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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (the "Act")
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______ to_____
Commission File Number 0-23070
AFC CABLE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-1517994
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Kennedy Plaza, Suite 1250, 02903
Providence, Rhode Island (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (401) 453-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock ($.01 Par Value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $356,391,160 on March 26, 1998, based on the
closing sales price of the registrant's common stock, $.01 par value (the
"Common Stock"), as reported on the Nasdaq National Market System as of such
date.
The number of shares of the registrant's Common Stock outstanding as of March
26, 1998 was 11,408,253 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the 1998 Annual Meeting of Stockholders is incorporated herein
by reference (in Part III).
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PART I
ITEM 1. BUSINESS
GENERAL
AFC Cable Systems, Inc. ("AFC" or the "Company") is a designer, manufacturer
and supplier of electrical, voice and data distribution products used primarily
in the construction and modernization of non-residential buildings. The
Company's products include prewired armored cable, flexible conduit, modular
wiring systems, electrical fittings and specialty coated metals. The Company
believes its products offer a total installed cost advantage over traditional,
labor intensive wiring methods by eliminating on-site installation time and
labor costs associated with bending, connecting and pulling wire through metal
pipe. The Company is the leading manufacturer of prewired armored cable in the
United States, with approximately 45% of the sales in the domestic armored cable
market based upon Company estimates.
The Company, through acquisitions made during 1997, also manufactures and
distributes photo controls for the lighting control and fixture industries,
electronic interfaces and connectors that facilitate data communications, and
flexible hoses, ducting and connections for diverse applications.
In order to penetrate higher margin, specialty application niche markets, the
Company has focused on the creation of proprietary value-added products which
utilize the Company's design and engineering expertise and various technologies.
These products include color-coded cables used for fire alarm systems and health
care facilities. In addition, the Company offers premise wiring systems,
including The Intelligent Floor and The Intelligent Ceiling, designed for the
modern workstation environment. These premise wiring systems are custom
engineered and pre-assembled by the Company for modular installation and have
the ability to supply the voice, data and electrical requirements throughout an
entire facility.
AFC sells its products principally to leading distributors of electrical
products and actively targets do-it-yourself ("DIY") customers and original
equipment manufacturers ("OEMs"). In an effort to include its products in
preferred project specifications, the Company educates electrical contractors
and inspectors, construction consultants and architects regarding the
technological advantages, compatibility and cost savings of the Company's
products. AFC distributes its products from its eighteen manufacturing,
warehouse and distribution facilities located throughout the country using its
own trucking fleet as well as other carriers and from sales representatives that
carry inventory on consignment.
The Company's products can be separated into two broad categories: armored
cable, flexible conduit, specialty cables, electrical fittings and specialty
coated metals, all manufactured by the Wire and Cable Division, and flexible and
premise wiring systems and related products manufactured by the America Cable
Systems Division. The divisions are vertically integrated in that many of the
products manufactured in the America Cable Systems Division utilize components,
including cable remnants, produced in the Wire and Cable Division. Also included
in the Wire and Cable Division are flexible metal, fabric and plastic hoses,
ducting and connectors manufactured by Federal Hose Manufacturing, Inc., and
electrical fittings sold by Madison Equipment Company, Inc., both of which were
acquired by the Company in 1997. Also included in the America Cable Systems
Division are electronic interfaces and connectors manufactured by B&B
Electronics Manufacturing Company, Inc. and photo controls and electrical
devices for the lighting control and fixture industries manufactured by Area
Lighting Research, Inc., both of which were also acquired in 1997.
The Company's executive offices are located at 50 Kennedy Plaza, Suite 1250,
Providence, Rhode Island 02903, and its telephone number is (401) 453-2000.
PRODUCTS
WIRE AND CABLE DIVISION. Wire and Cable Division products are utilized for
construction (both new and reconstruction, renovation and tenant improvement
projects) of offices, commercial buildings, industrial plants, shopping centers,
multifamily dwellings, hotels and health care, educational and recreational
facilities. Wire and Cable Division products consist primarily of armored cable,
flexible conduit, specialty cables, electrical fittings and connectors and
specialty processed metals and accounted for $181.0 million, or 82.2%, and
$144.3 million, or 89.1%, of the Company's net sales for the years ended
December 31, 1997 and 1996, respectively. The Company is the leading
manufacturer of armored cable in the United States, with approximately 45% of
the domestic market
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based on current Company estimates. Wire and Cable Division products have been
listed and labeled where required in accordance with Underwriters Laboratories
("UL") standards and comply with the National Electrical Code ("NEC"). Wire and
Cable Division products also meet the standards of the Canadian Standards
Association ("CSA") where required. See "Quality Assurance."
