order of the Board of Directors,
BURTON WINNICK, Clerk
Dated: October 27, 1999
PLEASE DO NOT SEND IN ANY OF YOUR COMPANY STOCK
CERTIFICATES AT THIS TIME
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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ASAHI/AMERICA, INC.
EXECUTIVE OFFICES:
35 GREEN STREET
MALDEN, MASSACHUSETTS 02148
PROXY STATEMENT
VOTING PROCEDURES AND GENERAL INFORMATION
This proxy statement and the accompanying proxy card are first being mailed
to stockholders commencing on or about October 27, 1999. The accompanying proxy
is solicited by the Board of Directors of Asahi/America, Inc. (the "Company"),
for use at the Special Meeting of Stockholders to be held on November 29, 1999,
and any adjournment or adjournments thereof (the "Special Meeting"). The cost of
soliciting proxies will be borne by the Company. Directors, officers and
employees of the Company may assist in the solicitation of proxies by mail,
telephone, telegraph and personal interview without additional compensation.
The purpose of the Special Meeting is to consider the following matters, as
more particularly described herein:
1. The approval of a proposal to adopt the Agreement and Plan of Merger
dated August 9, 1999, as amended by Amendment dated October 21, 1999,
among Asahi/America, Inc., Midnight Acquisition Holdings, Inc. and
Midnight Acquisition Corp., a wholly owned subsidiary of Midnight
Acquisition Holdings, Inc., both of which were created by Asahi Organic
Chemicals Industry Co., Ltd. to complete the merger, and to approve the
merger and other transactions described in the Agreement and Plan of
Merger; and
2. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
When a proxy card is returned properly signed, the shares represented
thereby will be voted by the persons named as proxies in accordance with the
stockholder's directions. You are urged to specify your choices on the enclosed
proxy card. If a proxy card is signed and returned without specifying choices,
the shares will be voted 'FOR' Proposal 1, the approval of the Agreement and
Plan of Merger dated August 9, 1999, as amended by Amendment dated October 21,
1999 (the "Merger Agreement") and the merger and other transactions described in
the Merger Agreement (the "Merger"), and in the discretion of the persons named
as proxies in the manner they believe to be in the best interests of the Company
as to other matters that may properly come before the Special Meeting. A
stockholder giving a proxy may revoke it at any time before it is voted at the
Special Meeting by written notice to the Company, by oral notice to the Clerk at
the Special Meeting or by submitting a later dated proxy.
The Board of Directors of the Company (sometimes referred to herein as the
"Board" or the "Board of Directors") has fixed October 19, 1999 as the record
date for the Special Meeting. Only stockholders of record on the record date are
entitled to notice of and to vote at the Special Meeting. On the record date,
there were 3,434,717 shares of common stock (each of which is entitled to one
vote), of the Company issued and outstanding.
Holders of the Company's common stock who comply with Sections 86 through
98, inclusive, of the Massachusetts Business Corporation Law ("MBCL") concerning
the right of holders of Company common stock to dissent from the Merger and
require appraisal of their shares shall not receive any consideration in the
Merger but shall have the right to receive such consideration as may be
determined to be due to such stockholders pursuant to the MBCL. A stockholder of
the Company wishing to exercise the right to demand the fair value of his or her
common stock must first file, before the vote of stockholders is taken at the
Special Meeting, a written objection to the proposed action and state his or her
intent to demand the fair value of his or her common stock if the action is
taken. In addition, the dissenting stockholder must not vote in favor of the
Merger. Because a proxy which does not contain voting instructions will, unless
revoked, be voted FOR the Merger, a stockholder who votes by proxy and who
wishes to exercise dissenter's rights must either (i) vote AGAINST the Merger or
(ii) ABSTAIN from voting with respect to
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the Merger. A vote against the Merger, in person or by proxy, will not in and of
itself constitute a written notice of intent to demand the fair value of a
stockholder's common stock satisfying the requirements of the MBCL. See "THE
MERGER--Rights of Security Holders Regarding the Transaction."
For all proposals considered at the Special Meeting, the holders of a
majority of the Company's common stock issued and outstanding and entitled to
vote and present in person or represented by proxy, will constitute a quorum.
Shares represented by all proxies received, including proxies that withhold
authority and/or abstain from voting on a proposal, as well as "broker
non-votes," discussed below, count toward establishing the presence of a quorum.
Assuming the presence of a quorum, the Merger must be approved by the
affirmative vote of at least a majority of the shares of the Company's common
stock issued and outstanding as of the record date. There is no requirement to
obtain the approval of at least a majority of unaffiliated security holders in
order to effect the transaction.
Under applicable rules, brokers who hold shares of the Company's common
stock in street name have the authority to vote the shares in the broker's
discretion on "routine" matters if they have not received specific instructions
from the beneficial owner of the shares. The Merger is NOT a "routine" matter
for this purpose. With respect to matters which are determined by the
appropriate broker-dealer regulatory organization to be "non-routine," such as
the Merger, brokers may not vote shares held in street name without specific
instructions from the beneficial owner. If a broker holding shares in street
name submits a proxy card on which the broker PHYSICALLY LINES OUT the matter,
whether it is "routine" or "non-routine," or does not indicate a specific choice
("for," "against" or "abstain") on a matter that is "non-routine," that action
is called a "broker non-vote" as to that matter. Broker "non-votes" with respect
to "routine" matters or "non-routine" matters (such as Proposal 1) are not
counted in favor of such matters.
If the Merger is approved and consummated pursuant to the Merger Agreement,
instructions with regard to the surrender of shares of the Company's common
stock, together with a letter of transmittal to be used for this purpose, will
be forwarded to stockholders as promptly as practicable following the Closing.
STOCKHOLDERS SHOULD NOT SEND IN ANY COMPANY STOCK CERTIFICATES AT THIS TIME.
On July 26, 1999, the date preceding the public announcement of the proposed
transaction, the high and low sale prices of the Company's common stock on the
Nasdaq National Market were $7.00 and $7.00, respectively.
A representative of Arthur Andersen LLP, the Company's independent
accountants for the current year and for the most recently completed fiscal
year, is expected to be present at the Special Meeting and will have the
opportunity to make a statement if he or she desires to do so, and is expected
to be available to respond to appropriate questions.
THE BOARD OF DIRECTORS, INCLUDING THE DISINTERESTED MEMBERS OF THE BOARD
CONSTITUTING A SPECIAL COMMITTEE OF THE BOARD, HAS UNANIMOUSLY APPROVED THE
MERGER AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER. For a
discussion of the factors considered by the Board of Directors in reaching its
conclusions, see "THE MERGER--Reasons for the Merger; Recommendation of the
Board." For a description of certain interests of certain of the Company's
directors and officers that may have presented them with actual or potential
conflicts of interest in connection with the Merger, see "THE MERGER--Interests
of Certain Persons in Matters to be Acted Upon."
AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this Proxy Statement, in connection
with the Merger Agreement or the Merger, and, if given or made, such information
or representations may not be relied upon as having been authorized by the
Company or any other party to the Merger Agreement. The delivery of this Proxy
Statement shall not,
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<PAGE>
under any circumstances, create any implication that there has been no change in
the information set forth herein or in the affairs of the Company since the date
hereof.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 or at its regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at http://www.sec.gov.
The Company's common stock is listed on the Nasdaq National Market and certain
reports, proxy statements and other information concerning the Company may be
inspected and copied at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, Washington, D.C. 20006.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
Statements made or incorporated in this Proxy Statement include a number of
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include, without limitation,
statements containing the words "estimates," "projects," "anticipates,"
"believes," "expects," "intends," "future" and words or information of similar
import which express management's belief, expectations or intentions regarding
the Company's future performance. The Company believes that such statements are
protected by the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks and uncertainties. The Company's
actual results could differ materially from those set forth in the
forward-looking statements. Additionally, the Company's operating results may be
affected by many factors, including but not limited to, materially adverse
changes in economic conditions in the markets served by the Company, significant
delay in the expected closing of the Merger, future regulatory actions and
conditions in the Company's operating areas, competition in the marketplace,
lack of consumer demand for the Company's products, and other factors that may
affect business in general. In addition, if the Merger is approved, the amount
of net proceeds available to stockholders is subject to final adjustments with
respect to the disposition of Quail Piping Products, Inc., as described herein.
iii
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION....................................... ii
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING
STATEMENTS................................................ iii
THE MERGER.................................................. 1
Board of Directors Recommendation....................... 1
The Companies........................................... 1
Background of the Merger................................ 1
Reasons for the Merger; Recommendation of the Board..... 5
Interests of Certain Persons in Matters to be Acted
Upon................................................... 7
Sale of Quail Piping Products, Inc.................. 7
Employment of Leslie B. Lewis....................... 7
Substantial Stock Ownership of Certain Persons and
Voting Agreement.................................... 8
Options Vested...................................... 8
Indemnification; Directors' and Officers'
Insurance........................................... 8
Terms of the Merger and the Merger Agreement............ 8
General............................................. 8
Consideration....................................... 9
Cancellation of Stock Options and Payment of Merger
Consideration....................................... 9
The Closing......................................... 10
Representations and Warranties...................... 11
Covenants........................................... 11
Additional Agreements............................... 12
Termination......................................... 13
Amendment........................................... 14
Extension; Waiver................................... 15
Payment for Shares...................................... 15
Rights of Security Holders Regarding the Transaction.... 16
Accounting Treatment of the Transaction................. 17
Federal Income Tax Consequences of the Transaction...... 18
NASDAQ Delisting........................................ 18
Regulatory Approvals.................................... 19
Plans for the Company after the Merger.................. 19
Risk that the Merger will not be Consummated............ 19
Fairness Opinion........................................ 20
Analysis of Comparable Publicly Traded Companies.... 22
Discounted Cash Flow ("DCF") Analysis............... 22
Comparable Transaction Analysis..................... 22
OTHER BUSINESS.............................................. 23
OWNERSHIP OF COMPANY COMMON STOCK........................... 24
SELECTED CONSOLIDATED FINANCIAL DATA........................ 26
INFORMATION ABOUT THE COMPANY............................... 28
BUSINESS.................................................... 28
Introduction............................................ 28
Industry Overview....................................... 30
Company Strategy........................................ 31
Products................................................ 32
Distribution and Marketing.............................. 35
End Users............................................... 36
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Suppliers............................................... 37
Manufacturing and Distribution.......................... 38
Competition............................................. 39
Joint Venture........................................... 39
Patents and Trademarks.................................. 40
Employees............................................... 41
Properties.............................................. 41
Legal Proceedings....................................... 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 42
Overview................................................ 42
Results of Operations................................... 43
Net Sales............................................... 43
Gross Profit............................................ 44
Selling, General and Administrative Expenses............ 45
Interest Expense and Income Taxes....................... 46
Other Income and Expenses............................... 47
Liquidity and Capital Resources......................... 47
New Accounting Standards................................ 48
Material Uncertainties.................................. 49
Quantitative and Qualitative Disclosures About Market
Risk................................................... 50
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 51
FINANCIAL STATEMENTS........................................ F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
ANNEX A Agreement and Plan of Merger and Amendment No. 1 to
Merger Agreement.......................................... A-1
ANNEX B Massachusetts General Laws, Chapter 156B, Sections
86 to 98, Inclusive....................................... B-1
ANNEX C Opinion of ING BARINGS LLC.......................... C-1
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THE MERGER
(PROPOSAL 1 ON PROXY CARD)
BOARD OF DIRECTORS RECOMMENDATION
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS TO THE STOCKHOLDERS
THAT THE STOCKHOLDERS VOTE 'FOR' THE MERGER AS DESCRIBED HEREIN. THE BOARD HAS
DETERMINED THAT THE TRANSACTIONS INCLUDED IN THE MERGER ARE IN THE BEST
INTERESTS OF THE STOCKHOLDERS.
THE COMPANIES
ASAHI/AMERICA, INC.
The Company markets and sells thermoplastic valves, piping systems and
components manufactured by the Company and others for use in a variety of
industrial applications. Since 1974, the Company has been the master distributor
in the United States, Latin America and the Caribbean for Asahi Organic
Chemicals Industry Co., Ltd. ("AOC"), a large Japanese manufacturer of
thermoplastic valves. The Company is the exclusive master distributor in the
United States for Alois-Gruber GmbH, an Austrian manufacturer of thermoplastic
pipe and fittings. The Company's wholly owned subsidiary, Quail Piping
Products, Inc. ("Quail"), manufactures, markets and sells corrugated
polyethylene piping systems for use in water, sewer and drain applications and
polyethylene duct pipe for fiber optic cable for use by the telecommunications
industry.
The Company has its principal executive offices at 35 Green Street, Malden,
Massachusetts 02148 (telephone number (781) 321-5409).
ASAHI ORGANIC CHEMICALS INDUSTRY CO., LTD., MIDNIGHT ACQUISITION
HOLDINGS, INC. AND
MIDNIGHT ACQUISITION CORP.
AOC is a large manufacturer of piping materials, industrial resin and molds
which it supplies to the Company and others. AOC's head office is located at
2-5955 Nakanose-machi, Nobeoka City, Miyazaki 882, Japan. Midnight Acquisition
Holdings, Inc. is a Delaware corporation formed for the purpose of this
transaction and is wholly owned by AOC. Midnight Acquisition Corp. is a
Massachusetts corporation formed for the purpose of this transaction and is
wholly owned by Midnight Acquisition Holdings, Inc.
BACKGROUND OF THE MERGER
Since 1974, the Company has been the exclusive master distributor in the
United States, Latin America and the Caribbean of thermoplastic valves produced
by AOC pursuant to the terms of distributorship agreements (collectively, the
"Distributorship Agreement") which have been renewed from time to time. Sales of
AOC's products account for approximately 50% of the Company's revenues,
exclusive of revenues of Quail. The Distributorship Agreement precluded the
Company's distribution of competing products during its term. The
Distributorship Agreement entered into in February 1993 was scheduled to expire
on December 31, 1999. Therefore, in early 1998, the Company's management began
preliminary discussions with representatives of AOC regarding the terms for the
extension of the Distributorship Agreement. In March 1998, the Company's
management and Board of Directors determined that it would be advisable to
explore other possible sources for supply in the event that a satisfactory
extension with AOC could not be consummated. The Company's management and the
Board considered several possible avenues for the production of a product line
to substitute for the AOC products, i.e., products to be manufactured by the
Company; products to be manufactured jointly by the Company and its current
supplier of pipes and fittings; purchasing products from third-parties and
acquiring or merging with a third-party manufacturer.
Following consideration of the alternatives, the Company's management and
the Board concluded that the Company and its current pipe supplier would find it
too difficult to obtain the necessary financing
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to develop the manufacturing capabilities to develop the entire range of
competing product lines and that the risks associated with the Company
undertaking a manufacturing plan or joint manufacturing plan with a non-valve
manufacturer were too great. Management believed that it was not likely that any
valve supplier, barring a merger or acquisition, would be willing to develop
additional lines of valves necessary to effectively compete in the Company's
current market. Therefore, management and the Board primarily considered a
merger with, or acquisition of, a valve manufacturer. In its further
evaluations, the Company considered the strategic fit with potential partners
based on their lines of business, their management, their availability of
capital and their customer base. As a result of the analysis conducted by
Company management, the Company's President and Chief Executive Officer, Leslie
B. Lewis, contacted two valve manufacturers to explore their willingness to
discuss supply or other joint relationships to provide the Company with valve
products. One of the valve manufacturers indicated that it was not interested in
pursuing a transaction with the Company. From his discussions with the other
valve manufacturer, Mr. Lewis believed that there were potentially significant
synergies between the two companies, due to a potential substantial overlap with
the Company's valve product lines. The manufacturer also indicated a willingness
to consider a potential transaction. The Company, represented by Mr. Lewis and
Jeffrey C. Bloomberg, an independent Board member, and the other party conducted
due diligence relative to a potential transaction with this manufacturer during
the remainder of 1998 and early into 1999, as negotiations with AOC continued.
In addition to his duties as a Board member, the Company had also retained
Mr. Bloomberg as a consultant in connection with its consideration of strategic
alternatives and to assist it in negotiations with AOC and other parties (the
Company will pay Mr. Bloomberg an aggregate of $175,000 plus expenses for such
consulting services).
During the fourth quarter of 1998, Mr. Lewis and Mr. Bloomberg conducted
extensive ongoing negotiations with AOC through representatives of Nichimen
America Inc. in connection with the renegotiation of the Distributorship
Agreement. AOC and the Company had significant differences in their respective
desired terms for extending the Distributorship Agreement concerning territory,
exclusivity, term and volume requirements. The status of negotiations with AOC
and possible alternative sources of supply were periodically discussed with the
Board during meetings in 1998 and 1999. On January 26 and 27, 1999, believing
that a satisfactory extension of the Distributorship Agreement was unlikely,
Mr. Lewis and Mr. Bloomberg met with representatives of AOC in Tokyo, Japan, to
explore alternatives to the supply arrangement. The parties discussed the
possibility of an AOC acquisition of the Company. AOC indicated that any
transaction would require the concurrent sale of Quail. On February 25, 1999,
Mr. Lewis reported to the Board the status of his discussions with AOC and the
status of the continuing discussions with the alternative manufacturer relative
to a transaction. He was subsequently directed by the Board to continue both
avenues of potential transactions. Over the next several weeks, Mr. Lewis and
Mr. Bloomberg continued discussions by telephone with both AOC and with
representatives of the alternative manufacturer regarding a potential
transaction. The alternative manufacturer indicated an interest in merging with
the Company, provided that the corporate owner of the manufacturer obtained a
50% interest in the Company in the merger.
On March 31, 1999, AOC submitted a letter to the Company relative to its
consideration of a purchase of all outstanding shares of the Company's common
stock other than the Company common stock owned by Nichimen Corporation and
Nichimen America Inc., a wholly owned subsidiary of Nichimen Corporation, for a
purchase price of $7.50 per share. The letter contemplated due diligence prior
to making a firm offer and also confirmed that any offer would require the prior
sale of Quail, the net sale consideration for which would be added to the
purchase price.
On March 31, 1999, the Company's Board of Directors met to discuss the
status of negotiations with AOC and the alternative manufacturer. The letter
from AOC and the ramifications of recommending the sale were discussed in
detail. The Board also discussed the impact of a merger with the alternative
manufacturer. Mr. Lewis described the possible advantages of a combination of
product lines and customer bases with the alternative manufacturer. He also
described the differences in product lines
2
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between AOC and the alternative manufacturer and the resulting need for
developing additional product manufacturing capabilities, involving considerable
time and capital resources. Mr. Lewis further described the possible desire of
management of the alternative manufacturer to divest the Company of Quail or to
restrict its growth. He reported that the alternative manufacturer's owner
required that a merger transaction result in the issuance to it of sufficient
stock of the Company such that it would be a 50% owner of the Company.
At the March 31(st) Board meeting, the Board established an independent
committee (the "Committee"), consisting of Messrs. Jeffrey C. Bloomberg
(Chairman), Samuel J. Gerson and Martin J. Reid to review and explore possible
transactions with AOC and the alternative manufacturer, giving it authority to
retain an investment banker to assist it in making its evaluations and to retain
independent counsel to advise the committee relative to its deliberations.
On April 2, 1999, Mr. Lewis at the direction of the Committee, responded to
the March 31, 1999, AOC letter, indicating that the Company required a firm
offer to consider a potential transaction and, in any event, $7.50 (plus the net
consideration from the sale of Quail) was likely to be unacceptable.
During the month of April 1999, representatives of the Company continued due
diligence relative to a potential transaction with the alternative manufacturer.
On April 30, 1999, the Committee retained ING Barings LLC ("ING Barings") to
advise it with regard to potential transactions with AOC and the alternative
manufacturer, and, if the purchase by AOC were to occur, an evaluation of a fair
price for a potential sale of Quail to an entity owned in substantial part by
Mr. Lewis and Thomas J. Hammer, Quail's President and Chief Executive Officer.
Equity interests would also be held by John E. Lawrence, the Company's Assistant
Vice President Finance, Randy Barton, Quail's Executive Vice President and
Nichimen America Inc., which with its parent company, Nichimen Corporation, owns
approximately 14.3% of the Company common stock and has two representatives on
the Company's Board of Directors. The Company's senior management continued to
review the potential synergies of a combination with the alternative
manufacturer and the potential impact of such a combination on its financial
results, stockholders, employees and customers.
At the direction of the Committee, Mr. Lewis met with representatives of AOC
in Tokyo, Japan on April 12(th) and 13(th), 1999, to facilitate AOC due
diligence relative to making a firm offer.
On April 16, 1999, AOC submitted a letter to the Company offering $7.50 per
share plus the net consideration from the sale of Quail.
By letter dated April 20, 1999, Mr. Bloomberg, on behalf of the Committee,
advised AOC that the offer was insufficient.
By letter dated April 26, 1999, AOC increased its offer to $8.00 per share
plus the net consideration from the sale of Quail.
By letter dated April 30, 1999, Mr. Bloomberg rejected the offer on behalf
of the Committee.
By letter dated May 10, 1999, AOC increased its offer to $8.25 plus the net
consideration from the sale of Quail.
On June 1, 1999, a group led by Mr. Lewis submitted to the Company's
independent committee an offer to purchase all the capital stock of Quail for
$4,500,000. The acquiring entity would assume the liabilities, including the
inter-company loan to be repaid to the Company, which, in total (including
accounts payable and accrued expenses), approximated $20,150,000 as of
August 31, 1999.
On June 1, 1999, the Committee met with representatives of ING Barings, at
which meeting such representatives presented a preliminary view of the firm's
analysis relative to the potential transactions with the alternative
manufacturer and AOC, as well as the sale of Quail. Mr. Lewis and Mr. Lawrence
were invited to participate in the presentation related to the transactions with
the alternative manufacturer
3
<PAGE>
and AOC, but did not participate in the meeting relative to the analysis of the
potential sale of Quail to the management led group (the "Disposition"). At the
meeting, ING Barings' representatives advised that: 1) ING Barings would have
difficulty concluding that a transaction with the alternative manufacturer in
which that company's owner received an amount of Company common stock equivalent
to 50% ownership of the Company would be fair to the Company's stockholders from
a financial point of view; 2) a transaction with AOC based on the $8.25 offer
(exclusive of the net pass through of consideration to be received for Quail)
would be fair to the Company's stockholders from a financial point of view; and
3) in order to better determine that the price offered by the management led
group for Quail was fair to the Company's stockholders from a financial point of
view, it would be advisable to market the sale of Quail to third parties. The
representatives therefore advised that, as the Company had not as of that time
marketed the sale of Quail to third-parties, ING Barings was not then prepared
to render a fairness opinion relative to that transaction. The Committee
directed ING Barings to search for other potentially interested buyers for
Quail. ING Barings was instructed with management's advice and the Committee's
concurrence not to solicit interest from two parties who directly compete with
Quail, as management advised, with the Committee's concurrence, that providing
information regarding Quail's business to such parties could be damaging to
Quail's business.
The Committee further directed that any agreement with the management led
group to acquire Quail should include a "fiduciary out" giving the Company the
right to consider other unsolicited offers following execution of the Stock
Purchase Agreement relative to the sale of Quail (the "Disposition Agreement").
The Committee determined, based on the ING Barings analysis of the effective
price proposed to be paid by the Company in the alternative transaction and the
dilutive impact of such price on the Company's stockholders, that the Company
should not pursue the transaction with the alternative manufacturer.
Following the meeting, Mr. Bloomberg advised the alternative manufacturer
that it was not prepared to effect a transaction based on the issuance of a 50%
interest to that company's owner. The alternative manufacturer has not advised
the Company that it is willing to consider a transaction on any other basis. In
mid-June 1999, the Company and AOC commenced negotiating the terms of a merger
agreement between the Company and an indirect subsidiary of AOC.
ING Barings commenced marketing the sale of Quail on the Company's behalf in
early June 1999, by contacting a number of parties. Expressions of interest were
obtained from three parties, none of which, after reviewing summary information
of Quail, decided to pursue a transaction with Quail.
The Committee met on July 26, 1999, at which meeting representatives of ING
Barings presented their analysis of the Merger Consideration (as described
herein) and the consideration to be paid to the Company in the Disposition. The
representatives also orally delivered the opinion of ING Barings to the effect
that, as of such date and based upon the assumptions made, matters considered
and the limitations of the review undertaken in connection therewith, the Merger
Consideration was fair to the holders of Company common stock from a financial
point of view and the consideration to be paid by the management led group in
the Disposition was fair to the Company from a financial point of view.
Following an in-depth discussion of such analysis and the terms of the Merger
Agreement, the Disposition Agreement and ancillary agreements, the Committee
voted unanimously to approve the Merger and Disposition. The full Board met
following the Committee meeting and also reviewed a presentation from
representatives of ING Barings and an oral report from the Committee as to its
recommendation to approve the Merger and Disposition. At the meeting, the Board
unanimously approved the Merger Agreement and the Disposition Agreement.
The Merger Agreement and Disposition Agreement were executed on August 9,
1999.
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In October 1999, the management led group reported that any financing
available to it that would provide for the continuation of the existing
industrial revenue bond financings for the Arkansas and Arizona facilities,
required terms that were not acceptable to the management led group. The Company
is currently the guarantor of Quail's obligations for the payment of all amounts
which become due and payable under the terms of Quail's industrial revenue bond
obligations. To remove the Company as guarantor as required by the provisions of
the Merger Agreement, the holder of the bonds requires either that it be
provided with a significantly stronger collateral position (which could not be
obtained with conditions aceptable to the management led group) or that the
obligations be prepaid, with applicable prepayment penalties. The management led
group further reported that financing which would be available and acceptable to
them would include a refinancing of the industrial revenue bond obligations,
necessitating an early repayment of those obligations, and resulting in Quail's
incurrence of prepayment penalties. Mr. Lewis discussed with a representative of
AOC that either AOC or the surviving corporation pay or share with Quail the
prepayment penalties in the interest of facilitating the required release of the
guaranties. This proposal was rejected by AOC. The management led group then
proposed that 50% of the prepayment penalty be paid by Quail, with the remainder
to be deducted from the net Quail proceeds to be paid to the stockholders in the
Merger. See "--Terms of the Merger and the Merger Agreement--General."
Mr. Lewis also requested that $5,000,000 of the Merger Consideration to
which he was entitled be deferred by delivering to him a promissory note for
$5,000,000, such note to be secured by a stand-by letter of credit, provided
that Mr. Lewis would pay any expenses associated with this arrangement.
The Committee met on October 19, 1999, to consider the requested amendment
to the Merger Agreement. At such meeting, the request relative to the note
payment to Mr. Lewis was approved. The amendment relative to sharing the
prepayment penalties was rejected by the Committee. Upon the Committee's report
to the management led group that the Committee had rejected this proposal, the
management led group reported to the Committee that the failure to accept this
proposal could result in a delay to the transaction and possibly a failure of
the management led group to consummate the Disposition. The Committee met on
October 20, 1999 and determined that the timely consummation of the Merger and
related Disposition was in the best interests of the stockholders and,
therefore, approved the proposal to deduct 50% of the prepayment penalties up to
a maximum of $160,000 from the net Quail proceeds to be paid to stockholders as
part of the Merger Consideration. The Committee noted that even following such
deduction, the estimated payment to the stockholders on account of the
Disposition remains within the assumed range. The Company, Parent and Sub
entered into Amendment No. 1 to the Merger Agreement dated October 21, 1999.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD
It is the strong desire of the Board and management of the Company to
protect and enhance stockholder value. Therefore, with the expiration of its
Distribution Agreement with AOC scheduled for the end of 1999, management began
to address the issue of an extension on terms that would protect such value.
When it was determined that AOC's terms for extension included a decrease in
territory, loss of exclusivity in Latin America and the Caribbean and penalties
for failure to meet sales quotas, terms which were unsatisfactory to the Board
of Directors, the Board of Directors charged management with the task of seeking
alternative manufacturers. Although Mr. Lewis approached two potential
manufacturers, and he and Mr. Bloomberg conducted extended discussions with one
of them, the Committee, based in part on the advice of the Company's financial
advisor, has determined that the terms upon which the transaction with the
alternative manufacturer would be consummated would not be fair to the Company's
stockholders from a financial point of view.
In the course of negotiations with AOC relative to the Distributorship
Agreement and consideration of the alternative manufacturer transaction, the
Board of Directors considered the possibility of selling the
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Company to AOC. The Board of Directors has determined that a sale to AOC by way
of the Merger provides the best opportunity to maximize stockholder value.
At meetings of the Committee and of the Board of Directors held on July 26,
1999, after due consideration, the Committee and Board unanimously:
(i) determined that the Merger Agreement, the Merger and the Disposition
Agreement and related transactions are fair to and in the best interests of
the Company and the Company's stockholders;
(ii) approved the Merger Agreement, the Merger, the Disposition
Agreement and the related transactions; and
(iii) determined to recommend that the stockholders of the Company
approve the Merger. Accordingly, the Board recommends that the Company
stockholders vote "FOR" the approval of the Merger.
In approving the transaction and making these recommendations, the Committee
and the Board consulted with the Company's management as well as its outside
legal counsel, including counsel to the Committee, and the Committee's financial
advisor, and considered the following material factors:
(1) all the reasons described above;
(2) the possibility, as alternatives to the Merger, of pursuing an
acquisition or business combination or joint venture with an entity other
than AOC and the Board's conclusion that a transaction with AOC is more
feasible and likely to achieve greater stockholder value than the likely
alternatives. The Board reached this conclusion for reasons including AOC's
interest in pursuing this transaction with the Company and the Company
management's assessment of the alternatives;
(3) the terms and conditions of the Merger Agreement, including the
conditions to closing and the termination fees payable under certain
circumstances;
(4) the analyses and presentation of ING Barings and its written opinion
to the effect that, as of August 9, 1999 and based upon and subject to the
various assumptions made and matters considered as set forth in its opinion,
the consideration proposed to be paid by AOC in the Merger is fair from a
financial point of view to the stockholders and the consideration proposed
to be paid for Quail is fair from a financial point of view to the Company;
and
(5) that while the Merger is likely to be completed, there are risks
associated with obtaining necessary approvals, and, as a result of certain
conditions to the completion of the Merger, it is possible that the Merger
may not be completed even if approved by the stockholders.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger and the complexity of these matters, neither the
Committee nor the Board found it useful to and did not attempt to quantify, rank
or otherwise assign relative weights to these factors. The Committee and Board
relied on the experience and expertise of ING Barings, its financial advisor,
for quantitative analysis of the financial terms of the Merger. See "--Fairness
Opinion." The Board and Committee also relied on their thorough discussions with
and questioning of the Company's management and its legal, financial and
accounting advisors. The Committee and the Board considered all these factors as
a whole and overall considered the factors to be favorable to support their
respective determinations. However, the general view of the Board was that
factors 3 and 5 were uncertainties or risks relating to the transaction, and
that the other reasons and factors described above were generally considered
favorable. In considering the factors described above, individual members of the
Committee and the Board may have given different weight to different factors.
The foregoing discussion of the information and factors considered by the
Committee and the Board is not intended to be exhaustive but is believed to
include all material factors considered by them.
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INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
In considering the recommendation of the Board with respect to the Merger
Agreement, stockholders should be aware that certain members of the management
of the Company and the Board have interests in the Merger that may be different
from, or in addition to, the interests of the other stockholders of the Company
generally.
SALE OF QUAIL PIPING PRODUCTS, INC.
A condition of the Merger is the sale of Quail. The Company has entered into
the Disposition Agreement relative to the sale of all of the outstanding stock
of Quail to Quail Acquisition Corporation, which is owned in substantial part by
Leslie B. Lewis, Chairman, President and Chief Executive Officer of the Company
and Thomas J. Hammer, President and Chief Executive Officer of Quail. Additional
investors in Quail Acquisition Corporation are John E. Lawrence, Assistant Vice
President Finance of the Company, and Randy Barton, Executive Vice President of
Quail. Nichimen America Inc., which with its affiliate has two representatives
on the Company's Board, may also make an investment in Quail Acquisition Corp.
Mr. Lewis will be Chairman of the Board of Quail upon consummation of the
Merger. The Disposition Agreement provides for the purchase of all the capital
of Quail for $4,500,000. In the Disposition, Quail will remain responsible for
all of its liabilities, including trade payables, capital lease obligations and
debt associated with its Arkansas, Massachusetts and Arizona facilities.
Conditions of the sale of Quail are the release of the Company from all
guaranties or other liabilities relative to Quail and the payment by Quail to
the Company of all amounts owed on intercompany receivables other than
$1,000,000 which may be repaid over a three-year period. This debt is secured by
a guaranty of Leslie B. Lewis as to which recourse is solely to a certain
"non-compete" payment due to Mr. Lewis as described below. Quail Acquisition
Corporation's obligation to purchase the stock of Quail is subject to customary
financing contingencies. The Merger Agreement provides that fifty percent of any
prepayment penalties incurred by Quail as a result of the refinancing of Quail's
industrial revenue bond debts as a result of the Disposition will be deducted
from the proceeds of the Disposition distributed to the Company's stockholders
in the Merger. The aggregate amount deductible from the net sale proceeds of
Quail is limited to $160,000.
In light of the potential conflict of interest intrinsic to the Disposition
to a management group, the sale of Quail was approved by the Committee, a
fairness opinion received with respect to the consideration of $4,500,000 was
obtained by the Committee from ING Barings and the Disposition Agreement
contains "fiduciary out" clauses more typical to public company dispositions.
EMPLOYMENT OF LESLIE B. LEWIS
Concurrently with the execution of the Merger Agreement, the Company entered
into an employment agreement with Leslie B. Lewis, Chairman, President and Chief
Executive Officer of the Company, which will become effective upon the Merger
(the "Employment Agreement"). The Employment Agreement provides for a three year
employment term of Mr. Lewis as President of the Company, with a base salary of
$330,000. Mr. Lewis will also continue as a Director of the Company. The terms
of the Employment Agreement provide that Mr. Lewis is eligible for bonus
payments upon the attainment by the Company of a certain level of net valve
sales. Such bonus is subject to certain adjustments based on the Company's
selling, general and administrative costs. Mr. Lewis' benefits remain
commensurate with those he currently has. Under the Employment Agreement, if
Mr. Lewis is terminated due to his death, disability or by the Company without
"cause" or by Mr. Lewis for "good reason" (such as a material change in his
status, a significant relocation of the Company's offices or a material breach
by the Company of the Employment Agreement), he is eligible for severance
payments based upon his base salary and bonuses, and he may also be eligible for
an additional $1,000,000 "non-compete" payment. In the event Mr. Lewis'
employment is terminated by the Company without "cause" or by Mr. Lewis for
"good reason" within one year following a change in control of the Company, then
he is eligible for a severance payment of up to 2.99 times his
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"base amount" within the meaning of Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended.
SUBSTANTIAL STOCK OWNERSHIP OF CERTAIN PERSONS; VOTING AGREEMENT AND PAYMENT
TERMS FOR MR. LEWIS
Leslie B. Lewis, Chairman, President and Chief Executive Officer of the
Company is the beneficial owner of 931,030 shares of common stock, or 27.1%
through his ownership of 723,773 shares and the right to vote an additional
207,257 shares. Mr. Lewis has entered into a stockholder agreement which gives a
proxy to Midnight Acquisition Holdings, Inc. to vote in favor of the Merger
Agreement and the Merger. AOC owns 491,470 shares of common stock of the
Company, or 14.3%. Nichimen Corporation and Nichimen America Inc. which have two
representatives on the Board of Directors of the Company and a longtime trading
relationship with AOC and the Company, together beneficially own 491,470 shares
of common stock representing 14.3% of the Company's common stock. Although there
is no agreement, arrangement or understanding requiring the Nichimen companies
to vote in favor of the Merger, management expects that their shares will be
voted in favor of the Merger. If that is the case, Mr. Lewis, AOC and the
Nichimen companies together will vote 1,913,970 or 56.1% of the Company's common
stock and are therefore in a position to approve the Merger as required by
Massachusetts law. See "Ownership of Company Common Stock."
All stockholders other than Mr. Lewis will receive the Merger Consideration
(as defined below) in cash. At such time as the Merger Consideration is made
available to other stockholders, Mr. Lewis will receive $5,000,000 of the Merger
Consideration to which he is entitled in the form of a promissory note of the
Surviving Corporation (as defined below). The note will be payable on
January 3, 2000, will bear interest annually at the applicable federal rate at
the time the note is delivered, and will be secured by a letter of credit. The
remainder of the Merger Consideration to which Mr. Lewis is entitled will be
paid in cash. Mr. Lewis may receive more favorable tax treatment as a result of
receiving the note.
OPTIONS VESTED
In connection with the Merger, all holders of options to purchase the
Company common stock other than Mr. Lewis will have their options fully vested
and will receive the Merger Consideration (as described below) net of any
purchase price payable for the options. While all director options are already
fully vested, the officers and employees of the Company currently hold vested
and unvested options.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
Midnight Acquisition Holdings, Inc. has agreed to maintain all rights to
indemnification as provided by the charter and By-law provisions of the Company
and its subsidiaries in effect on August 9, 1999, which provide for
indemnification obligations by such companies of their officers and directors.
In addition, Midnight Acquisition Holdings, Inc. has agreed that for six years
following the Merger, it will cause the Company to maintain a directors' and
officers' liability insurance policy in respect of all persons that such policy
now covers.
TERMS OF THE MERGER AND THE MERGER AGREEMENT
THE FOLLOWING DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL TERMS OF THE
MERGER AGREEMENT APPENDED AS Annex A TO THIS PROXY STATEMENT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT.
GENERAL
The Merger Agreement provides that, following the approval of the terms of
the Merger Agreement by the stockholders of the Company and the satisfaction or
waiver of the other conditions to the Merger, Midnight Acquisition Corp. ("Sub")
will be merged with and into the Company, the separate corporate
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existence of Sub will cease, and the Company will continue as the surviving
corporation (the "Surviving Corporation") and shall be a wholly owned subsidiary
of Midnight Acquisition Holdings, Inc. ("Parent").
The Merger will become effective at the "Effective Time" (as defined in the
Merger Agreement) which is such time as Articles of Merger are duly filed with
the Secretary of State of the Commonwealth of Massachusetts.
As of the Effective Time, the Articles of Organization and By-laws of Sub,
as in effect immediately prior to the Effective Time, shall be the Articles of
Organization and By-laws of the Surviving Corporation until thereafter changed
or amended as provided therein or by applicable law. The directors of Sub
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation and the officers of the Company immediately prior to the Effective
Time shall be the officers of the Surviving Corporation.
The Merger Agreement also contemplates that prior to the consummation of the
Merger, the transactions contemplated by the Disposition Agreement will be
consummated. The net proceeds of the Disposition (the "Net Quail Proceeds") will
become part of the Merger Consideration, as discussed below. "Net Quail
Proceeds" equals the aggregate amount of consideration received by the Company
in the Disposition, net of taxes paid or payable by the Company in respect of
the Disposition, after taking into account any tax deductions received or
receivable by the Company, net of fifty percent of the prepayment penalties
associated with the early repayment of debt obligations of Quail as a result of
the Disposition up to a maximum of $160,000 and net of all expenses paid or
payable by the Company or by Quail on account of any party other than the
Company or Quail in connection with the Disposition or pursuant to the
Disposition Agreement. It is currently estimated that the Net Quail Proceeds
will be between $1.30 and $1.36 per share.
CONSIDERATION
With the exception of shares of common stock owned by the Company, AOC,
Parent, Sub or any subsidiary thereof, which shall be cancelled at the Effective
Time ("Cancelled Shares"), each share of common stock of the Company shall be
converted into the right to receive from the Surviving Corporation in cash,
without interest $8.25, plus an amount equal to the Net Quail Proceeds divided
by (i) the number of shares of common stock of the Company issued and
outstanding other than Cancelled Shares plus (ii) all shares into which options
are exercisable at the Effective Time (the "Merger Consideration"). Leslie B.
Lewis, Chairman, President and Chief Executive Officer will receive $5,000,000
of the Merger Consideration to which he is entitled in the form of a promissory
note payable on January 3, 2000. The note will bear interest annually at the
applicable federal rate on the date the note is delivered and will be secured by
a letter of credit. The remainder of the Merger Consideration to which
Mr. Lewis is entitled will be paid in cash. A condition to the Merger is the
prior purchase by Parent of all shares of common stock of the Company owned by
Nichimen Corporation and Nichimen America Inc. These companies will not share in
the Merger Consideration. As of the Effective Time, all shares of common stock
of the Company shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of Company Common
Stock shall cease to have any rights with respect thereto, except for the right
to receive the Merger Consideration, without interest. Notwithstanding the
foregoing, holders of the Company's common stock who comply with Sections 86
through 98, inclusive, of the MBCL concerning the right of holders of Company
common stock to dissent from the Merger and require appraisal of their shares
("Dissenting Stockholders") shall not receive any consideration in the Merger
but shall have the right to receive such consideration as may be determined to
be due such stockholders pursuant to the MBCL. A copy of Sections 86 through 98
of the MBCL is attached to this proxy statement as ANNEX B.
CANCELLATION OF STOCK OPTIONS AND PAYMENT OF MERGER CONSIDERATION
In connection with the Merger, all holders of options to purchase the
Company's common stock (other than Mr. Lewis) will have their options fully
vested and will receive the Merger Consideration net of any purchase price
payable for the options (the "Option Consideration"). Each holder of options
shall be contacted and asked to turn in to the Parent (or a representative
thereof) such holder's option agreement or agreements for cancellation in return
for the Option Consideration.