Products manufactured by the Wire and Cable Division include the following:
- ARMORED CABLE is armor sheathed electrical cable that provides a versatile
and economical alternative to traditional pipe and wire. Fully
preassembled and tested, armored cable features excellent mechanical
protection, consistent color coding and a cost effective electrical
installation. Armored cable products are available in steel or aluminum
sheathing. Aluminum sheathed armored cable, which reduces a product's
weight by 30%, has gained wide customer acceptance over recent years due
to ease of preparation and installation and resulting cost savings.
METAL-CLAD (MC) CABLE is a single, steel clad assembly used for power,
lighting, control and signal circuits. MC has an internal insulated
solid copper ground wire for sensitive applications, including places
of public assembly such as convention halls and auditoriums. MC is
available in a lighter weight aluminum version, MC Lite.
AC-90 IS 90-DEGREE- rated for branch circuits and feeders in
commercial, multi-unit residential and industrial applications and for
hard wiring fixtures and other high temperature applications. Designed
for higher thermal capability, AC-90 provides more usable power per
conductor size. AC-90 Lite is the line's lighter weight aluminum
version.
- SPECIALTY CABLE products are specialized applications of the Company's
armored cable designed to meet a particular niche of the commercial
construction industry.
HCF-90 is AC-90 cable that features a fully insulated ground wire
providing dual path grounding for branch circuits and feeders where a
dedicated ground is required. This product is designed primarily for
health care facilities and has a process-patented green striped armor
designed to enhance ease of installation and identification. HCF-90 is
available in a lighter weight aluminum version, HCF-90 Lite.
FIRE ALARM/CONTROL CABLE is MC Cable that features a process-patented
red striped armor that is designed to enhance identification by fire
inspectors and prevent accidental disabling of fire security systems.
SUPER NEUTRAL CABLE is MC Cable containing an oversized neutral
conductor for use in electrical systems in which nonlinear switching
loads produce additive, third order harmonic currents which may
overload standard size neutral conductors. Typical applications include
computer systems, business equipment, variable speed drives, electronic
discharge lighting and other switching mode power supplies.
JACKETED MC CABLE is MC Cable with an added polyvinyl chloride ("PVC")
jacket designed for maximum physical circuit protection and
identification, and is utilized for installations in wet locations,
soil and concrete.
HOME RUN CABLE is MC Cable that is designed to hold a 6, 8, 12 or 16
wire insulated conductor assembly inside galvanized steel armor.
OPTICAL FIBER JACKETED CABLE is MC Cable that features a process
patented orange striped armor that is designed for specific control,
signaling and data communications applications, such as robotics, video
conferencing and local area networkings.
- FLEXIBLE CONDUIT is wireless conduit that provides mechanical protection
for electrical wiring where flexibility is required. Flexible conduit can
be made of steel, aluminum or plastic and is used in a variety of
construction applications as an alternative to pipe.
REDUCED WALL FLEXIBLE CONDUIT provides the strength and durability of
heavy gauge pipe at 40% less weight. It installs easily and is
available in sizes from 5/16" to 4" diameter. The Company also offers a
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Reduced Wall Flexible Aluminum Conduit that provides the strength and
durability of steel at one-third the weight.
LIQUID-TIGHT FLEXIBLE CONDUIT, which is offered in both metallic and
plastic versions, has been designed for use in factories, foundries and
assembly plants. It features a flexible conduit covered by a PVC jacket
and is resistant to oil, gasoline, salt spray and toxic fumes. It is
available in sizes from 3/8" to 4" diameter.
- OTHER PRODUCTS of the Wire and Cable Division include the following:
SPECIALTY PROCESSED METAL products have developed as a result of the
Company's ability to handle, slit and coil metals and supply galvanized
strip steel and various alloys of aluminum oscillate coils to a variety
of customers primarily in the petroleum drilling industry.
FITTINGS AND CONNECTORS are designed to connect armored cable and
conduit to electrical junction boxes and to join multiple types of
conduit. These products compliment the Company's AC, MC and
Liquid-Tight product lines.
FLEXIBLE METAL, FABRIC AND PLASTIC HOSES, DUCTING AND CONNECTORS made
for diverse applications including heavy duty vehicles, material
handling, and heating and ventilation systems.
AMERICA CABLE SYSTEMS DIVISION. America Cable Systems Division products
provide an integrated infrastructure for electrical, voice and data distribution
in a modular, plug-in fashion. The products are used primarily in office
buildings and retail centers with accessible ceilings and/or accessible floors,
and can be reused after retenanting or remodeling. America Cable Systems
Division products are completely preassembled for easy on-site installation and
are generally accompanied by detailed installation drawings produced by computer
aided drafting ("CAD") software. Therefore, these modular wiring products reduce
the time of initial installations, as well as the time required to make changes
in the office layout during the life of the building. The Company continues to
enhance its modular wiring systems used in broader premise wiring markets, which
encompass combined voice, data and electrical distribution. America Cable
Systems Division products have been listed and labeled where required in
accordance with UL and CSA standards and comply with the NEC. See "Quality
Assurance." Sales of America Cable Systems Division products were $38.4 million,
or 17.5%, and $16.7 million, or 10.3%, of the Company's net sales for the years
ended December 31, 1997 and 1996, respectively.
Products manufactured by the America Cable Systems Division include the
following:
- MODULAR WIRING SYSTEMS provide fast and efficient installation for
applications such as offices, health care facilities, industrial
facilities and educational institutions that require repetitive patterns
of branch circuit lighting fixtures and power outlets as well as a high
degree of flexibility to meet future needs. The Company estimates that
facilities can be completely "fitted out" with an integrated building
electrical infrastructure for lighting and power with total installed cost
savings of up to 40%.
- THE INTELLIGENT FLOOR AND THE INTELLIGENT CEILING are modifications to the
standard Modular Wiring System. These products provide an integrated
modular solution by supplying power distribution and optional voice and
data capability from the master distribution box to accessible floor and
ceiling modules and are designed primarily for space efficient
installation. The Intelligent Floor, which utilizes a patented connector
component, is completely modular, providing plug-in access for the modern
workstation under a raised floor. The Company believes that raised floor
modular wiring applications, such as The Intelligent Floor, significantly
reduce electrical related operating costs of office buildings and add to
present and resale value. The Intelligent Ceiling incorporates lighting,
power, and telecommunication systems through ceiling distribution into a
single integrated solution, thereby significantly reducing installation
time. The Intelligent Ceiling is particularly effective in retail malls
and health care facilities, which traditionally do not employ raised floor
systems. The Company has also established strategic alliances with a major
national manufacturer of office furniture and a major manufacturer of
raised flooring in an effort to expand the number of distribution channels
for The Intelligent Ceiling and The Intelligent Floor product offerings.
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- CUSTOM CUTS AND FIXTURE WHIPS provide builders with factory cut branch
circuit wiring used to connect convenience power receptacles and lighting
fixtures on the job site. Custom Cuts and Fixture Whips significantly
reduce installation time for branch circuit power distribution systems.
- PDQ SYSTEM COMPONENTS enable prefabrication of the entire electrical
branch circuit distribution network at the factory and complete system
delivery to the job site. PDQ System Components are the electrical devices
and support mechanisms to which Custom Cut wiring is attached. Through the
development of a patented specialized connector, prewired switches and
receptacles already set in electrical boxes can now be plugged together on
either end of the Custom Cut cable and from leads extending from the
prewired electrical boxes.
- ELECTRONIC INTERFACES AND CONNECTORS facilitate data acquisition and
communications in the computer environment.
- PHOTO ELECTRIC CONTROLS AND ELECTRICAL DEVICES are used in the lighting
control and fixture industries.
- OTHER CABLE AND LIGHTING PRODUCTS include temporary construction lights,
power poles, high bay lighting systems and prenumbered and prebundled
conductors.
MARKETING
The Company's products are marketed through independent regional sales
representatives, including several located outside the United States. Sales
representatives do not exclusively market the Company's products. At December
31, 1997, 72 of the Company's domestic representatives maintained product
inventories on consignment. The independent sales representatives are trained by
the Company through a comprehensive marketing program that includes a wide range
of product literature, specification sheets and technical brochures. The Company
actively markets its advanced engineering capabilities, including CAD, for
custom designed integrated systems to electrical contractors, construction
engineers and building contractors. The Company also advertises certain of its
product offerings in trade magazines and regularly participates in industry
trade shows. The domestic sales representatives are serviced by the Company's
fleet of trucks and trailers, which provide delivery and scheduled stock
replenishment. The Company believes that its internal trucking capability gives
it a competitive advantage by providing prompt delivery to its customers.