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THE CLOSING
The Merger Agreement contemplates a closing of the Merger at such time as
certain conditions are satisfied. Such conditions include the following:
(1) Any applicable waiting period (or extensions thereof) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and all
regulations promulgated thereunder relating to the transactions contemplated
by the Merger Agreement shall have expired without any adverse action having
been taken by the Federal Trade Commission or the U.S. Department of Justice
(or either party shall have received notice of early termination thereof);
see "--Regulatory Approvals;"
(2) The Company's stockholders shall have duly approved the
transactions contemplated by the Merger Agreement;
(3) No statute, rule, regulation, executive order, decree, temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other governmental entity or other
legal restraint or prohibition preventing the consummation of the Merger
shall be in effect;
(4) The representations and warranties of the Company, Parent and Sub
contained in the Merger Agreement, subject to certain qualifications, shall
continue to be true in all material respects, in each case when made and at
the Effective Time;
(5) The Company, Parent and Sub shall have performed or complied with
all agreements and conditions contained in the Merger Agreement required to
be performed or complied with by it prior to or at the Effective Time;
(6) All authorizations required in connection with the execution and
delivery of the Merger Agreement and the performance of the obligations
thereunder shall have been made or obtained, without any limitation,
restriction or condition that has or would have a material adverse effect on
the Company;
(7) The Disposition and all conditions related thereto shall have
occurred as described in the Merger Agreement, including the satisfactory
release of all Company guaranties of Quail obligations and any liabilities
relative to Quail and the settlement of intercompany accounts;
(8) The Employment Agreement with Leslie B. Lewis, President and Chief
Executive Officer of the Company entered into concurrently with the Merger
Agreement, shall be in full force and effect; see "--Interests of Certain
Persons in Matters to be Acted Upon;"
(9) As of the Effective Time, the Company and its subsidiaries (other
than Quail) will have no "indebtedness" other than (i) the loans outstanding
under the financing provided by the Massachusetts Industrial Finance
Authority, (ii) trade debt incurred and outstanding in the ordinary course
of business, (iii) any indebtedness to Citizens Bank of Massachusetts for
borrowings incurred to pay trade debts in the ordinary course of business or
expenses in connection with the transactions contemplated in the Merger
Agreement, and (iv) any capital lease obligations existing as of the date of
the Merger Agreement;
(10) As of the Effective Time, Quail will have repaid all intercompany
loans from the Company other than $1 million and Quail shall have delivered
a promissory note to the Company in respect of such indebtedness; See
"--Sale of Quail Piping Products, Inc.;" and
(11) Parent shall have purchased, and Nichimen Corporation and Nichimen
America Inc. shall have sold to Parent, all shares of Company's common stock
held by Nichimen Corporation and Nichimen America Inc. or any of their
subsidiaries.
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REPRESENTATIONS AND WARRANTIES
The Company makes various representations and warranties with respect to its
assets and activities. The representations and warranties do not survive the
Closing and the Company is not required to indemnify the Parent or AOC for any
breaches of representations or warranties following the Closing.
COVENANTS
Pursuant to the Merger Agreement, during the period from the date of the
Merger Agreement until the Effective Time, the Company is subject to numerous
restrictions and obligations, as follows:
RESTRICTIVE COVENANTS. During such time, the Company and its subsidiaries
must continue to operate its business and their businesses in the ordinary and
usual course consistent with past practice and use its and their respective
commercially reasonable efforts to preserve intact their current business
organizations, keep available the services of their current officers and
employees and preserve their relationships with customers, suppliers, licensors,
licensees, advertisers, distributors and others having business dealings with
them and to preserve goodwill. Such restrictions are specified in detail in the
Merger Agreement.
AFFIRMATIVE COVENANTS. During the period from the date of the Merger
Agreement through the Effective Time, the Company is obligated to confer on a
regular basis with one or more representatives of Parent with respect to
material operational matters, and the Company shall, within 30 days following
each fiscal month, deliver to Parent management prepared unaudited financial
statements as to the Company, including an income statement and balance sheet
for such month; and upon obtaining knowledge of any material adverse change to
the Company, any material litigation or material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated), or the breach in any material respect of any representation or
warranty contained in the Merger Agreement, the Company shall promptly notify
Parent thereof.
NON-SOLICITATION COVENANTS. Following the execution of the Merger
Agreement, the Company and its officers, directors, employees, representatives
and agents shall immediately cease any existing discussions or negotiations, if
any, with any parties conducted with respect to any acquisition or exchange of
all or any material portion of the assets of, or any equity interest in, the
Company or any of its subsidiaries or any business combination with the Company
or any of its subsidiaries (except as contemplated by the Merger Agreement or in
connection with the Disposition).
The Company has agreed that, prior to the Effective Time, it shall not, and
shall not authorize or permit any of its subsidiaries or any of its or its
subsidiaries' directors, officers, employees, agents or representatives,
directly or indirectly, to solicit, initiate, encourage or facilitate, or
furnish or disclose non-public information in furtherance of, any inquiries or
the making of any proposal with respect to any Acquisition Proposal (as defined
below), or negotiate, explore or otherwise engage in discussions with any person
(other than Parent, its affiliates or their respective directors, officers,
employees, agents and representatives) with respect to any Acquisition Proposal
or enter into any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the Merger or any other transactions
contemplated by the Merger Agreement.
The Company may, however, furnish information to, pursuant to a customary
confidentiality agreement, and negotiate or otherwise engage in discussions
with, any party who delivers a bona fide written proposal for an Acquisition
Proposal for which all necessary financing is then in the judgment of the
Committee reasonably obtainable, if the Committee determines in good faith by a
vote of a majority of the members of the Committee that failing to take such
action would create a reasonable possibility of a breach of the fiduciary duties
of the Company's Board of Directors (after consultation with its outside legal
counsel) and such a proposal is, in the written opinion of the Company's
financial advisor, more favorable to the Company's stockholders from a financial
point of view than the transactions contemplated by the Merger Agreement as the
same has been proposed to be amended by Parent; PROVIDED; FURTHER, that
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nothing contained in the Merger Agreement shall prohibit the Company or its
Board of Directors from making such disclosure to the Company's stockholders
which, in the judgment of the Board of Directors of the Company (after
consultation with its outside legal counsel), may be required under applicable
law.
From and after the execution of the Merger Agreement, the Company shall
promptly advise Parent in writing of the receipt, directly or indirectly, of any
inquiries, discussions, negotiations or proposals relating to an Acquisition
Proposal, identify the offeror and furnish to the Parent a copy of any such
proposal or inquiry, if it is in writing, relating to an Acquisition Proposal.
The Company shall promptly advise Parent of any material development relating to
such proposal, including the results of any discussions or negotiations with
respect thereto. Notwithstanding anything in the Merger Agreement to the
contrary, prior to the approval of an Acquisition Proposal by the Company's
Board of Directors, Company shall give Parent sufficient notice of the material
terms and conditions of any such Acquisition Proposal and negotiate in good
faith with Parent for a period of not less than five business days after receipt
of a written proposal or a written summary of any oral proposal to make such
adjustments in the terms and conditions of the Merger Agreement as would enable
the Company to proceed with the transactions contemplated therein.
Pursuant to the Merger Agreement, "Acquisition Proposal" means any inquiry,
proposal or offer from any person relating to any direct or indirect acquisition
or purchase of 15% or more of any class of equity securities of the Company or
any of its subsidiaries, any tender offer or exchange offer that, if
consummated, would result in any person beneficially owning 15% or more of any
class of equity securities of the Company or any of its subsidiaries, any
merger, consolidation, business combination, sale of substantially all the
assets, recapitalization, liquidation, dissolution or similar transaction
involving the Company or any of its subsidiaries, other than the transactions
contemplated by the Merger Agreement and the Disposition, or any other similar
transaction the consummation of which could reasonably be expected to impede,
interfere with, prevent or materially delay the Merger or which would reasonably
be expected to dilute materially the benefits to Parent of the transactions
contemplated thereby.
NOTICE COVENANTS. Prior to the Effective Time, the Company and Parent shall
promptly notify each other of:
(1) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with the
transactions contemplated by the Merger Agreement;
(2) any notice or other communication from any government entity in
connection with the transactions contemplated by the Merger Agreement;
(3) any action, suits, claims, investigations or proceedings commenced
or, to the actual knowledge of the executive officers of the notifying
party, threatened against, relating to or involving or otherwise affecting
such party or any of its subsidiaries;
(4) an administrative or other order or notification relating to any
material violation or claimed violation of law;
(5) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any representation or warranty contained
in the Merger Agreement to be untrue or inaccurate in any material respect
at or prior to the Closing Date; and
(6) any material failure of any party to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
under the Merger Agreement.
ADDITIONAL AGREEMENTS
AOC and Parent agree in the Merger Agreement to cause all shares of common
stock held by them to be voted in favor of the Merger. Prior to the Effective
Time, the Company shall give Parent and Sub, their counsel, financial advisors,
auditors and other authorized representatives full access to the offices,
properties, books and records of the Company and its subsidiaries during normal
business hours, will
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furnish to Parent and Sub, their counsel, financial advisors, financial
institutions auditors and other authorized representatives such financial and
operating data and other information as such may be reasonably requested and
will instruct the employees of the Company and its subsidiaries, their counsel
and financial advisors to cooperate with Parent and Sub in their investigation
of the Company's business.
Each of the Company, Parent and Sub have also agreed to use its reasonable
efforts to take, or cause to be taken, all actions necessary to comply promptly
with all legal requirements which may be imposed on itself with respect to the
Merger (which actions shall include furnishing all information required under
the HSR Act and in connection with approvals of or filings with any other
governmental entity) and will promptly cooperate with and furnish information to
each other in connection with any such requirements imposed upon any of them or
any of their subsidiaries in connection with the Merger. Each of the Company,
Parent and Sub will, and will cause its subsidiaries to, use its reasonable
efforts to take all reasonable actions necessary to obtain (and will cooperate
with each other in obtaining) any consent, authorization, order or approval of,
or any exemption by, any governmental entity or other public or private
third-party or made by Parent, Sub, the Company or any of their subsidiaries in
connection with the Merger or the taking of any action contemplated thereby or
by the Merger Agreement, except that no party need waive any substantial rights
or agree to any substantial limitation on its operations or to dispose of any
assets.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the terms of the Merger Agreement by
the stockholders of the Company:
(1) by mutual written consent of Parent and the Company, by action of
their respective Boards of Directors;
(2) by Parent or the Company if the Merger shall not have been
consummated on or before December 31, 1999; PROVIDED, HOWEVER, that neither
Parent nor the Company may terminate the Merger Agreement if such party
shall have materially breached the Merger Agreement;
(3) by Parent or the Company if any court of competent jurisdiction or
other governmental entity has issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
nonappealable; PROVIDED, HOWEVER, that the party seeking to terminate the
Merger Agreement shall have used its reasonable best efforts to remove or
lift such order, decree, ruling or other action;
(4) by the Company, if, in compliance with the conditions of the Merger
Agreement, the Company's Board of Directors approves an Acquisition
Proposal, for which all necessary financing is then in the judgment of the
Company Board reasonably obtainable, on terms which a majority of the
members of the Committee has determined in good faith after consultation
with its outside legal counsel to the effect that failing to take such
action would create a reasonable possibility of a breach of the fiduciary
duties of the Company's Board of Directors, and (ii) such Acquisition
Proposal is, in the written opinion of the Company's financial advisor, more
favorable from a financial point of view to the Company's stockholders than
the transactions contemplated by the Merger Agreement; PROVIDED; HOWEVER;
that such termination shall not be effective unless and until the Company
shall have paid to Parent certain fees and expenses described in the Merger
Agreement, including, without limitation, a termination fee of $600,000 (the
"Termination Fee");
(5) by Parent, if the Company Board shall have (i) failed to recommend
to the stockholders of the Company that they approve the Merger Agreement,
(ii) withdrawn or modified its approval or recommendation of the Merger
Agreement or the Merger, (iii) approved or recommended an Acquisition
Proposal or (iv) resolved to effect any of the foregoing; or
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(6) by either Parent or the Company, if the Company stockholder
approval shall not have been obtained at a stockholders meeting.
In the event that the Merger Agreement is terminated (i) by Parent (A) if
there occurs a material breach by the Company of any term, covenant,
representation or warranty contained in the Merger Agreement or (B) due to the
reason described in paragraph (5) above or (ii) by the Company due to the reason
described in paragraph (4) above, the Company shall promptly reimburse the
Parent or Sub, as the case may be, for all out-of-pocket expenses and fees
(including, without limitation, fees and expenses payable to all governmental
entities, banks, investment banking firms and other financial institutions, and
their respective agents and counsel, and all fees and expenses of counsel,
accountants, financial printers, proxy solicitors, exchange agents, experts and
consultants to Parent and its affiliates), actually incurred, whether incurred
prior to, on or after the date of the Merger Agreement, in connection with the
Merger and the consummation of all transactions contemplated by the Merger
Agreement (the "Fees") up to a maximum amount of $300,000. Except as otherwise
specifically provided for the Merger Agreement, whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated by the Merger Agreement shall be
paid by the party incurring such expenses.
If the Merger Agreement is terminated by the Company if there occurs a
material breach by AOC, Parent or Sub of any term, condition, covenant,
representation or warranty contained in the Merger Agreement, Parent shall
promptly reimburse the Company for all Fees, up to a maximum amount of $300,000.
In the event that the Merger Agreement is terminated pursuant to the reasons
described in paragraphs (4) or (5) above, then, in addition to the foregoing
amounts, the Company shall promptly pay Parent the Termination Fee.
The prevailing party in any legal action undertaken to enforce the Merger
Agreement or any provision hereof shall be entitled to recover from the other
party the costs and expenses (including attorneys' and expert witness fees and
expenses) incurred in connection with such action.
Parent and the Company shall cooperate in the preparation, execution and
filing of all returns, applications or other documents regarding any real
property transfer, stamp, recording, documentary or other taxes and any other
fees and similar taxes which become payable in connection with the Merger
(collectively, "Transfer Taxes"). The Company will pay all of the Transfer
Taxes, except that Parent will pay all fees related to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act").
In the event of a termination of the Merger Agreement as described herein,
the Merger Agreement shall become void and there shall be no liability or
obligation on the part of Parent, Sub or the Company or their respective
officers or directors, except those with respect to certain confidentiality
agreements among the parties, the Fees, Termination Fee, or Transfer Taxes, if
any; PROVIDED, HOWEVER, that each party shall remain liable for any breach of
the Merger Agreement.
AMENDMENT
The Merger Agreement may be amended by the parties thereto, by action taken
or authorized by their respective boards of directors, at any time before or
after obtaining the approval of the Company's stockholders, but, after any such
approval, no amendment shall be made which by law requires further approval by
such stockholders without obtaining such further approval. The Merger Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties thereto.
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EXTENSION; WAIVER
At any time prior to the Effective Time, the parties to the Merger
Agreement, by action taken or authorized by their respective boards of
directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
thereto, (ii) waive any inaccuracies in the representations and warranties
contained therein or in any document delivered pursuant thereto or (iii) waive
compliance with any of the terms of the Merger Agreement or conditions contained
therein. Any agreement on the part of a party to the Merger Agreement regarding
any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
PAYMENT FOR SHARES
If the Merger is approved and consummated pursuant to the Merger Agreement,
as soon as reasonably practicable after the Effective Time, a bank or trust
company designated by Parent ("the Paying Agent") shall mail to each stockholder
of record (i) a letter of transmittal and (ii) instructions for use in effecting
the surrender of shares held in the Company, including both certificated shares
and shares held in street name (collectively, "Company Shares") in exchange for
the Merger Consideration. The Company estimates that it will take approximately
three weeks following the Merger to finalize the calculation of the Net Quail
Proceeds at which time the Merger Consideration will be available to
stockholders. See "--Terms of the Merger and Merger Agreement; --General." Upon
surrender of Company Shares for cancellation to the Paying Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly executed, and such other documents as may reasonably be
required by the Paying Agent, and following the calculation of the Net Quail
Preceeds, the holder of such Company Shares shall be entitled to receive in
exchange therefor the amount of Merger Consideration into which the shares
represented by such Company Shares shall have been converted pursuant to the
Merger Agreement, and the Company Shares so surrendered shall be canceled.
Leslie B. Lewis, Chairman, President and Chief Executive Officer of the Company
at such time will receive a promissory note for a portion of the Merger
Consideration to which he is entitled. See "--Interests of Certain Persons in
Matters to be Acted Upon; Substantial Stock Ownership of Certain Persons;
- --Voting Agreement and Payment Terms for Mr. Lewis." In the event of a transfer
of ownership of shares that is not registered in the transfer records of the
Company, payment may be made to a person other than the person in whose name the
Company Shares so surrendered are registered, if such Company Shares shall be
properly endorsed or otherwise be in proper form for transfer, and the person
requesting such payment shall pay any required transfer or other taxes. Until
surrendered, all Company Shares shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the amount of
Merger Consideration, without interest, into which such Company Shares shall
have been converted pursuant to the Merger Agreement. No interest will be paid
or will accrue on the cash payable upon the surrender of any Company Shares.
All cash paid upon the surrender of Company Shares shall be deemed to have
been paid in full satisfaction of all rights pertaining to the shares
theretofore represented by such Company Shares. At the Effective Time, the stock
transfer books of the Company shall be closed, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Company Shares are presented to
the Surviving Corporation or the Paying Agent for any reason, they shall be
canceled and exchanged as provided in the Merger Agreement.
Stockholders should surrender Company Shares only after receiving
instructions from the Paying Agent following the Effective Time. STOCKHOLDERS
SHOULD NOT SURRENDER ANY CERTIFICATES WITH THE ENCLOSED PROXY.
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RIGHTS OF SECURITY HOLDERS REGARDING THE TRANSACTION
Stockholders of the Company may be entitled to exercise dissenters' rights
pursuant to the provisions of Sections 86 to 98, inclusive, of Chapter 156B of
the MBCL, copies of which are included with this Proxy Statement as ANNEX B. In
accordance with these Sections, the Company's stockholders have the right to
dissent from the Merger and to be paid the "fair value" of their common stock.
In this context, the term "fair value" means the value of a stockholder's common
stock immediately before the Closing Date of the Merger.
Pursuant to the MBCL, the Company must notify each of its stockholders of
this right to dissent. This Proxy Statement constitutes this notice to the
stockholders of the Company. The applicable statutory provisions of the MBCL are
attached as ANNEX B.
The following discussion is not a complete statement of the law pertaining
to a dissenting stockholder's rights under the MBCL and is qualified in its
entirety by the full text of Sections 86 to 98, inclusive, and attached as ANNEX
B. Any stockholder who wishes to exercise the right to dissent and demand the
fair value of his or her shares, or who wishes to preserve the right to do so,
should review the following discussion and ANNEX B carefully because failure to
timely and properly comply with the procedures will result in the loss of a
stockholder's right to dissent under the MBCL.
A stockholder of the Company wishing to exercise the right to demand the
fair value of his or her common stock must first file, before the vote of
stockholders is taken at the Special Meeting, a written objection to the
proposed action and state his or her intent to demand the fair value of his or
her common stock if the action is taken. In addition, the dissenting stockholder
must not vote in favor of the Merger. Because a proxy which does not contain
voting instructions will, unless revoked, be voted FOR the Merger, a stockholder
who votes by proxy and who wishes to exercise dissenter's rights must either
(i) vote AGAINST the Merger or (ii) ABSTAIN from voting with respect to the
Merger. A vote against the Merger, in person or by proxy, will not in and of
itself constitute a written notice of intent to demand the fair value of a
stockholder's common stock satisfying the requirements of the MBCL.
A demand for appraisal must be executed by or for the stockholder of record,
fully and correctly, as such stockholder's name appears on his or her stock
certificate or on the books and records of the Company's transfer agent. If the
common stock is owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, the demand must be executed by the fiduciary. If the
common stock is owned of record by more than one person, as in a joint tenancy
or tenancy in common, the demand must be executed by all joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal for a stockholder of record; however, the agent must
identify the record owner and expressly disclose the fact that, in exercising
the demand, he is acting as agent for the record owner.
A record owner who holds shares as a nominee for others, such as a broker,
may demand an appraisal of the shares held for all, or fewer than all, of the
beneficial owners of such shares. In such a case, the written demand should set
forth the number of shares to which it relates. When no number of shares is
expressly mentioned, the demand will be presumed to cover all shares standing in
the name of the record owner. Beneficial owners of common stock who are not
record owners and who intend to exercise appraisal rights should instruct the
record owner to comply with the statutory requirements with respect to the
exercise of appraisal rights before the date of the Special Meeting.
Stockholders who elect to exercise appraisal rights should mail or deliver
their written demand to Asahi/America, Inc., c/o Gadsby & Hannah LLP, 225
Franklin Street, Boston, Massachusetts 02110, ATTENTION: Marianne Gilleran,
Esquire. The written demand for appraisal should specify the stockholder's name
and mailing address, the number of shares of stock owned and that the
stockholder is thereby demanding appraisal of his or her shares.
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Within ten days following the Closing Date, the Company will cause to be
mailed to each stockholder who has properly asserted dissenter's rights a notice
stating that the Merger has become effective and contains (i) the address to
which a demand for payment and stock certificates (if any) must be sent in order
to receive payment and the date by which they must be received; (ii) a form to
be used to certify the date on which the stockholder, or the beneficial owner on
whose behalf the stockholder dissents, acquired his or her common stock or an
interest in them and to demand payment and (iii) another copy of Sections 86 to
98, inclusive, of Chapter 156B of the MBCL together with a brief description of
these Sections. To receive the fair value of his or her common stock, a
dissenting stockholder must demand payment (and deposit his or her certificates,
if any) to the address given in the notice within 20 days after the aforesaid
notice is given.
After the Company receives a valid demand for payment, it will cause within
30 days of receiving such demand, to be remitted to each dissenting stockholder
who has properly asserted dissenter's rights the fair value of his or her shares
of common stock. If the Company and the dissenting stockholder cannot reach
agreement within the 30 days following the filing of such dissenting
stockholder's demand with the Company as to the value of the stock, either the
Company or the dissenting stockholder may, at any time within four months
following the expiration of the 30-day period, demand a determination of the
value of the stock of all such objecting stockholders by a bill in equity filed
in the Superior Court in the county where the Company is located. After a
hearing, the court shall enter a decree determining the fair value of the stock
of those stockholders who have become entitled to the valuation of and payment
of such value, together with interest, if any. For this purpose, the value of
the shares shall be determined as of the day preceding the date of the Special
Meeting when the vote was taken to approve the Merger.
Generally, the costs and expenses associated with a court proceeding to
determine the fair value of the Company's common stock will be determined by the
court. The court may, in its discretion, include the costs of the reasonable
compensation and expenses of any master appointed by the court to assist in the
valuation process, but exclusive of attorneys' fees or of experts retained by
any party pursuant to Section 95 of Chapter 156B of the MBCL.
Failure to follow the steps required by Sections 86 to 98, inclusive of
Chapter 156B of the MBCL for asserting dissenters' rights may result in the loss
of a stockholder's rights to demand the fair value of his or her shares of the
Company's common stock. Stockholders considering seeking appraisal should
realize that the fair value of their shares, as determined under the MBCL in the
manner outlined above, could be more than, the same as or less than the Merger
Consideration they would be entitled to as a result of the Merger if they did
not seek appraisal of their shares.
Subject to the rights of dissenting stockholders, as discussed above, and
the payment of the Merger Consideration, at the Effective Time, all such shares
of common stock shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of Company Shares
shall cease to have any rights with respect thereto, except for the right to
receive the Merger Consideration, without interest. All cash paid upon the
surrender of Company Shares in accordance with the Merger Agreement shall be
deemed to have been paid in full satisfaction of all rights pertaining to the
shares theretofore represented by such Company Shares. At the Effective Time,
the stock transfer books of the Company shall be closed, and there shall be no
further registration of transfers on the stock transfer books of the shares that
were outstanding immediately prior to the Effective Time.
ACCOUNTING TREATMENT OF THE TRANSACTION
It is anticipated that the Merger will be accounted for by the Parent as a
purchase, as such term is used in generally accepted accounting principles, for
accounting and financial reporting purposes. Under the purchase method of
accounting, assets and liabilities of the Company would be recorded at their
fair value on the Closing Date, with the excess of the purchase price over the
net tangible and identifiable intangible assets acquired being recorded as
goodwill.
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FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
IN GENERAL. The following summary of the anticipated federal income tax
consequences to the Company of the Merger and Disposition is not intended as tax
advice and is not intended to be a complete description of the federal income
tax consequences of the proposed transaction. This summary is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), as presently in effect,
the rules and regulations promulgated thereunder, current administrative
interpretations and court decisions. No assurance can be given that future
legislation, regulations, administrative interpretations or court decisions will
not significantly change these authorities (possibly with retroactive effect).
No rulings have been requested or received from the Internal Revenue Service
("IRS") as to the matters herein discussed and there is no intent to seek any
such ruling. Accordingly, no assurance can be given that the IRS will not
challenge the tax treatment of certain matters discussed or, if it does
challenge the tax treatment, that it will not be successful.
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY. The Merger pursuant to the
Merger Agreement will not have a tax impact upon the Company. The Disposition
pursuant to the Disposition Agreement will be a taxable sale by the Company upon
which gain will be recognized by the Company.
FEDERAL INCOME TAX CONSEQUENCES TO STOCKHOLDERS UPON MERGER. The discussion
of federal income tax consequences set forth below is directed primarily toward
individual taxpayers who are citizens or residents of the United States.
However, because of the complexities of federal, state and local income tax
laws, it is recommended that the Company's stockholders consult their own tax
advisors concerning the federal, state and local tax consequences of the
proposed transactions to them. Persons who are trusts, tax-exempt entities,
corporations subject to specialized federal income tax rules (for example,
insurance companies) or non-U.S. citizens or non-residents are particularly
cautioned to consult their tax advisors in considering the tax consequences of
the proposed transactions.
Generally, upon the consummation of the Merger, stockholders shall recognize
gain or loss as measured by the difference between their amount realized and
their basis in the Company stock. As a result of receiving a promissory note for
a portion of the Merger Consideration, Leslie B. Lewis may be able to defer his
tax liability to 2000. See "--Interests of Certain Persons in the Merger;
Substantial Stock Ownership of Certain Persons; Voting Agreement and Payment
Terms for Mr. Lewis." For the Company stockholders who hold common stock as a
capital asset, their gain or loss recognized on the Merger will be treated as a
capital gain or loss. In the case of a corporate stockholder, capital losses are
allowed only to the extent of capital gains. In the case of a noncorporate
stockholder, capital losses are allowed only to the extent of capital gains plus
the lesser of (i) $3,000 ($1,500 in the case of a married individual filing a
separate return) or (ii) the excess of such losses over such gains. Generally, a
corporation may carry its excess capital loss back three years or forward five
years, subject to the limitations in the Code. In the case of a noncorporate
taxpayer, excess capital losses may be carried forward indefinitely, and used
each year subject to the $3,000 limitation ($1,500 in the case of a married
individual filing a separate return), subject to other limitations as provided
in the Code.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. IN
VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH STOCKHOLDER SHOULD
CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
MERGER TO HIM OR HER, INCLUDING THE EFFECT AND APPLICABILITY OF FEDERAL, STATE,
LOCAL AND OTHER TAX LAWS.
NASDAQ DELISTING
Following the consummation of the Merger, the Company will seek to have the
Company's common stock, which is currently listed on the Nasdaq National Market,
delisted.
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REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notification has been given and certain
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the specified waiting
period requirement has expired or has been terminated. The Company filed the
notification and report form under the HSR Act with the FTC and the Antitrust
Division relative to the Merger. On September 28, 1999, the Company received
notification from the FTC that the waiting period provided by the Act has been
terminated. Although management considers any further FTC or Antitrust Division
action unlikely at any time before or after consummation of the Merger, the
Antitrust Division or the FTC could take such action under the antitrust laws as
it deems necessary or desirable in the public interest, including seeking to
enjoin the consummation of the Merger. In addition, at any time after the
consummation of the Merger, any state could take such action under its antitrust
laws as it deems necessary or desirable in the public interest. Such action
could include seeking to enjoin the consummation of the Merger. Private parties
may also seek to take legal action under the antitrust laws under certain
circumstances.
Based on information available to it, the Company believes that the Merger
can be effected in compliance with federal and state antitrust laws. However, no
assurance can be given that a challenge to the consummation of the Merger on
antitrust grounds will not be made or that, if such a challenge were made, the
Company would prevail or would not be required to accept certain conditions, in
order to consummate the Merger.
PLANS FOR THE COMPANY AFTER THE MERGER
It is expected that following the Merger the business and operations of the
Company will, except as set forth in this Proxy Statement, be conducted by
Surviving Corporation substantially as they are currently conducted, except that
Quail will no longer be a subsidiary of the Company.
Except as described in this Proxy Statement, neither AOC nor the Parent has
any present plans or proposals that relate to, or would result in, an
extraordinary corporate transaction involving the Company's corporate structure,
business or management, such as a merger, reorganization, liquidation,
relocation of any operations of the Company or sale or transfer of a material
amount of assets other than the transactions described in this Proxy Statement.
However, AOC and members of management will continue to evaluate the business
and operations of the Surviving Corporation following the Merger and may propose
or develop new plans and proposals which they consider to be in the best
interests of the Surviving Corporation and its stockholder.
RISK THAT THE MERGER WILL NOT BE CONSUMMATED
Consummation of the Merger is subject to a number of conditions, including,
without limitation, receipt of the required stockholder approval, the absence of
an injunction or other order restraining consummation of the transactions
contemplated by the Merger Agreement and receipt by the management group of the
required financing to complete the Disposition. See "THE MERGER--Terms and
Conditions of the Merger and the Merger Agreement." Therefore, even if the
requisite stockholder approval is obtained, there can be no assurance that the
Merger will be consummated.
It is expected that if the Merger Agreement is not adopted by the
Stockholders, or if the Merger is not consummated for any other reason, the
Company's current management, under the direction of the Board of Directors,
will continue to manage the Company as an on-going business. No other
transaction is currently being considered by the Company as an alternative to
the Merger.
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FAIRNESS OPINION
THE SUMMARY DESCRIPTION OF THE OPINION OF ING BARINGS SET FORTH BELOW
REGARDING THE TRANSACTION IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF THE
OPINION ATTACHED HERETO AS Annex C.
On July 26, 1999, ING Barings delivered its oral opinion to the special
committee of the Company's Board of Directors, which opinion was subsequently
confirmed in a written opinion dated as of August 9, 1999, to the effect that,
as of such date and based upon the assumptions made, matters considered and the
limitations of the review undertaken in connection therewith, (i) the
consideration to be received in the Merger by the holders of common stock, other
than AOC, Nichimen Corporation and Nichimen America Inc., or their respective
affiliates and subsidiaries, is fair to those holders from a financial point of
view and (ii) the considerations to be received by the Company pursuant to the
Disposition Agreement is fair to the Company from a financial point of view.
A COPY OF THE FULL TEXT OF THE OPINION OF ING BARINGS DATED AUGUST 9, 1999,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS ANNEX C.
THIS SUMMARY DISCUSSION OF SUCH OPINION OF ING BARINGS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE ENGAGEMENT OF ING
BARINGS AND ITS OPINION ARE FOR THE BENEFIT OF THE COMPANY'S BOARD OF DIRECTORS,
AND ITS OPINION WAS RENDERED TO THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS
IN CONNECTION WITH ITS CONSIDERATION OF THE MERGER AND THE DISPOSITION. ING
BARINGS' OPINION WITH RESPECT TO THE MERGER AND THE DISPOSITION IS DIRECTED ONLY
TO THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO
HOLDERS OF THE COMPANY'S COMMON STOCK (OTHER THAN AOC, NICHIMEN CORPORATION AND
NICHIMEN AMERICA, INC.) AND THE FAIRNESS OF THE DISPOSITION CONSIDERATION FROM A
FINANCIAL POINT OF VIEW TO THE COMPANY AND DOES NOT ADDRESS ANY OTHER ASPECTS OF
THE MERGER OR DISPOSITION. THE OPINION IS NOT INTENDED TO, AND DOES NOT
CONSTITUTE, A RECOMMENDATION TO ANY HOLDER OF COMPANY COMMON STOCK AS TO WHETHER
SUCH HOLDER SHOULD VOTE FOR THE MERGER. HOLDERS OF COMPANY COMMON STOCK ARE
URGED TO READ THE OPINION OF ING BARINGS IN ITS ENTIRETY.
No limitations were imposed by the Board on the scope of ING Barings'
investigation or the procedures to be followed by ING Barings in tendering its
opinion. In arriving at its opinion, ING Barings, among other things,
(i) reviewed a draft dated July 20, 1999, of the Merger Agreement;
(ii) reviewed the Company's Annual Reports on Form 10-K for the fiscal years
ended December 31,1996 through 1998, including the audited consolidated
financial statements contained therein; (iii) reviewed the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, including the
unaudited consolidated financial statements contained therein; (iv) reviewed
historical financial results of the Company and its subsidiaries prepared by
management; (v) had discussions with the senior management of the Company
regarding the business, operations and prospects of the Company and its
subsidiaries, including Quail; (vi) reviewed projections of the Company and
Quail prepared by management; (vii) performed various analyses, as ING Barings
deemed appropriate, using generally accepted analytical methodologies, including
(a) the application to the financial results of the Company and Quail of the
public trading multiples of companies which ING Barings deemed comparable to the
Company and Quail, (b) the application to the financial results of the Company
and Quail of the multiples reflected in recent merger and acquisition
transactions involving businesses whose financial results ING Barings deemed
comparable to the financial results of the Company and Quail, and
(c) discounting the projected cash flows of the Company's and Quail operations;
(viii) reviewed historical trading prices and volume of the Company's common
stock; and (ix) performed such other of the financial studies, analyses,
inquiries and investigations, as deemed appropriate. In addition, ING Barings
took into account the results of its solicitations of indications of
20
<PAGE>
interest on behalf of the Company from persons thought likely to have a possible
interest in acquiring Quail.
ING Barings also held discussions with members of senior management of the
Company and Quail to discuss the information reviewed by ING Barings. ING
Barings also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria which it deemed
relevant, including ING Barings' assessment of general economic, monetary and
market conditions.
In preparing its opinion, ING Barings assumed and relied upon the accuracy
and completeness of all information supplied or otherwise made available to ING
Barings or discussed with or reviewed by or for ING Barings by the Company and
Quail, or otherwise publicly available, and did not independently verify any
such information. With respect to the financial forecast information made
available to ING Barings by the Company and Quail, ING Barings assumed that such
forecasts had been reasonably prepared and reflected the best currently
available estimates and judgments of the Company and Quail management as to the
expected future financial performance of the Company and Quail. ING Barings
expresses no opinion with respect to such forecasts or the assumptions upon
which they are based.
The matters considered by ING Barings in arriving at its opinion are
necessarily based upon financial, economic, market and other conditions as they
existed and could be evaluated by ING Barings and the information made available
to it, as of the date of its opinion. ING Barings has disclaimed any undertaking
or obligation to advise any person of any change in any fact or matter affecting
its opinion that is brought to its attention after the date of its opinion.
In preparing its opinion, ING Barings performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying ING Barings' opinion or of the oral presentation by ING Barings to
the Company's Board of Directors. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Furthermore, in arriving at its
opinion, ING Barings did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, ING Barings
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying the preparation of its opinion. In its analyses, ING Barings made
numerous assumptions with respect to the Company and Quail, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the Company and Quail.
The estimates contained in such analyses and the valuation ranges resulting from
any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. ING Barings' opinion and analyses were only one of many factors
considered by the Company's Board in its evaluation of the Merger and the sale
of Quail and should not be viewed as determinative of the view of the Board or
management of the Company with respect to the Merger Consideration, the Merger,
the sale of Quail or the consideration to be received under the Disposition
Agreement.
The following is a summary of certain financial and comparative analyses
performed by ING Barings in connection with its opinion.
21
<PAGE>
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES
Using publicly available information, ING Barings compared selected
historical and projected financial data of the Company and Quail to the
corresponding data of the following publicly- traded companies that ING Barings
deemed to be reasonably comparable to the Company (collectively the "Comparable
Companies"):
<TABLE>
<CAPTION>
THE COMPANY QUAIL PIPING PRODUCTS
- ----------- ---------------------
<S> <C>
- - Amcast Industrial Corporation - Amcast Industrial Corporation
- - Flowserve Corporation - Ameron International Corporation
- - IDEX Corporation - Denali Incorporated
- - Robbins & Myers Inc. - Furon Company
- - Roper Industries Inc.
- - Watts Industries, Inc.
</TABLE>
ING Barings compared (i) the stock prices, (ii) market capitalization
(defined as share price times total shares outstanding), (iii) stock price to
latest twelve months ("LTM") earnings per share ("EPS"), (iv) stock price to
year ("CY") 1999 EPS, (iv) enterprise values (defined as market capitalization
plus total debt, preferred stock and minority interest, and capitalized leases
less cash and cash equivalents) to LTM earnings before interest and taxes
("EBIT"), (v) enterprise values to CY 1999 EBIT, (vi) enterprise values to LTM
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
(vii) enterprise values to CY 1999 EBITDA for each of the Company, Quail Piping
Products and the selected Comparable Companies.
DISCOUNTED CASH FLOW ("DCF") ANALYSIS
ING Barings performed a DCF analysis using financial forecasts supplied to
ING Barings by the management of the Company and Quail for the years ending
December 31, 1999, December 31, 2000, and December 31, 2001, in the context of
the Company's and Quail's historical operating performance. ING Barings used
these projections and assumptions provided by management, projecting for the
years ending December 31, 2002, through December 31, 2003. The DCF was
calculated as the sum of the present values, using a range of discount rates
from 11% to 15% of (i) the projected unleveraged free cash flows from 1999-2003
for the Company, (ii) for the case of Quail, the projected unleveraged free cash
flows from 1999-2001, (iii) in the case of the Company, the 2003 terminal value
based upon a range of multiples from 6.5x to 8.5x projected EBITDA for 2003, and
(iv) in the case of Quail, the 2001 terminal value based upon a range of
multiples from 3.0x to 4.0x projected EBITDA for 2001. ING Barings then adjusted
the enterprise values thus obtained by subtracting existing debt and adding
existing cash to get a range of equity values for the Company and Quail.
COMPARABLE TRANSACTION ANALYSIS
Using publicly available information, ING Barings analyzed certain financial
and operating information relating to the following selected transactions in the
flow control industry, each of which were consummated after January 1, 1997 (the
purchaser is listed first and is followed by the seller):
Emerson Electric Co./Daniel Industries, Inc.
Pentair, Inc. / Essef Corporation
Denali Incorporated/Welna NV
Parker Hannifin Corporation/Fluid Power Systems
Sun Hydraulics Corporation/Korea Fluid Power
Crane Co./Liberty Technologies, Inc.
Dover Corporation/Wilden Pump & Engineering
Watts Industries Inc./Hoke Inc.
22
<PAGE>
Tyco International/Crosby Valve
Cooper Cameron Corporation/Orbit Valve
U.S. Industries Inc./Zurn Industries, Inc.
IDEX Corporation/Gast Manufacturing
IDEX Corporation/Knight Equipment International, Inc.
Robbins & Myers, Inc./the flow control equipment division of J.M. Huber
Corporation
Pentair, Inc./the pump group of General Signal Corporation
Durco International/BW/IP Inc.
With respect to each of the transactions analyzed, ING Barings computed the
equity costs (where applicable, the offer price per share multiplied by total
common shares outstanding (the "Equity Cost")) and the adjusted price (the
Equity Cost plus latest reported total debt, capitalized leases, preferred stock
and minority interest minus total cash and cash equivalents) paid in such
transactions and divided the adjusted price by the acquired company's EBIT and
EBITDA, for the LTM period corresponding to the date the transaction was
announced and the acquired company's projected EBIT and EBITDA for the next
fiscal year ending subsequent to the date the transaction was announced.
Based on the above analyses, ING Barings derived a mean per share range of
values for the Company common stock (including the Quail business) of $7.30 to
$9.65 per share.
Pursuant to the terms of ING Barings' engagement by the Company, the Company
has agreed, among other things, to pay ING Barings for its services in
connection with the Merger a financial advisory fee of approximately $400,000.
The Company has also agreed to reimburse ING Barings for reasonable
out-of-pocket expenses incurred by ING Barings in performing its services,
including the reasonable fees and expenses of its outside legal counsel, and to
indemnify ING Barings and related persons against certain liabilities relating
to or arising out of its engagement, including certain liabilities under the
federal securities laws.
ING Barings, as part of its investment banking business, is continually
engaged in the valuation of businesses or their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. ING Barings has in the past provided investment
banking services to the Company for which it has received customary fees. ING
Barings was selected to act as investment bankers to the Committee because of
its expertise and its reputation in investment banking and mergers and
acquisitions.
ING Barings, in the normal course of its business, may trade in securities
of the Company for its own account and for the accounts of its customers and,
accordingly, may hold a long or short position in such securities.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
OTHER BUSINESS
In addition to the business described above, there will be remarks by the
Chairman of the Board, President and Chief Executive Officer of the Company, and
a general discussion period during which stockholders will have an opportunity
to ask questions about the Company.
As of the date of this proxy statement, the management of the Company knows
of no matter not specifically referred to above as to which any action is
expected to be taken at the meeting of stockholders. It is intended, however,
that the persons named as proxies will vote the proxies, insofar as they are not
otherwise instructed, regarding such other matters and the transaction of such
other business as may be properly brought before the meeting, as seems to them
to be in the best interest of the Company and its stockholders.