Commensurate with its strategy of promoting armored cable, flexible wiring
and flexible conduit as the preferred alternative to traditional labor intensive
pipe and wire installation methods, the Company has specifically focused its
marketing efforts at electrical contractors and inspectors, construction
consultants, architects and other end users. This marketing strategy is
particularly important to the marketing efforts of the America Cable Systems
Division as its products are often developed to custom specifications. The
Company's in-house telemarketing department and field representatives research
pending construction projects in an effort to change project specifications to
allow for the use of the Company's prewired armored cable products. The Wire and
Cable Division has had particular success with this specification strategy in
the area of specialty cable products where competition is relatively limited.
The Company expects to continue this marketing strategy as it develops new
products for broader premise wiring markets.
Use of certain of the Company's armored cable products is not currently
permitted by local building codes in a limited number of municipalities,
including Chicago, San Antonio and Toledo. In several instances, the Company has
successfully illustrated to municipal building code authorities the benefits and
efficiencies of armored cable products over pipe and wire installations,
resulting in favorable changes in the particular municipality's building code.
For example, during the past three years, several municipalities, including
Charleston County, South Carolina, Dade County, Florida, Orange County, Florida,
the city of Springfield, Illinois, the city of Tampa, Florida and Sacramento
County, California, have amended their building codes to approve the use of the
Company's metal clad cables. Although the Company expects to continue such
efforts, there can be no assurance that it will be successful in influencing
other municipalities in adopting similar legislation. The failure to obtain a
change in these local codes is not anticipated to have a material adverse effect
on the Company's business, operating results or financial condition.
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CUSTOMERS
The Company sells its products primarily to distributors of electrical
products for resale to end users. Sales to distributors accounted for
approximately 81% and 87% of the Company's net sales during the years ended
December 31, 1997 and 1996, respectively. The Company's top ten customers have
traditionally accounted for approximately 30% of the Company's gross sales. In
addition to sales to distributors, the Company directs significant marketing
efforts toward DIY customers. Sales to DIY customers accounted for approximately
6% and 7% of the Company's gross sales for of the years ended December 31, 1997
and 1996, respectively, and were comprised mostly of armored cable and flexible
conduit.
COMPETITION
The Company faces competition for many of its core armored cable products
and for those products manufactured by the America Cable Systems Division. The
Company, however, has experienced less competition with respect to many of its
specialty cable products. The Company's competitors include both manufacturers
of products similar to those of the Company and producers of alternative
electrical, voice and data distribution systems, predominantly pipe and wire.
The number and size of the Company's competitors varies depending on the product
line. Competition can be generally categorized as either national in scope, with
companies that have substantial financial, research and development,
manufacturing and marketing resources, or regional in scope, with companies that
have more limited product offerings but compete effectively on the basis of
price.
The principal competitive factors in all product markets are price,
quality, product features, availability, customer support and distribution
strength. The relative importance of each of these factors varies depending on
the specific product category. As products mature, such as certain of the
Company's core armored cable products, competitive forces tend to drive down
prices. In contrast, the Company has been able to maintain higher margins on its
specialty cable products and certain of its products manufactured by the America
Cable Systems Division. There can be no assurances, however, that this trend
will continue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
MANUFACTURING
The Company's manufacturing operations utilize a wide variety of raw
materials for which it has multiple commercial sources, and include a broad
variety of processes reflective of the Company's product diversity. See "Raw
Materials." Operations for cable manufacturing at the Wire and Cable Division
include drawing copper wire; extruding wire; slitting and galvanizing steel and
aluminum used for armor; wrapping, twisting and cutting wire; armoring
conductors; and testing for conductor continuity and grounding. The Company's
manufacturing equipment allows for a wide assortment of product categories with
armored cable diameters ranging from 1/4" to 2" and flexible conduit diameters
ranging from 5/16" to 4". The America Cable Systems Division manufacturing
operations primarily consist of metal stamping, riveting, custom wire cutting,
custom assembly and packaging operations. This division utilizes proprietary
tooling in its assembly techniques. Manufacturing operations at the Company's
two divisions are vertically integrated. The Company believes that its
armored cable manufacturing operation is the most vertically integrated in
the industry. This enables the Company to source primary raw materials at
favorable prices and terms, control inventories and better manage lead times.
The America Cable Systems Division uses remnants from the Wire and Cable
Division in its manufacturing process, thereby reducing the Company's overall
scrap ratio.