23
<PAGE>
OWNERSHIP OF COMPANY COMMON STOCK
The following table sets forth certain information as of September 30, 1999,
with respect to the Company's common stock owned by (i) each Director of the
Company, (ii) all executive officers who are not Directors, (iii) all Directors
and executive officers of the Company as a group and (iv) each person who is
known by the Company to beneficially own more than 5% of the Company's capital
stock. Unless otherwise indicated in the footnotes to the table, all stock is
owned of record and beneficially by the persons listed in the table.
<TABLE>
<CAPTION>
NAME AND, WITH RESPECT TO OWNERS
OF MORE THAN 5%, ADDRESS NUMBER PERCENT(1)
- -------------------------------- --------- ----------
<S> <C> <C>
Leslie B. Lewis(2).......................................... 931,030 27.1%
President, Chief Executive Officer and Chairman of the Board
C/O ASAHI/AMERICA, INC.
35 GREEN STREET
MALDEN, MA 02148
Nannette S. Lewis, Director(3).............................. 932,530 27.2%
Jeffrey C. Bloomberg, Director(4)........................... 17,500 *
Samuel J. Gerson, Director(5)............................... 15,000 *
Masashi Uesugi, Director.................................... --
Masahiro Inoue, Director.................................... --
Martin J. Reid, Director(5)................................. 10,000 *
Kozo Terada, Vice President, Treasurer and Chief Financial
Officer(6)................................................ 28,320 *
Peter Schwartz, Senior Vice President(7).................... 3,333 *
Ronald J. Richards, Vice President Sales(8)................. 11,319 *
Robert B. Lewis, Vice President and General Manager(9)...... 26,540 *
Asahi Organic Chemicals Industry Co., Ltd................... 491,470 14.3%
2-5955 NAKANOSE-MACHI
NOBEOKA CITY, MIYAZAKI 882
JAPAN
Nichimen Corporation(10).................................... 491,470 14.3%
1-23, SHIBA 4-CHOME
MINATO-KU, TOKYO 108
JAPAN
Nichimen America Inc.(10)................................... 147,585 4.3%
1345 AVENUE OF THE AMERICAS
NEW YORK, NY 10105
David Baker(11)............................................. 207,257 6.0%
Wellington Trust Company, N.A.(12).......................... 268,000 7.8%
75 STATE STREET
BOSTON, MA 02109
Wellington Management Company LLP(12)....................... 268,000 7.8%
75 STATE STREET
BOSTON, MA 02109
All Directors and executive officers as a group (11
persons).................................................. 1,044,542 29.6%
</TABLE>
- ------------------------
* Less than one percent.
(1) Percentage ownership of common stock is based on 3,434,717 shares issued and
outstanding plus 92,333 shares subject to options exercisable within sixty
(60) days of September 30, 1999 held by the stockholder or group.
24
<PAGE>
(2) Leslie B. Lewis and Nannette S. Lewis are husband and wife. Includes 207,257
shares owned by David Baker. Pursuant to a voting trust, Mr. Lewis has
voting control over the shares, and he also holds a currently exercisable
option and right of first refusal to purchase the shares. Does not include
approximately 1,822 shares held in Mr. Lewis' 401(k) account.
(3) Represents shares beneficially owned by Mrs. Lewis' spouse, Leslie B. Lewis
and 1,500 shares owned by Mrs. Lewis' son as to which she is custodian.
(4) Includes 2,500 shares for which Mr. Bloomberg serves as custodian pursuant
to the terms of a gift to his children under the Uniform Gift to Minors Act
and includes 10,000 shares of common stock subject to currently exercisable
options.
(5) Includes 10,000 shares of common stock subject to currently exercisable
options owned by Mr. Gerson and Mr. Reid respectively.
(6) Includes 25,000 shares of common stock subject to options owned by
Mr. Terada and exercisable within 60 days of September 30, 1999.
(7) Includes 3,333 shares of common stock subject to options owned by
Mr. Schwartz and exercisable within 60 days of September 30, 1999.
(8) Includes 9,000 shares of common stock subject to options owned by
Mr. Richards and exercisable within 60 days of September 30, 1999. Does not
include approximately 714 shares held in Mr. Richards' 401(k) account.
(9) Includes 25,000 shares of common stock subject to options owned by Robert
Lewis and exercisable within 60 days of September 30, 1999. Does not include
approximately 450 shares held in Mr. Lewis' 401(k) account.
(10) All Nichimen Corporation amounts and percentages include shares owned by
Nichimen America Inc. as Nichimen Corporation may be deemed to be the
beneficial owner of such shares.
(11) Pursuant to a voting trust, Leslie B. Lewis has voting control over the
207,257 shares owned by David Baker, and Mr. Lewis also holds a currently
exercisable option and right of first refusal to purchase the shares.
(12) Both Wellington Trust Company, N.A. and Wellington Management Company LLP
have shared voting and dispositive power over 268,000 shares which are owned
of record by their respective clients who have the right to receive or the
power to direct the receipt of, dividends from or the proceeds from the sale
of such shares.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below (except for the six
months ended June 30, 1998 and 1999) has been derived from the consolidated
financial statements of the Company as audited by Arthur Andersen LLP,
independent public accountants, and whose report is included elsewhere herein.
The selected consolidated financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................. $28,518 $34,998 37,894 $37,934 $37,578 $17,168 $21,061
Cost of goods sold.................... 18,608 23,409 24,346 24,173 24,773 11,323 13,495
Foreign currency (gains) losses....... 47 (391) (378) (345) 53 (170) (143)
------- ------- ------- ------- ------- ------- -------
Gross profit...................... 9,863 11,980 13,926 14,106 12,752 6,015 7,709
Operating Expenses:
Research and development............ -- -- -- 186 329 148 138
Selling, general and administrative
expenses.......................... 7,613 8,682 9,751 10,647 11,614 5,676 6,752
Litigation settlement................. -- -- -- -- -- -- 400
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 7,613 8,682 9,751 10,833 11,943 5,824 6,490
Income from operations................ 2,250 3,298 4,175 3,273 809 191 1,219
Other income.......................... -- -- -- -- 225 -- --
Interest expense, net................. (536) (713) (196) (201) (516) (174) (549)
------- ------- ------- ------- ------- ------- -------
Income before provision for income
taxes............................... 1,714 2,585 3,979 3,072 518 17 670
Provision for income taxes............ 596 1,000 1,541 1,290 341 12 268
------- ------- ------- ------- ------- ------- -------
Net income before cumulative effect of
Change in Accounting Principle...... $ 1,118 $ 1,585 $ 2,438 $ 1,782 $ 177 $ 5 $ 402
======= ======= ======= ======= ======= ======= =======
Cumulative effect of Change in
Accounting
Principle, net of benefit for income
taxes of $138..................... $ -- $ -- $ -- $ -- $ (205) $ (88) $ --
======= ======= ======= ======= ======= ======= =======
Net income............................ $ 1,118 $ 1,585 $ 2,438 $ 1,782 $ (28) $ (83) $ 402
======= ======= ======= ======= ======= ======= =======
Basic and diluted earnings per share
before cumulative effect of Change
in Accounting Principle............. $ .48 $ .68 $ .82 $ .53 $ 0.05 $ 0.00 $ 0.12
======= ======= ======= ======= ======= ======= =======
Basic and diluted (loss) per share
effect of cumulative effect of
Change in Accounting Principle...... $ -- $ -- $ -- $ -- $ (0.06) $ (0.03) $ 0.00
Basic and diluted earnings (loss) per
share............................... $ .48 $ .68 $ .82 $ .53 $ (0.01) $ (0.02) $ .12
======= ======= ======= ======= ======= ======= =======
Weighted average number of common
shares outstanding.................. 2,340 2,340 2,973 3,349 3,376 3,370 3,405
Weighted average number of shares
outstanding, assuming dilution...... 2,340 2,340 2,988 3,349 3,376 3,370 3,405
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... $ 2,116 $ 3,850 $ 9,043 $ 6,769 $ 8,310 $ 5,132 $ 5,560
Total assets.......................... 21,308 22,452 28,443 32,049 48,224 37,470 47,305
Long-term liabilities................. 4,583 5,313 4,059 5,141 15,070 7,010 14,508
Total liabilities..................... 15,479 15,018 12,239 13,448 29,464 18,781 28,050
Retained earnings (deficit)........... (1,160) 426 2,864 4,646 4,617 4,658 5,020
Stockholders' equity.................. 5,829 7,434 16,204 18,601 18,760 18,689 19,255
</TABLE>
27
<PAGE>
INFORMATION ABOUT THE COMPANY
BUSINESS
INTRODUCTION
Asahi/America, Inc. markets and sells thermoplastic valves, piping systems,
flow meter devices, filtration equipment and components manufactured by the
Company and others for use in a variety of environmentally sensitive and
industrial applications, including semiconductor manufacturing, chemical
processing, waste and water treatment processing and pharmaceutical
manufacturing, as well as for use in mining, aquarium and other industries. The
Company, an ISO 9001 quality control certified manufacturer, produces electric
and pneumatic valve actuators and controls, proprietary double containment
thermoplastic piping systems, custom fabricated fittings and other specialty
products including thermoplastic flow meter devices and filtration equipment.
The Company offers a broad selection of industrial thermoplastic valves in, and,
based on data recorded by the Valve Manufacturer's Association, believes it has
one of the largest shares of, the United States industrial thermoplastic valve
market.
In July 1997, the Company established a wholly owned subsidiary, Quail
Piping Products, Inc., to manufacture and market corrugated polyethylene piping
systems for use in water, sewer and drain applications and polyethylene duct
pipe for use in the telecommunications industry for the housing of fiber optic
duct cable. Quail's manufacturing facilities, which are located in Magnolia,
Arkansas and Kingman, Arizona, are being financed by Arkansas State Industrial
Revenue Bonds and County of Mohave, Arizona Industrial Development Bonds,
respectively, through GE Capital Public Finance, Inc. ("GECPF"). Limited
production of corrugated pipe, in the Arkansas facility, commenced in the Spring
of 1998, with full production by November, 1998, while full production of fiber
optic cable duct in the Arizona facility commenced in October 1998. Production
of corrugated pipe began in July 1999 at the Arizona facility. In May 1999,
Quail leased a facility in Canton, Massachusetts for the manufacture of
polyethylene duct pipe. Production began in August 1999. These new product lines
increase the manufacturing component of the Company's business, further
diversify the Company's product offerings and distribution base and positions
the Company to penetrate new markets providing additional opportunity to
increase sales of the Company's distributed products.
The Company distributes valves in the United States, Latin America and the
Caribbean for Asahi Yukizai Kogyo Co., Ltd. (official English translation Asahi
Organic Chemicals Industry Co., Ltd.), a Japanese company that the Company
believes to be one of the largest manufacturers of thermoplastic valves in the
world. The Company is also the exclusive master distributor in the United States
for Alois-Gruber GmbH (together with its United States subsidiary, "Agru"), an
Austrian manufacturer of thermoplastic pipe and fittings.
AOC, Nichimen Corporation and its affiliate, Nichimen America Inc.,
collectively own approximately 28% of the Company. Nichimen Corporation, one of
the largest Japanese trading companies, and Nichimen America, provide credit and
import services to the Company in connection with its purchases from AOC and
others.
As a master distributor for AOC since 1974 and for Agru since 1985, the
Company has developed a network of more than 300 United States and approximately
34 foreign distributors, with 11 additional foreign non-employee sales
representatives. Initially developed as the distribution channel for the
products purchased by the Company from AOC and Agru, this extensive distribution
network also supports increasing sales of the higher margin products
manufactured by the Company.
End users of the Company's products often specify thermoplastic valves and
piping systems over metal because thermoplastics resist corrosion and do not
contaminate transported fluids or gases. The Company's products combine the
benefits associated with all plastic valve and piping products, such as light
weight, ease of installation, long life and low installed cost, with the
additional benefits of thermoplastic
28
<PAGE>
products, such as resistance to damage from corrosion. The Company seeks to
identify industrial applications where the end users' requirements justify the
use of industrial thermoplastics. Examples include double containment
corrosion-resistant piping systems that meet EPA regulations, piping systems for
compressed air and gases, and high purity pipe and valves to assure contaminant
free processing of liquids. The Company sells its products to distributors who
sell to end users. Representative end users include Motorola, Waste Management
Technologies, Micron Technology, the Army Corps of Engineers, Browning Ferris
Industries, IBM, Schering-Plough, Estee Lauder, Rhone Poulenc and DuPont, none
of which individually represents a material portion of the Company's sales.
Quail sells directly to end user customers.
The Company was originally founded to be the exclusive master distributor in
the United States, Latin America and the Caribbean for AOC. Since the early
1980s, the Company has pursued a program to broaden its product lines and
customer base in order to sell higher margin products that are complementary to
the valves supplied by AOC. Highlights in the implementation of this program
include the following:
THE ADDITION OF THERMOPLASTIC PIPE. In 1985, the Company became the
exclusive master distributor in the United States of thermoplastic pipe
manufactured by Agru, enabling the Company to supply all of the components
for complete thermoplastic piping systems. With the development of its own
engineering and manufacturing capabilities, the Company is able to provide
custom designed piping systems.
THE DEVELOPMENT OF NEW PRODUCTS. The Company has developed a number of new
higher margin products, including the introduction in 1980 of its first
valve actuator and in 1986 of its patented double containment piping system,
known as DuoPro. The Company now manufactures several different types of
pneumatic and electric actuators in a variety of sizes, which permit a valve
to be operated from a remote site or controlled according to a programmed
set of instructions. The Company's DuoPro piping systems, including
detection systems, are designed to allow for detection and containment of
accidental discharge of hazardous or toxic material, meet EPA requirements
for underground transport of hazardous liquids and address customer concerns
for worker safety and protection of the environment.
THE ACQUISITION OF COMPLEMENTARY PRODUCT LINES. The Company has sought to
expand its product offerings by acquiring product lines that are not
available from its principal suppliers.
- In 1994, the Company acquired its PolyFlo product line of double
containment pipe and fittings that are extruded or molded in a
proprietary, patented one-step process. The PolyFlo product line, which is
manufactured by the Company, is available in internal diameters up to 6
inches and complements the Company's DuoPro line, which is available in
larger diameters.
- The Company added a line of pressure relief valves in October 1995, when
it acquired an exclusive perpetual license of the technology to
manufacture the valves in thermoplastics.
- In February 1996, the Company added a line of industrial filters, which
alleviate environmental concerns relating to cartridge, oil and other
waste disposal, which it now manufactures and assembles in its Malden, MA
facility.
- In May 1997, the Company acquired the thermoplastic flow meter division
and related assets of Universal Flow Monitors, Inc. and The Rosaen
Company. The acquired product lines included the design, development,
manufacture, marketing and servicing of a line of thermoplastic vortex
flow sensor products known as the "Vortex Shedding Product Line" and a new
line of vortex products using ultrasonic sensing technology. The
production process for the 3/4 inch ultrasonic shedding flow meter has
been completed and ultrasonic meters in other sizes are in the development
stage. This
29
<PAGE>
division was integrated into the Company's existing facility. The new
product lines complement the Company's existing business and diversify its
total product offerings.
- In September 1999, the Company acquired the customer lists and certain
other intangible assets related to the double containment piping business
of ISCO Industries, LLC, of Huntsville, Alabama including the
Fluid-Lok-TM- patent. The newly formed Fluid Controls Division of the
Company now subcontracts manufacture of the double containment piping
business to ISCO under the supervision of the Company.
THE FORMATION OF NEW COMPANIES. In July 1997, Quail was established to
manufacture and market corrugated polyethylene piping systems for use in
water, sewer and drain applications and polyethylene fiber optic duct pipe
for use in the telecommunications industry for the housing of fiber optic
lines. Currently, from its Arkansas plant, Quail is producing corrugated
polyethylene pipe in up to 24 inches in diameter, with an additional line
dedicated to fiber optic duct. Quail's Arizona operation is currently
producing duct pipe and up to 48" diameter corrugated pipe. In May 1999,
Quail leased a facility in Canton, Massachusetts for the manufacture of
polyethylene duct pipe. Production began at this facility in August 1999.
THE EXPANSION OF ITS DISTRIBUTION NETWORK. The expansion of the Company's
product lines enables the Company to increase sales to existing
distributors, add distributors serving new markets and provide direct sale
and service to end customers. In addition, the Company has initiated a
number of programs to support its distributors, including the addition of an
in-house engineering department to provide technical support, a variety of
advertising and promotional programs, a reorganized sales department to
better serve and identify new markets and customers, and the conducting of
product education seminars. See "Business--Distribution and Marketing."
In February 1996, the Company was awarded ISO 9001 status by the
International Organization for Standardization based in Geneva, Switzerland,
which is the principal international body for establishing guidelines for and
certifying adherence to a stringent set of quality control and assurance
standards. The award is significant in validating the Company's manufacturing
standards and the Company believes that this standard, which is recognized in at
least 80 countries, is of increasing importance in the selection of vendors of
industrial products. The Company's two principal suppliers, AOC and Agru, are
also ISO 9001 certified.
INDUSTRY OVERVIEW
According to industry sources, the estimated United States market in 1998
for industrial valves was approximately $3.1 billion, unchanged from 1997.
Industry sources estimate that, in 1999, the market for metal valves will remain
relatively unchanged, at $3.2 billion, while the Company estimates its market
for thermoplastic industrial valves is expected to grow by approximately 6% to
8%.
Traditionally, industrial companies have used metal pipe and valves for the
transportation of fluids and gases. As industrial manufacturing processes have
grown more sophisticated and environmental concerns have increased, the
disadvantages of metal valves and piping systems, including weight,
susceptibility to corrosion, and labor intensive fabrication and installation,
have become more apparent. In many applications, metal pipe and valves will
interact with the surrounding environment or the transported liquid or gas,
which may result in corrosion of the piping system, leakage or contamination of
the transported liquid or gas.
Advances in thermoplastic technology have made possible the manufacture of
thermoplastic valves and piping systems with the strength and temperature
resistance required for many industrial applications. Thermoplastic piping
systems can be used in applications involving pressures up to 230 pounds per
square
30
<PAGE>
inch and temperatures up to 300 degrees F and can provide superior performance
to metal systems in many applications. These applications include:
WHERE THE ENVIRONMENT IS CORROSIVE OR CORROSIVE MATERIALS ARE BEING
TRANSPORTED. The chemical processing industry was an early adopter of
thermoplastic valves and pipe because chemical companies frequently
transport corrosive fluids and gases that can degrade metal systems. In
certain of these applications, thermoplastic systems require less frequent
replacement than metal systems, which can result in a lower lifetime cost
for a thermoplastic system.
WHERE THE POTENTIAL FOR DAMAGE TO THE ENVIRONMENT IS A
CONSIDERATION. Federal, state and local environmental authorities are
mandating that companies which handle toxic fluids attempt to prevent
leakage into the environment. All owners of underground storage tanks are
required to comply with the EPA's requirements regarding leak containment.
Owners may comply with these requirements by using piping systems which are
either made of corrosion resistant material, such as plastic, or are treated
with corrosion resistant coating. Furthermore, the EPA is mandating the use
of double containment systems, such as the Company's Duo Pro and PolyFlo
products, a "pipe-within-a-pipe architecture, to reduce the likelihood of
leakage and to detect leaks.
WHERE THE PURITY OF THE TRANSPORTED LIQUID OR GAS IS A CONCERN. In the
semiconductor industry, manufacturers require thermoplastic piping systems
for the transport of ultrapure water for washing computer chips. Likewise,
pharmaceutical and biotechnology manufacturers employ high purity plastic
piping systems to reduce the risk of contamination.
WHERE INSTALLATION COSTS ARE A SIGNIFICANT FACTOR IN THE TOTAL SYSTEM
COST. Because of the lighter weight of the components and the relatively
easier installation, thermoplastic piping systems often can be installed
more quickly than metal systems and without the use of heavy equipment that
is often required to install comparable metal piping systems. Eliminating
the need for heavy equipment and extensive labor can result in a lower
installed cost for plastic systems than for comparable metal systems.
Management believes that thermoplastic products will continue to increase
their share of the total market for industrial valves and piping systems. In
management's view, a number of factors drive this increase, including continued
improvement in thermoplastics technology, enforcement of environmental
regulations, more widespread recognition of the benefits of thermoplastic and
increased familiarity with the skills required to install thermoplastic piping
systems.
COMPANY STRATEGY
Through its alliances with AOC and Agru, through its formation of Quail and
its additions of high quality manufactured product offerings, the Company
believes it has established itself as a market leader in thermoplastic
industrial valves and piping systems, as evidenced by the breadth of its product
line, industry recognition of its brand names and the scope of its distribution
network. The Company's strategy is to:
PROVIDE A THERMOPLASTIC ALTERNATIVE TO METAL VALVES AND PIPING SYSTEMS. The
Company considers its primary competitors to be the suppliers of traditional
metal products. The Company believes that a substantial opportunity exists
for suppliers of thermoplastic products to gain a larger share of the total
industrial market for valves, pipe and related system components.
DEVELOP AND MARKET PRODUCTS MANUFACTURED BY THE COMPANY. As a master
distributor for AOC and Agru, the Company believes it offers a broader line
of thermoplastic valves and pipe than any of its competitors. The Company
seeks to leverage its valve and pipe sales by offering complementary higher
margin products manufactured by the Company. These products include valve
actuators and controls, double containment piping systems, custom fittings
and other specialty products including thermoplastic flow meter devices and
filtration equipment. Additionally, with the start-up of Quail,
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<PAGE>
the Company has positioned itself to enter new markets with its manufactured
corrugated polyethylene piping systems and fiber optic cable duct, while
providing additional opportunity to increase sales of the Company's
distributed products. Sales of products manufactured by the Company
increased by 29.5% from 1997 to 1998, with sales of manufactured products
having increased by over 106% from 1993 to 1998, from approximately
$7.6 million (29.7% of total sales) to $15.7 million (41.8% of total sales).
Total Company sales in 1998 to the Company's core markets were deeply
affected by the instability of foreign markets and the rapid changes that
occur within the technological sector, particularly semiconductor. This has
caused an overall hesitation, cutback and decline in infrastructure
expansion within the United States and foreign markets and has caused a
general slowdown in daily recurring business. Despite this economic slowdown
with the Company's core markets, the addition of Quail and its manufacturing
processes, has enabled the Company to reposition itself to expand its higher
margin manufacturing offerings and achieve growth in other key vertical
markets while working aggressively to expand into new markets and into new
areas of opportunity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
IDENTIFY AND SERVE MARKETS IN DIVERSE INDUSTRIES. The Company seeks to
continue to expand the market for its products and diversify its end user
base by identifying new applications where the benefits of thermoplastics
are superior to metal piping systems. In the early 1980s, virtually all of
the Company's products were sold through distributors to end users in the
chemical processing industry. In 1998, total Company sales spanned numerous
key industrial manufacturing industries, including the semiconductor,
telecommunication, pharmaceutical and chemical processing industries,
federal and local governmental agencies (in connection with environmental
clean up of government-owned sites and water treatment facilities), and
aquarium, cruise line, mining, waste management and municipal highway
construction sectors. By expanding the applications for its products, the
Company seeks to increase revenues, to reduce its vulnerability to economic
downturns specific to the industries in which its customers operate and to
benefit from diverse market developments, including the anticipated returned
growth of the semiconductor manufacturing industry, increased compliance
with the EPA's underground storage tank regulations and continued business
concern for the protection of the environment.
ACQUIRE COMPLEMENTARY PRODUCT LINES. The thermoplastic valve and pipe
industry is fragmented, and the Company believes there are opportunities to
expand its product base through acquisitions of complementary businesses and
product lines. The Company believes that its current network of more than
300 United States and approximately 34 foreign distributors can serve as a
marketing channel for complementary products. In the last four years, the
Company expanded its product offerings with the acquisition of the PolyFlo
product line, the acquisition of a line of industrial filtration equipment,
a license of the technology for the manufacture of pressure relief valves
and the May 1997 acquisition of the vortex flow meter division.
Additionally, in July 1997, the Company established Quail to manufacture and
market corrugated polyethylene piping systems and polyethylene fiber optic
cable duct. Management continues to explore and seek potential
opportunities, including mergers and acquisitions, joint ventures, licensing
and start-up ventures that would benefit from exposure to the Company's
broad and established distribution network or widen the Company's existing
distribution channels.
PRODUCTS
The Company manufactures and sells thermoplastic valve actuators and
controls, custom fabricated valves, proprietary double containment piping
systems, industrial filtration equipment and thermoplastic flow meter devices,
while Quail manufactures corrugated polyethylene piping systems and polyethylene
duct pipe for fiber optic cable. Products marketed and sold by the Company
include thermoplastic valves and pipe supplied by AOC and Agru, respectively. In
addition, the Company rents and sells specialized welding equipment for use in
the installation of its piping systems. With its broad product base, the Company
is able to offer its end users "one stop shopping" to meet substantially all of
their requirements for thermoplastic industrial valves, pipe and piping systems.
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<PAGE>
The following table sets forth information concerning the contribution to
total sales from the Company's principal classes of products (excluding sale and
rental of welding equipment):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998
------------------- ------------------- -------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Distributed products, including valves,
pipe and fittings....................... $24,579 64.9% $24,518 64.6% $21,086 56.1%
Manufactured products, including actuators
and controls, fabricated valves and
piping systems, filtration equipment and
plastic flow meters..................... $11,374 30.0% $12,141 32.0% $15,728 41.8%
</TABLE>
VALVES. The valves supplied by the Company are injection molded from one of
four primary resins: Polyvinyl Chloride (PVC); Chlorinated Polyvinyl Chloride
(CPVC); Polypropylene (PP); and Polyvinylidene Flouride (PVDF). Product
selection is based on such criteria as chemical and temperature resistance,
pressure tolerance levels, purity, abrasion resistance and cost. Valves made
from PVC are the lowest in cost. They typically have good chemical resistance,
can withstand temperatures up to 140 degrees F and are used extensively in
applications for chlorinated water, salt water and relatively mild chemicals.
CPVC and PP valves can withstand more severe chemicals and tolerate temperatures
up to 200 degrees F and 180 degrees F, respectively. PVDF can be used in
applications with temperatures up to 250 degrees F. It is ideally suited for
halogens, strong acids, mild caustics and is the most commonly specified
material for the transport of distilled water and high purity chemicals in the
semiconductor industry.
The Company markets seven basic valve designs: ball, butterfly, swing check,
gate, globe, ball check and diaphragm. Most valves are available in all four of
the primary resins with a variety of elastomeric sealing materials as options.
With the size range of each valve style and the various seat, seal and stem
materials available, there are a tremendous number of variations for each valve
style. For example, the Company offers over 2,000 butterfly valve
configurations. Each valve style addresses specific fluid flow requirements.
Criteria for selecting one model over another include time to open, the presence
of suspended solids in the transported fluid, the potential for bacterial growth
and line size.
Manual valves range in price from $5.50 for a sampling valve to over $25,000
for a 24 inch PVDF butterfly valve. A typical valve will sell for $50 to $100.
The Company processes approximately 3,000 invoices per month, indicating a
broad-based demand.
ACTUATORS AND CONTROLS. To meet the growing demands of industry for plant
automation, reduced labor costs and increased productivity, the Company has
developed electric and pneumatic actuators and controls for remote and
programmable operation and control of valves. The Company's actuators and
controls enable the end user to program or remotely adjust valves in response
to, or in order to achieve, specified temperature, pressure and flow rate of the
transported substance, whether a liquid or gas. These products enable the end
user to actuate and control precisely the valves in a system in response to
process variables. Additionally, valve modifications are custom designed and
fabricated by the Company to meet customer requirements, including special
stems, locking devices, stem extensions, lugs, etc. The Company currently offers
six basic types of actuators and controls in a variety of sizes that are
adaptable to the broad spectrum of the valves that it distributes for AOC.
Actuation and special valve modifications can add from $150 to $1,000 to the
price of a manual valve, with a positive effect on the Company's gross margins.
PIPE AND PIPING SYSTEMS. As the exclusive United States distributor for
Agru, the Company supplies a line of thermoplastic pipe and fittings. In
addition, the Company fabricates two types of double containment piping systems,
which are sold under the brand names DuoPro and PolyFlo. These double
containment "pipe-within-a-pipe" systems are designed to contain accidental
ruptures and leaks and may be
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<PAGE>
equipped with detection systems that signal and locate a leak in the system.
These systems are designed to meet environmental regulatory requirements for the
transport of certain toxic and corrosive materials.
The Company supplies thermoplastic piping systems made of PP, PVDF, HDPE and
Halar. PP systems are offered in sizes from 3/8 inch to 24 inches, with PVDF and
Halar offered in sizes from 1/2 inch through 12 inches. HDPE pipe and fittings
are specifically used for compressed air lines, and are sold under the Company's
trade name "Air-Pro." Typically, piping is sold as a system with the end user
purchasing all the pipe, fittings and valves from one source. Piping system
orders average $10,000 to $15,000, with several each year exceeding $100,000.
In 1986, the Company developed and patented its DuoPro double containment
piping system to meet requirements set forth by the EPA's Underground Storage
Tank Regulations. Pipe and fittings primarily supplied by Agru are fabricated
into systems as large as 18 inch diameter inner pipe by 24 inch diameter
containment pipe. An average DuoPro system sells for $25,000 to $50,000.
With the acquisition of the PolyFlo product line in 1994, the Company's
double containment pipe line was expanded to include pipe which is extruded
using a patented one-step manufacturing process.
FILTERS. Many fluid flow processes include the need for filtration of the
transported liquids, including chemical solutions, electroplating fluids and
water, both in process and waste. The Company's AF Series Filters include a
patented back-washing system that reduces waste and improves filtering
efficiency. The AF Series Filters are back-washed directly to waste or recycling
tanks, without operator contact, reducing the often costly waste disposal
process and the potential for dangerous contamination.
FLOW METERS. With increased concern from the semiconductor industry over
fluid contamination in the transport of both high purity chemicals and
ultra-pure deionized water for the cleaning of computer chips, in May, 1997, the
Company expanded its product offerings with two new thermoplastic flow meter
devices. Traditional flow meters use moving paddle wheels to measure fluid flow.
These wheels are located in the fluid flow path and are a potential source of
contamination. Their replacement also means that the entire line must be shut
down, an expensive process for semiconductor chip manufacturers. The Company's
flow meter line uses vortex shedding technology. As fluid moves past fixed
structures within the flow path, vortices are formed and measured by
peizoelectric crystals located within those fixed structures. The deletion of
any moving parts within the flow path reduces the risk for contamination. The
Company's FloSonex vortex flow meter uses ultrasonic technology for measurement,
removing all electronics from the pipe's interior. This is an important feature
as it removes the electronics from influence of the heat of the measured fluids
and because flow meter sensor replacement can be accomplished without shutting
down the line.
CORRUGATED POLYETHYLENE PIPE. Thermoplastic pipe is specified over
traditional materials in many new and upgraded water and waste projects for
highways, landscaping, sewers, irrigation and for municipal water supply
systems. Older systems utilize either concrete or steel. As concrete cracks and
steel corrodes, there is a growing demand for corrosion-resistant plastic pipe.
As engineers and contractors begin to specify plastic pipe for new projects and
municipal codes change, the low installation cost and longer life benefits of
plastic piping systems become more broadly recognized. The first Quail
manufacturing facility, in Magnolia, Arkansas was completed in the spring of
1998. After overcoming a number of production issues with the equipment, full
production was achieved in November 1998. The corrugated polyethylene piping
industry grows at an estimated 20% per year. Currently, Quail has the ability to
produce pipe up to 24" diameter size in its Magnolia plant, with up to 48"
diameter size as of July 1999 in its second manufacturing plant in Kingman,
Arizona. Demand for duct pipe should continue as these systems are installed,
utilizing the advantages of lower cost, lighter weight and longer life.
POLYETHYLENE DUCT PIPE FOR FIBER OPTIC CABLE. Today, information
communication networks are being configured using Internet Protocol technology.
Internet and local/long distance telephone service providers are combining,
using this technology to allow for quicker response time and lower costs. Fiber
optic lines,
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<PAGE>
housed in fiber optic cable duct, are allowing for this communication. Quail is
becoming a major supplier of fiber optic cable duct, much in part to a 36 month
supply agreement awarded to Quail during 1998. As technology continues to adapt,
newer advanced fiber optic lines will be required to be installed. Demand for
duct pipe should continue as these lines are installed, utilizing the advantages
of lower cost, longer life and continuous 3800' lengths of pipe. So as to meet
production demands, Quail's second regional manufacturing plant was purchased in
Kingman, AZ in June 1998, with manufacturing of duct pipe commencing in October,
1998, together with Arkansas's operations, all operating at capacity. In
May 1999, Quail leased a facility in Canton, Massachusetts for the manufacture
of polyethylene duct pipe. Production at this new facility began in
August 1999.
OTHER SOURCES OF SALES. The Company also rents and sells specialized
welding equipment for use in the installation of its piping systems. In 1998,
revenues from the rental and sale of such equipment totaled approximately
$765,000.
During the past three years, the Company has invested in additional
manufacturing equipment and plant expansion for the Company's operations in
Malden, Massachusetts, Quail's operations in Magnolia, Arkansas and in Kingman,
Arizona, and in new product development, with the goal of increasing its
production capability and building a broader base of manufactured products. In
May 1999, Quail leased a facility in Canton, Massachusetts for the manufacture
of polyethylene duct pipe. Production began in August 1999. Recent products have
included two electric actuators, a mini pneumatic actuator, printed circuit
boards for more precise control of actuators, a fail safe battery pack and a
patented stem support assembly for landfill applications. While the Company will
continue to develop new products and accessories and introduce new product
lines, the Company has not incurred a material amount of expenses for research
and development during the past three fiscal years. In May 1997, the Company
acquired the vortex division of Universal Flow Monitors, Inc. The acquired
product lines include the design, development, manufacture, marketing and
servicing of a line of thermoplastic vortex flow sensor products known as the
"Vortex Shedding Product Line" and a new line of vortex products using
ultrasonic sensing technology. The production process for the 3/4 inch
ultrasonic shedding flow meter has been completed and ultrasonic meters in other
sizes are currently in the development stage. In connection with this
acquisition, the Company established a dedicated Research and Development
department. This department is focusing its efforts on finalizing the
development of a full range of sizes for ultrasonic flow meter, developing
continued product and purity enhancements of the vortex shedding product line
and working to develop digital communications between the Company's flow meters
and actuators with the customers computer systems.
DISTRIBUTION AND MARKETING
DOMESTIC. Substantially all of the Company's sales in the United States are
made through an established network of more than 300 independent distributors,
many of whom have been distributors of the Company's products for 20 years.
Approximately 125 are stocking distributors, which carry an inventory of the
Company's products. One distributor accounted for 23%, 32% and 26% of the
Company's sales in 1996, 1997 and 1998 respectively. The Company's principal
distributor estimates that it sold the Company's products to not fewer than
5,000 end users in both 1997 and 1998.
The Company supports its distributors with fourteen Company-employed sales
representatives and one national sales manager. The Company also has an internal
group of six employees who provide customer service and support to the Company's
customer base. The Company's sales force works jointly with its distributors and
independently to develop sales leads, which are referred to the distributors.
Additional sales and marketing support is provided by the Company's staff of
eight engineers and two field technicians, who are available to provide
technical information on the Company's products, suggest solutions to customers'
requirements and assist in the design and installation of full piping systems.
The Company also promotes its products through trade shows, customer product
seminars and the use of
35
<PAGE>
promotional materials, including full color product brochures, advertising in
trade journals and other public relations activities.
The Company has developed an extensive educational program for its
distributors to train them in the use and benefits of its products. This program
includes in-house and regional seminars, as well as one-on-one presentations by
the Company's sales representatives to individual distributors and their sales
forces. The Company provides its distributors with extensive written materials
relating to its products and their applications.
The Company does not have contracts with its distributors. None of the
Company's distributors carry the Company products exclusively. The Company
believes that the use of distributors, which generally specialize in pipe and
valve products and focus on specific industry or geographic markets and,
accordingly, have specific knowledge of and contacts in particular markets,
enhance the scope of the Company's marketing efforts and permits the Company to
penetrate a broader market without the significant costs associated with a large
direct sales force that would otherwise be required.
Quail supports its direct customers with three Company-employed sales
representatives together with an internal group of three employees who provide
customer service, product knowledge and support to the customer base. Quail also
promotes its products through trade shows and related association memberships,
and through the use of promotional materials, including full color product
brochures and other public relations activities. Quail has a 36 month long
supply agreement with a telecommunications customer requiring the production of
minimum quantities of pipe on a monthly basis. Quail is currently meeting the
production requirements and believes its relationship with this customer to be
good.
FOREIGN. The Company has an established network of approximately 22 foreign
distributors, with 11 additional foreign non-employee sales representatives. For
fiscal years 1996, 1997 and 1998, the Company had export sales of approximately
$1.6 million, $2.7 million and $2.2 million, respectively, primarily to Latin
America. All of the Company's export sales are denominated in United States
dollars.
END USERS
The Company sells substantially all of its products through distributors to
a diversified end user base. A common characteristic of end users is the need
for pipe, valves and related components to control, transport and contain
corrosive fluids, ultrapure liquids, environmentally harmful fluids or gases. No
single
36
<PAGE>
end user is responsible for a material portion of the Company's sales. Principal
industries, representative applications and representative end users for the
Company's products include:
<TABLE>
<CAPTION>
REPRESENTATIVE
INDUSTRY APPLICATIONS REPRESENTATIVE END USERS
- -------- -------------- ------------------------
<S> <C> <C>
Chemical processing Transfer of corrosive and Dow Chemical, DuPont, Rohm & Haas,
environmentally hazardous P.P.G., Clorox, B.F. Goodrich and Kerr
chemicals McGee
Semiconductor manufacturing Transfer of deionized water, IBM, Motorola, Texas Instruments,
ultra pure chemicals and Micron Technology, Advanced Micro
chemical waste Devices, National Semiconductor, IBM,
Samsung Semiconductor and Matsushita
Landfill Collection of methane gas and WMX Technologies, Laidlaw Waste
leachate Systems, Inc. and Browning Ferris
Industries
Aquariums Automated circulation of salt New Orleans, Monterey Bay, Tampa Bay,
water and life support systems Albuquerque BioPark, Omaha, Long Beach
National Aquarium, China Aquarium and
Colorado Ocean Journey
Federal Facilities Soil remediation and transfer Aberdeen Proving Grounds, Tinker Air
of hazardous waste Force Base, Hill Air Force Base, Tooele
Army Base, Fort Belvoir Defense
Laboratory, Nevada Test Site and China
Lake
Mining Transfer of sulfuric acid and Kennecott Utah Copper, Corporacion
cyanide Nacional de Cobre de Chile (Codelco),
Sociedad Contractual Minera El Abra and
Cypress Mines
Pharmaceutical Transfer of chemical waste Schering-Plough, Eli Lilly, Abbott
Labs, Merck and Bristol-Myers Squibb
</TABLE>
SUPPLIERS
The Company has distribution agreements in defined territories for
substantially all of the valves and fittings and certain of the pipe sold by the
Company. The Company has been the exclusive master distributor of a broad line
of valves and related accessories for AOC in the United States, Latin America
and the Caribbean since 1974. AOC has agreed to extend the Company's
distribution rights on a non-exclusive basis until December 31, 2000, with the
Company having the right to purchase products at prices no greater than those
charged others in its territories after January 1, 2000. Either party may
terminate the distribution arrangement on 90 days notice. No assurances can be
given that AOC will agree to renew its contract with the Company at the end of
the current term or that it will not give notice of 90 day termination.
AOC, which manufactures the valves it supplies to the Company at its plant
in Japan, warrants that its products are merchantable and free from defects in
material and workmanship and indemnifies the Company against losses or claims
arising from the sale of the products. In the case of defective products, AOC
agrees to repair or replace the products. In addition, AOC must maintain a
minimum of $3.0 million of product liability insurance that includes the Company
as a named insured. Purchases by the Company are made under written purchase
orders. Once an order is accepted, it may not be canceled except by
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<PAGE>
agreement of the parties; AOC may not reject an order unreasonably or in bad
faith. Either party may terminate the agreement if the other party defaults and
the default continues for 30 days after notice or if the other party becomes
subject to a bankruptcy or insolvency proceeding.
A large percentage of the pipe and fittings sold by the Company is supplied
by Agru under a five-year distribution agreement, which was amended and restated
effective as of January 1, 1995. Under the agreement, the Company has exclusive
distribution rights in the United States for certain products (PP, PVDF and
Halar fittings and pipe, and PVDF welding equipment) and non-exclusive rights
for other products. The Company may not purchase products that compete with the
exclusive products unless Agru is unable to deliver products within four weeks
of order. Agru is obligated to repair or replace any defective product it
supplies. The Company is obligated to make minimum purchases from Agru each
year, using 1994 total purchases of $3.1 million as a base. If purchases in any
year decline by 20% or more from the base, Agru may terminate the contract at
the end of the following year unless purchases in that year equal or exceed
$3.1 million in which case the contract continues in force. During the year
ended December 31, 1998, total purchases from Agru totaled approximately
$3.0 million. The agreement is terminable in the event of a serious breach which
is not cured within three months of receipt notice, and in the event of the
bankruptcy or insolvency of either party. The agreement currently extends
through December 31, 2004. Unless either party gives notice of termination not
less than 12 months prior to the end of the term, the contract automatically
extends for five years.
While there are other sources of supply for the products which the Company
purchases from AOC and Agru, the Company is not aware of other single sources of
supply that offer the variety and quality of products they produce. In addition,
several sources of supply have existing exclusive arrangements with other
companies that would preclude dealing with the Company. The Company's supply
arrangements with AOC and Agru are also subject to all of the usual risks of
foreign trade. The loss of either AOC or Agru as a supplier or the imposition of
restrictions on foreign trade would have a material adverse effect on the
Company unless the Company is successful in securing alternative supply
arrangements.
MANUFACTURING AND DISTRIBUTION
The Company has a technical support and engineering department of eight
professionals with an additional two professionals serving as field technicians,
who support the Company's sales and marketing activities and provide solutions
to special end user customer requirements, such as modifications of valves and
special piping system designs. The department has designed a number of actuators
and accessories that are sold in conjunction with the Company's valves. In
addition, the department assists end user customers in the design, engineering
and installation of complete valve and piping systems.
At its Malden, Massachusetts facility, the Company manufactures and
assembles a variety of valve actuators, valve/actuator assemblies and
accessories, including, among others, industrial filtration equipment and
thermoplastic flow meter devices. The Company also operates a "clean room" for
the fabrication and cleaning of ultrapure water piping systems for the
semiconductor and pharmaceutical industries. In addition, the Company fabricates
double containment piping systems and assists the end user customer (or its
mechanical contractor) with on-site installation and testing. The Company rents
and sells specialized welding equipment to customers and contractors for this
purpose. Additionally, in conjunction with the Company's May 1997 acquisition of
the plastic flow meter division of Universal Flow Monitors, Inc., the Company
expanded its manufacturing capabilities to include the full manufacturing,
machining and testing of both the flow sensing and ultrasonic flow meters. Quail
commenced production of corrugated polyethylene piping systems and polyethylene
fiber optic cable duct pipe in its Magnolia, Arkansas manufacturing facility in
the spring of 1998. So as to enable an expedient start-up of production for
Quail's 36 month fiber optic duct pipe supply agreement, the Company accelerated
plans for establishing Quail's second regional manufacturing site. As such, in
June 1998 the Company closed on the purchase of a 55,000 square foot facility in
Kingman, Arizona and commenced production of duct pipe in October 1998. Quail's
Arkansas plant is producing corrugated polyethylene pipe in up to 24 inches in
diameter, with an additional line
38
<PAGE>
dedicated to fiber optic duct. The Arizona operation is currently producing duct
pipe and has the ability to produce up to 48" diameter corrugated pipe. In
May 1999, Quail leased a facility in Canton, Massachusetts for the manufacture
of polyethylene duct pipe. Production at the new facility began in August 1999.
On February 24, 1996, the Company was awarded ISO 9001 certification
following a fourteen month review process. The certification indicates that the
Company's operations meet the stringent standards for quality control and
assurance established by the International Organization for Standardization. ISO
9001 has been adopted to date in more than 80 countries. It is anticipated that
ISO certification will increasingly become a prerequisite for doing business
with many customers and in many markets.
The Company purchases and maintains an inventory of valves, pipe, fittings
and related fluid flow components and products, in anticipation of customer
orders. The Company has warehouse facilities at its principal offices in Malden,
Massachusetts. Because lead times for delivery from its principal suppliers are
long, the Company carries significant inventory in relation to sales in order to
be able to meet delivery requirements of its distributors and end user
customers. Approximately 125 of the Company's distributors also stock inventory,
principally valves and valve accessories. Quail, which will maintain inventory
of corrugated pipe, also has adequate warehousing capacity at its Magnolia,
Arkansas and Kingman, Arizona facilities.
COMPETITION
The industrial valve, pipe and fittings market is very fragmented, with many
manufacturers and suppliers. The Company estimates that there are more than 100
suppliers of metal valves and at least a dozen suppliers of thermoplastic
valves. There are also many suppliers of both metal and plastic pipe and
fittings. There is no single company that dominates the market for either
thermoplastic industrial valves or pipe. The Company believes that there are two
companies which have significant shares of both markets, and one additional
significant competitor in the valve market and three additional significant
competitors in the pipe market. Of its competitors, the Company is aware of only
one competitor that offers a comparable variety of thermoplastic valve and pipe
products as the Company. Many of the Company's competitors, especially
manufacturers of metal valves and pipe, have substantially greater financial,
marketing, personnel and other resources than the Company. A 1995 market study,
commissioned by the Company, indicated that the Company had one of the largest
shares of the United States market for industrial thermoplastic valves. With its
ability to provide complete fluid flow solutions to customers, the Company
believes that it continues to hold this market share.
Suppliers of industrial valves, pipe and piping systems, whether metal or
plastic, compete primarily on the basis of price, performance and service to the
customer or end user. In applications requiring high performance of the valves
and pipe in terms of temperature, pressure and durability, the Company believes
that its products compete favorably in terms of performance, price and lifetime
cost with metal products available for the same applications. In certain
applications, alternative plastic products may be available at lower prices than
the Company's products. The Company believes, however, that many end users are
willing to pay higher prices for the Company's products in exchange for the
higher quality and service that the Company offers. The Company believes that
its competitive advantages include the breadth of its valve, actuator and pipe
product lines and its ability to supply complete piping systems, including
custom fabricated components, flow meter devices and industrial filtration
equipment. The Company believes that it has an advantage over other
manufacturers of valve actuation and piping products because of its ability to
offer "one stop shopping" to the end user.
JOINT VENTURE
In February 1990, the Company established a joint venture with Watts
Industries, Inc. ("Watts"), a United States manufacturer of metal valves, for
the development of an electric actuator to supply the partners' respective
needs. The two companies co-funded the tooling of the product, and the Company
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manufactures the product for sale by the Company through its regular
distribution network and for sale to Watts, as OEM products, at a discounted
price. The employees of both companies executed confidentiality agreements to
protect the confidential and proprietary information possessed by each company
and utilized in the development of the actuator. All technology, information,
material and data developed pursuant to the joint venture as well as any
trademarks, patents, copyrights or other property interest that may result from
the joint venture, is the joint and several property of the Company and Watts.
Development of the product was completed in August 1992, and all manufacturing
of the product line is done in the Company's plant.
PATENTS AND TRADEMARKS
The Company exclusively owns six United States patents relating to its
double containment pipe assemblies, seven United States patents relating to
actuators and accessories used in conjunction with plastic valves, as well as
two corresponding Canadian patents and two corresponding Canadian patent
applications, and one United States patent relating to the filter backwashing
system. In conjunction with the May 1997 acquisition of the vortex flow meter
division of Universal Flow Monitors, Inc., the Company acquired a United States
patent and two United States patent applications, which were subsequently issued
into patents, relating to ultrasonic vortex flow meters. Subsequently, the
Company filed eleven patent applications, in Europe, Japan, China, Taiwan and
Korea. All of the United States patents have been issued since December 1985,
and extend at least until 2002. In addition, the Company owns 30 United States
trademark applications and seven pending trademark registrations. The trademark
registrations, which are renewable by their terms in the ordinary course of
business, cover various products offered for sale by the Company. The Company
also owns copyright registration for its catalogs and design guides, as well as
for the printed circuit boards it has developed for use in its valve actuators.
All of the Company's intellectual property is owned or is held under a
perpetual license, is free and clear of restrictions of any nature and is not
subject to any license, sublicense, agreement or commitment with any third
party, other than a security interest to the Company's bank lender and the
non-exclusive license referred to hereinafter. The Company's intellectual
property rights are important to its business, and the Company intends to
enforce its intellectual property rights. However, the Company believes that
product quality and service are more important to the success of the Company.
Except as discussed below, the Company has not been engaged in any litigation
during the last six years in regard to its intellectual property rights.
In July 1997, the United States Patent and Trademark Office reconfirmed the
validity of a patent owned by the Company (the "544 Patent"). In August 1997,
the Company instituted a patent infringement suit in the United States District
Court in New York (the "District Court") against MFRI, Inc. of Niles, Illinois,
and its associated companies, Perma-Pipe, Inc., Midwesco, Simtech, Inc. and
Mr. I. Wayne James, President of Simtech (and former employee of the Company)
(collectively, ("MFRI"). In the fourth quarter of 1997 and first quarter of
1998, the Company incurred approximately $400,000 and $132,000, respectively, in
legal expenses related to this patent issue. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Financial
Statements and Schedules." In February 1999, the District Court ruled in favor
of the Company, rendering a decision of patent infringement against MFRI. The
case was referred to a Magistrate Judge for inquest hearing, scheduled for
March 5, 1999, to direct a determination as to damages. In March 1999, the
Company and MFRI reached an amicable settlement of this case. The settlement
included monetary consideration totaling $900,000, which was paid by MFRI to the
Company in March 1999. Said monetary consideration included the advance payments
of royalties for the payment of a non-exclusive license, granted by the Company
to MFRI, under the 544 Patent.
The Company intends to pursue other possible infringers of the 544 Patent.
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EMPLOYEES
As of December 31, 1998, the Company had a work force of 130 people, of
which 20 are executive and administrative personnel, 25 are engaged in sales and
marketing, 12 are engineering staff, 2 are research and development personnel
and 71 are engaged in manufacturing, assembling, fabricating and warehouse
operations. At December 31, 1998, Quail had a work force of 59 people, of which
7 are executive and administrative personnel, 5 are engaged in sales and
marketing and 47 are engaged in manufacturing operations. None of the Company's
employees are covered by a collective bargaining agreement. The Company believes
its labor relations to be good.
PROPERTIES
The Company's executive offices and the Company's manufacturing/warehouse
facility, comprised of approximately 94,000 square feet, is located in a modern
facility in Malden, Massachusetts. Quail conducts its manufacturing at three
separate facilities. The first, a 18,400 square foot, 7.6 acre facility in
Magnolia, Arkansas, was purchased in October 1997 and required certain
improvements to accommodate Quail's manufacturing process. The second, a 55,000
square foot, 20 acre facility in Kingman, Arizona, was purchased in June 1998.
The third, a 17,000 square foot facility in Canton, Massachusetts was leased in
May 1999. Quail also leases a 5 acre storage facility in Canton. All properties
are in good operating condition and suitable for the purposes for which they are
used.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings at this time.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a manufacturer and distributor of thermoplastic valves,
piping systems, flow meter devices, filtration equipment and components
manufactured by the Company and others for use in a variety of environmentally
sensitive and industrial applications including semiconductor manufacturing,
chemical processing, waste and water treatment processing and pharmaceutical
manufacturing, as well as for use in mining, aquarium and other industries.
Manufactured products include valve actuators and controls, specialized valve
assemblies, double containment piping systems, thermoplastic flow meter devices
and filtration equipment. Distributed products consist principally of
thermoplastic valves, pipe and fittings which are purchased from two major
foreign suppliers under long term supply agreements. The Company also realizes
revenue for the rental and sale to contractors and end user customers of
specialized welding equipment that is used in connection with the installation
of the Company's piping systems.
The Company distributes its products through an extensive network of
domestic and foreign distributors and sales representatives which are supported
by Company sales, marketing and engineering personnel. Substantially all of the
Company's purchases of valves are made from its Japanese supplier and are
transacted in Japanese yen. As a result, the Company is exposed to fluctuations
in foreign currency exchange rates. The Company may use hedging procedures
including foreign exchange forward contracts and currency options in managing
the fluctuations in foreign currency exchange rates. The Company also purchases
pipe and fittings from an Austrian supplier. Purchases from the Company's
Austrian supplier are denominated in United States dollars.
In July 1997, the Company established a wholly owned subsidiary, Quail
Piping Products, Inc. to manufacture and market corrugated polyethylene piping
systems for use in water, sewer and drain applications and polyethylene duct
pipe for fiber optic cable for use by the telecommunications industry. Quail's
first manufacturing facility is located in Magnolia, Arkansas. In June 1998, the
Company and Quail closed on the purchase of a second manufacturing facility in
Kingman, Arizona, which commenced production in October 1998. Limited production
of corrugated pipe in the Arkansas facility commenced in the spring of 1998,
with full production by November 1998, while full production of fiber optic
cable duct in the Arizona facility commenced in October 1998. Production of
corrugated pipe began in June of 1999 at the Arizona facility. In May 1999,
Quail leased a manufacturing facility in Canton, Massachusetts for the
manufacture of polyethylene duct pipe. Production began in August 1999. These
new product lines increase the manufacturing component of the Company's
business, further diversify the Company's product offerings and distribution
base and positions the Company to penetrate new markets providing additional
opportunity to increase sales of the Company's distributed products.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's net
sales as well as certain income and expense items, expressed as a percentage of
sales:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....................................... 63.3 62.8 66.1 65.0 63.4
----- ----- ----- ----- -----
Gross Profit......................................... 36.7 37.2 33.9 35.0 36.6
Research and development expenses........................ -- 0.5 0.8 0.9 0.7
Selling, general and administrative expenses............. 25.7 28.1 30.9 33.0 32.0
Litigation Settlement.................................... 0.0% 0.0% 0.0% 0.0% (1.9%)
----- ----- ----- ----- -----
Income from operations............................... 11.0 8.6 2.2 1.1 5.8
Interest and other expense, net.......................... 0.5 0.5 0.8 1.0 2.6
----- ----- ----- ----- -----
Income before provision for income taxes................. 10.5 8.1 1.4 0.1 3.2
Provision for income taxes............................... 4.1 3.4 0.9 0.1 1.3
Net Income before cumulative effect of change in
accounting principle................................... 6.4 4.7 0.5 0.0 1.9
Cumulative effect of change in accounting principle, net
of benefit for income taxes............................ -- -- (0.5) (0.5) --
----- ----- ----- ----- -----
Net income............................................... 6.4 4.7 0.0 (0.5) 1.9
</TABLE>
NET SALES
QUARTERS ENDED JUNE 30, 1998 AND JUNE 30, 1999
Net sales were $10.3 million and $21.1 million for the three and six months
ended June 30, 1999, respectively, as compared to $9.1 million and
$17.2 million for the comparative periods of 1998. This increase was mainly due
to sales of fiber optic cable duct pipe and corrugated polyethylene pipe
manufactured by the Company's wholly owned subsidiary, Quail. Sales of the
Company's core products decreased by approximately 3.3% in the six month period
of 1999 as compared to the six month period of 1998 due to a decrease in both
project and daily business as a result of the continued slowness in the
Company's core markets.
Export sales for the three and six months ended June 30, 1999 were $447,000
and $858,000, respectively, as compared to $634,000 and $1.2 million for the
corresponding periods of 1998. For the three and six months ended June 30, 1999,
one customer accounted for approximately 27% and 28% respectively, of sales,
while another customer accounted for approximately 16% and 15% respectively, of
sales. For the three and six months ended June 30, 1998, one customer accounted
for approximately 28% and 28%, respectively, of total sales.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Net sales for the year ended December 31, 1998 were $37.6 million,
relatively unchanged from 1997. Sales of manufactured products increased 30% in
1998 as compared to 1997 due primarily to the commencement of sales from Quail,
coupled with increased sales of actuation and filtration products and a full
year's sales of the vortex flow meter product line, offsetting the decline in
sales of dual containment pipe products and welding equipment revenues. Quail
experienced its first full quarter, in Q4 1998, of production with sales of its
fiber optic cable duct pipe, from both its Arkansas and Arizona plants, coupled
with limited sales volume of its corrugated polyethylene pipe. Sales of
corrugated polyethylene pipe were
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below the Company's anticipated levels for the year, due to delays in the
shipping of the related equipment and certain performance issues experienced
with the set-up and start-up of the equipment. The Company and the equipment
manufacturer have resolved the manufacturing issues, and currently the equipment
is working at a level acceptable to the Company. Distributed product sales
decreased by 14% in 1998 as compared to 1997 due mainly to a general decline in
demand for such products as a result of the broad weaknesses across the
industrial manufacturing marketplace due in part to the instability of foreign
markets and the rapid changes that occur within the technological sector,
particularly the semiconductor industry. This has caused an overall hesitation,
cutback and decline in infrastructure expansion within the United States and
foreign markets and has caused a general slowdown in daily recurring business.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Net sales for the year ended December 31, 1997 were $37.9 million,
relatively unchanged from 1996. The Company experienced increases in sales from
its distributed valve and manufactured actuation products primarily as a result
of increased demand from and direct sales efforts to the chemical processing and
mining industries. Sales of distributed valves benefited from the favorable
movement of the U.S. dollar against the Japanese yen. As a result of the
favorable movement of the US dollar, the Company has been able to be competitive
with its pricing of distributed valves, achieving growth in certain of its key
vertical markets and expanding into new markets as well. Sales for 1997 also
benefited from the May 1997 acquisition of the flow meter division of Universal
Flow Monitors, Inc. The Company integrated the new manufacturing process into
its Malden, Massachusetts facility according to plan and was able to achieve
positive results from its operation. Sales in 1997 were adversely affected by
decreased demand for the Company's high purity and manufactured dual containment
piping systems and the related decline in the sale and rental of welding
equipment, for which sales decreased significantly in 1997 as compared to 1996.
This decrease is directly attributable to the deferral of and the decrease in
the construction of new plants within the semiconductor industry, the Company's
largest vertical market in 1996. Sales to the semiconductor industry represented
approximately 31% of the Company's total sales in 1996 as compared to
approximately 16% in 1997.
During 1996, 1997 and 1998, export sales accounted for 4%, 7% and 6%,
respectively, of net sales. Sales to the Company's largest customer accounted
for 23%, 32% and 26%, in 1996, 1997 and 1998, respectively.
GROSS PROFIT
QUARTERS ENDED JUNE 30, 1998 AND JUNE 30, 1999
Gross profit as a percentage of sales was 35.6% and 36.6% during the three
and six months ended June 30, 1999, respectively as compared to 33.4% and 35.0%
for the same period of 1998. The quarterly and year to date increases were a
result of efficient manufacturing processes at Quail and due to the fact that
Quail's sales of duct pipe are on a tolling basis, as much of the required
material is supplied by the end customer. This increase was offset by a decrease
in the Company's overall gross profit which was due to continued aggressive
pricing to maintain existing sales volume, a price increase implemented by the
Company's Japanese supplier on its purchase of valves and the overall lower
value of the U.S. dollar as compared to the Japanese yen as compared to the year
ago period.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Gross profit as a percentage of sales (gross margin) for the year ended
December 31, 1998 was 33.9% as compared to 37.2% for the year ended
December 31, 1997. The approximate 3.3% decline in gross margin is primarily
attributable to the prolonged start-up, including labor and material costs for
testing and correcting equipment issues, associated with Quail's Magnolia,
Arkansas location and the expenses incurred therein. Also, continued aggressive
pricing to maintain and increase sales volume for the
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Company's products, the lack of economies of scale within the production process
due to lower than expected sales volume, a price increase implemented by the
Company's Japanese supplier on the Company's purchase of valves and an
approximate 14% downward turn in the value of the U.S. dollar as compared to the
Japanese yen throughout the fourth quarter of 1998, all contributed to the
decline in gross margin. The 1998 gross profit included foreign currency losses
of $53,000, (0.1%) of sales, while the 1997 gross profit included foreign
currency gains of $345,000, 0.9% of sales.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Gross profit as a percentage of sales (gross margin) for the year ended
December 31, 1997 improved 0.5 percentage points, or 1.4%, to 37.2% from 36.7%
in 1996, due to the overall increase in the Company's sales of manufactured
products coupled with the lower average product costs for certain of the
Company's distributed products, associated with the continued favorable movement
of the U.S. dollar against the Japanese yen. Sales generated from the newly
acquired flow meter division coupled with an increase in sales of actuation
products and filtration equipment offset the decline in sales of the Company's
dual containment piping systems, leading to the overall increase in sales of
manufactured product and contributing to the increase in gross margin. Although
the Company instituted a price increase on certain of its distributed products
in 1997, aggressive pricing to promote the sales of these items offset the gross
margin effects of the price increase. The 1997 gross profit included foreign
currency gains aggregating $345,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
QUARTERS ENDED JUNE 30, 1998 AND JUNE 30, 1999
Selling, general and administrative expenses for the three and six months
ended June 30, 1999 were $3.2 million and $6.8 million as compared to
$2.9 million and $5.7 million for the comparable periods of 1998. The increase
in overall expenses for the three and six month periods of 1999 was primarily
due to the selling and administrative support for Quail's sales and operations,
particularly, shipping, commission and selling and administrative expenses.
Selling, general and administrative expenses as a percentage of sales for the
three and six month periods of 1999 were 31.0% and 32.0% as compared to 31.3%
and 33.0% for the comparable 1998 periods. The quarter and year to date
decreases were due primarily to sales increasing 13.6% and 22.7% for the quarter
and year to date period of 1999 as compared to the 12.8% and 19.0% increase in
selling, general and administrative expenses for the same period.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Selling, general and administrative expenses were $11.6 million for the year
ended December 31, 1998 as compared to $10.6 million in 1997. Selling, general
and administrative expenses as a percentage of net sales were 30.9% in 1998 as
compared to 28.1% in 1997. Included in selling, general and administrative
expenses for 1998 were approximately $1.1 million of expenses related to the
start-up, administration and initial sales and marketing process of Quail's
Arkansas and Arizona facilities, and approximately $132,000 related to the
Company's patent infringement lawsuit. Included in selling, general and
administrative expenses for 1997 are approximately $400,000 of legal expenses
incurred by the Company related to a patent infringement lawsuit. The final
decision from the December 1997 patent infringement lawsuit was made in
February 1999. The New York District Court ruled in favor of the Company,
rendering a decision of patent infringement against MFRI, Inc. The case was
referred to a Magistrate Judge for inquest hearing, scheduled for March 5, 1999,
to direct a determination as to damages. In March 1999, the Company and MFRI
reached an amicable settlement of this case. The settlement included monetary
consideration totaling $900,000, which was paid by MFRI to the Company in
March 1999. Said monetary consideration included the advance payments of
royalties for the payment of a non-exclusive license, granted by the Company to
MFRI, under the 544 Patent. Selling, general and administrative expenses,
excluding the above mentioned charges increased by approximately $87,000 in 1998
as compared to the
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<PAGE>
1997 period. The increase is reflective of increased amortization expenses as a
result of the Company's May 1997 acquisition of the plastic flow meter division,
increased commission expenses related to flow meter sales and to the attainment
of other recurring and project related business, coupled with an overall
increase in sales related travel and entertainment expenses. These increases
offset certain reductions, made by the Company, to reduce overall overhead and
labor expenses in 1998, which will carry over into 1999.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Selling, general and administrative expenses were $10.6 million for the year
ended December 31, 1997 as compared to $9.8 million in 1996. Selling, general
and administrative expenses as a percentage of net sales were 28.1% in 1997 as
compared to 25.7% in 1996. Included in selling, general and administrative
expenses for 1997 are approximately $400,000, or 1.0% of sales, of legal
expenses incurred by the Company related to a patent infringement lawsuit
whereby the Company is enforcing its US patent rights against a major
competitor. The above mentioned expenses reduced net income and both basic and
diluted earnings per share by approximately $226,000 or $.07, respectively, for
the year ended December 31, 1997. Additionally, selling, general and
administrative expenses increased in 1997 over 1996 due to increased
amortization expense as a result of the Company's May of 1997 acquisition,
higher operating costs to support the approximate 38,000 square foot expansion
in office, plant and warehouse capacity, increased payroll in support of
anticipated 1997 sales volumes and an increase in promotion and advertising
expenses to facilitate sales opportunities in new and existing markets.
INTEREST EXPENSE AND INCOME TAXES
QUARTERS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Interest expense, net increased $197,000 and $375,000 for the three and six
months ended June 30, 1999 as compared to the corresponding period of 1998. The
overall increase was due to interest expense incurred on additional Industrial
Revenue Bond debt to support Quail's expansion and to increased operational
borrowings on the Company's line of credit.
The provision for income taxes increased by $30,000 and $256,000 in the
three and six months periods of 1999 as compared to the same periods of 1998.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Interest expense increased approximately $397,000 in 1998 as compared to
1997 due primarily to interest expense incurred in 1998 on the Arkansas and
Arizona Industrial Development Bonds, financed through GECPF, for the purchase
of the facilities and manufacturing equipment for Quail's operations. Interest
expense was further increased by additional borrowings on the Company's line of
credit to support Company operations and the start-up of Quail. Interest income
increased by approximately $82,000 in 1998 as compared to 1997. This increase is
primarily a result of the interest earned on the Company's restricted cash,
associated with the Industrial Development Bonds, being held in escrow for
equipment purchases related to Quail's facilities.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Interest expense decreased $39,000, to $300,000, for the year ended
December 31, 1997 due to lower average interest rates on borrowings on the
Company's line of credit in 1997 as compared to 1996 and due to decreases in
interest on the Company's Industrial Revenue Bonds and capital lease
obligations.
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<PAGE>
OTHER INCOME AND EXPENSES
Included in other income for the year ended December 31, 1998 is a gain of
$225,000 received as a result of a settlement related to performance issues,
received from the manufacturer of Quail's corrugated pipe manufacturing
equipment. The settlement was in the form of credits to be taken on future
purchases.
In February 1999, the Court ruled in favor of the Company with respect to
its previously filed patent infringement lawsuit, as it upheld the validity of
the Company's patent. In March 1999, the Company and its competitor reached an
amicable settlement of this case. This settlement included monetary
consideration from the competitor to the Company, as well as the granting by the
Company of a nonexclusive license for this patent to the competitor, totaling
$900,000, which was paid to the Company in March 1999. Included in the statement
of operations is $400,000 related to the recovery of past damages. Further, the
Company has recorded deferred revenue related to the royalty agreement reached
as part of the settlement.
In connection with the Company's May 1997 acquisition of the flow meter
division of Universal Flow Monitors, Inc., the Company established a dedicated
Research and Development department. This department initially focused its
efforts on finalizing the development of a full range of sizes for ultrasonic
flow meters, developing continued product and purity enhancements of the vortex
shedding product line and working to develop digital communications between the
Company's flow meters and actuators with customer's computer systems. Research
and development expenses were $329,000 in 1998 as compared to $186,000 in 1997.
This increase is a result of a full year of expense in 1998. Total research and
development expenses for the three and six months ended June 30, 1999 were
$71,000 and $138,000 as compared to $86,000 and $148,000 for the comparable
periods of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through cash generated from
operations, the sale of equity securities, borrowings under lines of credit and
Industrial Revenue Bond financings. In addition, the Company has benefited from
favorable payment terms under a $8 million open account arrangement, for the
purchase of Japanese valve products, as to which the majority of its purchases
are at payment terms of 180 days after the bills of lading dates.
In June 1998, the Company and its bank amended its then existing line of
credit agreement and executed a loan agreement for an $11,000,000 secured,
committed revolving line of credit. This line of credit is secured by
substantially all assets of the Company and extends through January 31, 2000.
Interest on this credit line is based on the prime rate or LIBOR plus 1.55% to
2.30%. There is an unused fee ranging from .15% to .25%, based on the
performance levels of certain financial ratios. The Company is required to
maintain certain financial ratios, including, among others, debt service,
minimum working capital and tangible net worth. The credit line is for working
capital and merger and acquisition purposes. As of June 30, 1999, there was
$3,100,000 outstanding under the line of credit. In February of 1999, this loan
agreement was retroactively amended. The amended agreement provides for the
maximum amount of borrowings, including issued letters of credit, which may at
any time be outstanding, be the lesser of $11 million or the sum of 80% of
qualified accounts receivable and 50% of eligible inventory, as defined. The
interest on new borrowings is at the prime rate plus 1%. The Company is required
to maintain certain financial ratios, including, among others, minimum working
capital, debt service and tangible net worth, as defined in the amended
agreement. The Company was in compliance with these covenants as of June 30,
1999.
In July 1997, Quail was established to manufacture and market corrugated
polyethylene piping systems for use in water, sewer and drainage applications
and polyethylene fiber optic duct pipe for use in the telecommunications
industry. Quail's first manufacturing facility, for which limited production
commenced in the spring of 1998, is located in Magnolia, Arkansas. The facility
and manufacturing equipment are being financed by Arkansas Industrial Revenue
Bonds (the "Arkansas Bonds") totaling $4.3 million.
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Payments on the bonds began in January 1998, with equal monthly principal
payments and extend until December 2007. The bonds bear interest at 5.89%. In
June 1998, for the purchase price of $1,139,844, the Company and Quail purchased
a second manufacturing facility in Kingman, Arizona, commencing production of
fiber optic cable duct in October 1998 and corrugated polyethylene piping in
April 1999. Total project costs for the Arkansas facility and equipment, which
are estimated to be $8 million, are being financed through the County of Mohave
Industrial Development Bonds (the "Arizona Bonds") which were finalized in
August 1998. These bonds, which total $8 million, bear interest at 5.65% and are
payable in equal monthly installment over 10 years, beginning in September,
1998. As of June 30, 1999, the Company had expended approximately $7.2 million
in connection with the purchase of the facility and equipment for use in Quail's
Arizona operations. In accordance with both the Arkansas Bonds and the Arizona
Bonds, the Company is required to maintain certain financial ratios, including,
among others, minimum working capital, debt service and tangible net worth, as
defined. The Company was in compliance with these covenants as of June 30, 1999.
In May 1999 Quail leased a manufacturing facility in Canton, Massachusetts for
the manufacture of polyethylene duct pipe. Total equipment costs for this
facility will approximate $2.5 million.
At June 30, 1999 cash and cash equivalents were $261,000.
The Company generated $3.4 million of cash flow from operations during the
six months ended June 30, 1999 as compared to $825,000 of cash flow used in
operations for the comparable 1998 period. The increase is due to the higher net
income level in the 1999 period as compared to the 1998 period coupled with
lower overall working capital requirements in 1999 as compared to 1998.
Inventory at June 30, 1999, decreased $445,000 from December 31, 1998, primarily
due to a lower level of purchases to support the Company's sales. Accounts
receivable at June 30, 1999 decreased $434,00 from December 31, 1998 as a result
of the timing of fourth quarter 1998 sales and strong collections in the first
quarter of 1999. From December 31, 1997 to June 30, 1998, inventory increased
$1.6 million as a result of the timing of inventory receipts, additional on-hand
inventory as a result of Quail's initial manufacturing processes commencing and
lower than expected first half 1998 sales level. From December 31, 1997 to
June 30, 1998, accounts receivable increased by $949,000 due to the timing of
second quarter sales and due to strong collection efforts in the 1997 fourth
quarter. Further, the Company has deferred revenue of $363,000, initially
recorded in the 1999 first quarter, related to the royalty agreement reached as
part of the patent infringement lawsuit settlement. The royalty license fee was
paid in full in March 1999.
The Company's industrial revenue bonds funded through the Massachusetts
Industrial Finance Agency (MIFA) are secured by a letter of credit issued by a
bank which is cross-collateralized and cross-defaulted with the Company's line
of credit, as amended. The bonds consist of six separate series each with
differing interest rates and maturities. Interest rates range from 4.2% to 4.3%
and are subject to adjustment in 2004 and 2009. The maximum principal payable in
any one year is $320,000 payable in 2014. The bonds are secured by an
irrevocable letter of credit issued by a bank, which expires in March 2004. This
letter of credit is secured by substantially all assets of the Company and does
not affect the availability under the Company's revolving credit line. As of
June 30, 1999, the Company had $3,465,000 outstanding related to the MIFA
obligations.
The Company believes that its current funds together with its line of credit
facility and cash generated from operations will be sufficient to fund the
Company's operations, debt service and capital requirements at least through the
next 12 months.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability
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measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137,
DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133, delaying the effective dates of
SFAS No. 133 from June 15, 1999 to June 15, 2000. Statement 133 cannot be
applied retroactively. The Company believes that the adoption of Statement 133
will not have a material effect on its financial statements.
MATERIAL UNCERTAINTIES
YEAR 2000 COMPLIANCE. The Year 2000 (Y2K) issue exists because many
computer systems and applications currently use two-digit date fields to
designate a year. As the century date change occurs, many date sensitive systems
will recognize the year 2000 as 1900, or not at all. This inability to recognize
or properly treat Y2K may cause systems to process critical financial and
operational information incorrectly. The Company utilizes software and related
technologies throughout its business that could be affected by the date change
in Y2K. The Company has established an internal task force which has developed a
testing and compliance program to ascertain whether and to what extent there may
be a need to update its computer systems to become Y2K compliant. Additionally,
the Company is in the process of communicating with key third party vendors and
customers to ascertain their ability to become compliant. To manage its Y2K
program, the Company has divided its efforts into four program areas:
1) Information Technology (computer hardware, software, and other data exchange
sources); 2) Physical Plant (manufacturing equipment and facilities);
3) Products (including product development); and 4) Extended Enterprise
(suppliers and customers). For each of these program areas, the Company is using
a four-step approach: 1) Ownership (creating awareness, assigning tasks);
2) Inventory (listing items to be assessed for Y2K readiness); 3) Assessment
(prioritizing the inventoried items, assessing their Y2K readiness, planning
corrective actions, making initial contingency plans); and 4) Corrective Action
Deployment (implementing corrective actions, verifying implementation,
developing, finalizing and executing contingency plans). As of December 31,
1998, the Ownership and Inventory steps were essentially complete for all
program areas. The target completion dates for priority items by remaining steps
are as follows: Assessment--May 1999; Corrective Action
Deployment--December 1999. To date, the Company has achieved approximately
ninety percent of its Assessment goals for its four program areas. The
Assessment status for each program area is as follows:
1) Information Technology: Substantially all of the Company's business
information systems (manufacturing, distribution, sales, financial, and
human resources) have been assessed, corrected and verified, and corrected
systems have been or have been identified to be deployed. Hardware
assessment is in process and on schedule for completion. There can be no
assurance that the Company will complete in a timely manner the testing of
such software/hardware products or the development/ installation of any
updates necessary to render such products Y2K compliant. Likewise, there can
be no assurance that the Company will not encounter Y2K problems arising
from these technologies or any other technologies that the Company may
acquire in the future.
2) Physical Plant: Manufacturing equipment assessment is substantially
completed with corrective actions, if necessary, scheduled. Facilities
assessment is in process with continued assessments being made. These
efforts are expected to be completed on schedule.
3) Products: the Company continues to assess the readiness of its
current products. Product assessments are expected to be completed on time.
4) Extended Enterprise: the Company has begun contacting its suppliers
regarding their Y2K readiness. The Company's Y2K supplier program includes
assessing the readiness of its suppliers with a particular focus on those
considered essential for prevention of a material disruption of the
Company's business operations. The assessment is ongoing. The Company is
also discussing Y2K status with selected strategic customers. The ability of
vendors to supply and customers to purchase may be affected by Y2K issues,
as vendors may be unable to supply and/or customers unable to
49
<PAGE>
purchase. There can be no assurance that the Company will not experience a
disruption in its business as a result of third party noncompliance, the
occurrence of which may have a material adverse effect on the Company's
business, operating results and financial condition.
Costs to Address Y2K Issues: Although the Company does not expect, and has
not as of this date incurred, the non-capitalized costs associated with its Y2K
project plan to be material, outside of labor time incurred by existing
employees, there can be no assurance that unidentified Y2K problems will not
cause the Company to incur material expenses in responding to such problems or
otherwise have a material adverse effect on the Company's business, operating
results and financial performance. Capitalizable costs, including costs of new
hardware and software and the related costs of implementation and installation
will approximate $1.6 million.
Risks of Y2K Issues and Contingency Plans: The Company continues to assess
the Y2K issues relating to its physical plant, products, suppliers and
customers, as well as legal risks that may be associated with noncompliance. The
Company's contingency planning process will be intended to mitigate worst-case
business disruptions, such as delays in product delivery, which could
potentially result from events such as supply chain disruptions. As noted above,
the Company expects its contingency plans to be complete by December 1999. If
there are unidentified dependencies on internal systems or on key third parties
to operate the business, or if any required modifications are not completed in a
timely basis or are more costly to implement than currently anticipated, the
Company's business, financial condition or results of operations could be
materially adversely affected.
SOURCES OF SUPPLY. The Company purchases substantially all of its
requirements for valves from Asahi Organic Chemicals Industry Co. Ltd., and a
large percentage of the pipe and fittings sold by the Company are supplied by
Alois-Gruber GmbH. The Company has entered into a Merger Agreement with AOC. In
the event that the parties fail to consummate the Merger, the parties have
agreed to continue their supply relationship on a non-exclusive basis until
December 31, 2000. The Company would be permitted to purchase valves at prices
no less favorable than other purchasers in the same territory. Either party will
be permitted to terminate the supply agreement on 90 days notice after
January 1, 2000. The Company's contract with Agru renews automatically for an
additional five-year period unless either party gives notice of termination no
less than twelve months prior to the end of the term. The contract currently
extends through 2004. Although alternative sources of supply are available, the
loss of either AOC or Agru as a source of supply would have a material adverse
effect on the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's purchases of valves are made from its
Japanese supplier and are transacted in Japanese yen. As a result, the Company
is exposed to fluctuations in foreign currency exchange rates. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 119, DISCLOSURE
ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
the Company may use hedging procedures including foreign exchange forward
contracts and currency options in managing the fluctuations in foreign currency
exchange rates. The Company charges foreign currency transaction gains and
losses to operations in accordance with SFAS No. 52, FOREIGN CURRENCY
TRANSLATION.
50
<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Asahi/America, Inc. is traded on the Nasdaq National
Market System under the symbol ASAM. The following table sets forth the range of
high and low selling prices (in U.S. dollars per share) for the common stock of
the Company for the fiscal periods indicated, as reported on the Nasdaq National
Market System. This information reflects inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily reflect actual
transactions.
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
- ----------- -------- --------
<S> <C> <C>
First Quarter............................................... 7.38 5.63
Second Quarter.............................................. 9.00 5.63
Third Quarter............................................... 7.25 5.00
Fourth Quarter.............................................. 6.00 2.63
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
- ----------- -------- --------
<S> <C> <C>
First Quarter............................................... 6.88 2.00
Second Quarter.............................................. 9.00 4.94
Third Quarter............................................... 8.75 6.75
</TABLE>
On October 19, 1999, there were 143 record holders of the Company's common
stock. The Company believes the actual number of beneficial owners of the common
stock is greater than the stated number of holders of record because a large
number of shares of the Company's common stock is held in custodial or nominee
accounts for the benefit of persons other than the record holder.
The Company has never paid a dividend on its common stock and currently
intends to retain immediate future earnings to fund the growth of the business.
In subsequent periods, if the Company has funds legally available for the
payment of dividends, the Board of Directors intends to consider the payment of
dividends. The payment of dividends is within the discretion of the Board of
Directors and will depend upon the Company's earnings, its capital requirements
and financial condition, and other relevant factors.
THE FOREGOING DISCUSSION OF THE COMPANY'S BUSINESS IS HEREBY QUALIFIED IN
ITS ENTIRETY BY THE DISCUSSION IN THE SECTIONS UNDER THE HEADINGS "BACKGROUND TO
THE MERGER" AND "REASONS FOR THE MERGER."