RAW MATERIALS
Copper, steel and aluminum used in manufacturing represented approximately
58% of cost of goods sold for the year ended December 31, 1997. The principal
raw material used by the Company is copper, which is purchased in the form of
redrawn rod from several domestic producers. Price terms are based on monthly
average copper prices, as determined by the New York Commodity Exchange, plus a
premium. The Company believes world stocks and capacity continue to be adequate
to meet market needs. At December 31, 1997, the Company had agreed to purchase
the majority of its 1998 copper usage from two vendors. Other raw materials used
by the Company include aluminum, galvanized steel, molding materials, PVC and
nylon, for which the Company generally has either alternative sources of supply
or access to alternative materials. Supplies of these materials are adequate and
are expected to remain so for the foreseeable future.
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QUALITY ASSURANCE
The Company is committed to the philosophy that meeting industry standards
and codes is critical to its success, and its products are designed to satisfy
the safety and performance standards set by various industrial groups and
testing laboratories. Underwriters Laboratories ("UL"), a nonprofit, independent
organization, operates a listing service for electrical and electronic materials
and equipment. UL listing is required by national and most local electrical
codes in the United States, and UL conformity assessment includes testing,
evaluation and certification. UL inspectors visit the Company's various
facilities on a regular basis.
The Canadian Standards Association ("CSA") is the UL equivalent in Canada.
Like UL listing, CSA listing is product based and is awarded after testing and
evaluation. The British Approval Service for Cables ("BASEC") provides product
assessment and certification for cable products which are intended for use in
the United Kingdom. Other European Community countries currently rely on UL or
BASEC approval or certification for cable products. In addition to standards
organizations, the Company's products are designed to comply with required
electrical code requirements, particularly the National Electric Code ("NEC")
and federal specifications. The NEC, administered by the National Fire
Protection Association ("NFPA"), sets the minimum safety standards to which
electrical products are manufactured and installed in the United States. NEC
standards are enforced and supplemented by the appropriate State, county and
municipal authorities having jurisdiction. Federal specifications detail the
requirements for all electric products to be installed in federal buildings.
The Company has implemented a Total Quality Management ("TQM") program
which is intended to maximize customer satisfaction while implementing cost
effective production methods. The Company's TQM program embodies an interlocking
set of procedures and practices that ensures employees in various departments
are adequately trained and directed to continuously implement improvements in
quality, service and cost savings. In connection with its TQM program, the
Company has obtained ISO 9001 certification at two of its facilities in New
Bedford, Massachusetts and ISO 9002 certification at its Byesville, Ohio
facility. ISO 9001 certification is a standard developed by the International
Standards Organization that provides a management systems model for process
quality assurance in design, development, installation and servicing. ISO 9002
is a quality systems model for quality assurance in production, installation and
servicing. The Company believes that ISO 9001 and 9002 certifications signify
excellence in manufacturing and process integrity, thereby serving as a
competitive advantage and strengthening its marketing efforts. There can be no
assurance, however, that further certifications will be granted. The Company
believes that if additional certifications are not granted at its other
facilities, its business and competitive position will not be materially
adversely affected.
DEVELOPMENT, DESIGN AND ENGINEERING
The Company employs 53 draftsmen and engineers and 65 professional
technicians that are actively engaged in product and process development.
Development and design efforts often result from informal dialogues with major
electrical contractors, consulting engineers and facility managers, and
generally include product development, testing and analysis, component
development and testing, tooling design and resolution of process problems. The
Company fabricates some of the tooling and key machinery used in its cable
production.
The Company takes an active role in guiding industry standards. The
Company has representatives on the electrical section of the NFPA and the
Industry Advisory Council of UL and maintains ongoing relations with standards
enforcement organizations such as UL, the NFPA, the International Association of
Electrical Inspectors, the National Armored Cable Manufacturers Association and
the National Electrical Manufacturing Association.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
The Company believes that its success depends more heavily on name
recognition, technical competence and the marketing abilities of its sales
representatives than on any individual patent, trademark or copyright.
Nevertheless, the Company intends to seek patent coverage for its products and
manufacturing technology where appropriate. The Company holds several patents
covering certain of its products and processes and also has several registered
trademarks. The Company believes its patents and trademarks are of
considerable importance to the manufacturing and marketing of certain
products.
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The Company also relies upon trade secret protection for its confidential
and proprietary information. The Company routinely enters into confidentiality
agreements with its employees. There can be no assurance, however, that others
will not independently obtain similar information and techniques or otherwise
gain access to the Company's trade secrets or that the Company can effectively
protect its trade secret.
BACKLOG
The Company's business is characterized by short-term order and shipment
schedules rather than volume purchase contracts. Accordingly, the Company does
not consider backlog at any given date to be indicative of future sales.
Immediate delivery requirements and the nature of the Company's business
preclude any significant backlog.