51
<PAGE>
FINANCIAL STATEMENTS
ASAHI/AMERICA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND
1998...................................................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1997 AND 1998.......................... F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998.............. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1997 AND 1998.......................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-7
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND JUNE
30, 1999.................................................. F-23
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999............... F-24
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999.............................. F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Asahi/America, Inc.:
We have audited the accompanying consolidated balance sheets of
Asahi/America, Inc. (a Massachusetts corporation) and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These consolidated financial statements are
the responsibility of Asahi's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Asahi/America, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 16, 1999
(except for the matter discussed in Note 20,
as to which the date is March 8, 1999)
F-2
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
ASSETS
1997 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 915,601 $ 1,056,987
Restricted cash (Note 11(c)).............................. -- 2,855,071
Accounts receivable, less allowance for doubtful accounts
of $263,000 in 1997 and $257,000 in 1998................ 4,212,867 6,154,853
Inventories............................................... 9,335,982 11,373,751
Prepaid expenses and other current assets................. 611,389 1,263,844
----------- -----------
Total current assets.................................... 15,075,839 22,704,506
----------- -----------
PROPERTY AND EQUIPMENT, NET................................. 11,754,268 20,199,720
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,653,868 in
1997 and $1,967,974 in 1998............................. 2,470,335 2,156,229
Other, net................................................ 2,748,438 3,163,592
----------- -----------
Total other assets.................................... 5,218,773 5,319,821
----------- -----------
$32,048,880 $48,224,047
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Demand note payable to a bank............................. $ 1,000,000 $ 4,639,844
Current portion of MIFA obligations....................... 145,000 150,000
Current portion of GECPF obligations...................... 430,000 1,252,200
Current portion of capital lease obligations.............. 149,326 331,042
Accounts payable.......................................... 4,857,107 5,825,677
Accrued expenses.......................................... 991,786 1,678,951
Deferred income taxes..................................... 734,000 517,000
----------- -----------
Total current liabilities............................... 8,307,219 14,394,714
----------- -----------
MIFA OBLIGATIONS, LESS CURRENT PORTION...................... 3,615,000 3,465,000
----------- -----------
GECPF OBLIGATIONS, LESS CURRENT PORTION..................... 1,047,292 10,328,067
----------- -----------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION............. 301,873 522,468
----------- -----------
DEFERRED INCOME TAXES....................................... 177,000 754,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $10.00 par value--
Authorized--1,000,000 shares
Issued and outstanding--none............................ -- --
Common stock, no par value--
Authorized--10,000,000 shares
Issued and outstanding--3,358,669 and 3,382,228 shares
at December 31, 1997 and 1998, respectively........... 13,603,333 13,720,921
Additional paid-in capital................................ 579,130 579,130
Retained earnings......................................... 4,645,533 4,617,247
----------- -----------
18,827,996 18,917,298
----------- -----------
Less--Note receivable from stockholder/officer............ 227,500 157,500
----------- -----------
Total stockholders' equity............................ 18,600,496 18,759,798
----------- -----------
$32,048,880 $48,224,047
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................................. $37,894,238 $37,934,003 $37,578,050
COST OF GOODS SOLD.................................... 23,968,230 23,827,618 24,826,480
----------- ----------- -----------
Gross profit........................................ 13,926,008 14,106,385 12,751,570
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 9,751,265 10,647,716 11,614,172
RESEARCH AND DEVELOPMENT.............................. -- 185,830 328,579
----------- ----------- -----------
Income from operations.............................. 4,174,743 3,272,839 808,819
INTEREST AND OTHER INCOME............................. 143,606 98,705 406,146
INTEREST EXPENSE...................................... (339,197) (299,695) (696,767)
----------- ----------- -----------
Income before provision for income taxes............ 3,979,152 3,071,849 518,198
PROVISION FOR INCOME TAXES............................ 1,541,000 1,290,000 340,837
----------- ----------- -----------
Net income before cumulative effect of change in
accounting principle.............................. $ 2,438,152 $ 1,781,849 $ 177,361
=========== =========== ===========
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF BENEFIT FOR INCOME TAXES OF $137,944 (NOTE
3).................................................. $ -- $ -- $ (205,647)
=========== =========== ===========
Net income (loss)................................... $ 2,438,152 $ 1,781,849 $ (28,286)
=========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............ $ .82 $ .53 $ .05
=========== =========== ===========
BASIC AND DILUTED (LOSS) PER SHARE EFFECT OF
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAXES................................. $ -- $ -- $ (.06)
=========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE........... $ .82 $ .53 $ (.01)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING......... 2,972,877 3,349,335 3,376,199
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING,
ASSUMING DILUTION................................... 2,987,932 3,349,335 3,376,199
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK NOTE RECEIVABLE
------------------------ FROM TOTAL
NUMBER OF NO PAR ADDITIONAL RETAINED STOCKHOLDER/ STOCKHOLDERS'
SHARES VALUE PAID-IN CAPITAL EARNINGS OFFICER EQUITY
---------- ----------- --------------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995............ 2,340,000 $ 7,338,283 $ 20,163 $ 425,532 $(350,000) $ 7,433,978
Initial public offering of common
stock, net of issuance costs of
$1,334,129........................ 1,000,000 6,165,871 -- -- -- 6,165,871
Proceeds from note receivable from
stockholder/officer............... -- -- -- -- 52,500 52,500
Exercise of stockholder's stock
repurchase rights................. -- -- 113,967 -- -- 113,967
Net income.......................... -- -- -- 2,438,152 -- 2,438,152
--------- ----------- -------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1996............ 3,340,000 13,504,154 134,130 2,863,684 (297,500) 16,204,468
Issuance of stock under Employee
Stock Purchase Plan............... 18,669 99,179 -- -- -- 99,179
Proceeds from note receivable from
stockholder/officer............... -- -- -- -- 70,000 70,000
Proceeds from contingent shares
(Note 13(a))...................... -- -- 445,000 -- -- 445,000
Net income.......................... -- -- -- 1,781,849 -- 1,781,849
--------- ----------- -------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1997............ 3,358,669 13,603,333 579,130 4,645,533 (227,500) 18,600,496
Issuance of stock under Employee
Stock Purchase Plan............... 23,559 117,588 -- -- -- 117,588
Proceeds from note receivable from
stockholder/officer............... -- -- -- -- 70,000 70,000
Net loss............................ -- -- -- (28,286) -- (28,286)
--------- ----------- -------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1998............ 3,382,228 $13,720,921 $579,130 $4,617,247 $(157,500) $18,759,798
========= =========== ======== ========== ========= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 2,438,152 $ 1,781,849 $ (28,286)
Cumulative effect of change in accounting principle, net
of income taxes of $137,944............................. -- -- 205,647
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization........................... 1,284,827 1,461,015 1,763,794
(Benefit) provision for deferred income taxes........... (152,000) (115,000) 360,000
Changes in assets and liabilities, net of 1997
acquisition (Note 17)--
Accounts receivable................................... (845,290) 1,078,457 (1,941,986)
Inventories........................................... (466,272) (507,748) (2,037,769)
Prepaid expenses and other current assets............. 447,708 (381,023) (652,455)
Accounts payable...................................... 180,921 (533,091) 968,570
Accrued expenses...................................... 614,627 (621,753) 687,165
----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ 3,502,673 2,162,706 (675,320)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (3,388,476) (2,472,977) (1,661,277)
Acquisition of certain assets of Universal Flow Monitors,
Inc..................................................... -- (3,000,000) --
Decrease (increase) in other assets....................... 20,927 (1,187,013) (775,803)
----------- ----------- -----------
Net cash used in investing activities............... (3,367,549) (6,659,990) (2,437,080)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments on) proceeds from demand note payable to a
bank.................................................... (3,377,000) 1,000,000 3,639,844
Payments on capital lease obligations..................... (104,524) (126,410) (302,383)
Proceeds from reimbursement of amounts financed under
GECPF................................................... -- 1,477,292 311,143
Payments on MIFA obligations.............................. (68,336) (135,000) (145,000)
Payments on GECPF obligations............................. -- -- (704,066)
Proceeds from initial public offering, net of issuance
costs................................................... 6,165,871 -- --
Proceeds from note receivable from stockholder/officer.... 52,500 70,000 70,000
Proceeds from stock issued under ESPP..................... -- 99,179 117,588
Proceeds from sales-leaseback financing................... -- -- 266,660
----------- ----------- -----------
Net cash provided by financing activities........... 2,668,511 2,385,061 3,253,786
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,803,635 (2,112,223) 141,386
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 224,189 3,027,824 915,601
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 3,027,824 $ 915,601 $ 1,056,987
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest................................................ $ 290,363 $ 230,278 $ 722,264
=========== =========== ===========
Income taxes............................................ $ 1,106,196 $ 1,731,351 $ 209,500
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of equipment under capital lease
obligations............................................. $ 13,063 $ 263,526 $ 438,951
=========== =========== ===========
Exercise of stockholder's stock repurchase right.......... $ 113,967 $ -- $ --
=========== =========== ===========
Purchase of certain assets with contingent restricted
stock................................................... $ -- $ 445,000 $ --
=========== =========== ===========
Acquisition of equipment under GECPF bond financing....... $ -- $ -- $ 7,711,020
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION
(a) HISTORICAL BACKGROUND
Asahi/America, Inc. ("the Company") was established on August 18, 1977 as a
Massachusetts corporation and is involved in the manufacturing and distribution
of thermoplastic valves, actuators and controls, piping systems, flow meters,
filtration systems and related components for environmentally sensitive and
industrial applications. These applications include chemical processing,
semiconductor and pharmaceutical manufacturing, wastewater treatment, as well as
for the aquarium and mining industries. The Company has exclusive distribution
agreements with two international manufacturers (see Note 9).
(b) QUAIL PIPING PRODUCTS, INC.
In July 1997, the Company established a wholly owned subsidiary, Quail
Piping Products, Inc. ("Quail") (the Company and Quail, collectively, referred
to as the "Company"), to manufacture and market polyethylene piping systems for
use in water, sewer and drain applications and polyethylene duct pipe for fiber
optic cable for use in the telecommunications industry. Quail's manufacturing
facilities, which are located in Magnolia, Arkansas and Kingman, Arizona, are
being financed principally by Industrial Development Bonds through GE Capital
Public Finance, Inc. (GECPF) (see Note 11).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described below and elsewhere in the notes to
consolidated financial statements. The preparation of these consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Asahi Engineered Products, Inc.
and Quail. All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) REVENUE RECOGNITION
The Company recognizes revenue on product sales at the time the products are
shipped. Rental revenues, which are less than 10% of total revenues for all
periods presented, are recognized over the related rental period.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. Cash equivalents at December 31, 1998
consist mainly of treasury bills.
F-7
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) INVENTORIES
The Company accounts for inventories using the lower of last-in, first-out
(LIFO) cost or market value. Quail accounts for inventories using the lower of
first-in, first-out (FIFO) cost or market value.
(e) DEPRECIATION
The Company provides for depreciation using the straight-line method and
charges to operations amounts estimated to allocate the cost of the assets over
their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- --------------------
<S> <C>
Machinery and equipment........................ 5-10 years
Furniture and fixtures......................... 7 years
Building and improvements...................... 7.5-40 years
</TABLE>
(f) GOODWILL
Goodwill was recorded as a result of a change in ownership control in 1989,
from the acquisition of Poly-Flowlines Company in 1994 and from the acquisition
of the vortex flow meter division of Universal Flow Monitors, Inc. in 1997 (see
Note 17). Goodwill from the Poly-Flowlines acquisition and the change in
ownership control is being amortized on the straight-line basis over 10 years.
Goodwill related to the vortex flow meter acquisition is being amortized on the
straight-line basis over 20 years.
(g) OTHER ASSETS
Other assets primarily consist of costs of obtaining patents and costs
related to internal use software. The Company provides for amortization using
the straight-line method and charges to operations amounts estimated to allocate
the cost of the assets over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- ------------------
<S> <C>
Software costs.................................. 5 years
Patents......................................... 5-20 years
</TABLE>
The Company assesses the realizability of intangible assets including
goodwill in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. SFAS No. 121 requires, among other things, that an
entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. As a result of its review, the Company
does not believe that any impairment related to its long-lived assets currently
exists.
(h) RESEARCH AND DEVELOPMENT COSTS
The Company charges research and development costs to operations as
incurred.
F-8
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, EARNINGS PER SHARE. This statement established standards for computing
and presenting earnings per share and applies to all entities with publicly
traded common stock or potential common stock. This statement is effective for
fiscal years ending after December 15, 1997. The Company adopted the provisions
of SFAS No. 128 as of December 31, 1997. Accordingly, earnings per share for
1996 were retroactively restated to reflect the adoption of SFAS No. 128.
Basic net income per share and basic pro forma net income per share were
computed by dividing net income or pro forma net income by the weighted average
number of common shares outstanding during the period. Diluted net income per
share and diluted pro forma net income per share were computed by dividing net
income or pro forma net income by diluted weighted average number of common and
common equivalent shares outstanding during the period. The weighted average
number of common equivalent shares outstanding has been determined in accordance
with the treasury-stock method. Common stock equivalents consist of common stock
issuable on the exercise of outstanding options.
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ---------
<S> <C> <C> <C>
Basic--
Net income (loss)............................... $2,438,152 $1,781,849 $ (28,286)
========== ========== =========
Weighted average common shares outstanding...... 2,972,877 3,349,335 3,376,199
Diluted--
Effect of dilutive securities
Stock options................................... 15,055 -- --
---------- ---------- ---------
Weighted average common shares outstanding,
assuming dilution............................. 2,987,932 3,349,335 3,376,199
---------- ---------- ---------
Basic and diluted earnings per share.............. $ .82 $ .53 $ (.01)
========== ========== =========
</TABLE>
As of December 31, 1996, 1997 and 1998, 334,945, 313,167 and 311,500
options, respectively, were outstanding but not included in the diluted weighted
average common share calculation as the effect would have been antidilutive.
(j) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The financial instrument that potentially subjects the Company
to concentrations of credit risk is accounts receivable. As of December 31,
1996, 1997 and 1998, one customer accounted for 20%, 36% and 21% of total
accounts receivable, respectively. The Company had one customer account for 23%,
32% and 26% of total revenues in 1996, 1997 and 1998, respectively.
F-9
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized in
earnings currently, unless specific hedge accounting criteria are met. Special
accounting or qualifying hedges allows derivative gains and losses to offset
related results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
Company may also implement the SFAS No. 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantially
modified after December 31, 1997 (and, at the company's election, before
January 1, 1998). The Company believes that the adoption of SFAS No. 133 will
not have a material effect on its financial statements.
(l) FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, which
include cash and cash equivalents, accounts receivable, accounts payable and
debt, approximates their carrying value.
(3) ACCOUNTING FOR START-UP COSTS
In May 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES.
SOP 98-5, which is effective for fiscal years beginning after December 15, 1998
but provides for early adoption, requires that the costs of start-up activities,
including organization costs, be expensed as incurred. Initial adoption of SOP
98-5 should be reported as a cumulative effect of a change in accounting
principle. During the quarter ended December 31, 1998 the Company adopted the
provisions of SOP 98-5, which resulted in a net charge to income of $206,000
(net of income taxes of $138,000) of previously capitalized start-up costs.
Amortization expense related to these costs through September 30, 1998 was not
material to the financial statements.
(4) ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary for the allowance for doubtful accounts activity is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year............................ $244,893 $283,067 $263,469
Amounts charged to expense.......................... 67,382 -- --
Amounts written-off................................. (29,208) (19,598) (6,555)
-------- -------- --------
Balance, end of year.................................. $283,067 $263,469 $256,914
======== ======== ========
</TABLE>
F-10
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(5) INVENTORIES
Inventories at December 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Raw materials....................... $ 514,157 $ 909,462
Finished goods...................... 8,643,781 10,055,545
LIFO surplus........................ 178,044 408,744
---------- -----------
$9,335,982 $11,373,751
========== ===========
</TABLE>
Had the first-in, first-out (FIFO) method of inventory costing been used by
Asahi, inventories at December 31, 1997 and 1998 would have been $9,157,938 and
$10,965,007, respectively.
(6) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Construction period interest, on
borrowings used to finance construction of facilities, is included in the cost
of the construction facilities. Property and equipment and accumulated
depreciation consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Machinery and equipment............................ $ 6,750,027 $14,049,448
Furniture and fixtures............................. 525,887 642,851
Building and improvements.......................... 5,654,030 7,997,224
Land............................................... 1,255,134 1,415,765
Construction-in-process............................ 1,831,388 1,181,256
----------- -----------
16,016,466 25,286,544
Less--Accumulated depreciation..................... 4,262,198 5,086,824
----------- -----------
$11,754,268 $20,199,720
=========== ===========
</TABLE>
(7) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Accrued payroll/payroll-related....................... $416,811 $ 428,066
Other accruals........................................ 574,975 1,250,885
-------- ----------
$991,786 $1,678,951
======== ==========
</TABLE>
(8) INCOME TAXES
The Company accounts for income taxes under the liability method in
accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109,
deferred tax assets or liabilities are computed based on the differences between
the financial statement and income tax bases of assets and liabilities as
measured by the enacted tax rates. The provision for deferred taxes is based on
changes in the asset or liability from
F-11
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(8) INCOME TAXES (CONTINUED)
period to period. The provision for income taxes consists of the following for
the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ---------
<S> <C> <C> <C>
Current--
Federal................................. $1,436,000 $1,192,000 $(121,077)
State................................... 257,000 213,000 (36,030)
---------- ---------- ---------
1,693,000 1,405,000 (157,107)
---------- ---------- ---------
Deferred--
Federal................................. (111,000) (66,000) 290,000
State................................... (41,000) (49,000) 70,000
---------- ---------- ---------
(152,000) (115,000) 360,000
---------- ---------- ---------
$1,541,000 $1,290,000 $ 202,893
========== ========== =========
</TABLE>
The components of the net deferred tax liability recognized in the
accompanying consolidated balance sheets with the approximate income tax effect
of each type of temporary difference are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Nondeductible reserves and accruals................ $ 445,000 $ 666,000
Depreciation....................................... (177,000) (820,000)
LIFO reserve....................................... (1,179,000) (1,117,000)
----------- -----------
Net deferred tax liability..................... $ (911,000) $(1,271,000)
=========== ===========
</TABLE>
The Company's policy is to provide for a valuation allowance on deferred tax
assets for which realization is uncertain.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Provision at federal statutory rate................ 34.0% 34.0% 34.0%
State income tax, net of federal benefit........... 4.2 6.3 11.8
Change in valuation allowance...................... -- (1.8) --
Amortization of goodwill........................... 1.8 2.1 34.5
Other, net......................................... (1.3) 1.4 35.9
---- ---- -----
Effective tax rate............................... 38.7% 42.0% 116.2%
==== ==== =====
</TABLE>
Other, net consists primarily of nondeductible meals and entertainment
expenses and premiums paid for officers' life insurance policies.
F-12
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(9) RELATED PARTY ARRANGEMENTS
(a) DISTRIBUTORSHIP AGREEMENT AND INVENTORY ARRANGEMENTS
The Company has a 10-year exclusive distributorship agreement with a
Japanese valve manufacturer, Asahi Yukizai Kogyo Co., LTD., (official English
translation, Asahi Organic Chemical Industry Company LTD) (AOC) and Nichimen
Corporation, a Japanese trading company, and Nichimen America, Inc., the
Japanese trading company's U.S. affiliate (together, Nichimen). Both AOC and
Nichimen are greater than 10% stockholders of the Company. Under the terms of
the agreement, the Company is expected to purchase a total of $140,000,000 of
merchandise over a 10-year period, which began January 2, 1990. The agreement
provides for annual purchase guidelines but does not assess penalties if either
the annual purchase guidelines or other cumulative totals are not met. The
Company has made cumulative purchases of approximately $81,792,000 under this
agreement through December 31, 1998. For their services, Nichimen is paid by AOC
a combined markup of approximately 8% of the invoiced price of the Company's
purchases from AOC.
The Company purchased approximately $10,351,000, $9,664,000 and $10,345,000
of valves from AOC during the years ended December 31, 1996, 1997 and 1998,
respectively. The accompanying consolidated balance sheets include accounts
payable to Nichimen America, Inc. of approximately $2,909,000 and $2,728,000 at
December 31, 1997 and 1998, respectively.
To facilitate purchases from AOC, the Company has, from time to time, made
arrangements with a bank whereby irrevocable letters of credit for 180 days are
drawn upon shipment. Currently, Nichimen America, Inc. allows the Company to
purchase on open account and to maintain a payable balance of up to $8 million.
At December 31, 1997 and 1998, there were no letters of credit issued by the
bank that have been drawn under these arrangements.
(b) RELATED PARTY TRANSACTIONS
The Company sells products to an entity controlled by the chief executive
officer's father. Sales to this customer were $306,751, $312,331 and $255,537 in
1996, 1997 and 1998, respectively. Management believes that all transactions
were made at terms no more favorable than similar transactions with nonrelated
parties.
(10) FOREIGN CURRENCY TRANSACTIONS
The Company charges foreign currency transaction gains or losses to
operations in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. The
foreign currency transaction gain (loss) recorded in cost of goods sold in the
accompanying consolidated statements of income for the years ended December 31,
1996, 1997 and 1998 was approximately $378,000, $345,000 and $(53,000),
respectively.
The Company purchases product through Nichimen America, Inc. denominated in
Japanese yen. The Company may enter into foreign exchange forward and option
contracts to reduce the exposure to changes in foreign currencies related to the
purchase of inventories. Gains and losses on the contracts that are hedges of
firm commitments are deferred and recognized in the accompanying consolidated
statement of income in the same period as the related transaction.
In accordance with SFAS No. 119, DISCLOSURE ABOUT DERIVATIVE FINANCIAL
INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, at December 31, 1997 and
1998, the Company had foreign exchange forward
F-13
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(10) FOREIGN CURRENCY TRANSACTIONS (CONTINUED)
contracts, all having maturities of less than one year, to buy Japanese yen in
amounts equal to $962,106 and $972,319 respectively. The deferred gain related
to these contracts as of December 31, 1997 was $64,793. There was no deferred
gain or loss related to these contracts as of December 31, 1998.
(11) DEBT
(a) MIFA OBLIGATIONS
In connection with the purchase of its Malden facility, the Company issued
bonds through the Massachusetts Industrial Finance Agency (MIFA) for a total of
$4,150,000. The bonds bear interest at rates that range from 4.2% to 5.1%.
Interest is payable semiannually and is subject to adjustment in 1999, 2004 and
2009. The bonds are payable in annual installments, which commenced on March 1,
1995, of $125,000; the installments increase $5,000 per year through 1999. The
bonds require payments of $160,000 (increasing $5,000 to $15,000 each year) to
$320,000 per year from 2000 to 2014. The bonds are secured by an irrevocable
letter of credit issued by a bank, which expires in March 1999. This letter of
credit, which does not affect the availability under Asahi's revolving credit
lines, is subject to the same covenants and is cross-collateralized and
cross-defaulted with the Company's revolving credit lines (Note 11 (b)). As of
December 31, 1998, the Company had $3,615,000 outstanding related to the MIFA
obligations. A substitute letter of credit was obtained on March 1, 1999 which
expires March 2004 and the interest rate was adjusted from 5.10% to 4.30%.
(b) REVOLVING CREDIT LINES
In January 1997, the Company and its bank executed a loan agreement that
provides for a $5,000,000 committed unsecured revolving credit line (the
Committed Line) and a $5,000,000 discretionary unsecured revolving credit line
(the Discretionary Line). Interest on the credit lines is based on the prime
rate (8.5% at December 31, 1997 and 7.75% at December 31, 1998) or LIBOR plus
1.65%, as elected by the Company at each borrowing date. The Company is required
to maintain certain financial ratios, including, among others, minimum working
capital and tangible net worth, as defined in the agreements. The Discretionary
Line expired on September 30, 1997. The Committed Line extended through
September 30, 1998.
In June 1998, the Company and its bank executed a new loan agreement for an
$11,000,000 secured, committed revolving line of credit (the New Committed
Line). The New Committed Line replaced the Committed Line and is secured by
substantially all assets of the Company and extends through January 31, 2000.
Interest on this credit line is based on the prime rate or LIBOR plus 1.55% to
2.40%. There is an unused fee ranging from .15% to .25%, based on borrowing
levels. The Company is required to maintain certain financial ratios, including,
among others, minimum working capital, debt service and tangible net worth. The
credit line is for working capital and merger and acquisition purposes. As of
December 31, 1998, the Company had $4,639,844 outstanding under the New
Committed Line.
Subsequent to year-end, the New Committed Line was retroactively amended as
of December 31, 1998. The amended agreement provided that the maximum amount of
borrowings, including issued letters of credit, which may at any time be
outstanding, be the lesser of $11 million or the sum of 80% of qualified
accounts receivable and 50% of eligible inventory, as defined. The interest on
borrowings is at the prime rate plus 1%. The Company is required to maintain
certain financial ratios, including, among others,
F-14
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(11) DEBT (CONTINUED)
minimum working capital, debt service and tangible net worth, as defined in the
amended agreement. The Company was in compliance with these covenants under the
amended agreement as of December 31, 1998.
(c) GECPF OBLIGATIONS
In connection with the purchase of the building and manufacturing equipment
for Quail in Magnolia, Arkansas, GECPF financed the purchase through the
issuance of $4,300,000 of Arkansas State Industrial Revenue Bonds, of which
$3,600,000 represents bonds related to equipment and $700,000 represents bonds
related to real estate, building improvements and other equipment,
(collectively, the Arkansas Borrowings). The Arkansas Borrowings bear interest
at 5.89% commencing January 1, 1998 and are payable monthly. Principal payments
on the Arkansas Borrowings are $35,833 per month commencing January 1, 1998 and
end December 31, 2007. The equipment bonds are secured by the related financed
assets and the real estate bonds are secured by a self-reducing letter of credit
equal to the outstanding principal balance plus 90 days interest, which reduces
the availability under the Company's line of credit.
In June 1998, the Company and Quail purchased a second manufacturing
facility in Kingman, Arizona, commencing production of fiber optic cable duct in
October 1998. In connection with the purchase of the building and manufacturing
equipment for this facility, GECPF financed the purchase through the issuance of
$8,000,000 of County of Mohave Industrial Development Bonds, of which $6,205,000
represents bonds related to equipment and $1,795,000 represents bonds related to
real estate, building improvements and other equipment (collectively, the
Arizona Borrowings). The Arizona Borrowings bear interest at 5.65% which began
September 27, 1998 and are payable monthly. Principal payments on the Arizona
Borrowings are $68,517 per month from September 27, 1998 to August 27, 2003 and
$64,817 per month from September 27, 2003 to August 27, 2008. The equipment
bonds are secured by the related financed assets and the real estate bonds are
secured by a self-reducing letter of credit equal to the outstanding principal
balance plus 90 days interest, which reduces the availability under the
Company's line of credit.
As of December 31, 1998, there was $11,580,267 outstanding related to the
GECPF obligations. There was $2,855,071 of proceeds remaining in escrow, to be
disbursed as final payments of the equipment and real estate. This amount is
included in restricted cash in the accompanying consolidated balance sheet.
In accordance with both the Arkansas Borrowings and the Arizona Borrowings
(collectively, the Borrowings), the Company is required to maintain certain
financial ratios, including, among others, minimum working capital, debt service
and tangible net worth, as defined. The Company was not in compliance with
certain of its financial covenants as of December 31, 1998. Subsequent to
year-end, the Company received a waiver for the events of noncompliance as of
December 31, 1998 and the Borrowings were amended, changing the covenant ratios
for 1999 and thereafter. The Company would have been in compliance with all of
the required financial ratios as of December 31, 1998 under the agreement, as
amended.
F-15
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(11) DEBT (CONTINUED)
(d) CAPITAL LEASES
The Company leases certain equipment under capital leases. Future minimum
lease payments under these leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL
YEAR LEASES
- ---- --------
<S> <C>
1999........................................................ $390,167
2000........................................................ 375,068
2001........................................................ 134,083
2002........................................................ 34,981
2003........................................................ 13,159
--------
Total minimum lease payments............................ 947,458
Less--Amount representing interest........................ 93,948
--------
Capital lease obligations............................... 853,510
Less--Current portion of capital lease obligations........ 331,042
--------
$522,468
========
</TABLE>
(12) STOCKHOLDERS' EQUITY
(a) NOTE RECEIVABLE FROM STOCKHOLDER/OFFICER
On October 1, 1991, the Company loaned $350,000 to a stockholder/officer of
the Company. The terms of the loan were amended on March 31, 1993, and interest
began accruing on April 1, 1996 at the prime rate (7.75% as of December 31,
1998) plus 1%. The outstanding principal and interest are due in equal quarterly
payments, which commenced April 1996, over a five-year period. The proceeds of
the loan were used for the purchase of the Company common stock by the officer
from another stockholder. The balance outstanding under this note at
December 31, 1998 was $157,500.
(b) INITIAL PUBLIC OFFERING
In May 1996, the Company sold 1,334,000 shares of common stock to the
public, at an offering price of $7.50 per share (including 174,000 shares sold
pursuant to an overallotment option exercised by the underwriters), of which
1,000,000 shares were sold by the Company and 334,000 shares were sold by
selling stockholders. Net proceeds to the Company were $6,165,871 after
deducting offering expenses of $1,334,129.
(c) STOCK SPLIT
In March 1996, the Board of Directors approved an 836-to-1 stock split of
the Company's common stock. All share and per share amounts have been
retroactively restated as a result of this stock split.
F-16
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(12) STOCKHOLDERS' EQUITY (CONTINUED)
(d) PREFERRED STOCK
The Board of Directors has the authority to issue up to 1,000,000 shares of
preferred stock, $10.00 par value, in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action of
the stockholders.
(13) STOCK-BASED COMPENSATION PLANS
(a) QUAIL EXECUTIVE STOCK OPTIONS
In connection with the establishment of Quail, the Company and the
individual hired as President of Quail (the Executive) entered into a stock
purchase agreement whereby the Company agreed to sell to the Executive 68,461
shares of the Company's common stock for $6.50 per share if certain financial
performance milestones are met in any one of the first three years of Quail's
operation. The purchase price for the shares was paid to the Company in
July 1997 and was in the form of certain equipment and trademark rights valued
at $145,000 and a $300,000 irrevocable letter of credit. The total purchase
price of $445,000 was recorded in stockholders' equity as additional paid-in
capital. If the performance milestones are not met, the shares will not be sold
to the Executive and the Executive forfeits to the Company the amounts paid for
the shares.
In March 1998, prior to any of the performance milestones being met, the
Company amended its agreement with the Executive whereby the Company issued the
Executive an option to purchase 68,461 shares of the Company's common stock for
$6.50 per share which was the fair market value of the underlying common stock.
As such, the option grant has been accounted for under fixed plan accounting and
no compensation charge has been recognized. The option vests in seven annual
increments beginning on the first anniversary of the date of grant. The amended
agreement provides for accelerated vesting in any of the first three years if
the performance milestones are met.
(b) EQUITY INCENTIVE PLAN
On March 11, 1996, the Board of Directors and stockholders approved the
Asahi/America Equity Incentive Plan (the Incentive Plan). The aggregate number
of shares of common stock that may be issued pursuant to the Incentive Plan is
330,000 shares. The Company may grant incentive stock options and other stock
compensation arrangements to eligible employees and consultants. The exercise
price of each incentive stock option may not be less than 100% (110% for greater
than 10% stockholders) of the fair market value of common stock at the date of
grant. Nonqualified stock options may be granted to any employee, officer,
director or consultant of the Company. The terms of each nonqualified stock
option are determined by the Board of Directors. All options vest in three equal
annual increments beginning on the first anniversary of the date of grant.
(c) INDEPENDENT DIRECTORS' STOCK OPTION PLAN
On March 11, 1996, the Board of Directors and stockholders approved the
Asahi/America Independent Directors' Stock Option Plan (the Directors' Plan).
The Directors' Plan authorizes the issuance of an option to each Company
director who is neither an employee of Asahi nor a holder of, or affiliated with
or
F-17
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(13) STOCK-BASED COMPENSATION PLANS (CONTINUED)
related to a holder of, 5% or more of Asahi's common stock, to purchase up to
10,000 shares of Asahi's common stock on the date of election to the Board of
Directors. These shares are granted at fair market value and are fully vested
upon grant. A total of 30,000 shares of common stock is reserved under the
Directors' Plan.
The following schedule summarizes the activity under the Incentive Plan and
the Directors' Plan for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Granted, Fiscal 1996...................................... 359,500 $7.56
Canceled................................................ (9,500) 7.50
------- -----
Outstanding, December 31, 1996............................ 350,000 7.56
Granted................................................. 16,500 7.83
Canceled................................................ (53,333) 7.50
------- -----
Outstanding, December 31, 1997............................ 313,167 7.58
Granted................................................. 36,000 7.11
Canceled................................................ (37,667) 7.45
------- -----
Outstanding, December 31, 1998............................ 311,500 $7.53
======= =====
</TABLE>
The range of exercise prices for the options outstanding at December 31,
1998 was $6.63 to $9.50 per share. Options canceled during the years ended
December 31, 1996, 1997 and 1998 related primarily to employee terminations.
There were 196,167 stock options exercisable under both stock option plans
as of December 31, 1998. The weighted average exercise price was $7.59 and the
range of actual exercise prices was $7.50 to $9.50 for the shares exercisable at
December 31, 1998.
There were 48,500 total stock options available for future grants under the
equity incentive plan as of December 31, 1998. There were no stock options
available for future grant under the Directors' Plan.
(d) EMPLOYEE STOCK PURCHASE PLAN
In July 1996, the Company established the Asahi/America, Inc. Employee Stock
Purchase Plan (the Purchase Plan), which allows substantially all employees to
acquire shares of common stock of the Company. The Purchase Plan authorizes the
issuance of up to a total of 150,000 shares of common stock to participating
employees.
The price at which shares may be purchased is 85% of the fair market value
per share of the common stock on either the semiannual offering commencement
date or the semiannual offering termination date. Purchases under the Purchase
Plan are subject to certain limitations, as defined. In 1997 and 1998, there
were 18,669 and 23,559 shares issued under the Purchase Plan, respectively.
F-18
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(13) STOCK-BASED COMPENSATION PLANS (CONTINUED)
(e) PROFORMA ADJUSTMENT
SFAS No. 123 established a fair-value-based method of accounting for
stock-based compensation plans. The Company adopted the disclosure-only
alternative under SFAS No. 123 for stock options granted to employees and
directors, which requires disclosure of the pro forma effects on earnings and
earnings per share as if the fair value accounting as calculated under SFAS
No. 123 had been used, as well as certain other information. The Company
accounts for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, as permitted by
SFAS No. 123.
The Company had no stock option grants prior to 1996; accordingly, the
Company has computed only the pro forma disclosures required under SFAS No. 123
for all stock options granted since 1996 and under the Purchase Plan using the
Black-Scholes option pricing model.
The assumptions used for the three years ended December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Risk-free interest rates......................... 6.48%-6.69% 6.20%-6.38% 5.40%-5.61%
Expected dividend yield.......................... 0% 0% 0%
Expected lives................................... 5 years 5 years 5 years
Expected volatility.............................. 25% 25% 25%
Weighted average remaining contractual life of
options outstanding............................ 9.33 years 8.51 years 7.92 years
Weighted average fair value of options granted... $2.70 $2.77 $2.24
</TABLE>
The pro forma effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ---------
<S> <C> <C> <C>
Net income (loss) as reported............................. $2,438,152 $1,781,849 $ (28,286)
========== ========== =========
Pro forma net income (loss)............................... $2,226,948 $1,435,489 $(360,926)
========== ========== =========
Basic and diluted proforma earnings (loss) per share as
reported................................................ $ .82 $ .53 $ (.01)
========== ========== =========
Pro forma basic and diluted proforma earnings (loss) per
share................................................... $ .77 $ .43 $ (.11)
========== ========== =========
</TABLE>
F-19
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(14) LEASE COMMITMENTS
The Company leases certain office space and certain equipment under
operating leases through July 2003. The approximate future minimum lease
payments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
1999........................................................ $255,000
2000........................................................ 168,000
2001........................................................ 33,000
2002........................................................ 3000
2003........................................................ 2,000
--------
Total minimum lease payments............................ $461,000
========
</TABLE>
Rental expense incurred under these leases and charged to operations was
approximately $204,000, $344,000 and $288,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
(15) OTHER EMPLOYEE BENEFITS
(a) PROFIT SHARING PLAN
The Asahi/America, Inc. Profit Sharing Plan (the Plan) is a combined 401(k)
and profit sharing plan.
Employer contributions for the profit sharing portion of the Plan are
discretionary and determined by the Board of Directors. The Company made a
contribution to the Plan of $100,000 in 1996. There was no contribution made in
1997 or 1998.
Under the terms of the 401(k) portion of the Plan, eligible employees may
contribute limited percentages of their salaries to the Plan, and the Company
matches a portion. The Company's matching contributions were approximately
$31,000, $43,000 and $49,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
(b) POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company has no obligations for postretirement or postemployment
benefits.
(16) SETTLEMENT WITH EQUIPMENT VENDOR
Included in other income for the year ended December 31, 1998 is a gain of
$225,000 received as a result of a settlement related to performance issues,
with the manufacturer of Quail's corrugated equipment. This settlement was in
the form of credits to be taken on future purchases.
(17) BUSINESS SEGMENTS
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating
F-20
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(17) BUSINESS SEGMENTS (CONTINUED)
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions on how
to allocate resources and assess performance. The Company's chief
decision-maker, as defined under SFAS No. 131, is a combination of the President
and Chief Executive Officer, the Chief Financial Officer and other operating and
financial officers. To date, the Company has viewed its operations and manages
its business as two segments, the Company and Quail, as being strategic business
units that offer different products (see Note 1). The Company evaluates the
performance of its operating segments based on revenues from external customers,
net income (loss) before provision from income taxes and total assets.
Summarized financial information concerning the Company's reportable
segments for the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
THE COMPANY
(W/O QUAIL) QUAIL ELIMINATING CONSOLIDATED
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $35,166,327 $2,489,577 $ (77,854) $37,578,050
Net income (loss) before provision for
income taxes............................. 1,094,187 (575,989) -- 518,198
Gross profit............................... 12,137,955 613,615 -- 12,751,570
Selling, general and administrative
expenses................................. 10,475,024 1,139,148 -- 11,614,172
Depreciation and amortization.............. 1,488,915 274,879 -- 1,763,794
Interest expense, net...................... 240,165 275,456 -- 515,621
Accounts receivable, net................... 4,883,737 1,271,116 -- 6,154,853
Inventory, net............................. 10,560,090 813,661 -- 11,373,751
Capital expenditures....................... 814,492 9,027,922 -- 9,842,414
Total assets............................... 36,323,176 16,476,375 (4,575,504) 48,224,047
</TABLE>
As of December 31, 1997, management viewed its operations and managed its
business as one principal segment, the Company. Operations for Quail in 1997
were not significant. As a result, the financial information for the year ended
December 31, 1997 disclosed herein represents all of the material financial
information related to the Company's principal operating segment.
(18) SIGNIFICANT CUSTOMER AND EXPORT SALES
During 1996, 1997 and 1998, one customer accounted for 23%, 32% and 26%
respectively, of net sales. During 1996, 1997 and 1998, export sales accounted
for 4%, 7% and 6%, respectively, of net sales.
(19) ACQUISITION
In May 1997, the Company acquired the vortex flow meter division of
Universal Flow Monitors, Inc. and the Rosaen Company for $3,000,000. The
acquisition was accounted for as a purchase. The results of operations of the
vortex flow meter division have been included in the Company's statement of
income since the date of acquisition. Pro forma information has not been
presented due to immateriality.
F-21
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(19) ACQUISITION (CONTINUED)
The Company allocated the purchase price to the acquired assets as follows:
<TABLE>
<S> <C>
Patents..................................................... $1,100,000
Goodwill.................................................... 1,652,120
Fixed assets................................................ 71,906
Inventory................................................... 155,974
Noncompete agreement........................................ 20,000
----------
$3,000,000
==========
</TABLE>
(20) PATENT LITIGATION
In July 1997, the United States Patent and Trademark Office reconfirmed the
validity of a patent owned by the Company. In August 1997, the Company
instituted a patent infringement suit in the United States District Court in New
York against a competitor. In the fourth quarter of 1997 and first quarter of
1998, the Company incurred approximately $400,000 and $132,000, respectively, in
legal expenses related to this patent issue. These costs are included in
selling, general, and administrative expense in the accompanying statement of
operations. In February 1999, the Court ruled in favor of the Company as it
upheld the validity of the Company's patent. The Court has referred the case to
a Magistrate Judge for an inquest hearing, scheduled for March 5, 1999 and
directed a determination as to damages to be completed within three months of
the hearing. On March 8, 1999, the Company and its competitor reached an
amicable settlement of this case. This settlement included monetary
consideration from the competitor to the Company, as well as the granting by the
Company of a nonexclusive license for this patent to the competitor, totaling
$900,000, which was paid to the Company in March 1999.
F-22
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,057 $ 261
Restricted Cash........................................... 2,855 799
Accounts receivable, less reserves of $257 at December 31,
1998
and $362 at June 30, 1999............................... 6,155 5,720
Inventories............................................... 11,373 10,928
Prepaid expenses and other current assets................. 1,264 1,394
------- -------
Total current assets.................................... 22,704 19,102
PROPERTY AND EQUIPMENT, NET................................. 20,200 23,027
OTHER ASSETS
Goodwill, net of accumulated amortization of $1,968 at
December 31, 1998 and $2,111 at June 30, 1999........... 2,156 2,013
Other, net................................................ 3,164 3,163
------- -------
Total other assets...................................... 5,320 5,176
------- -------
$48,224 $47,305
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Demand note payable to bank............................... $ 4,640 $ 3,100
Current portion of MIFA obligations....................... 150 160
Current portion of GECPF obligations...................... 1,252 1,252
Current portion of capital lease obligations.............. 331 342
Accounts payable.......................................... 5,826 5,725
Accrued expenses.......................................... 1,679 2,376
Deferred revenue.......................................... -- 70
Deferred income taxes..................................... 517 517
------- -------
Total current liabilities............................... 14,395 13,542
------- -------
MIFA OBLIGATIONS, LESS CURRENT PORTION...................... 3,465 3,305
------- -------
GECPF OBLIGATIONS, LESS CURRENT PORTION..................... 10,328 9,760
------- -------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION............. 522 397
------- -------
DEFERRED REVENUE, LESS CURRENT PORTION...................... -- 292
------- -------
DEFERRED INCOME TAXES....................................... 754 754
------- -------
COMMITMENTS................................................. -- --
STOCKHOLDERS' EQUITY
Common Stock.............................................. 13,721 13,779
Additional paid-in capital................................ 579 579
Retained Earnings......................................... 4,617 5,020
------- -------
18,917 19,378
------- -------
Less-Note receivable from stockholder/officer............. 157 123
------- -------
Total stockholders' equity.............................. 18,760 19,255
------- -------
$48,224 $47,305
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-23
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- ---------------------------
1998 1999 1998 1999
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales..................................... $ 9,072 $ 10,310 $ 17,168 $ 21,061
Cost of sales................................. 6,039 6,643 11,154 13,352
---------- ---------- ---------- ----------
Gross Profit................................ 3,033 3,667 6,015 7,709
Selling, general and administrative
expenses.................................... 2,836 3,199 5,676 6,752
Research and development expenses............. 86 71 148 138
Litigation settlement......................... -- -- -- (400)
---------- ---------- ---------- ----------
Income from operations...................... 111 397 191 1,219
Interest expense, net......................... 93 290 174 549
---------- ---------- ---------- ----------
Income before provision for income taxes...... 18 107 17 670
Provision for income taxes.................... 10 40 12 268
---------- ---------- ---------- ----------
Net Income before cumulative effect of a
change in accounting principle............ $ 8 $ 67 $ 5 $ 402
========== ========== ========== ==========
Cumulative effect of a change in accounting
principle, net of income taxes of $59..... $ -- $ -- $ (88) $ --
========== ========== ========== ==========
Net Income (Loss)........................... $ 8 $ 67 $ (83) $ 402
========== ========== ========== ==========
Basic earnings per share before cumulative
effect of change in accounting
principle................................. $ 0.00 $ 0.02 $ 0.00 $ 0.12
========== ========== ========== ==========
Diluted earnings per share before cumulative
effect of a change in accounting
principle................................. $ 0.00 $ 0.02 $ 0.00 $ 0.12
========== ========== ========== ==========
Basic and diluted earnings per share effect
of cumulative effect of a change in
accounting principle, net of income taxes
of $59.................................... $ 0.00 $ 0.00 $ (0.03) $ 0.00
========== ========== ========== ==========
Basic earnings (loss) per share............. $ 0.00 $ 0.02 $ (0.02) $ 0.12
========== ========== ========== ==========
Diluted earnings (loss) per share........... $ 0.00 $ 0.02 $ (0.02) $ 0.12
========== ========== ========== ==========
Weighted average number of shares
outstanding................................. 3,370,169 3,405,000 3,370,169 3,405,000
========== ========== ========== ==========
Weighted average number of shares outstanding,
assuming dilution........................... 3,376,000 3,410,611 3,370,169 3,405,000
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-24
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss)......................................... $ (83) $ 402
Cumulative effect of change in accounting principle, net
of income taxes of $59.................................. 88 --
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation and amortization........................... 795 1,253
Changes in assets and liabilities
Accounts receivable................................... (949) 434
Inventories........................................... (1,619) 445
Prepaid expenses and other current assets............. (80) (130)
Accounts payable...................................... 1,056 (101)
Accrued expenses...................................... (33) 697
Deferred revenue...................................... -- 363
------- -------
Net cash (used in) provided by operating activities..... (825) 3,363
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (2,048) (1,570)
Increase in others assets................................. (402) (194)
------- -------
Net cash used in investing activities................... (2,450) (1,764)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under demand note payable to
bank.................................................... 2,302 (1,540)
Payments on MIFA obligations.............................. (145) (150)
Payments on GECPF obligations............................. (215) (626)
Payments on capital lease obligations..................... (143) (172)
Payments of note receivable from stockholder/officer...... 18 35
Proceeds from stock issued under ESPP..................... 59 58
Proceeds from reimbursement of amounts financed under
GECPF................................................... 311 --
Proceeds from sales-leaseback financing................... 267 --
------- -------
Net cash provided by (used in) financing activities..... 2,454 (2,395)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (821) (796)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 916 1,057
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 95 $ 261
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest................................................ $ 294 $ 410
======= =======
Income taxes............................................ $ 162 $ 175
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of assets under capital lease obligations..... $ 288 $ 52
======= =======
Acquisition of equipment under GECPF bond financing....... $ 1,640 $ 2,108
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-25
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION OF INTERIM INFORMATION
The unaudited interim financial statements included herein have been
prepared by Asahi/ America, Inc. and Subsidiaries (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission and include,
in the opinion of management, all adjustments which the Company considers
necessary for a fair presentation of such information. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These statements should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto which are contained in the Company's Form 10-K for the year ended
December 31, 1998. Interim results are not necessarily indicative of the results
for a full year.