EMPLOYEES
At December 31, 1997 the Company had approximately 1,196 full-time
employees, of which 540 employees were represented by labor unions. The
Company's union contracts expire July 31, 1998, June 30, 1999, February 4, 2000
and February 23, 2001. Of the Company's employees, 107 are in administration, 62
in sales and marketing, 73 in engineering, 889 in manufacturing and 65 in
distribution. The Company has not experienced any work stoppages at its plants
and believes its current relations with its employees are good.
ITEM 2. PROPERTIES
The following table provides information with respect to the Company's
facilities:
<TABLE>
<CAPTION>
OWNED/
LOCATION FACILITY TYPE SQUARE FEET LEASED
- -------- ------------- ----------- ------
<S> <C> <C> <C>
New Bedford, MA (1) Assembly-America Cable Systems
Division, Fittings and Connectors,
Administration, Engineering 123,200 Owned
New Bedford, MA Manufacturing-Conduit and Cable 71,700 Owned
New Bedford, MA Manufacturing-Wire, Administration,
Engineering 64,000 Owned
New Bedford, MA Trucking, Warehousing, Administration 48,000 Leased
New Bedford, MA Warehousing 15,000 Leased
Fullerton, CA Manufacturing-Conduit and Cable,
Warehousing 59,800 Leased
Largo, FL Manufacturing-Conduit and Cable 39,800 Leased
Largo, FL Distribution Center 25,500 Leased
Ottawa, IL Manufacturing-Modems and Connectors 21,000 Owned
Reno, NV Warehousing 28,000 Leased
Burlington, NJ Manufacturing-Conduit and Cable,
Warehousing 84,500 Leased
Hackettstown, NJ Manufacturing-Photo Controls and
Electrical Devices, Warehousing 40,000 Leased
Linden, NJ Distribution Center 23,800 Leased
Byesville, OH Manufacturing-Metal Processing 37,000 Leased
Cleveland, OH Warehousing, Office-Connectors 20,700 Leased
Painesville, OH Manufacturing-Conduit, Administration 49,000 Leased
Bensalem, PA Manufacturing-Metal Processing 28,800 Leased
Providence, RI Administration 2,500 Leased
Garland, TX Manufacturing-America Cable Systems
Division 45,300 Leased
</TABLE>
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(1) This property secures the repayment of the proceeds received from the
issuance of the Industrial Revenue Bonds issued by the Massachusetts
Industrial Finance Agency in July 1996. See Item 7--"Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company believes that its facilities are suitable for their present
intended purposes and adequate for the Company's current level of
operations. The Company, however, is operating at close to existing capacity
levels and anticipates additional investments in plant and equipment over
the next twenty four months.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various nonenvironmental legal proceedings and
administrative actions, all of which are incidental to the operations of the
Company. In the opinion of the Company's management, such proceedings and
actions should not, individually or in the aggregate, have a material adverse
effect on the Company's financial condition or results of operations.
Regarding environmental matters, owners and operators of sites containing
hazardous substances, as well as generators of hazardous substances, are subject
to broad liability under various federal and State Environmental laws and
regulations, including liability for clean up costs and damages arising out of
past disposal activity. The principal raw material used by the Company is
copper, which is classified as a hazardous substance. In addition, prior to the
Company's acquisition of its present business, it was engaged in certain
activities that may have utilized other hazardous substances. Governmental
authorities may seek to impose liability regardless of fault or the legality of
the original disposal activity and regardless of whether the Company is
otherwise currently responsible for liabilities with respect to such activities.
The Company has been named in connection with certain proceedings relating to
various properties currently being investigated or remediated for environmental
problems arising therefrom. The Company's business was formerly operated as
American Flexible Conduit Company Inc. ("American"), a manufacturer of flexible
conduit and armored cable products, which commenced operations in 1926. In 1969,
Nortek, Inc. ("Nortek") purchased the assets and liabilities of American and
subsequently transferred the business to its Monogram Industries, Inc.
("Monogram") subsidiary, incorporated in Delaware in September 1969. In December
1989, a corporation controlled by Mr. Papitto purchased Monogram from Nortek.