2. FINANCIAL STATEMENTS
The condensed consolidated financial statements include the accounts of the
Asahi/America, Inc. (the Company) and its wholly owned subsidiaries, Asahi
Engineered Products, Inc.(AEP) and Quail Piping Products, Inc. (Quail). All
significant intercompany balances and transactions have been eliminated.
3. CASH EQUIVALENTS
Cash equivalents, if any are short-term, highly liquid investments with
original maturities of less than three months and consist primarily of treasury
bills.
4. INVENTORIES
The Company accounts for inventories using the lower of last-in, first-out
(LIFO) cost or market value. Quail accounts for inventories using the lower of
first-in, first-out (FIFO) cost or market value. The components of inventory are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
<S> <C> <C>
Raw materials......................................... $ 909 $ 925
Finished goods........................................ 10,055 9,201
LIFO surplus.......................................... 409 337
------- -------
Total............................................. $11,373 $10,463
======= =======
</TABLE>
5. EARNINGS PER SHARE
In accordance with the Statement of Financial Accounting Standards (SFAS)
No. 128, EARNINGS PER SHARE, basic net income per share and basic pro forma net
income per share were computed by dividing net income or pro forma net income by
the weighted average number of common shares outstanding during the period.
Diluted net income per share and diluted pro forma net income per share were
computed by dividing net income or pro forma net income by diluted weighted
average number of common and common equivalent shares outstanding during the
period. The weighted average number of common equivalent shares outstanding has
been determined in accordance with the treasury-stock method. Common stock
equivalents consist of common stock issuable on the exercise of outstanding
options.
F-26
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EARNINGS PER SHARE (CONTINUED)
Basic and diluted earnings (loss) per share were calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Basic--
Net income (loss).................................... $ (90,472) $ 334,102
========= =========
Weighted average common shares outstanding........... 3,370,169 3,405,000
Diluted--
Effect of dilutive securities........................ -- --
Stock options........................................ -- --
--------- ---------
Weighted average common shares outstanding, assuming
dilution........................................... 3,370,169 3,405,000
--------- ---------
Basic earnings (loss) per share........................ $ (0.03) $ 0.10
========= =========
Diluted earnings (loss) per share...................... $ (0.03) $ 0.10
========= =========
</TABLE>
As of March 31, 1998 and 1999, 394,331 and 412,461 options, respectively,
were outstanding but not included in the diluted weighted average common share
calculation as the effect would have been antidilutive.
6. ACCOUNTING FOR START-UP COSTS
In May 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES.
SOP 98-5, which is effective for fiscal years beginning after December 15, 1998
but provides for early adoption, requires that the costs of start-up activities,
including organization costs, be expensed as incurred. Initial adoption of SOP
98-5 should be reported as a cumulative effect of a change in accounting
principle. During the quarter ended December 31, 1998 the Company adopted the
provisions of SOP 98-5. In accordance with the provisions of SFAS No. 16, PRIOR
PERIOD ADJUSTMENTS, prior year interim periods have been restated, adopting the
provisions of SOP 98-5 as of January 1, 1998, so as to include the portion of
the item that is directly related to the Company's business in the determination
of net income in the first interim period of that year. As such, the Company
restated 1998 first quarter results to record a net charge to income of $88,000
(net of income taxes of $59,000) for previously capitalized start-up costs,
reflected as a cumulative effect of a change in accounting principle.
Subsequently recorded amortization expense on these start-up costs has been
reversed and subsequent additions to start-up costs have been expensed.
7. REVOLVING CREDIT LINE
In June 1998, the Company and its bank executed a new loan agreement for an
$11,000,000 secured, committed revolving line of credit (the Committed Line).
The Committed Line is secured by substantially all assets of the Company and
extends through January 31, 2000. Interest on this credit line is based on the
prime rate or LIBOR plus 1.55% to 2.30%. There is an unused fee ranging from
.15% to .25%. The Company is required to maintain certain financial ratios,
including, among others, minimum working capital, debt service and tangible net
worth. The credit line is for working capital and merger and acquisition
purposes.
F-27
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REVOLVING CREDIT LINE (CONTINUED)
In February 1999, the Committed Line was retroactively amended as of
December 31, 1998. The amended agreement provided that the maximum amount of
borrowings, including issued letters of credit, which may at any time be
outstanding, be the lesser of $11 million or the sum of 80% of qualified
accounts receivable and 50% of eligible inventory, as defined. The interest on
additional borrowings is at the prime rate plus 1%. The Company is required to
maintain certain financial ratios, including, among others, minimum working
capital, debt service and tangible net worth, as defined in the amended
agreement. The Company was in compliance with these covenants as of March 31,
1999. As of March 31, 1999, there was $3,850,000 outstanding under the line of
credit.
8. CONCENTRATION OF CREDIT RISK
Sales to the Company's two major domestic customers during the three month
period ended March 31, 1999 were approximately 29% and 15% of total sales, as
compared to 27% for the Company's one major customer for the same period of
1998. Export sales as a percent of total sales during the first quarter were
approximately 3.9% and 6.9% in 1999 and 1998, respectively.
9. BUSINESS SEGMENTS
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions on how to allocate
resources and assess performance. The Company views its operations and manages
its business as two segments, Asahi and Quail, as being strategic business units
that offer different products. The Company evaluates the performance of its
operating segments based on revenues from external customers, net income before
provision from income taxes, total assets and other balance sheet information.
Summarized financial information concerning the Company's reportable
segments is as follows:
<TABLE>
<CAPTION>
THE COMPANY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 (W/O QUAIL) QUAIL ELIMINATING CONSOLIDATED
- ----------------------------------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues from external customers.......... $ 8,534,615 $ 2,216,148 $ (28,249) $10,722,514
Net income before provision for income
taxes................................... 163,020 398,968 -- 561,988
Net Income................................ 94,722 239,380 -- 334,102
Accounts receivable, net.................. 4,619,009 854,966 -- 5,473,975
Inventory, net............................ 9,260,993 1,202,203 -- 10,463,196
Property & Equipment, net................. 9,112,748 12,663,753 -- 21,776,501
Total assets.............................. 35,585,776 16,418,080 (4,235,088) 47,768,768
</TABLE>
F-28
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
THE COMPANY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (W/O QUAIL) QUAIL ELIMINATING CONSOLIDATED
- ----------------------------------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues from external customers.......... $ 8,096,131 $ -- $ -- $ 8,096,131
Net income before provision for income
taxes................................... 104,010 (104,287) -- (277)
Net Income................................ 20,036 (110,508) -- (90,472)
Accounts receivable, net.................. 3,802,737 1,873 -- 3,804,610
Inventory, net............................ 9,885,922 31,179 -- 9,917,101
Property & Equipment, net................. 9,894,329 2,950,251 -- 12,844,580
Total assets.............................. 30,657,269 3,064,167 (557,312) 33,164,124
</TABLE>
10. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows derivative gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantially
modified after December 31, 1997 (and, at the company's election, before
January 1, 1998). The Company believes that the adoption of Statement 133 will
not have a material effect on its financial statements.
11. LITIGATION SETTLEMENT
In July 1997, the United States Patent and Trademark Office reconfirmed the
validity of a patent owned by the Company. In August 1997, the Company
instituted a patent infringement suit in the United States District Court in New
York against a competitor. In the fourth quarter of 1997 and first quarter of
1998, the Company incurred approximately $400,000 and $132,000, respectively, in
legal expenses related to this patent issue. These costs were included in
selling, general, and administrative expense. In February 1999, the Court ruled
in favor of the Company as it upheld the validity of the Company's patent. The
Court referred the case to a Magistrate Judge for an inquest hearing, scheduled
for March 5, 1999 and directed a determination as to damages to be completed
within three months of the hearing. On March 8, 1999, the Company and its
competitor reached an amicable settlement of this case. This settlement included
monetary consideration of $500,000 paid by the competitor to the Company, as
well as the granting by the Company to the competitor of a nonexclusive
eight-year license for this patent at $75,000 per year, discounted to $400,000
and paid to the Company in March 1999. Included in the accompanying statement of
operations is $400,000 related to monetary consideration paid to the Company
with the balance of $100,000 related to additional legal fees, included in
accrued expenses in the accompanying balance sheet. Included in deferred revenue
in the accompanying balance sheet is the license portion of the settlement, to
be recognized over the related term.
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ANNEX A
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August 9,
1999, is among MIDNIGHT ACQUISITION HOLDINGS, INC., a Delaware Corporation
("Parent"), MIDNIGHT ACQUISITION CORP., a Massachusetts corporation and a
subsidiary of Parent ("Sub"), and ASAHI/AMERICA, INC., a Massachusetts
corporation (the "Company").
RECITALS
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have each determined that it is advisable and in the best interests of their
respective stockholders for Sub to merge with and into the Company (the
"Merger"), upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, pursuant to the Merger, each outstanding share of common stock, no
par value, of the Company (the "Company Common Stock," all the outstanding
shares of the Company Common Stock being hereinafter collectively referred to as
the "Shares") shall be converted into the right to receive the Merger
Consideration (as defined below), upon the terms and subject to the conditions
set forth herein;
WHEREAS, Parent, Sub and the Company are hereby adopting a plan of merger,
providing for the merger of Sub with and into the Company, with the Company
being the surviving corporation. The Merger will be consummated in accordance
with this Agreement upon the filing by the Company and Sub of articles of merger
(the "Articles of Merger") with the Secretary of State of the Commonwealth of
Massachusetts, such Merger to be consummated as of the Effective Time (as
defined below) of the Merger;
WHEREAS, upon consummation of the Merger, the separate corporate existence
of Sub shall cease and the Company, as the surviving corporation in the Merger
(the "Surviving Corporation"), shall continue its corporate existence under the
Business Corporation Law of the Commonwealth of Massachusetts (the "MBCL") as
provided in this Agreement;
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;
WHEREAS, Parent and Sub have required, as a condition to their willingness
to enter into this Agreement, that Leslie B. Lewis (the "Executive")
contemporaneously enter into the Employment Agreement (as defined herein)
concurrently with the execution and delivery of this Agreement; and
WHEREAS, the Board of Directors of the Company (the "Board") has directed
that this Agreement be submitted to a vote of the holders of the Shares in
accordance with the MBCL, and Parent, as sole shareholder of Sub, has duly
approved this Agreement in accordance with the MBCL.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, Parent, Sub and the Company hereby agree
as follows:
AGREEMENT
ARTICLE I
THE MERGER
SECTION 1.01. THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the MBCL, Sub shall be merged
with and into the Company at the Effective Time (as defined in Section 1.03),
whereupon the separate corporate existence of Sub shall cease
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and the Company shall continue as the Surviving Corporation and shall continue
its corporate existence as a subsidiary of Parent and shall continue to be
governed by the laws of the Commonwealth of Massachusetts. At the election of
Parent, any direct or indirect wholly owned subsidiary (as defined in
Section 9.03) of Parent may be substituted for Sub as a constituent corporation
in the Merger. In such event, the parties agree to execute an appropriate
amendment to this Agreement in order to reflect the foregoing.
SECTION 1.02. CLOSING. The closing of the Merger (the "Closing") will take
place at 10:00 a.m. (New York City time) on a date to be specified by Parent or
Sub, which shall be no later than the second business day after satisfaction or
waiver of the conditions set forth in Article VII (the "Closing Date"), at the
offices of Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York
10112, unless another date, time or place is agreed to in writing by the parties
hereto.
SECTION 1.03. EFFECTIVE TIME. Subject to the provisions of this Agreement,
as soon as practicable on or after the Closing Date, the parties shall file with
the Secretary of State of the Commonwealth of Massachusetts (i) the Articles of
Merger executed in accordance with the relevant provisions of the MBCL, and
(ii) all other filings or recordings required under the MBCL and the
Massachusetts General Laws. The Merger shall become effective at such time as
Articles of Merger are duly filed with the Secretary of State of the
Commonwealth of Massachusetts, or at such other time not more than thirty days
after such filing as Sub and the Company shall agree should be specified in the
Articles of Merger (the time the Merger becomes effective being hereinafter
referred to as the "Effective Time").
SECTION 1.04. EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in Section 80 of the MBCL. From and after the Effective Time, the
Surviving Corporation shall possess all the rights, privileges, powers and
franchises and be subject to all of the restrictions, disabilities and duties of
the Company and Sub, all as provided under Massachusetts law.
SECTION 1.05. ARTICLES OF ORGANIZATION AND BY-LAWS.
(a) The Articles of Organization of Sub, as in effect immediately prior
to the Effective Time, shall be the Articles of Organization of the
Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law.
(b) The By-Laws of Sub as in effect immediately prior to the Effective
Time shall be the By-Laws of the Surviving Corporation, until thereafter
changed or amended as provided therein or by applicable law.
SECTION 1.06. DIRECTORS. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be, and the Company shall procure,
prior to and as a condition to the Closing, the resignation of each of its
directors effective as of the Closing.
SECTION 1.07. OFFICERS. The officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.01. EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any Shares or
any shares of capital stock of Sub:
(a) CAPITAL STOCK OF SUB. Each issued and outstanding share of capital
stock of Sub shall be converted into and become 1 fully paid and
nonassessable share of Common Stock, par value $.01 per share, of the
Surviving Corporation.
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(b) CANCELLATION OF TREASURY STOCK AND GRANDPARENT AND PARENT OWNED
STOCK. Each share of Company Common Stock that is owned by the Company or
by any subsidiary of the Company and each Share that is owned by Asahi
Organic Chemicals Industry Co., Ltd. ("Grandparent"), Parent, Sub or any
other subsidiary of Parent shall automatically be canceled and retired and
shall cease to exist, and no consideration shall be delivered in exchange
therefor.
(c) CONVERSION OF COMPANY COMMON STOCK. Subject to Section 2.01(d),
each Share issued and outstanding (other than Shares to be canceled in
accordance with Section 2.01(b)) shall be converted into the right to
receive from the Surviving Corporation in cash, without interest, $8.25,
plus an amount equal to the Net Quail Proceeds divided by (i) the number of
Shares issued and outstanding (other than Shares to be canceled in
accordance with Section 2.01(b)) plus (ii) all Shares into which Options (as
defined in Section 2.03(a)) are exercisable at the Effective Time (the
"Merger Consideration"). As of the Effective Time, all such Shares shall no
longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each holder of a certificate representing any such
Shares shall cease to have any rights with respect thereto, except the right
to receive the Merger Consideration, without interest. For the purposes
hereof, "Net Quail Proceeds" shall mean the aggregate amount of
consideration received by the Company in the Disposition (as defined in
Section 3.02), net of taxes paid or payable by the Company in respect of the
Disposition, after taking into account any tax deductions received or
receivable by the Company, and net of all expenses paid or payable by the
Company or by Quail Piping Products, Inc. ("Quail") on account of any other
party in connection with the Disposition or pursuant to Section 8 of the
agreement in the form attached hereto as Exhibit B (the "Disposition
Agreement").
(d) SHARES OF DISSENTING STOCKHOLDERS. Notwithstanding anything in
this Agreement to the contrary, any issued and outstanding Shares held by a
person (a "Dissenting Stockholder") who complies with Sections 86 through
98, inclusive, of the MBCL concerning the right of holders of Company Common
Stock to dissent from the Merger and require appraisal of their Shares
("Dissenting Shares") shall not be converted as described in
Section 2.01(c) but shall become the right to receive such consideration as
may be determined to be due to such Dissenting Stockholder pursuant to the
MBCL. If, after the Effective Time, such Dissenting Stockholder withdraws
his demand for appraisal or fails to perfect or otherwise loses his right of
appraisal, in any case pursuant to the MBCL, his Shares shall be deemed to
be converted as of the Effective Time into the right to receive the Merger
Consideration. The Company shall give Parent (i) prompt notice of any
demands for appraisal of Shares received by the Company and (ii) the
opportunity to participate in and direct all negotiations and proceedings
with respect to any such demands. The Company shall not, without the prior
written consent of Parent, make any payment with respect to, or settle,
offer to settle or otherwise negotiate, any such demands.
(e) WITHHOLDING TAX. Parent shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement to any
holder of shares of Common Stock outstanding immediately prior to the
Effective Time such amounts as may be required to be deducted and withheld
with respect to the making of such payment under the Internal Revenue Code
of 1986, as amended (the "Code"), or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the holder of the shares of Common Stock outstanding immediately
prior to the Effective Time in respect of which such deduction and
withholding was made.
SECTION 2.02. PAYMENT FOR SHARES.
(a) PAYING AGENT. Prior to the Effective Time, Parent shall designate
a bank or trust company located in the United States to act as paying agent
in the Merger (the "Paying Agent"), and, at the Effective Time, Parent shall
make available to the Paying Agent funds in amounts necessary for the
payment of the Merger Consideration, excluding the Net Quail Proceeds, which
shall be made
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available to the Paying Agent by the Surviving Corporation in amounts and at
the times necessary, upon surrender of certificates representing Shares as
part of the Merger pursuant to Section 2.01 and upon cancellation of any
Option as part of the Merger pursuant to Section 2.03 (it being understood
that any and all interest earned on funds made available to the Paying Agent
pursuant to this Agreement shall be turned over to Parent).
(b) EXCHANGE PROCEDURE. As soon as reasonably practicable after the
Effective Time, the Paying Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented Shares (the "Certificates"), (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Paying Agent and shall be in a form and have such other provisions as Parent
may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration. Upon
surrender of a Certificate for cancellation to the Paying Agent or to such
other agent or agents as may be appointed by Parent, together with such
letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Paying Agent, the holder of such Certificate
shall be entitled to receive in exchange therefor the amount of cash into
which the Shares theretofore represented by such Certificate shall have been
converted pursuant to Section 2.01, and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Shares
that is not registered in the transfer records of the Company, payment may
be made to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such
payment shall pay any transfer or other taxes required by reason of the
payment to a person other than the registered holder of such Certificate or
establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Until surrendered as contemplated by this
Section 2.02, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender
the amount of cash, without interest, into which the Shares theretofore
represented by such Certificate shall have been converted pursuant to
Section 2.01. No interest will be paid or will accrue on the cash payable
upon the surrender of any Certificate.
(c) NO FURTHER OWNERSHIP RIGHTS IN THE COMPANY COMMON STOCK. All cash
paid upon the surrender of Certificates in accordance with the terms of this
Article II shall be deemed to have been paid in full satisfaction of all
rights pertaining to the Shares theretofore represented by such
Certificates. At the Effective Time, the stock transfer books of the Company
shall be closed, and there shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the Shares that
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or
the Paying Agent for any reason, they shall be canceled and exchanged as
provided in this Article II.
(d) TERMINATION OF FUND; NO LIABILITY. At any time following six
months after the Effective Time, the Surviving Corporation shall be entitled
to require the Paying Agent to deliver to it any funds (including any
interest received with respect thereto) which had been made available to the
Paying Agent and which have not been disbursed to holders of Certificates,
and thereafter such holders shall be entitled to look to the Surviving
Corporation (subject to abandoned property, escheat or other similar laws)
only as general creditors thereof with respect to the Merger Consideration
payable upon due surrender of their Certificates, without any interest
thereon. Notwithstanding the foregoing, neither the Surviving Corporation
nor the Paying Agent shall be liable to any holder of a Certificate for
Merger Consideration delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
SECTION 2.03. OPTIONS.
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(a) OPTION PLANS. Prior to the Effective Time, the Company shall take
all actions necessary, including without limitation, obtaining any required
consent of each holder of the following options, awards or other rights
(each an "Option" and collectively, the "Options"): (i) the Stock Option
Agreement dated March 4, 1998 issued to Thomas J. Hammer (the "TJH Option"),
(ii) all options, awards or rights under the Midnight Independent Directors'
Stock Option Plan (the "Directors Plan"), (iii) all options, awards or
rights under the Midnight Employee Stock Purchase Plan (the "Stock Purchase
Plan") and (iv) all options, awards or rights under the Midnight 1996 Equity
Incentive Plan (the "Equity Plan," and together with the Directors Plan and
the Stock Purchase Plan, the "Option Plans," and each an "Option Plan") to
terminate each Option Plan without liability to the Company and to cancel
each Option as provided in Section 2.03(b) below.
(b) CANCELLATION OF OPTIONS. The Company shall cause:
(i) all Options outstanding immediately prior to the Effective Time
under the Stock Purchase Plan, whether or not then exercisable, to be
canceled at the Effective Time and all payroll deductions (the "Payroll
Amount") plus accrued interest to be refunded to each such Option holder
after such cancellation, plus payment of an amount in cash equal to that
amount which is equal to the excess, if any, of the Merger Consideration
over the purchase price of the Company Common Stock at the Effective Time
(the "Option Price"), multiplied by the amount obtained by dividing the
aggregate Payroll Amount of such Option holder at the Effective Time by
the Option Price; and
(ii) the TJH Option and all Options outstanding immediately prior to
the Effective Time under the Equity Plan and the Directors Plan, whether
or not then exercisable, to immediately vest and be canceled at the
Effective Time, and each holder of an Option under such plan or agreement
will be entitled to receive, after the Effective Time from the Surviving
Corporation, for each share of Common Stock subject to any such Option,
an amount in cash equal to the excess, if any, of the Merger
Consideration over the per share exercise price of such Option, without
interest (the "Delta Payment"); PROVIDED, that any Options held by Leslie
B. Lewis will be canceled but no Delta Payment will be paid on such
options. Parent shall cause the Paying Agent to mail to each holder of an
Option under such plan or agreement appropriate instructions and
documents to effect the cancellation of such Options and the cash payment
thereof. All amounts payable pursuant to this Section 2.03(b)(ii) shall
be subject to all applicable withholding taxes and shall be paid as soon
as practicable following the Effective Time.
(iii) If and to the extent that the TJH Option has not been
exercised prior to its cancellation in connection with the Merger, the
Company will pay to Thomas J. Hammer the Delta Payment plus the sum of
$145,000, prorated to the extent of any prior exercise, and any amount
the Company has drawn under any letter of credit described in the
Amendment to Agreement between the Company and Mr. Hammer dated March 4,
1998, prorated to the extent of any prior exercise, so as to avoid any
duplicate payments to Mr. Hammer.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the schedule attached to this Agreement setting forth
exceptions to the Company's representations and warranties set forth herein (the
"Company Disclosure Schedule"), the Company represents and warrants to Parent
and Sub as set forth below. The Company Disclosure Schedule will be arranged in
sections corresponding to sections of this Agreement to be modified by such
disclosure schedule.
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SECTION 3.01. ORGANIZATION. The Company and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to carry on its business as now being conducted, except where the
failure to be so organized, existing and in good standing or to have such power
and authority would not have a material adverse effect (as defined in
Section 9.03) on the Company. The Company and each of its subsidiaries is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not have a material adverse effect on the Company or
prevent or materially delay the consummation of the Merger. The Company has made
available to Parent complete and correct copies of its Articles of Organization
and By-laws and the certificates of incorporation and by-laws (or similar
organizational documents) of its subsidiaries.
SECTION 3.02. SUBSIDIARIES. Section 3.02 of the Company Disclosure
Schedule sets forth for each subsidiary of the Company: (i) its name and
jurisdiction of incorporation or organization; (ii) its authorized capital stock
or share capital; (iii) the number of issued and outstanding shares of capital
stock or share capital; and (iv) the holder or holders of such shares. All the
outstanding shares of capital stock of each such subsidiary, other than director
qualifying shares of foreign subsidiaries, are owned by the Company, by another
wholly owned subsidiary of the Company or by the Company and another wholly
owned subsidiary of the Company, free and clear of all pledges, claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens"), except for immaterial Liens on outstanding shares of
capital stock of foreign subsidiaries of the Company, and are duly authorized,
validly issued, fully paid and nonassessable. Except for the capital stock of
its subsidiaries, the Company does not own, directly or indirectly, any capital
stock or other ownership interest in any corporation, partnership, joint
venture, business, trust or other entity. Notwithstanding the foregoing, prior
to or concurrently with the Closing, the Disposition shall have occurred. The
Disposition has been authorized by all necessary corporate action on the part of
the Company and no other corporate proceedings on the part of the Company are
necessary to authorize or consummate the Disposition.
SECTION 3.03. CAPITALIZATION. The authorized capital stock of the Company
consists of 10,000,000 shares of Company Common Stock and 1,000,000 shares of
preferred stock, par value $10.00 per share ("Company Preferred Shares"). At the
close of business on July 26, 1999, (i) 3,427,217 shares of Company Common Stock
were issued and outstanding, (ii) no shares of Company Common Stock were held by
the Company in its treasury and (iii) 401,961 shares of Company Common Stock
were reserved for issuance upon exercise of outstanding Options. There are no
shares of Company Preferred Shares issued and outstanding. Except as set forth
above and except for Shares issued upon the exercise of Options, as of the date
of this Agreement, no shares of capital stock or other voting securities of the
Company were issued, reserved for issuance or outstanding. All outstanding
shares of capital stock of the Company are, and all shares which may be issued
will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes or other indebtedness of the Company having the right to vote
(or convertible into, or exchangeable for, securities having the right to vote)
on any matters on which stockholders of the Company may vote. Except as set
forth above, and except for obligations to issue shares subject to options
outstanding on the date hereof, subject to the approval of the Board of
Directors of the Company, there are no securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which the Company or any of its subsidiaries is a party or by which any of them
is bound obligating the Company or any of its subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other voting securities of the Company or of any of its subsidiaries or
obligating the Company or any of its subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking, including any securities pursuant to
which rights to acquire capital stock became exercisable only after a change of
control of the Company or any of its subsidiaries or upon the acquisition of a
specified amount of the Common Stock or voting powers of the Company or any
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of its subsidiaries. There are no outstanding contractual obligations (i) of the
Company or any of its subsidiaries to repurchase, redeem or otherwise acquire
any shares of capital stock of the Company or (ii) of the Company to vote or to
dispose of any shares of the capital stock of any of its subsidiaries other than
as contemplated by this Agreement. Since July 26, 1999, no shares of the capital
stock of the Company or any of its subsidiaries have been issued other than
pursuant to the exercise of Company stock options and warrants already in
existence and outstanding on such date, and neither the Company nor any of its
subsidiaries has granted any stock options, warrants or other rights to acquire
any capital stock of the Company or any of its subsidiaries. There are no
securities issued by the Company or agreements, arrangements or other
understandings to which the Company is a party giving any person any right to
acquire equity securities of the Surviving Corporation at or following the
Effective Time and all securities, agreements, arrangements and understandings
relating to the right to acquire equity securities of the Company (whether
pursuant to the exercise of options, warrants or otherwise) provide that, at and
following the Effective Time, such right shall entitle the holder thereof to
receive the consideration he would have received in the Merger had he exercised
his right immediately before the Effective Time.
SECTION 3.04. AUTHORITY. The Company has the requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby (other than, with respect to the Merger, the
approval and adoption of the terms of this Agreement by the holders of a
majority of the Shares (the "Company Stockholder Approval")). The only votes of
the holders of any class or series of Company capital stock necessary to approve
the Merger are the affirmative votes of the holders of a majority of the
outstanding shares of Common Stock. The execution, delivery and performance of
this Agreement and the consummation by the Company of the Merger and of the
other transactions contemplated hereby, including but not limited to the
delivery and performance of the Disposition Agreement and the Employment
Agreement and the acknowledgment and acceptance of the Executive's execution and
performance of the Stockholder Agreement, have been duly authorized by all
necessary corporate action on the part of the Company and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the transactions so contemplated (in each case, other than,
with respect to the Merger, the Company Stockholder Approval). This Agreement
has been duly executed and delivered by the Company and, assuming this Agreement
constitutes a valid and binding obligation of Parent and Sub, constitutes a
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies.
SECTION 3.05. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (including the filing with the SEC of a proxy
statement relating to any required approval by the Company's stockholders of
this Agreement (the "Proxy Statement")), the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), Chapters 110C, 110D, 110E,
and 110F of the Massachusetts General Laws and the laws of other states in which
the Company is qualified to do or is doing business, the MBCL (including the
filing of the Articles of Merger), state takeover laws and foreign laws, neither
the execution, delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby will
(i) conflict with or result in any breach of any provision of the Articles of
Organization or By-laws of the Company or of the similar organizational
documents of any of its subsidiaries, (ii) require any filing with, or permit,
authorization, consent or approval of, any Federal, state or local government or
any court, tribunal, administrative agency or commission or other governmental
or other regulatory authority or agency, domestic, foreign or supranational (a
"Governmental Entity") (except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings would not have a
material adverse effect on the Company or prevent or materially delay the
consummation of the Merger), (iii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or
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both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which the Company or any of its subsidiaries
is a party or by which any of them or any of their properties or assets may be
bound; PROVIDED, HOWEVER, that certain contracts and agreements set forth in
Section 3.05 of the Company Disclosure Schedule, (A) provide for their
termination upon a change of control of the Company or (B) contain provisions
restricting their assignment pursuant to a merger, or (iv) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Company,
any of its subsidiaries or any of their properties or assets, except in the case
of clauses (iii) or (iv) for violations, breaches or defaults that would not
have a material adverse effect on the Company or prevent or materially delay the
consummation of the Merger.
SECTION 3.06. SEC REPORTS AND FINANCIAL STATEMENTS. The Company has filed
with the SEC, and has heretofore made available to Parent true and complete
copies of, all forms, reports, schedules, statements and other documents
required to be filed by it since May 16, 1996, under the Exchange Act or the
Securities Act of 1933, as amended (the "Securities Act") (such forms, reports,
schedules, statements and other documents, including any financial statements or
schedules included therein, are referred to as the "Company SEC Documents"). The
Company SEC Documents, at the time filed, (a) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading and (b) complied in
all material respects with the applicable requirements of the Exchange Act and
the Securities Act, as the case may be, and the applicable rules and regulations
of the SEC thereunder. Except to the extent revised or superseded by a
subsequently filed Company SEC Document (a copy of which has been made available
to Parent on or prior to the date hereof), the Company SEC Documents, considered
as a whole as of their date, do not contain an untrue statement of a material
fact or omit to state a material fact required to be stated or incorporated by
reference therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading (it being
understood that the foregoing does not cover future events resulting from public
announcement of the Merger). The financial statements of the Company included in
the Company SEC Documents comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Forms 10-Q and 8-K of the SEC) and fairly
present (subject, in the case of the unaudited statements, to normal, recurring
audit adjustments) the consolidated financial position of the Company and its
consolidated subsidiaries as at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended.
SECTION 3.07. ABSENCE OF CERTAIN CHANGES OR EVENTS. Other than in respect
of the Disposition, since December 31, 1998, the Company and its subsidiaries
have conducted their respective businesses only in the ordinary course, and
there has not been any material adverse change (as defined in Section 9.03) with
respect to the Company or its subsidiaries. Since December 31, 1998, there has
not been (i) any declaration, setting aside or payment of any dividend or other
distribution with respect to its capital stock or any redemption, purchase or
other acquisition of any of its capital stock, (ii) any split, combination or
reclassification of any of its capital stock or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock, (iii) (v) any granting by
the Company or any of its subsidiaries to any officer or director of the Company
or any of its subsidiaries of any increase in compensation, (w) any granting by
the Company or any of its subsidiaries to any such officer or director of any
increase in severance or termination pay, (x) any granting by the Company or any
of its subsidiaries to any such officer, director or other key employees of any
loans or any increases to outstanding loans, (y) except employment arrangements
in the ordinary course of business consistent with past practice with employees
other than any executive officer of the Company, and except for the Employment
Agreement in the form attached hereto as Exhibit A (the "Employment Agreement")
any
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entry by the Company or any of its subsidiaries into any employment, severance
or termination agreement with any such employee or executive officer or director
or (z) any increase in or establishment of any bonus, insurance, deferred
compensation, pension, retirement, profit-sharing, stock option (including the
granting of stock options, stock appreciation rights, performance awards or
restricted stock awards or the amendment of any existing stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan or agreement or arrangement, (iv) any
damage, destruction or loss, whether or not covered by insurance, that has or
reasonably could be expected to have a material adverse effect on the Company,
(v) any material payment to an affiliate of the Company or any of its
subsidiaries other than in the ordinary course of business consistent with past
practice, (vi) any revaluation by the Company of any of its material assets,
(vii) any mortgage, lien, pledge, encumbrance, charge, agreement, claim or
restriction placed upon any of the material properties or assets of the Company
or any of its subsidiaries, (viii) any material change in accounting methods,
principles or practices by the Company, (ix) (A) any licensing or other
agreement with regard to the acquisition or disposition of any material
Intellectual Property Right (as defined in Section 3.18) or rights thereto other
than licenses or other agreements in the ordinary course of business consistent
with past practice or (B) any amendment or consent with respect to any licensing
agreement filed, or required to be filed, by the Company with the SEC or
(x) any capital contributions, loans or other payments to, or on account of,
Quail.
SECTION 3.08. NO UNDISCLOSED LIABILITIES. Except as and to the extent set
forth in the 1998 financial statements of the Company, as of December 31, 1998
(the "1998 Financial Statements") as disclosed in Company SEC Documents, neither
the Company nor any of its subsidiaries had any Liabilities (as defined below),
that would be required by generally accepted accounting principles to be
reflected on a consolidated balance sheet of the Company and its subsidiaries
(including the notes thereto). Since December 31, 1998, except as and to the
extent set forth in the Company SEC Documents, neither the Company nor any of
its subsidiaries has incurred any liabilities of any nature, whether or not
accrued, contingent or otherwise, that would have a material adverse effect on
the Company. For purposes of this Agreement, "Liabilities" shall mean debts,
liabilities, obligations and commitments, whether known or unknown, asserted or
unasserted, fixed, absolute or contingent, matured or unmatured, accrued or
unaccrued, liquidated or unliquidated, due or to become due, whenever or however
arising (including, without limitation, whether arising out of any contract,
agreement or understanding, whether written or oral, or tort based on
negligence, strict liability or otherwise) and whether or not the same would be
required by generally accepted accounting principles to be reflected as a
liability in financial statements or disclosed in the notes thereto.
SECTION 3.09. INFORMATION SUPPLIED. None of the information supplied or to
be supplied by the Company specifically for inclusion or incorporation by
reference in the Proxy Statement, or related filings, will, at the time the
Proxy Statement is first mailed to the Company's stockholders or at the time of
the Stockholders Meeting (as defined in Section 6.01), 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 Proxy
Statement, and related filings, will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation or warranty is made by the Company
with respect to statements made or incorporated by reference therein based on
information supplied by Parent or Sub specifically for inclusion or
incorporation by reference therein.
SECTION 3.10. BENEFIT PLANS.
(a) Each "employee pension benefit plan" (as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(a "Pension Plan"), "employee welfare benefit plan" (as defined in
Section 3(1) of ERISA) (a "Welfare Plan") and each other pension,
profit-sharing, savings, cash incentive, equity incentive (including, but
not limited, to stock options, stock purchases, employee stock ownership,
stock awards, restricted stock, phantom stock and stock
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appreciation rights), severance, fringe benefits, payroll practices and
other current and deferred compensation and employee benefit plans,
arrangement and practices (whether written or oral, direct or contingent),
in each case maintained or contributed to, or required to be maintained or
contributed to, by the Company or its subsidiaries for the benefit of any
present or former employee, consultant, officer or director (each of the
foregoing, including Pension Plans and Welfare Plans, a "Benefit Plan") has
been administered in all material respects in accordance with its terms. The
Company and its subsidiaries and all the Benefit Plans are in compliance in
all material respects with the applicable provisions of ERISA, the Code and
all other applicable laws.
(b) Section 3.10 to the Company Disclosure Schedule attached hereto sets
forth a complete list of each Benefit Plan as well as each employment,
consulting, termination, indemnity and severance agreement and any and all
other contracts, binding arrangements and understandings (whether written or
oral) with employees, consultants, officers and directors of the Company and
its subsidiaries.
(c) None of the Pension Plans is subject to Title IV of ERISA or
Section 412 of the Code and the Company nor any other person or entity that,
together with the Company, is treated as a single employer under
Section 414 (b), (c), (m) or (o) of the Code (each, including the Company, a
"Commonly Controlled Entity"): (i) currently has an obligation to contribute
to, or during any time during the last six years had an obligation to
contribute to, a Pension Plan subject to Title IV of ERISA or Section 412 of
the Code, or (ii) has incurred any liability to the Pension Benefit Guaranty
Corporation, which liability has not been fully paid. All contributions and
other payments required to be made by the Company to any Pension Plan with
respect to any period ending before the Closing Date have been timely made
and reserves adequate for such contributions or other payments that have
accrued for the period before the Closing Date but which are not required to
be made before the Closing Date have been or will be set aside therefor and
have been or will be reflected in financial statements.
(d) Neither the Company nor any Commonly Controlled Entity is or has
ever been required to contribute to any "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) or has withdrawn from any multiemployer plan
where such withdrawal has resulted or would result in any "withdrawal
liability" (within the meaning of Section 4201 of ERISA) or "mass withdrawal
liability" within the meaning of PBGC Regulation Section 4219.2 that has not
been fully paid.
(e) Each Pension Plan (and its related trust) that is intended to be
qualified under Sections 401 and 501(a) of the Code has been determined by
the IRS to qualify under such sections and nothing has occurred to cause the
loss of such qualified status.
(f) Each Benefit Plan that is a Welfare Plan may be amended or
terminated, upon thirty (30) days notice, at any time after the Effective
Time without liability to the Company or its subsidiaries.
(g) Except as required by law or under Section 4980B of the Code, the
Company does not have any obligation to provide post-retirement health
benefits.
(h) The Company has heretofore delivered to Parent correct and complete
copies of each of the following:
(1) all written, and descriptions of all oral, employment,
consulting, termination and severance agreements, contracts, arrangements
and understandings listed in Section 3.10 of the Company Disclosure
Schedule (other than the Employment Agreement);
(2) each Benefit Plan and all amendments thereto; the trust
instrument and/or insurance contracts, if any, forming a part of such
Benefit Plan and all amendments thereto;
(3) the three most recent IRS Form 5500 and all schedules and
attachments thereto for each Benefit Plan, if required;
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(4) the most recent determination letter issued by the IRS regarding
the qualified status for each Pension Plan;
(5) the most recent accountant's report for each Pension Plan, if
required; and
(6) the most recent summary plan description for each Benefit Plan,
if required.