The purchasing corporation and Monogram were subsequently merged, with Monogram
becoming the surviving corporation. In October 1993, the Company changed its
name to AFC Cable Systems, Inc. Prior to the sale of the stock of Monogram by
Nortek in December 1989, Monogram transferred to another subsidiary of Nortek
all the assets and liabilities associated with the businesses not related to the
Company's present business operations. In connection with the sale of the stock
of Monogram, Nortek agreed to indemnify the Company, subject to certain
limitations, for liabilities and obligations of Monogram unrelated to the
business operations of Nortek's American Flexible Conduit Division, which had
been transferred to the Company in connection with such sale. With the exception
of property discussed below located in New Bedford, Massachusetts (the
"Sullivan's Ledge Site") all of the properties being investigated or remediated
are unrelated to the business operations acquired.
In 1984, the United States Environmental Protection Agency ("EPA") placed
the Sullivan's Ledge Site on the National Priorities List, which is a list of
sites that the EPA has ranked in terms of priority for remedial action pursuant
to the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). Under CERCLA, all owners and operators (former and current) and
generators can be found jointly and severally liable with respect to the
Sullivan's Ledge Site. In March 1990, the EPA requested information from the
Company, and the Company admitted that between 1960 and 1969, American, the
predecessor of the business currently operated by the Company, had disposed of
waste metal at the site. A number of responsible parties entered into a consent
decree with regard to a portion of the Sullivan's Ledge Site in June 1991 and,
subsequently, such parties as plaintiffs (the "Plaintiffs") have sought
contribution in the United States District Court for the District of
Massachusetts from twelve corporations, including the Company and Nortek,
neither of which were named as potentially responsible parties by the EPA. In
the consent decree, the EPA estimated the cost of remediation at the Sullivan's
Ledge Site to be approximately $10-$12 million. The Company has defended and
will continue to defend the action based upon its belief that its predecessors
contributed only de minimis amounts of waste material. On December 17, 1996, the
United States District Court for The District of Massachusetts entered a
judgment in favor of the Company with respect to this claim. As of December 31,
1997, there is an appeal pending with the U.S. Court of Appeals for the First
Circuit.
9
<PAGE>
The Company is not able to predict with certainty the extent of its
ultimate liability with respect to any pending or future environmental matters.
However, the Company does not believe that any such liability with respect to
the aforementioned environmental matters would have a material adverse effect
upon its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters during the fourth quarter of the
fiscal year covered by this report to a vote of the security holders through the
solicitation of proxies or otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ---- --- -------- -----
<S> <C> <C> <C>
Ralph R. Papitto 71 Chairman of the Board and Chief Executive Officer December 1989
Robert R. Wheeler 53 President and Chief Operating Officer October 1995
Raymond H. Keller 60 Vice President and Chief Financial Officer December 1989
</TABLE>
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS
RALPH R. PAPITTO has been Chairman of the Board and a Director of the
Company since December 1989. Mr. Papitto has been Chief Executive Officer since
1995. Until 1990 Mr. Papitto was the Chairman of the Board, Chief Executive
Officer and a director of Nortek, an industrial conglomerate. Mr. Papitto
founded Nortek in 1967. In 1956, Mr. Papitto founded Glass-Tite Industries, Inc.
("Glass-Tite"), a manufacturer of electronic semiconductor components.
Glass-Tite was acquired by GTI Corporation ("GTI") in 1963. Mr. Papitto served
as Chairman of the Board of GTI Corporation until 1966. Mr. Papitto is also a
director of Lynch Corporation, a communications and multi-media services
company, and is also Chairman of the Board of Trustees of Roger Williams
University.
ROBERT R. WHEELER has been President and Chief Operating Officer of the
Company since December 1995 and a Director of the Company since March 1996. Mr.
Wheeler was Executive Vice President and Chief Operating Officer of the Company
from October 1995 to December 1995. From 1992 to 1995, Mr. Wheeler had been
President and Chief Executive Officer of The North American Industrial Company
of BICC Cable, Inc.
RAYMOND H. KELLER has been Vice President and Chief Financial Officer of
the Company since December 1989 and a Director of the Company since October
1993. From January 1989, he served as the Vice President and Chief Financial
Officer of the American Flexible Conduit Division of Nortek. Prior to that time,
Mr. Keller held several positions with Microdot, Inc., a multi-industry
components manufacturer, most recently as Vice President and Chief Financial
Officer of the Microdot, Inc. operating companies. Mr. Keller had been employed
by Microdot, Inc. since 1972.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "AFCX." The following table sets forth for the two most recently
completed fiscal years the high and low closing sale prices for the Common Stock
as reported on the Nasdaq National Market. The prices below reflect the October
20, 1997 five-for-four stock split.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1996
First Quarter .............................................. 11.80 9.50
Second Quarter ............................................. 14.00 10.60
Third Quarter .............................................. 14.80 12.40
Fourth Quarter ............................................. 19.10 13.60
1997
First Quarter .............................................. 21.40 16.00
Second Quarter ............................................. 22.40 15.50
Third Quarter .............................................. 28.40 21.10
Fourth Quarter ............................................. 31.875 22.50
</TABLE>
Since its initial public offering in 1993, the Company has not declared or
paid a cash dividend on its Common Stock and does not intend to do so in the
foreseeable future. The Company's current policy is to retain its earnings, if
any, to finance expansion and product development. Payment of dividends in the
future will depend on the earnings and financial condition of the Company and
such other factors as the Company's Board of Directors may consider or deem
appropriate at the time.