SECTION 3.11. OTHER COMPENSATION ARRANGEMENTS. Except (i) as disclosed in
the Company SEC Documents, (ii) for the Employment Agreement and (iii) with
respect to Quail (not involving any officer or employee of the Company or any
other of its subsidiaries), as of the date of this Agreement, neither the
Company nor any of its subsidiaries is a party to any oral or written
(a) consulting agreement terminable on more than 60 calendar days notice (except
for third party agreements for the development of, and assignment to, the
Company of Intellectual Property in the ordinary course of business) and
involving the payment of more than $100,000 per annum, (b) agreement with any
executive officer or other key employee of the Company or any of its
subsidiaries (1) the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving the Company
of the nature contemplated by this Agreement or (2) providing any term of
employment or compensation guarantee extending for a period longer than two
years or the payment of more than $100,000 per annum or (c) agreement or plan,
including any stock option plan, stock appreciation right plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
SECTION 3.12. LITIGATION. There is no suit, claim, action, proceeding or
investigation pending before any Governmental Entity or, to the best knowledge
of the Company, threatened against the Company or any of its subsidiaries that
could reasonably be expected to have a material adverse effect on the Company.
Neither the Company nor any of its subsidiaries is subject to any outstanding
order, writ, injunction or decree that could reasonably be expected to have a
material adverse effect on the Company.
SECTION 3.13. COMPLIANCE WITH APPLICABLE LAW. The Company and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for the lawful conduct of their
respective businesses (the "Company Permits"), except for failures to hold such
permits, licenses, variances, exemptions, orders and approvals that would not
have a material adverse effect on the Company. The Company and its subsidiaries
are in compliance with the terms of the Company Permits, except where the
failure so to comply would not have a material adverse effect on the Company.
Except as disclosed in the Company SEC Documents, to the best knowledge of the
Company, the businesses of the Company and its subsidiaries are not being
conducted in violation of any law, ordinance or regulation of any Governmental
Entity, except for possible violations that would not have a material adverse
effect on the Company or prevent or materially delay the consummation of the
Merger. As of the date of this Agreement, no investigation or review by any
Governmental Entity with respect to the Company or any of its subsidiaries is
pending or, to the best knowledge of the Company, threatened, nor has any
Governmental Entity indicated an intention to conduct any such investigation or
review, other than, in each case, those the outcome of which would not be
reasonably expected to have a material adverse effect on the Company or prevent
or materially delay the consummation of the Merger.
SECTION 3.14. TAX MATTERS.
(a) The Company and each of its subsidiaries (and any affiliated group
of which the Company or any of its subsidiaries is now or has ever been a
member) has timely filed all Federal income tax returns and all other
material tax returns and reports required to be filed by it. All such
returns are complete and correct in all material respects. Each of the
Company and its subsidiaries (i) has paid (or the Company has paid on its
subsidiaries' behalf) to the appropriate authorities all taxes required to
be paid by it (without regard to whether a tax return is required), except
taxes for which an adequate
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reserve has been established on the financial statements contained in the
Company SEC Documents or the 1998 Financial Statements, and (ii) has
withheld and paid to the appropriate authorities all material withholding
taxes required to be withheld by it. The most recent financial statements
contained in the Company SEC Documents reflect an adequate reserve for all
taxes payable by the Company and its subsidiaries for all taxable periods
and portions thereof through the date of such financial statements.
(b) Except as disclosed in the Company SEC Documents, no Federal income
tax return or other material tax return of the Company or any of its
subsidiaries is under audit or examination by any taxing authority, and no
written or unwritten notice of such an audit or examination has been
received by the Company or any of its subsidiaries. Each material deficiency
resulting from any audit or examination relating to taxes by any taxing
authority has been paid, except for deficiencies being contested in good
faith. No material issues relating to taxes were raised in writing by the
relevant taxing authority in any completed audit or examination that can
reasonably be expected to recur in a later taxable period. The Federal
income tax returns of the Company and each of its subsidiaries do not
contain any positions that could give rise to a material substantial
understatement penalty within the meaning of Section 6662 of the Code.
(c) There is no agreement or other document extending, or having the
effect of extending, the period of assessment or collection of any taxes and
no power of attorney with respect to any taxes has been executed or filed
with any taxing authority.
(d) No material liens for taxes exist with respect to any assets or
properties of the Company or any of its subsidiaries, except for liens for
taxes not yet due.
(e) None of the Company or any of its subsidiaries is a party to or is
bound by any tax sharing agreement, tax indemnity obligation or similar
agreement, arrangement or practice with respect to taxes (including any
advance pricing agreement, closing agreement or other agreement relating to
taxes with any taxing authority).
(f) None of the Company or any of its subsidiaries shall be required to
include in a taxable period ending after the Effective Time taxable income
attributable to income that accrued in a prior taxable period but was not
recognized in any prior taxable period as a result of the installment method
of accounting, the completed contract method of accounting, the long-term
contract method of accounting, the cash method of accounting or Section 481
of the Code or comparable provisions of state, local or foreign tax law.
(g) Neither the Company nor any of its subsidiaries (i) is a party to a
safe harbor lease within the meaning of Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended and in effect prior to amendment by the Tax
Equity and Fiscal Responsibility Act of 1982, (ii) is a "consenting
corporation" under Section 341(f) of the Code, (iii) has agreed or is
obligated to make any payments for services which would not be deductible
pursuant to Sections 162(a)(1), 162(m) or 280G of the Code, (iv) has
participated in an international boycott as defined in Section 999 of the
Code, (v) is required to make any adjustment under Section 481(a) of the
Code by reason of a change in accounting method or otherwise, (vi) owns any
assets which directly or indirectly secure any debt the interest on which is
tax-exempt under Section 103(a) of the Code, or (vii) owns any asset which
is tax-exempt use property within the meaning of Section 168(h) of the Code.
(h) None of the Company or any of its subsidiaries is a party to any
joint venture, partnership or other arrangement or contract which is treated
as a partnership for tax purposes, or has elected to be treated as a branch
or a partnership pursuant to Treasury Regulation Section 301.7701-3.
(i) Each of the Company and its subsidiaries is a United States person
within the meaning of Section 7701(a)(30) of the Code.
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(j) As used in this Agreement, "Taxes" shall include all Federal, state,
local and foreign income, property, sales, excise, withholding and other
taxes, tariffs or governmental charges of any nature whatsoever.
SECTION 3.15. STATE TAKEOVER STATUTES. The Board of Directors of the
Company has approved the Merger and this Agreement and such approval is
sufficient to render inapplicable to the Merger, this Agreement, the Stockholder
Agreement and the transactions contemplated by this Agreement and the
Stockholder Agreement, the provisions of Chapters 110C, 110D, 110E and 110F of
the Massachusetts General Laws. To the actual knowledge of the Company without
investigation, no other state takeover statute or similar statute or regulation
applies or purports to apply to the Merger, this Agreement, or any of the
transactions contemplated by this Agreement.
SECTION 3.16. BROKERS; FEES AND EXPENSES. No broker, investment banker,
financial advisor, consultant or other person, other than ING Barings LLC (the
"Financial Adviser") and Jeffrey Bloomberg, the fees and expenses of which will
be paid by the Company, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. The estimated fees and expenses incurred and to be incurred by the
Company in connection with this Agreement and the transactions contemplated by
this Agreement (including the fees of the Company's legal counsel, legal counsel
for the special committee and the legal counsel for its financial advisor) are
set forth in a letter dated July 26, 1999 from the Company to Parent, all of
which will have been paid in full immediately prior to the Effective Time.
SECTION 3.17. OPINION OF FINANCIAL ADVISOR. The Special Committee has
received the opinion of the Financial Adviser, dated August 9, 1999, to the
effect that, as of that date, (a) the consideration to be received by the
Company pursuant to the Disposition is fair to the Company from a financial
point of view and (b) the Merger Consideration to be received by the holders of
Shares pursuant to the Merger is fair to such holders from a financial point of
view (the "Fairness Opinion"), and a complete and correct signed copy of such
opinion will be included in the Proxy Statement, and related filings.
SECTION 3.18. INTELLECTUAL PROPERTY. The Company and its subsidiaries
have, and after the Disposition, will have, rights to use, whether through
ownership, licensing or otherwise, all patents, trademarks, service marks, trade
names, copyrights, trade secrets, know-how, invention and other proprietary
rights and processes of which the Company is aware that are material to its
business as now conducted (collectively the "Company Intellectual Property
Rights"). Except for such matters as would not, individually or in the
aggregate, have a material adverse effect on the Company, (a) the Company and
its subsidiaries have not assigned, hypothecated or otherwise encumbered any of
the Company Intellectual Property Rights and (b) none of the licenses included
in the Company Intellectual Property Rights purports to grant sole or exclusive
licenses to another person, including, without limitation, sole or exclusive
licenses limited to specific fields of use. To the best of the Company's
knowledge, the patents owned by the Company and its subsidiaries are valid and
enforceable and any patent issuing from patent applications of the Company and
its subsidiaries will be valid and enforceable, except as such invalidity or
unenforceability would not, individually or in the aggregate, have a material
adverse effect on the Company. The Company has no knowledge of any infringement
by any other person of any of the Company Intellectual Property Rights, and the
Company and its subsidiaries have not, to the Company's knowledge, entered into
any agreement to indemnify any other party against any charge of infringement of
any of the Company Intellectual Property Rights, except for such matters as
would not, individually or in the aggregate, have a material adverse effect on
the Company. To the best of the Company's knowledge, the Company and its
subsidiaries have not and do not violate or infringe any intellectual property
right of any other person, and neither the Company nor any of its subsidiaries
have received any communication alleging that it violates or infringes the
intellectual property right of any other person, except for such matters as
would not, individually or in the aggregate, have a material adverse effect on
the Company. Except for such matters as would not, individually or in the
aggregate, have a material effect on the
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Company, the Company and its subsidiaries have not been sued for infringing any
intellectual property right of another person. None of the Company Intellectual
Property Rights or other know-how relating to the business of the Company and
its subsidiaries, the value of which to Parent is contingent upon maintenance of
the confidentiality thereof, has been disclosed by the Company or any affiliate
thereof to any person other than those persons who are bound to hold such
information in confidence pursuant to confidentiality agreements or by operation
of law.
SECTION 3.19. LABOR RELATIONS AND EMPLOYMENT.
(a) There is no labor strike, dispute, slowdown, stoppage or lockout
actually pending, or, to the best knowledge of the Company, threatened
against the Company or any of its subsidiaries, and during the past three
years there has not been any such action; (ii) no union claims to represent
the employees of the Company or any of its subsidiaries; (iii) neither the
Company nor any of its subsidiaries is a party to or bound by any collective
bargaining or similar agreement with any labor organization, or work rules
or practices agreed to with any labor organization or employee association
applicable to employees of the Company or any of its subsidiaries;
(iv) none of the employees of the Company or any of its subsidiaries is
represented by any labor organization and the Company does not have any
knowledge of any current union organizing activities among the employees of
the Company or any of its subsidiaries, nor are there representation or
certification proceedings or petitions seeking a representation proceeding
presently pending or threatened to be brought or filed with the National
Labor Relations Board or any other labor relations tribunal; (v) the Company
and its subsidiaries are, and have at all times been, in compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment, wages, hours of work and occupational safety and
health, and are not engaged in any unfair labor practices as defined in the
National Labor Relations Act or other applicable law, ordinance or
regulation; (vi) there is no unfair labor practice charge or complaint
against the Company or any of its subsidiaries pending or, to the knowledge
of the Company, threatened before the National Labor Relations Board or any
similar state or foreign agency; (vii) there is no grievance with respect to
or relating to the Company or any of its subsidiaries arising out of any
collective bargaining agreement or other grievance procedure; (viii) no
charges with respect to or relating to the Company or any of its
subsidiaries are pending before the Equal Employment Opportunity Commission
or any other agency responsible for the prevention of unlawful employment
practices; (ix) neither the Company nor any of its subsidiaries has received
notice of the intent of any federal, state, local or foreign agency
responsible for the enforcement of labor or employment laws to conduct an
investigation with respect to or relating to the Company or any of its
subsidiaries and no such investigation is in progress; and (x) there are no
complaints, lawsuits or other proceedings pending or to the knowledge of the
Company threatened in any forum by or on behalf of any present or former
employee of the Company or any of its subsidiaries alleging breach of any
express or implied contract of employment, any law or regulation governing
employment or the termination thereof or other discriminatory, wrongful or
tortious conduct in connection with the employment relationship.
(b) To the knowledge of the Company, since the enactment of the Worker
Adjustment and Retraining Notification ("WARN") Act, there has not been
(i) a "plant closing" (as defined in the WARN Act) affecting any site of
employment or one or more facilities or operating units within any site of
employment or facility of the Company or any of its subsidiaries; or (ii) a
"mass layoff" (as defined in the WARN Act) affecting any site of employment
or facility of the Company or any of its subsidiaries; nor has the Company
or any of its subsidiaries been affected by any transaction or engaged in
layoffs or employment terminations sufficient in number to trigger
application of any similar state or local law. To the knowledge of the
Company, none of the employees of the Company or any of its subsidiaries has
suffered an "employment loss" (as defined in the WARN Act) since three
months prior to the date of this Agreement.
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SECTION 3.20. CHANGE OF CONTROL; EFFECT OF THE DISPOSITION. The
transactions contemplated by this Agreement, including, without limitation, the
Disposition, will not constitute a "change of control" under, require the
consent from or the giving of notice to a third party pursuant to, permit a
third party to terminate or accelerate vesting, repayment or repurchase rights,
or create any other detriment under the terms, conditions or provisions of any
note, bond, mortgage, indenture, license, lease, contract, agreement or other
instrument or obligation to which the Company or any of its subsidiaries is a
party or by which any of them or any of their properties or assets may be bound.
The Disposition will not result in the creation of any Liabilities of the
Company or any of its subsidiaries and will result in the release of all
outstanding Liabilities of the Company in relation to Quail.
SECTION 3.21. ENVIRONMENTAL MATTERS.
(a) To the best knowledge of the Company, after due inquiry, the Company
and its subsidiaries have been and are in compliance with all applicable
Environmental Laws (as this term and the other terms in this section are
defined below), except for such violations and defaults as would not,
individually or in the aggregate, have a material adverse effect on the
Company.
(b) To the best knowledge of the Company, after due inquiry, the Company
and its subsidiaries possess all required Environmental Permits; all such
Environmental Permits are in full force and effect; there are no pending or
threatened proceedings to revoke such Environmental Permits and the Company
and its subsidiaries are in compliance with all terms and conditions
thereof, except for such failures to possess or comply with Environmental
Permits as would not, individually or in the aggregate, have a material
adverse effect on the Company.
(c) Except for matters which would not, individually or in the
aggregate, have a material adverse effect on the Company, neither the
Company nor any of its subsidiaries has received any notification that the
Company or any subsidiary as a result of any of the current or past
operations of the Business, or any property currently or formerly owned or
leased or used in connection with the Business, is or may be adversely
affected by any proceeding, investigation, claim, lawsuit or order by any
Governmental Entity or other person relating to whether (i) any Remedial
Action is or may be needed to respond to a Release or threat of Release into
the environment of Hazardous Substances arising out of or caused by any
current or past operations of the Company or any of its subsidiaries,
(ii) any Environmental Liabilities and Costs imposed by, under or pursuant
to Environmental Laws as in effect on or prior to the date hereof shall be
sought, or proceeding commenced, arising from the current or past operations
of the Business or (iii) the Company or any subsidiary is or may be a
"potentially responsible party" for a Remedial Action, pursuant to any
Environmental Law for the costs of investigating or remediating Releases or
threatened Releases into the environment of Hazardous Substances, whether or
not such Release or threatened Release has occurred or is occurring at
properties currently or formerly owned or operated by the Company and its
subsidiaries;
(d) Except for Environmental Permits, none of the Company or its
subsidiaries has entered into any written agreement with any entity or
persons including any Governmental Entity by which the Company or any of its
subsidiaries has assumed the responsibility, either directly or by acting as
a guarantor or surety, to pay for the remediation of any condition arising
from or relating to a Release of Hazardous Substances as defined under
Environmental Laws as in effect on or prior to the date hereof into the
environment in connection with the Business, including for cost recovery by
third parties with respect to such Releases or threatened Releases;
(e) Except for matters which would not, individually or in the
aggregate, have a material adverse effect on the Company, to the best
knowledge of the Company, after due inquiry, there has been no Release of
Hazardous Substances for which the Company is or may be liable under any
Environmental Laws on, under or from any real property currently or
previously owned or operated by the Company or in connection with the
Company's Business except for authorized discharges complying with
applicable Environmental Laws.
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(f) For purposes hereof:
(i) "Business" means the current and former businesses of the Company
and its subsidiaries including, but not limited to, businesses or
subsidiaries that have been previously sold by the Company, its
subsidiaries or any predecessors thereto.
(ii) "Environmental Laws" means all Laws relating to the protection
of human health or the environment, or to any emission, discharge,
generation, processing, storage, holding, abatement, existence, Release,
threatened Release or transportation of any chemical or Hazardous
Substances, including, but not limited to, (i) CERCLA, the Resource
Conservation and Recovery Act, the Clean Water Act, the Clean Air Act,
the Toxic Substances Control Act, property transfer statutes or
requirements and (ii) all other requirements pertaining to reporting,
licensing, permitting, investigation or remediation of Hazardous
Substances in the air, surface water, groundwater or land, or relating to
the manufacture, processing, distribution, use, sale, treatment, receipt,
storage, disposal, transport or handling of Hazardous Substances or
relating to human health or safety from exposure to Hazardous Substances.
(iii) "Environmental Liabilities and Costs" means all damages,
natural resource damages, claims, losses, expenses, costs, obligations,
and liabilities (collectively, "Losses"), whether direct or indirect,
known or unknown, current or potential, past, present or future, imposed
by, under or pursuant to Environmental Laws, including, but not limited
to, all Losses related to Remedial Actions, and all fees, capital costs,
disbursements, penalties, fines and expenses of counsel, experts,
contractors, personnel and consultants and the value of any services that
might be provided by the Company or any of its subsidiaries in lieu
thereof and expenditures necessary to cause any such property or the
Company or any subsidiary to be in compliance with requirements of
Environmental Laws.
(iv) "Environmental Permits" means any federal, state, provincial or
local permit, license, registration, consent, order, administrative
consent order, certificate, approval or other authorization necessary for
the conduct of the Business as currently conducted, and wherever it is
currently conducted, under any applicable Environmental Law.
(v) "Governmental Entity" means any government or subdivision
thereof, domestic, foreign or supranational or any administrative,
governmental or regulatory authority, agency, commission, tribunal or
body, domestic, foreign or supranational.
(vi) "Hazardous Substances" means any substance that (a) is defined,
listed or identified or otherwise regulated under any Environmental Law
(including, without limitation, radioactive substances,
polycholorinated-biphenyls, petroleum and petroleum derivatives and
products) or (b) requires investigation, removal or remediation under
applicable Environmental Law.
(vii) "Laws" means all (A) constitutions, treaties, statutes, laws
(including, but not limited to, the common law), rules, regulations,
ordinances or codes of any Governmental Entity, (B) Environmental
Permits, and (C) orders, decisions, injunctions, judgments, awards and
decrees of any Governmental Entity.
(viii) "Release" shall be as defined in CERCLA.
(ix) "Remedial Action" means all actions required by any Governmental
Entity pursuant to Environmental Law or otherwise taken as necessary to
comply with Environmental Law to (i) clean up, remove, treat or in any
other way remediate any Hazardous Substances; (ii) prevent the release of
Hazardous Substances so that they do not migrate or endanger or threaten
to endanger public health or welfare or the environment; or
(iii) perform studies, investigations or monitoring in respect of any
such matter.
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SECTION 3.22. MATERIAL CONTRACTS. Neither the Company nor any of its
subsidiaries is a party to or bound by any:
(a) employment or consulting agreement or contract that has an aggregate
future liability in excess of $100,000 annually and is not terminable by the
Company or a subsidiary by notice of not more than 60 days for a cost of
less than $100,000;
(b) employee collective bargaining agreement or other contract with any
labor union;
(c) covenant of the Company or a subsidiary not to compete;
(d) agreement, contract or other arrangement with any current or former
officer, director, or any relative thereof, of the Company or any subsidiary
(other than employment agreements covered by clause (i) above);
(e) lease, sublease or similar agreement involving annual payments in
excess of $100,000 with any person (other than the Company or a subsidiary)
under which the Company or a subsidiary is a lessor or sublessor of, or
makes available for use to any person (other than the Company or a
subsidiary), (A) any Company Property (as hereinafter defined) or (B) any
portion of any premises otherwise occupied by the Company or a subsidiary;
(f) lease or similar agreement with any person (other than the Company
or a subsidiary) under which (A) the Company or a subsidiary is lessee of,
or holds or uses, any machinery, equipment, vehicle or other tangible
personal property owned by any person or (B) the Company or a subsidiary is
a lessor or sublessor of, or makes available for use any person, any
tangible personal property owned or leased by the Company or a subsidiary,
in any such case which has an aggregate annual future liability or
receivable, as the case may be, in excess of $100,000 and is not terminable
by the Company or a subsidiary by notice of not more than 60 days for a cost
of less than $100,000;
(g) (A) continuing contract for the future purchase of materials,
supplies or equipment (other than purchase contracts and orders for
inventory in the ordinary course of business consistent with past practice)
in excess of $100,000 annually, (B) management, service, consulting or other
similar type of contract or (C) advertising agreement or arrangement, in any
such case which has an aggregate future liability to any person (other than
the Company or a subsidiary) in excess of $100,000 and is not terminable by
the Company or a subsidiary by notice of not more than 60 days for a cost of
less than $100,000;
(h) material license, option or other agreement relating in whole or in
part to intellectual property (including any license or other agreement
under which the Company or a subsidiary is licensee or licensor of any such
intellectual property);
(i) agreement, contract or other instrument under which the Company or
a subsidiary has borrowed any money from, or issued any note, bond,
debenture or other evidence of indebtedness to, any person (other than the
Company or a subsidiary) or any other note, bond, debenture or other
evidence of indebtedness issued to any person (other than the Company or a
subsidiary);
(j) agreement, contract or other instrument (including so-called
take-or-pay or keepwell agreements) under which (A) any person (including
the Company or a subsidiary) has directly or indirectly guaranteed
Liabilities of the Company or a subsidiary or (B) the Company or a
subsidiary has directly or indirectly guaranteed Liabilities of any person
(in each case other than endorsements for the purpose of collection in the
ordinary course of business);
(k) agreement, contract or other instrument under which the Company or
a subsidiary has, directly or indirectly, made any advance, loan, extension
or credit or capital contribution in excess of $50,000 to, or other
investment in any person;
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(l) mortgage, pledge, security agreement, deed of trust or other
instrument granting a lien or other encumbrance upon any Company Property;
(m) agreement or instrument providing for indemnification of any person
with respect to Liabilities relating to any current or former business of
the Company, a subsidiary or any predecessor person exclusive of
indemnifications included in other documents listed in the Company
Disclosure Schedule or granted to sellers of real property owned or leased
by the Company or its affiliates; or
(n) any other material agreement, contract, management contract, lease,
license, commitment or instrument to which the Company or any subsidiary is
a party or by or to which it or any of its assets or business is bound or
subject, not covered by any of the categories specified in clauses
(i) through (xiii) above.
All agreements, contracts, leases, licenses, commitments or instruments
of the Company or any subsidiary listed in the Company Disclosure Schedule
(collectively, the "Contracts") are valid, binding and in full force and
effect and are enforceable by the Company or the relevant subsidiary in
accordance with its terms. The Company and the subsidiaries have performed
all material obligations required to be performed by them to date under the
Contracts and they are not (with or without the lapse of time or the giving
of notice, or both) in breach or default in any material respect thereunder
and, to the knowledge of the Company and its subsidiaries, no other party to
any of the Contracts is (with or without the lapse of time or the giving of
notice, or both) in breach or default in any material respect thereunder.
SECTION 3.23. PROPERTY. Section 3.23 of the Company Disclosure Schedule
accurately identifies all real property, leases and other rights in real
property, structures and other buildings of the Company and, with the exception
of Quail, its subsidiaries (collectively, the "Company Properties"). All
properties and assets of the Company and its subsidiaries, real and personal,
material to the conduct of their respective businesses are, except for changes
in the ordinary course of business since December 31, 1998, reflected in the
balance sheet of the Company dated December 31, 1998 (the "1998 Balance Sheet"),
the Company and its subsidiaries (other than Quail) have good and marketable
title to their respective real and personal property reflected on the 1998
Balance Sheet or acquired by them since the date of such balance sheet, free and
clear of all mortgages, liens, pledges, encumbrances, charges, agreements,
claims, restrictions and defects of title (collectively, "Title Liens"), other
than Permitted Title Liens (as defined below). All real property, structures and
other buildings and material equipment of each of the Company and its
subsidiaries (other than Quail) are currently used in the operation of the
business, are adequately maintained and are in satisfactory operating condition
and repair for the requirements of the business as presently conducted.
"Permitted Title Liens" means Title Liens for (i) taxes or other charges or
levies of a Governmental Entity which are not due and payable or which are being
contested in good faith by appropriate proceedings as described in Section 3.14
of the Company Disclosure Schedule and as to which adequate financial reserves
have been established and described in Section 3.14 of the Company Disclosure
Schedule; (ii) workmen's, repairmen's or other similar Title Liens (inchoate or
otherwise) arising or incurred in the ordinary course of business in respect of
obligations which are not overdue; (iii) minor title defects, easements or Title
Liens affecting real property, which defects, easements or Liens do not,
individually or in the aggregate, materially impair the continued use,
occupancy, value or marketability of title of the real property to which they
relate, assuming that the property is used on substantially the same basis as
such property is currently being used by the Company.
SECTION 3.24. INSURANCE. Section 3.24 of the Company Disclosure Schedule
accurately identifies each material insurance policy (including policies
providing property, casualty, environmental liability, liability, malpractice
and workers compensation insurance) and all other material types of insurance
maintained by the Company and its subsidiaries, together with carriers and
liability limits for each such policy, other than those insurance policies that
are maintained separately by and/or for Quail. Each such policy is duly in force
and no notice has been received by the Company or any of its subsidiaries from
any insurance carrier purporting to cancel or reduce coverage under any such
policy. The Company and its
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subsidiaries (other than Quail) are current in all premiums or other payments
due thereunder and no notice has been received by the Company or any of its
subsidiaries (other than Quail) from any insurance carrier purporting to
increase any such premiums in any material respect. All insurance coverage held
for the benefit of the Company or its subsidiaries (other than Quail) is
adequate to cover risks customarily insured against by similar companies in
their industry.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
SECTION 4.01. ORGANIZATION. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to carry on its business as now being conducted, except where the
failure to be so organized, existing and in good standing or to have such power
and authority would not be reasonably expected to prevent or materially delay
the consummation of the Merger.
SECTION 4.02. AUTHORITY. Parent and Sub have requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Parent and
Sub and no other corporate proceedings on the part of Parent and Sub are
necessary to authorize this Agreement or to consummate such transactions. No
vote of Parent shareholders is required to approve this Agreement or the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Parent and Sub, as the case may be, and, assuming this Agreement
constitutes a valid and binding obligation of the Company, constitutes a valid
and binding obligation of each of Parent and Sub enforceable against them in
accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies.
SECTION 4.03. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Exchange Act (including the filing with
the SEC of the Proxy Statement), the HSR Act, the MBCL, the Massachusetts
General Laws, the laws of other states in which Parent is qualified to do or is
doing business, state takeover laws and foreign laws, neither the execution,
delivery or performance of this Agreement by Parent and Sub nor the consummation
by Parent and Sub of the transactions contemplated hereby will (i) conflict with
or result in any breach of any provision of the respective certificate of
incorporation, articles of organization or By-Laws of Parent and Sub,
(ii) require any filing with, or permit, authorization, consent or approval of,
any Governmental Entity (except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings would not be
reasonably expected to prevent or materially delay the consummation of the
Merger), (iii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
lease, contract, agreement or other instrument or obligation to which Parent or
any of its subsidiaries is a party or by which any of them or any of their
properties or assets may be bound or (iv) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Parent, any of its
subsidiaries or any of their properties or assets, except in the case of clauses
(iii) and (iv) for violations, breaches or defaults which would not,
individually or in the aggregate, be reasonably expected to prevent or
materially delay the consummation of the Merger.
SECTION 4.04. INFORMATION SUPPLIED. None of the information supplied or to
be supplied by Parent or Sub specifically for inclusion or incorporation by
reference in the Proxy Statement and related filings, will, at the time the
Proxy Statement is first mailed to the Company's stockholders or at the time of
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the Stockholders Meeting, 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.
SECTION 4.05. INTERIM OPERATIONS OF SUB. Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby.
ARTICLE V
COVENANTS
SECTION 5.01. CONDUCT OF BUSINESS OF THE COMPANY. Except as contemplated
by this Agreement, as expressly agreed to in writing by Parent or in connection
with the Disposition, or as described in Section 5.01 of the Company Disclosure
Schedule, during the period from the date of this Agreement until the Effective
Time, the Company will, and will cause each of its subsidiaries to, conduct its
operations according to its ordinary and usual course of business and consistent
with past practice and use its and their respective commercially reasonable
efforts to preserve intact their current business organizations, keep available
the services of their current officers and employees and preserve their
relationships with customers, suppliers, licensors, licensees, advertisers,
distributors and others having business dealings with them and to preserve
goodwill. Without limiting the generality of the foregoing, and except as
(x) otherwise expressly provided in this Agreement, (y) required by law, or
(z) set forth in Section 5.01 of the Company Disclosure Schedule, the Company
will not, and will cause its subsidiaries not, without the consent of Parent,
to:
(a) (i) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to its stockholders in their
capacity as such, other than dividends declared prior to the date of this
Agreement, (ii) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock or
(iii) purchase, redeem or otherwise acquire any shares of capital stock of
the Company or any of its subsidiaries or any other securities thereof or
any rights, warrants or options to acquire any such shares or other
securities;
(b) issue, deliver, sell, pledge, dispose of or otherwise encumber any
shares of its capital stock, any other voting securities or equity
equivalent or any securities convertible into, or any rights, warrants or
options to acquire, any such shares, voting securities or convertible
securities or equity equivalent (other than in connection with the exercise
of options outstanding prior to the date hereof in accordance with their
current terms);
(c) amend its Articles of Organization or By-Laws;
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of or equity in, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof or otherwise acquire or
agree to acquire any assets that in the aggregate have a value in excess of
1% of the Company's assets;
(e) except for the Disposition and in the ordinary course of business,
sell, lease or otherwise dispose of, or agree to sell, lease or otherwise
dispose of, any of its assets that in the aggregate have an excess of 1% of
the Company's assets;
(f) amend or otherwise modify, or terminate, any material Contract, or
enter into any joint venture, lease or management agreement or other
material agreement of the Company or any of its subsidiaries (other than the
Employment Agreement);
(g) except in the ordinary course of business under the Company's
existing line of credit (including letters of credit), incur any additional
indebtedness (including for this purpose any
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indebtedness evidenced by notes, debentures, bonds, leases or other similar
instruments, or secured by any lien on any property, conditional sale
obligations, obligations under any title retention agreement and obligations
under letters of credit or similar credit transaction) in a single
transaction or a group of related transactions, enter into a guaranty, or
engage in any other financing arrangements having a value in excess of 1% of
the Company's assets, or make any loans, advances or capital contributions
to, or investments in, any other person;
(h) alter through merger, liquidation, reorganization, restructuring or
in any other fashion its corporate structure or ownership;
(i) except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
principles or practices used by it;
(j) revalue any of its assets, including, without limitation, writing
down the value of its inventory or writing off notes or accounts receivable
other than in the ordinary course of business;
(k) make any tax election, change any annual tax accounting period,
amend any tax return, settle or compromise any income tax liability, enter
into any closing agreement, settle any tax claim or assessment, surrender
any right to claim a tax refund or fail to make the payments or consent to
any extension or waiver of the limitations period applicable to any tax
claim or assessment;
(l) except in the ordinary course of business, settle or compromise any
pending or threatened suit, action or claim with a cost of $100,000 or more;
(m) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise) other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in, or contemplated
by, the financial statements (or the notes thereto) of the Company or
incurred in the ordinary course of business consistent with past practice;
(n) increase in any manner the compensation or fringe benefits of any
of its directors or officers or pay any pension or retirement allowance not
required by any existing plan or agreement to any such employees, or become
a party to, amend or commit itself to any pension, retirement,
profit-sharing savings, severance, incentive or other or welfare benefit
plan or agreement or employment agreement with or for the benefit of any
employee, other than increases in the compensation of employees who are not
officers or directors of the Company or any of its subsidiaries made in the
ordinary course of business consistent with past practice, or, except to the
extent required by law, voluntarily accelerate the vesting of any
compensation or benefit, or grant any loans or increases to any outstanding
loans to any of the Company's or its subsidiaries, directors or officers;
(o) waive, amend or allow to lapse any term or condition of any
confidentiality, "standstill," consulting, advisory or employment agreement
to which the Company is a party;
(p) approve any annual operating budgets for the Company and its
subsidiaries;
(q) change the Company's dividend policy;
(r) enter into any transaction with affiliates;
(s) enter into any business other than the business currently engaged
in by the Company;
(t) pursuant to or within the meaning of any bankruptcy law,
(i) commence a voluntary case, (ii) consent to the entry of an order for
relief against it in an involuntary case, (iii) consent to the appointment
of a custodian of it or for all or substantially all of its property or
(iv) make a general assignment for the benefit of its creditors;
(u) purchase or lease or enter into a binding agreement to purchase or
lease any real property;
(v) enter into or amend, modify or terminate any employment, consulting
or independent contractor agreement, arrangement or understanding with any
officer, director, or any relative thereof, or employee;
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(w) enter into any development agreement, option relating to new
development or any other obligation relating to new development which in the
aggregate would have a cost to the Company in excess of 1% of the Company's
assets;
(x) make any capital contributions, loans or other payments to, or on
account of, Quail; or
(y) take, or agree in writing or otherwise to take, any of the
foregoing actions.
During the period from the date of this Agreement through the Effective
Time, (i) as reasonably requested by Parent so as not to interfere with ongoing
operations of the Company, the Company shall confer on a regular basis with one
or more representatives of Parent with respect to material operational matters;
(ii) the Company shall, within 30 days following each fiscal month, deliver to
Parent management prepared unaudited financial statements as to the Company,
including an income statement and balance sheet for such month; and (iii) upon
obtaining knowledge of any material adverse change to the Company, any material
litigation or material governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the breach in
any material respect of any representation or warranty contained herein, the
Company shall promptly notify Parent thereof.
The Company shall have the right to update the Company Disclosure Schedule
between the date hereof and the Effective Time to reflect actions taken by the
Company and its subsidiaries which are permitted to be taken pursuant to this
Section 5.01.
SECTION 5.02. NO SOLICITATION.
(a) The Company and its officers, directors, employees, representatives
and agents shall immediately cease any existing discussions or negotiations,
if any, with any parties conducted heretofore with respect to any
acquisition or exchange of all or any material portion of the assets of, or
any equity interest in, the Company or any of its subsidiaries or any
business combination with the Company or any of its subsidiaries (except as
contemplated by this Agreement or in connection with the Disposition). The
Company agrees that, prior to the Effective Time, it shall not, and shall
not authorize or permit any of its subsidiaries or any of its or its
subsidiaries' directors, officers, employees, agents or representatives,
directly or indirectly, to solicit, initiate, encourage or facilitate, or
furnish or disclose non-public information in furtherance of, any inquiries
or the making of any proposal with respect to any Acquisition Proposal (as
defined below), or negotiate, explore or otherwise engage in discussions
with any person (other than Parent, its affiliates or their respective
directors, officers, employees, agents and representatives) with respect to
any Acquisition Proposal or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement; PROVIDED;
HOWEVER, that the Company may furnish information, pursuant to a customary
confidentiality agreement with terms not more favorable to such third party
than the Confidentiality Agreement (as defined in Section 6.02), to, and
negotiate or otherwise engage in discussions with, any party who delivers a
bona fide written proposal for an Acquisition Proposal for which all
necessary financing is then in the judgment of the Company's Independent
Committee of the Board of Directors reasonably obtainable, if the Company's
Independent Committee of the Board of Directors determines in good faith by
a vote of a majority of the members of the Independent Committee of the
Board of Directors that failing to take such action would create a
reasonable possibility of a breach of the fiduciary duties of the Company's
Board of Directors (after consultation with its outside legal counsel) and
such a proposal is, in the written opinion of the Company's financial
advisor, more favorable to the Company's stockholders from a financial point
of view than the transactions contemplated by this Agreement as the same has
been proposed to be amended by Parent pursuant to Section 5.02(b); PROVIDED,
FURTHER, that nothing contained in this Section 5.02 shall prohibit the
Company or its Board of Directors from making such disclosure to the
Company's stockholders which, in the judgment of the Board of Directors of
the Company (after consultation with its outside legal counsel), may be
required under applicable law.
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(b) From and after the execution of this Agreement, the Company shall
promptly advise Parent in writing of the receipt, directly or indirectly, of
any inquiries, discussions, negotiations or proposals relating to an
Acquisition Proposal, identify the offeror and furnish to the Parent a copy
of any such proposal or inquiry, if it is in writing, relating to an
Acquisition Proposal. The Company shall promptly advise Parent of any
material development relating to such proposal, including the results of any
discussions or negotiations with respect thereto. Notwithstanding anything
in this Agreement to the contrary, prior to the approval of an Acquisition
Proposal by the Company's Board of Directors Board in accordance with
Section 8.01(d), Company shall give Parent sufficient notice of the material
terms and conditions of any such Acquisition Proposal and negotiate in good
faith with Parent for a period of not less than five business days after
receipt of a written proposal or a written summary of any oral proposal to
make such adjustments in the terms and conditions of this Agreement as would
enable the Company to proceed with the transactions contemplated herein.
(c) For purposes hereof: "Acquisition Proposal" means any inquiry,
proposal or offer from any person relating to any direct or indirect
acquisition or purchase of 15% or more of any class of equity securities of
the Company or any of its subsidiaries, any tender offer or exchange offer
that if consummated would result in any person beneficially owning 15% or
more of any class of equity securities of the Company or any of its
subsidiaries, any merger, consolidation, business combination, sale of
substantially all the assets, recapitalization, liquidation, dissolution or
similar transaction involving the Company or any of its subsidiaries, other
than the transactions contemplated by this Agreement and the Disposition, or
any other transaction the consummation of which could reasonably be expected
to impede, interfere with, prevent or materially delay the Merger or which
would reasonably be expected to dilute materially the benefits to Parent of
the transactions contemplated hereby.
SECTION 5.03. OTHER ACTIONS. The Company shall not, and shall not permit
any of its subsidiaries to, take any action that would, or that could reasonably
be expected to, result in (i) any of the representations and warranties of the
Company set forth in this Agreement that are qualified as to materiality
becoming untrue or (ii) any of such representations and warranties that are not
so qualified becoming untrue in any material respect (subject to the Company's
right to take actions specifically permitted by Section 5.02).
SECTION 5.04. NOTICE OF CERTAIN EVENTS. The Company and Parent shall
promptly notify each other of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any Government Entity in
connection with the transactions contemplated by this Agreement;
(c) any action, suits, claims, investigations or proceedings commenced
or, to the actual knowledge of the executive officers of the notifying
party, threatened against, relating to or involving or otherwise affecting
such party or any of its subsidiaries;
(d) an administrative or other order or notification relating to any
material violation or claimed violation of law;
(e) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any representation or warranty contained
in this Agreement to be untrue or inaccurate in any material respect at or
prior to the Closing Date; and
(f) any material failure of any party to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder;
PROVIDED, HOWEVER, that the delivery of any notice pursuant to this
Section 5.04 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
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ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. STOCKHOLDER APPROVAL; PREPARATION OF PROXY STATEMENT.
(a) The Company shall call, give notice of, convene and hold a meeting
of its stockholders (the "Stockholders Meeting") for the purpose of
obtaining the Company Stockholder Approval as soon as practicable following
the execution of this Agreement. The Company will, through its Board of
Directors, recommend to its stockholders that the Company Stockholder
Approval be given. Without limiting the generality of the foregoing, the
Company agrees that its obligations pursuant to the first sentence of this
Section 6.01(a) shall not be affected by (i) the commencement, public
proposal, public disclosure or communication to the Company of any
Acquisition Proposal or (ii) the withdrawal or modification by the Board of
Directors of the Company of its approval or recommendation of this Agreement
or the Merger, except upon a termination of this Agreement pursuant to
Section 8.01(d).
(b) The Company shall as soon as practicable following the execution of
this Agreement, prepare and file a preliminary Proxy Statement with the SEC
and will use its best efforts to respond to any comments of the SEC or its
staff and to cause the Proxy Statement to be mailed to the Company's
stockholders as promptly as practicable after responding to all such
comments to the satisfaction of the staff and will make any additional
filings as may be required by law. The Company will notify Parent promptly
of the receipt of any comments from the SEC or its staff and of any request
by the SEC or its staff for amendments or supplements to the Proxy
Statement, or any additional filings, or for additional information, and
will supply Parent with copies of all correspondence between the Company or
any of its representatives, on the one hand, and the SEC or its staff, on
the other hand, with respect to the Proxy Statement and any additional
filings, or the Merger. If at any time prior to the Stockholders Meeting
there shall occur any event that should be set forth in an amendment or
supplement to the Proxy Statement, the Company will promptly prepare and
mail to its stockholders such an amendment or supplement. The Company will
not mail or file any Proxy Statement, or make any additional filings, or any
amendment or supplement thereto, to which Parent reasonably objects unless,
upon consultation with counsel, the Company determines such document is
required as a matter of law.
(c) Grandparent and Parent agree to cause all Shares owned by
Grandparent, Parent or any subsidiary of Grandparent or Parent to be voted
in favor of the Company Stockholder Approval.
SECTION 6.02. ACCESS TO INFORMATION. From the date hereof until the
Effective Time, the Company shall give Parent and Sub, their counsel, financial
advisors, auditors and other authorized representatives full access to the
offices, properties, books and record of the Company and its subsidiaries during
normal business hours, will furnish to Parent and Sub, their counsel, financial
advisors, financial institutions auditors and other authorized representatives
such financial and operating data and other information as such may be
reasonably requested and will instruct the employees of the Company and its
subsidiaries, their counsel and financial advisors to cooperate with Parent and
Sub in their investigation of the Business; PROVIDED, that no investigation
pursuant to this Section 6.02 shall affect any representation or warranty given
by the Company to Parent and Sub hereunder; and PROVIDED, FURTHER, that any
information provided to Parent and/or Sub pursuant to this Section 6.02 shall be
subject to the confidentiality agreement, dated as of May 19, 1999 (the
"Confidentiality Agreement"), the terms of which shall continue to apply, except
as otherwise agreed by the Company, unless and until the Effective Time and
notwithstanding termination of this Agreement and provided further that any
requests shall not interfere with ongoing operations of the Company and its
subsidiaries.
SECTION 6.03. REASONABLE EFFORTS. Each of the Company, Parent and Sub
agree to use its reasonable efforts to take, or cause to be taken, all actions
necessary to comply promptly with all legal requirements which may be imposed on
itself with respect to the Merger (which actions shall include furnishing all
information required under the HSR Act and in connection with approvals of or
filings with
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any other Governmental Entity) and will promptly cooperate with and furnish
information to each other in connection with any such requirements imposed upon
any of them or any of their subsidiaries in connection with the Merger. Each of
the Company, Parent and Sub will, and will cause its subsidiaries to, use its
reasonable efforts to take all reasonable actions necessary to obtain (and will
cooperate with each other in obtaining) any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity or other public or
private third party required to be obtained or made by Parent, Sub, the Company
or any of their subsidiaries in connection with the Merger or the taking of any
action contemplated thereby or by this Agreement, except that no party need
waive any substantial rights or agree to any substantial limitation on its
operations or to dispose of any assets.
SECTION 6.04. FEES AND EXPENSES.
(a) In addition to any other amounts which may be payable or become
payable pursuant to any other paragraph of this Section 6.04, in the event
that this Agreement is terminated (i) by Parent (A) if there occurs a
material breach by the Company of any term, covenant, representation or
warranty contained in this Agreement, (B) pursuant to Section 8.01(e) or
(C) pursuant to Section 8.01(g) or (ii) by the Company pursuant to
Section 8.01(d) of this Agreement, the Company shall promptly reimburse the
Parent or Sub, as the case may be, for all out-of-pocket expenses and fees
(including, without limitation, fees and expenses payable to all
Governmental Entities, banks, investment banking firms and other financial
institutions, and their respective agents and counsel, and all fees and
expenses of counsel, accountants, financial printers, proxy solicitors,
exchange agents, experts and consultants to Parent and its affiliates),
actually incurred, whether incurred prior to, on or after the date hereof,
in connection with the Merger and the consummation of all transactions
contemplated by this Agreement (the "Fees") up to a maximum amount of
$300,000. Except as otherwise specifically provided for herein, whether or
not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated by this Agreement
shall be paid by the party incurring such expenses.
(b) If this Agreement is terminated by the Company if there occurs a
material breach by Grandparent, Parent or Sub of any term, condition,
covenant, representation or warranty contained in this Agreement, Parent
shall promptly reimburse the Company for all Fees, up to a maximum amount of
$300,000.
(c) In the event that this Agreement is terminated pursuant to
Section 8.01(d) or (e), then, in addition to the amounts paid pursuant to
Section 6.04(b), the Company shall promptly pay Parent a termination fee of
$600,000 (the "Termination Fee").
(d) The prevailing party in any legal action undertaken to enforce this
Agreement or any provision hereof shall be entitled to recover from the
other party the costs and expenses (including attorneys' and expert witness
fees and expenses) incurred in connection with such action.
(e) Parent and the Company shall cooperate in the preparation,
execution and filing of all returns, applications or other documents
regarding any real property transfer, stamp, recording, documentary or other
taxes and any other fees and similar taxes which become payable in
connection with the Merger (collectively, "TRANSFER TAXES"). The Company
will pay all of the Transfer Taxes, except that Parent will pay all fees
related to the HSR Act.
SECTION 6.05. INDEMNIFICATION; INSURANCE.
(a) Parent and Sub agree that all rights to indemnification for acts or
omissions occurring prior to and concurrently with the Effective Time now
existing in favor of the current or former directors or officers (the
"Indemnified Parties") of the Company and its subsidiaries as provided in
their respective articles of organization or by-laws (or similar
organizational documents) or existing indemnification contracts (all of
which have been disclosed in Section 3.10 of the Company Disclosure
Schedule) shall survive the Merger and shall continue in full force and
effect in accordance with their
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terms, and the Surviving Corporation's Articles of Organization and By-laws
shall reflect such protections.
(b) For six years from the Effective Time, Parent shall cause the
Surviving Corporation to maintain in effect the Company's current directors'
and officers' liability insurance covering those persons who are currently
covered by the Company's directors' and officers' liability insurance policy
(a copy of which has been heretofore delivered to Parent); PROVIDED,
HOWEVER, that in no event shall Parent be required to expend in any one year
an amount in excess of 150% of the annual premiums currently paid by the
Company for such insurance (which the Company represents is currently not
more than $50,000); and, PROVIDED, FURTHER, that if the annual premiums of
such insurance coverage exceed such amount, Parent shall be obligated only
to obtain a policy with the greatest coverage available for a cost not
exceeding such amount.
(c) This Section 6.05 shall survive the consummation of the Merger at
the Effective Time, is intended to benefit the Company, the Surviving
Corporation and the Indemnified Parties, and shall be binding on all
successors and assigns of Parent and the Surviving Corporation.
SECTION 6.06. CERTAIN LITIGATION. The Company agrees that it will not
settle any litigation commenced after the date hereof against the Company or any
of its officers or directors by any stockholder of the Company relating to the
Merger or this Agreement, without the prior written consent of Parent. In
addition, the Company will not voluntarily cooperate with any third party which
may hereafter seek to restrain or prohibit or otherwise oppose the Merger and
will cooperate with Parent and Sub to resist any such effort to restrain or
prohibit or otherwise oppose the Merger, unless the Board of Directors of the
Company determines in good faith, after consultation with and receipt of a
written opinion to such effect from its outside counsel, that failing so to
cooperate with such third party or cooperating with Parent or Sub, as the case
may be, would constitute a breach of the director's fiduciary duties under
applicable law.
ARTICLE VII
CONDITIONS
SECTION 7.01. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligation of each party to effect the Merger shall be
subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) COMPANY STOCKHOLDER APPROVAL. The Company Stockholder Approval
shall have been obtained.
(b) HSR ACT. Any waiting period applicable to this Agreement and the
transactions contemplated hereby under the HSR Act shall have expired or
early termination thereof shall have been granted, without limitation,
restriction or condition of any kind.
(c) NO INJUNCTIONS OR RESTRAINTS. No statute, rule, regulation,
executive order, decree, temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other Governmental Entity or other legal restraint or
prohibition preventing the consummation of the Merger shall be in effect;
PROVIDED, HOWEVER, that each of the parties shall have used reasonable
efforts to prevent the entry of any such injunction or other order and to
appeal as promptly as possible any injunction or other order that may be
entered.
(d) DISPOSITION OF QUAIL. The Disposition of Quail shall have occurred
pursuant to the terms of an agreement in the form attached hereto as
Exhibit B hereto, with no waivers, amendments or modifications of the terms
thereof other than as consented to in writing by Parent. All items stated
therein to be to the agreement, approval or satisfaction of the Company
shall also be to the prior written agreement, approval or satisfaction of
Parent. The Company shall have obtained a fairness opinion with respect to
the consideration being paid for the sale of Quail. Following the
Disposition, the Company shall have no Liabilities, other than as specified
in the Disposition Agreement, related
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to Quail or its Disposition other than the payment of Taxes in connection
with the receipt of the purchase price therefor.
(e) REQUIRED CONSENTS. (i) All consents and approvals required as set
forth in Section 3.05 of the Company Disclosure Schedule shall have been
made or obtained, without limitation, restriction or condition and (ii) all
other consents and approvals shall have been made or obtained, without
limitation, restriction or condition that has or would have a material
adverse effect on the Company (or any effect on Parent and Sub), except for
such authorizations the failure of which does not and would not,
individually or in the aggregate, have a material adverse effect on the
Company (or any material adverse effect on Parent and Sub).
SECTION 7.02. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB. The respective
obligations of Parent and Sub to consummate the transactions contemplated by
this Agreement are subject to the fulfillment at or prior to the Effective Time
of each of the following additional conditions, any or all of which may be
waived in whole or part by Parent to the extent permitted by applicable law:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company contained in this Agreement, to the extent qualified by
materiality or material adverse effect, shall have been true and, to the
extent not qualified by materiality or material adverse effect, shall have
been true in all material respects, in each case when made and on and as of
the Effective Time as though made on and as of the Effective Time (except
for representations and warranties made as of a specified date, which need
be true, or true in all material respects, as the case may be, only as of
the specified date) and Parent and Sub shall have received a certificate of
the Company to that effect signed by a duly authorized officer thereof.
(b) PERFORMANCE. The Company shall have performed or complied with all
agreements and conditions contained herein required to be performed or
complied with by it prior to or at the Effective Time.
(c) OTHER AUTHORIZATIONS. All authorizations (other than those
specified in Section 7.01(b) and 7.01(e) hereof) required in connection with
the execution and delivery of this Agreement and the performance of the
obligations hereunder shall have been made or obtained, without any
limitation, restriction or condition that has or would have a material
adverse effect on the Company (or any effect on Parent and Sub), except for
such authorizations the failure of which to have been made or obtained does
not and would not, individually or in the aggregate, have a material adverse
effect on the Company (or any material adverse effect on Parent and Sub).
(d) INTERCOMPANY ACCOUNTS. All intercompany accounts between the
Company and Quail shall have been settled as nearly as possible as can be
determined at the Closing Date on an accrual basis in accordance with
generally accepted accounting principles (except that adjustments for the
month in which the Closing Date occurs shall be made on a cash basis) and an
accounting satisfactory to Parent, shall have been made thereof except that
$1 million worth in loans outstanding from the Company to Quail at the
Effective Time shall be converted into a loan with the following terms,
subject to documentation reasonably satisfactory to Parent (the "Quail
Loan"): (i) the repayment of the Quail Loan shall be guaranteed by Executive
and secured, with recourse solely to, the $1 million payment to the
Executive under Section 3 of the Employment Agreement, (ii) the Quail Loan
will be payable in 36 equal monthly installments of principal, with simple
annual interest thereon at the "prime rate," as announced from time to time
by Citibank, N.A., with the first such installment of principal and interest
payable on the last business day of the first full month following the
Effective Time and thereafter on the last business day of each of the next
35 months following such date, and (iii) the Quail Loan shall be
subordinated to payment obligations of Quail to its senior lenders providing
financing for the Disposition in form and substance satisfactory to Parent.
Quail shall have paid the Company as part of the above intercompany account
settlement $145,000 on account of the Thomas J. Hammer Option payment
referred to in Section 2.03(b)(iii).
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(e) COMPANY DEBT. As at the Effective Time, the Company and its
subsidiaries (other than Quail) will have no "indebtedness" other than
(i) the loans outstanding under the financing provided by the Massachusetts
Industrial Finance Authority, (ii) trade debt incurred and outstanding in
the ordinary course of business, (iii) any indebtedness to Citizens Bank for
borrowing incurred to pay trade debts in the ordinary course of business or
expenses in connection with the transactions contemplated herein, (iv) the
Quail Loan and (v) any capital leases existing as of the date hereof. For
the purposes of this paragraph "indebtedness" shall mean and include
(1) all obligations of such entity for borrowed money, (2) all obligations
of such entity evidenced by bonds, debentures, notes or other similar
instruments, (3) all obligations of such entity to pay the deferred purchase
price of property, except accounts payable arising in the ordinary course of
business, (4) all obligations of such entity as lessee under capital leases,
(5) all indebtedness of others secured by a lien on any asset of such
entity, whether or not such indebtedness is assumed by such entity, and
(6) all indebtedness of others guaranteed by such entity.
(f) EMPLOYMENT AGREEMENT. The Employment Agreement entered into by the
Company and Executive, as provided in Section 3.07, shall not have been
modified or amended in any manner since its execution and shall be in full
force and effect as of the Effective Time.
SECTION 7.03. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of
the Company to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions, any or all of which may be waived in whole or in part by
the Company to the extent permitted by applicable law:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Parent and Merger Sub contained in this Agreement, to the extent
qualified by materiality shall be true and, to the extent not qualified by
materiality shall be true in all material respects, in each case when made
and on and as of the Effective Time as though made on and as of the
Effective Time (except for representations and warranties made as of a
specified date, which need be true, or true in all material respects, as the
case may be, only as of the specified date) and the Company shall have
received a certificate of Parent and Sub to that effect signed by a duly
authorized officer thereof.
(b) PERFORMANCE. Parent and Sub shall have performed or complied with
all agreements and conditions contained herein required to be performed or
complied with by them prior to or at the Effective Time.
(c) PURCHASE OF NICHIMEN SHARES. Parent shall have purchased, and
Nichimen Corporation ("NMC") and Nichimen America Inc. ("NAI") shall have
sold to Parent, all Shares held by NMC, NAI or any of their subsidiaries,
and the Company shall have received a certificate of Parent to that effect
signed by a duly authorized officer thereof.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the terms of
this Agreement by the stockholders of the Company:
(a) by mutual written consent of Parent and the Company, by action of
their respective Boards of Directors;
(b) by Parent or the Company if the Merger shall not have been
consummated on or before December 31, 1999; PROVIDED, HOWEVER, that neither
Parent nor the Company may terminate this Agreement pursuant to this
Section 8.01(b) if such party shall have materially breached this Agreement;
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(c) by Parent or the Company if any court of competent jurisdiction or
other Governmental Entity has issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
nonappealable; PROVIDED, HOWEVER, that the party seeking to terminate this
Agreement shall have used its reasonable best efforts to remove or lift such
order, decree, ruling or other action;
(d) by the Company if, following compliance with the Company of its
obligations under Section 5.02, (i) the Company's Board of Directors
approves an Acquisition Proposal, for which all necessary financing is then
in the judgment of the Company Board reasonably obtainable, on terms which a
majority of the members of the Company's Independent Committee of the Board
of Directors has determined in good faith after consultation with its
outside legal counsel to the effect that failing to take such action would
create a reasonable possibility of a breach of the fiduciary duties of the
Company's Board of Directors, and (ii) such Acquisition Proposal is, in the
written opinion of the Company's financial advisor, more favorable from a
financial point of view to the Company's stockholders than the transactions
contemplated by this Agreement (as the same may have been proposed to be
amended by Parent as provided in Section 5.02(b)); PROVIDED; HOWEVER; that
the termination described in this Section 8.01(d) shall not be effective
unless and until the Company shall have paid to Parent all of the fees and
expenses described in Section 6.04(b) including, without limitation, the
Termination Fee;
(e) by Parent, if the Company Board shall have (i) failed to recommend
to the stockholders of the Company that they approve and adopt this
Agreement (the "Stockholder Acceptance"), (ii) withdrawn or modified its
approval or recommendation of this Agreement or the Merger, (iii) approved
or recommended an Acquisition Proposal or (iv) resolved to effect any of the
foregoing;
(f) by either Parent or the Company, if the Company Stockholder
Approval shall not have been obtained at a Stockholders Meeting including
any adjournments thereof; or
(g) by Parent if the Stockholder Agreement (the "Stockholder
Agreement") in the form attached hereto as Exhibit C, shall not have been
executed and delivered by Leslie B. Lewis, individually and as trustee of a
certain voting trust described therein, to Parent on August 9, 1999.
SECTION 8.02. EFFECT OF TERMINATION. In the event of a termination of this
Agreement pursuant to Section 8.01, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Parent, Sub or the
Company or their respective officers or directors, except with respect to the
Confidentiality Agreement, Section 6.04, this Section 8.02 and Article IX;
PROVIDED, HOWEVER, that nothing herein shall relieve any party for liability for
any breach hereof.
SECTION 8.03. AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after obtaining the Company Stockholder Approval, but,
after any such approval, no amendment shall be made which by law requires
further approval by such shareholders without obtaining such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
SECTION 8.04. EXTENSION; WAIVER. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (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 document delivered pursuant hereto or (iii) waive compliance
with any of the terms of this Agreement or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in a written instrument signed on behalf of such party.
The failure of any party hereto to assert any of its rights hereunder or
otherwise shall not constitute a waiver of those rights.
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ARTICLE IX
MISCELLANEOUS
SECTION 9.01. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties in this Agreement or in any instrument delivered
pursuant hereto shall terminate at the Effective Time.
SECTION 9.02. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed), sent by overnight courier (providing proof of
delivery) or mailed by registered or certified mail (return receipt requested)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to Grandparent, Parent or Sub:
c/o Asahi Organic Chemicals Industry Co., Ltd.
15-9 Uchikanda 2-chome,
Chiyoda-ku, Tokyo 101-0047, Japan
Attention: Ichiro Murao
Telecopy No.:03-3254-3473
with a copy to:
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: David M. Wilf, Esq.
Telecopy No.: (212) 541-5369
and
(b) if to the Company:
Asahi/America, Inc.
19 Green Street,
Malden, MA 02148
Attention: President
Telecopy No.: (781) 321-8467
with a copy to:
Gadsby & Hannah LLP
225 Franklin Street
Boston, MA 02110-2811
Attention: Burton Winnick, Esq.
Telecopy No.: (617) 345-7050
SECTION 9.03. INTERPRETATION. When a reference is made in this Agreement
to an Article or a Section, such reference shall be to an Article or a Section
of this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." The phrase "made
available" in this Agreement shall mean that the information referred to has
been made available if requested by the party to whom such information is to be
made available. As used in this Agreement, the term "subsidiary" of any person
means another person, an amount of the voting securities, other voting ownership
or voting partnership interests of which is sufficient
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to elect at least a majority of its Board of Directors or other governing body
(or, if there are no such voting interests, 50% or more of the equity interests
of which) is owned directly or indirectly by such first person. As used in this
Agreement, "material adverse change" or "material adverse effect" means, when
used in connection with the Company, any change or effect (or any development
that, insofar as can reasonably be foreseen, is likely to result in any change
or effect) that, individually or in the aggregate with any such other changes or
effects, is materially adverse to the business, financial condition, prospects
or results of operations of the Company and its subsidiaries taken as a whole.
Notwithstanding the foregoing, a material adverse change or material adverse
effect shall not include any material adverse change or material adverse effect
caused by any change resulting from the announcement of the Merger.
SECTION 9.04. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
SECTION 9.05. ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement
(including the documents and the instruments referred to herein)
(a) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Section 6.05, is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
SECTION 9.06. GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the Commonwealth of Massachusetts
without regard to any applicable conflicts of law.
SECTION 9.07. PUBLICITY. Except as otherwise required by law or the rules
of the Nasdaq National Market, for so long as this Agreement is in effect,
neither the Company nor Parent shall, or shall permit any of its subsidiaries
to, issue or cause the publication of any press release or other public
announcement with respect to the transactions contemplated by this Agreement
without the consent of the other party, which consent shall not be unreasonably
withheld.
SECTION 9.08. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to any
direct or indirect subsidiary of Parent. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
SECTION 9.09. ENFORCEMENT. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the Commonwealth of Massachusetts or in a Massachusetts state court,
this being in addition to any other remedy to which they are entitled at law or
in equity. In addition, each of the parties hereto (i) consents to submit to the
personal jurisdiction of any Federal court located in the Commonwealth of
Massachusetts or any Massachusetts state court in the event any dispute arises
out of this Agreement or any of the transactions contemplated hereby,
(ii) agrees that such party will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court,
(iii) agrees that such party will not bring any action relating to this
Agreement or any of the transactions contemplated hereby in any court other than
a Federal court sitting in the Commonwealth of Massachusetts or a Massachusetts
state court and (iv) waives any right to trial by jury with respect to any claim
or proceeding related to or arising out of this Agreement or any of the
transactions contemplated hereby.
[Text continued on next page]
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
<TABLE>
<S> <C> <C>
MIDNIGHT ACQUISITION HOLDINGS, INC.
By: /s/ ICHIRO MURAO
-----------------------------------------
Name: Ichiro Murao
Title: President
MIDNIGHT ACQUISITION CORP.
By: /s/ ICHIRO MURAO
-----------------------------------------
Name: Ichiro Murao
Title: President
ASAHI/AMERICA, INC.
By: /s/ LESLIE B. LEWIS
-----------------------------------------
Name: Leslie B. Lewis
Title: Chairman, President and CEO
</TABLE>
The undersigned hereby consents to the provisions of Section 2.01(b) of the
Agreement and agrees to the obligations of the undersigned stated in
Section 6.01 of the Agreement. The undersigned irrevocably, unconditionally and
absolutely guarantees to the Company primarily and not merely as a surety that
Parent and Sub will duly and punctually pay or perform, all of their obligations
and liabilities arising pursuant to the terms of this Agreement and such other
agreements as may be entered into by Parent or Sub in connection with this
Agreement. The undersigned hereby waives to the fullest extent permitted by law
all defenses based on the granting of any time or other indulgence, or the
variation, renewal or release of or neglect to enforce any right or remedy
against or with respect to Parent and Sub. The undersigned further agrees to be
bound by the terms of Sections 9.06, 9.08 and 9.09 of this Agreement in the same
manner as the parties to this Agreement.
<TABLE>
<S> <C> <C>
ASAHI ORGANIC CHEMICALS INDUSTRY CO., LTD.
By: /s/ HARURO TABATA
-----------------------------------------
Name: Haruro Tabata
Title: Chairman and CEO
</TABLE>
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AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
Amendment No. 1 to Agreement and Plan of Merger dated as of August 9, 1999
among Midnight Acquisition Holdings, Inc., a Delaware Corporation ("Parent"),
Midnight Acquisition Corp., a Massachusetts corporation and a subsidiary of
Parent ("Sub"), and Asahi/America, Inc., a Massachusetts corporation (the
"Company;" such Agreement hereinafter being referred to as the "Agreement") made
as of October 21, 1999. Any capitalized terms used herein which are not
otherwise expressly defined in this Amendment are as defined in the Agreement.
WHEREAS, Parent, Sub and the Company desire to amend certain terms of the
Agreement as set forth herein;
NOW, THEREFORE, in consideration of the premises and the payment of other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. AMENDMENTS. The Agreement is hereby amended as follows:
(a) The following sentence shall be added to follow the first sentence of
Section 2.01(c):
"The terms of the foregoing sentence notwithstanding, Leslie B. Lewis
shall be paid a portion of the Merger Consideration in respect of shares
of Common Stock owned by him by delivery to Mr. Lewis of a promissory
note (the "Note") of the Surviving Corporation, payable in full on
January 3, 2000 and bearing interest at an annual rate at the applicable
federal rate as determined on the date of the Note, such note to be
backed by a standby letter of credit issued by a bank reasonably
acceptable to Mr. Lewis (the "L/C") in the face amount equivalent to the
principal amount of the Note, provided that Mr. Lewis shall pay any fees
of the bank issuing such letter of credit and any other incidental costs
or expenses related to the Note. Such portion of the Merger Consideration
to be delivered by the Note shall be $5,000,000; provided, however, that
if the aggregate Merger Consideration due to Mr. Lewis pursuant to the
Merger is less than $5,000,000, the Note shall be in an amount no greater
than such aggregate amount payable to him. The Note and L/C shall both be
in negotiable form."
(b) The following phrase shall be added to follow the parenthetical in the
fourteenth and fifteenth lines of Section 2.01(c):
", net of fifty percent of the prepayment penalties, not to exceed
$160,000, associated with the early repayment of debt obligations of
Quail Piping Products, Inc. as a result of the Disposition"
(c) The following sentence shall be added to follow the first sentence of
Section 2.02(a):
"The foregoing provisions of this Section 2.02(a) notwithstanding, the
Paying Agent shall be instructed not to deliver any Merger Consideration
to Leslie B. Lewis until the Note has been issued, and then to deliver
only the Merger Consideration in excess of the principal amount of the
Note to Mr. Lewis and the remainder to the Surviving Corporation. Parent
agrees to cause the Surviving Corporation to take all steps commercially
necessary to issue the L/C, including providing adequate security thereof
if necessary. If the L/C issuing bank requires cash collateral for the
L/C, Mr. Lewis will reimburse the difference, if any, between the
interest paid to the Surviving Corporation on such cash collateral and
the interest paid under the Note."
2. RATIFICATION. Except as specifically amended hereby the terms of the
Agreement are hereby ratified and confirmed in all respects.
3. AUTHORIZATION. This Amendment No. 1 to the Agreement has been duly
approved by the Special Committee constituted to act in connection with this
transaction and has been authorized by all necessary corporate action on the
part of the Company and no other corporate proceeding on the part of the Company
are necessary to authorize this Amendment or to consummate the transactions so
contemplated.
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This Amendment has been duly executed and delivered by the Company and, assuming
this Amendment constitutes a valid and binding obligation of Parent and Sub,
constitutes a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally and (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed and delivered as of October 21, 1999.
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MIDNIGHT ACQUISITION HOLDINGS, INC.
By: /s/ ICHIRO MURAO
-----------------------------------------
Name: Ichiro Murao
Title: President
MIDNIGHT ACQUISITION CORP.
By: /s/ ICHIRO MURAO
-----------------------------------------
Name: Ichiro Murao
Title: President
ASAHI/AMERICA, INC.
By: /s/ LESLIE B. LEWIS
-----------------------------------------
Name: Leslie B. Lewis
Title: Chairman, President and CEO
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ANNEX B
MASSACHUSETTS GENERAL LAWS, CHAPTER 156B
SECTIONS 86 TO 98, INCLUSIVE
86. SECTIONS APPLICABLE TO APPRAISAL; PREREQUISITES. If a corporation
proposes to take a corporate action as to which any section of this chapter
provides that a stockholder who objects to such action shall have the right to
demand payment for his shares and an appraisal thereof, sections eighty-seven to
ninety-eight, inclusive, shall apply except as otherwise specifically provided
in any section of this chapter. Except as provided in sections eighty-two and
eighty-three, no stockholder shall have such right unless (1) he files with the
corporation before the taking of the vote of the shareholders on such corporate
action, written objection to the proposed action stating that he intends to
demand payment for his shares if the action is taken and (2) his shares are not
voted in favor of the proposed action.
87. STATEMENT OF RIGHTS OF OBJECTING STOCKHOLDERS IN NOTICE OF MEETING;
FORM. The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to create
any rights in any stockholder receiving the same to demand payment for his
stock, and the directors may authorize the inclusion in any such notice of a
statement of opinion by the management as to the existence or non-existence of
the right of the stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable, but the following form of notice
shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting
and effected by the corporation, any stockholder (1) who files with the
corporation before the taking of the vote on the approval of such action,
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not
voted in favor of such action has or may have the right to demand in writing
from the corporation (OR, IN THE CASE OF A CONSOLIDATION OR MERGER, THE NAME
OF THE RESULTING OR SURVIVING CORPORATION SHALL BE INSERTED), within twenty
days after the date of mailing to him of notice in writing that the
corporate action has become effective, payment for his shares and an
appraisal of the value thereof. Such corporation and any such stockholder
shall in such cases have the rights and duties and shall follow the
procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the
General Laws of Massachusetts.
88. NOTICE OF EFFECTIVENESS OF ACTION OBJECTED TO. The corporation taking
such action, or in the case of a merger or consolidation the surviving or
resulting corporation, shall, within ten days after the date on which such
corporate action became effective, notify each stockholder who filed written
objection meeting the requirements of section eighty-six and whose shares were
not voted in favor of the approval of such action, that the action approved at
the meeting of the corporation of which he is a stockholder has become
effective. The giving of such notice shall not be deemed to create any rights in
any stockholder receiving the same to demand payment for his stock. The notice
shall be sent by registered or certified mail, addressed to the stockholder at
his last known address as it appears in the records of the corporation.
89. DEMAND FOR PAYMENT; TIME FOR PAYMENT. If within twenty days after the
date of mailing of a notice under subsection (e) of section eighty-two,
subsection (f) of section eighty-three, or section eighty-eight any stockholder
to whom the corporation was required to give such notice shall demand in writing
from the corporation taking such action, or in the case of a consolidation or
merger from the resulting or surviving corporation, payment for his stock, the
corporation upon which such demand is made shall pay to him the fair value of
his stock within thirty days after the expiration of the period during which
such demand may be made.
90. DEMAND FOR DETERMINATION OF VALUE; BILL IN EQUITY; VENUE. If during
the period of thirty days provided for in section eighty-nine the corporation
upon which such demand is made and any such
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objecting stockholder fail to agree as to the value of such stock, such
corporation or any such stockholder may within four months after the expiration
of such thirty-day period demand a determination of the value of the stock of
all such objecting stockholders by a bill in equity filed in the superior court
in the county where the corporation in which such objecting stockholder held
stock had or has its principal office in the commonwealth.
91. PARTIES TO SUIT TO DETERMINE VALUE; SERVICE. If the bill is filed by
the corporation, it shall name as parties respondent all stockholders who have
demanded payment for their shares and with whom the corporation has not reached
agreement as to the value thereof. If the bill is filed by a stockholder, he
shall bring the bill in his own behalf and in behalf of all other stockholders
who have demanded payment for their shares and with whom the corporation has not
reached agreement as to the value thereof, and service of the bill shall be made
upon the corporation by subpoena with a copy of the bill annexed. The
corporation shall file with its answer a duly verified list of all such other
stockholders, and such stockholders shall thereupon be deemed to have been added
as parties to the bill. The corporation shall give notice in such form and
returnable on such date as the court shall order to each stockholder party to
the bill by registered or certified mail, addressed to the last known address of
such stockholder as shown in the records of the corporation, and the court may
order such additional notice by publication or otherwise as it deems advisable.
Each stockholder who makes demand as provided in section eighty-nine shall be
deemed to have consented to the provisions of this section relating to notice,
and the giving of notice by the corporation to any such stockholder in
compliance with the order of the court shall be a sufficient service of process
on him. Failure to give notice to any stockholder making demand shall not
invalidate the proceedings as to other stockholders to whom notice was properly
given, and the court may at any time before the entry of a final decree make
supplementary orders of notice.
92. DECREE DETERMINING VALUE AND ORDERING PAYMENT; VALUATION DATE. After
hearing the court shall enter a decree determining the fair value of the stock
of those stockholders who have become entitled to the valuation of and payment
for their shares, and shall order the corporation to make payment of such value,
together with interest, if any, as hereinafter provided, to the stockholders
entitled thereto upon the transfer by them to the corporation of the
certificates representing such stock if certificated, or if uncertificated, upon
receipt of an instruction transferring such stock to the corporation. For this
purpose, the value of the shares shall be determined as of the day preceding the
date of the vote approving the proposed corporate action and shall be exclusive
of any element of value arising from the expectation or accomplishment of the
proposed corporate action.
93. REFERENCE TO SPECIAL MASTER. The court in its discretion may refer the
bill or any question arising thereunder to a special master to hear the parties,
make findings and report the same to the court, all in accordance with the usual
practice in suits in equity in the superior court.
94. NOTATION ON STOCK CERTIFICATES OF PENDENCY OF BILL. On motion the
court may order stockholder parties to the bill to submit their certificates of
stock to the corporation for the notation thereon of the pendency of the bill
and may order the corporation to note such pendency in its records with respect
to any uncertificated shares held by such stockholder parties, and may on motion
dismiss the bill as to any stockholder who fails to comply with such order.
95. COSTS; INTEREST. The costs of the bill, including the reasonable
compensation and expenses of any master appointed by the court, but exclusive of
fees of counsel or of experts retained by any party, shall be determined by the
court and taxed upon the parties to the bill, or any of them, in such manner as
appears to be equitable, except that all costs of giving notice to stockholders
as provided in this chapter shall be paid by the corporation. Interest shall be
paid upon any award from the date of the vote approving the proposed corporate
action, and the court may on application of any interested party determine the
amount of interest to be paid in the case of any stockholder.
96. DIVIDENDS AND VOTING RIGHTS AFTER DEMAND FOR PAYMENT. Any stockholder
who has demanded payment for his stock as provided in this chapter shall not
thereafter be entitled to notice of any meeting of
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stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the date of the vote approving the proposed corporate action) unless:
(1) A bill shall not be filed within the time provided in section
ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation,
or in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to and an
acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
97. STATUS OF SHARES PAID FOR. The shares of the corporation paid for by
the corporation pursuant to the provision of this chapter shall have the status
of treasury stock, or in the case of a consolidation or merger the shares or the
securities of the resulting or surviving corporation into which the shares of
such objecting stockholder would have been converted had he not objected to such
consolidation or merger shall have the status of treasury stock or securities.
98. EXCLUSIVE REMEDY; EXCEPTION. The enforcement by a stockholder of his
right to receive payment for his shares in the manner provided in this chapter
shall be an exclusive remedy except that this chapter shall not exclude the
right of such stockholder to bring or maintain an appropriate proceeding to
obtain relief on the ground that such corporate action will be or is illegal or
fraudulent as to him.
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ANNEX C
[LOGO]
August 9, 1999
Special Committee of the
Board of Directors
Asahi/America, Inc.
35 Green Street
Malden, Massachusetts 02148
Gentlemen:
We understand that Asahi/America, Inc., a Massachusetts corporation (the
"Company") proposes to enter into two transactions (the "Transactions"), as
follows:
1. The Company proposes to sell all of the capital stock of its wholly
owned subsidiary, Quail Piping Products, Inc. ("Quail") to an investor group
that includes certain members of Quail's management (the "Disposition"),
pursuant to a Stock Purchase Agreement to be entered into between the
Company and Quail Acquisition Corporation (the "Stock Purchase Agreement").
2. The Company proposes to enter into an Agreement and Plan of Merger
among Midnight Acquisition Holdings, Inc. ("Holdings"), Midnight Acquisition
Corp. ("Merger Sub") and the Company (the "Merger Agreement"), which will
provide for the merger (the "Merger") of Merger Sub with and into the
Company and will further provide that in the Merger, each issued and
outstanding share of the common stock, no par value, of the Company (the
"Company Common Stock") (other than shares owned by Asahi Organic Chemicals
Industry Co., Ltd., Nichimen Corporation or any of their respective
affiliates or subsidiaries (the "AOC/Nichimen Stockholders") or by the
Company or any subsidiary of the Company), shall be converted into the right
to receive an amount in cash equal to the sum of (x) $8.25 plus (y) the net
after-tax proceeds from the Disposition divided by the number of shares of
Company Common Stock that are outstanding on a fully diluted basis
immediately prior to the effective time of the Merger.
You have request our opinion, as investment bankers, (i) as to the fairness,
from a financial point of view to the Company of the consideration to be
received by the Company in the Disposition and (ii) as to the fairness, from a
financial point of view, to the holders of Company Common Stock other than the
AOC/Nichimen Stockholders of the consideration to be offered in the Proposed
Transaction.
We have acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the Proposed Transaction and will
receive a fee for our services.
In conducting our analysis and arriving at our opinions as expressed herein,
we have reviewed and analyzed, among other things, the following:
(i) a signed copy of the Stock Purchase Agreement dated August 9, 1999;
(ii) a signed copy of the Merger Agreement dated August 9, 1999;
[LOGO]
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[LOGO]
(iii) the Company's Annual Reports on Form 10-K for each of the fiscal
years in the three-year period ended December 31, 1998 and the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
(iv) certain other publicly available information concerning the Company
and the trading market for the Company Common Stock.
(v) certain internal information and other data relating to the Company,
its business and prospects, including forecasts and projections, provided to
us by management of the Company;
(vi) certain publicly available information concerning certain other
companies engaged in businesses which we believe to be generally comparable
to the Company and the trading markets for certain of such other companies'
securities; and
(vii) the financial terms of certain recent business combinations which
we believe to be relevant.
We conducted a limited solicitation of indications of interest to acquire
Quail over a 45-day period ending in July 1999.
We have also met with certain officers and employees of the Company
concerning its business and operations, assets, present condition and prospects
and undertook such other studies, analyses and investigations as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us and have not
attempted independently to verify such information, nor do we assume any
responsibility to do so. We have assumed that the Company's forecasts and
projections provided to or reviewed by us have been reasonably prepared based on
the best current estimates and judgment of the Company's management as to the
future financial condition and results of operations of the Company and of
Quail. We have not conducted a physical inspection of the properties and
facilities of the Company or of Quail nor have we made or obtained any
independent evaluation or appraisal of such properties and facilities. We have
also taken into account our assessment of general economic market and financial
conditions and our experience in similar transactions, as well as our experience
in securities valuation in general. Our opinion necessarily is based upon
economic, market, financial and other conditions as they exist and can be
evaluated on the date hereof and we assume no responsibility to update or revise
our opinion based upon events or circumstances occurring after the date hereof.
We reserve, however, the right to withdraw, revise or modify our opinion based
upon additional information which may be provided to or obtained by us, which
suggests, in our judgment, a material change in the assumptions upon which our
opinion is based.
This letter and the opinions expressed herein are for the use of the Special
Committee. These opinions do not address the Company's underlying business
decision to approve the Transactions or constitute a recommendation to the
shareholders of the Company as to how such shareholders should vote or as to any
other action such shareholders should take regarding the Transactions. This
opinion may not be reproduced, summarized, excerpted from or otherwise publicly
referred to or disclosed in any manner without our prior written consent except
that the Company may include this opinion in its entirety in any proxy statement
or information statement relating to the Transactions sent to the Company's
shareholders.
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[LOGO]
Based upon and subject to the foregoing, it is our opinion as investment
bankers that (i) the consideration to be received by the Company in the
Disposition is fair, from a financial point of view, to the Company; and
(ii) the consideration to be received by the holders of the Company Common Stock
(other than the AOC/Nichimen Stockholders) in the Merger is fair, from a
financial point of view, to such holders.
Very truly yours,
/s/ ING BARINGS LLC
ING Barings LLC
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1514-SPS-99
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ASAHI/AMERICA, INC.
35 GREEN STREET
MALDEN, MA 02148
SPECIAL MEETING OF STOCKHOLDERS--NOVEMBER 29, 1999
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints Leslie B. Lewis
and Kozo Terada as Proxies, with full power of substitution to each, to vote
for and on behalf of the undersigned at the Special Meeting of Stockholders
of ASAHI/AMERICA, INC. to be held at the offices of Gadsby & Hannah LLP, 225
Franklin Street, 22nd Floor, Boston, Massachusetts 02110, on November 29,
1999, at 1:00 p.m., and at any adjournment(s) or postponement(s) thereof. The
undersigned hereby directs each such Proxy to vote in accordance with his
judgment on any business that may properly come before the Special Meeting or
any adjournment(s) or postponement(s) thereof, all as indicated in the Notice
of Special Meeting, receipt of which is hereby acknowledged, and to act on
the following matters set forth in such Notice as specified herein by the
undersigned.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL 1 AND IN THE DISCRETION OF THE ABOVE-NAMED PROXIES AS TO
ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE MEETING OR AT ANY
ADJOURNMENT(S) OR POSTPONEMENT(S) THEREOF, INCLUDING MATTERS WHICH THE
COMPANY DID NOT KNOW WOULD BE PROPERLY PRESENTED AT THE MEETING.
PLEASE VOTE, DATE, AND SIGN ON REVERSE AND RETURN PROMPTLY USING THE ENCLOSED
ENVELOPE.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
Form of Proxy--Page 1
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ASAHI/AMERICA, INC.
Dear Stockholder,
Please take note of the important information enclosed with this proxy card.
The issue of the merger of the Company requires your immediate attention and
approval. The matter is discussed in detail in the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your right to vote
your shares.
Please mark the boxes on this proxy card to indicate how your shares will be
voted. Then sign the card, detach it and return your proxy vote in the enclosed
postage paid envelope.
Your vote must be received prior to the Special Meeting of Stockholders, to be
held on November 29, 1999.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Asahi/America, Inc.
[Name and Address of Stockholder]
Form of Proxy--Page 2
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______
PLEASE MARK VOTES
X AS IN THIS EXAMPLE
______
_____________________________ For Against Abstain
/ / / / / /
ASAHI/AMERICA INC.
_____________________________ 1. To approve a proposal to adopt the
Agreement and Plan of Merger dated
August 9, 1999, as amended by Amendment
dated October 21, 1999 among Asahi/America,
Inc., Midnight Acquisition Holdings,
Inc. and Midnight Acquisition Corp., a
wholly owned subsidiary of Midnight
Acquisition Holdings, Inc., both of which
were created by Asahi Organic Chemicals
Industry Co., Ltd. to complete the merger,
and to approve the merger and other
transactions described in the Agreement
and Plan of Merger; and
2. In their discretion, the Proxies are authorized
to vote upon any other business that may
properly come before the Special Meeting or
at any adjournment(s) or postponement(s)
thereof.
/ /
Mark here for address change and
note at left.
Please sign exactly as your name(s) appear(s) on the
books of the Company. Joint owners should each sign
personally. Trustees, custodians, and other fiduciaries
should indicate the capacity in which they sign, and
where more than one name appears, a majority must sign.
If the stockholder is a corporation, the signature
should be that of an authorized officer who should
indicate his or her title.
Signature: _______________________ Date: _____________
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DETACH CARD DETACH CARD
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