As of March 26, 1998, there were approximately 103 holders of record of
the Company's Common Stock and approximately 800 beneficial Shareholders.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following financial information is qualified in its entirety by
reference to, and should be read in conjunction with, the Company's financial
statements, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report. For the short tax year from January 1 through December 16, 1993,
the consummation date of the Company's initial public offering ("IPO"), the
Company elected to be treated for income tax reporting purposes as an S
corporation under the Internal Revenue Code.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales ............................ $ 89,890 $ 114,386 $ 139,483 $ 161,868 $ 220,264
Cost of Goods Sold ................... 66,775 82,497 107,087 118,487 156,479
--------- --------- --------- --------- ---------
Gross profit ......................... 23,115 31,889 32,396 43,381 63,785
Selling, general and administrative
expenses ........................ 16,460 21,491 21,926 26,384 35,483
Owners' compensation (1) ............. 3,141 -- -- -- --
--------- --------- --------- --------- ---------
Income from operations ............... 3,514 10,398 10,470 16,997 28,302
Other income (expense), net .......... (23) 160 39 (48) (192)
Investment income .................... 14 80 3,001 2,339 2,141
Interest expense ..................... 1,142 176 614 728 620
--------- --------- --------- --------- ---------
Income before taxes .................. 2,363 10,462 12,896 18,560 29,631
Income taxes ......................... 1,209 4,269 4,791 7,100 11,392
--------- --------- --------- --------- ---------
Net income (2) ....................... $ 1,154 $ 6,193 $ 8,105 $ 11,460 $ 18,239
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share (3) ......... $ 0.27 $ 0.90 $ 0.92 $ 1.25 $ 1.71
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic average shares (3) ............. 4,346 6,881 8,851 9,134 10,664
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share (3) ....... $ 0.27 $ 0.90 $ 0.90 $ 1.23 $ 1.66
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dilutive average shares (3) .......... 4,346 6,909 9,047 9,288 11,024
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Balance Sheet Data:
Cash and cash equivalents ............ $ 2,986 $ 2,571 $ 2,090 $ 980 $ 2,803
Working capital ...................... 14,485 17,789 48,099 58,959 88,141
Total assets ......................... 33,953 50,254 84,784 97,923 161,129
Short-term debt ...................... 1,250 3,500 6,952 2,270 6,457
Long-term debt ....................... -- -- -- 3,300 3,893
Total liabilities .................... 12,155 19,867 23,473 24,933 37,994
Stockholders' equity ................. 21,798 30,387 61,311 72,990 123,135
</TABLE>
- ------------------------
(1) Represents amounts distributed to the Company's stockholders as additional
compensation, a portion of which was to provide those stockholders with
funds to pay their income taxes, which included income taxes on the
Company's income. The portion of such additional compensation in excess of
the stockholders' income tax obligations was loaned back to the Company.
12
<PAGE>
(2) Pro Forma net income for the year ended December 31, 1993 after
considering the following adjustments is $3,584,000 or $.54 per common
share (6,675,806 dilutive average shares) assumed to be outstanding after
the IPO. The adjustments (i) reduce the level of compensation to the
Company's stockholders by $2.5 million in 1993, based upon current
compensation practices as determined by written agreement and the
Company's compensation committee, (ii) provide related income taxes (at an
assumed rate of 40%) based on pro forma income before income taxes as if
the Company were taxed as a C corporation and (iii) reflect the reduction
in interest expense of $1.1 million in 1993 resulting from the conversion
of certain of the Company's subordinated debt to equity and the repayment
of certain debt from proceeds of the IPO.
(3) Restated to include the effect of the October 20, 1997 five-for-four stock
split and the adoption in 1997 of Financial Accounting Standard No. 128,
"Earnings Per Share." See Notes 1, 10 and 11 to Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
STATEMENTS INCLUDE, AMONG OTHERS, STATEMENTS RELATING TO FUTURE EVENTS OR THE
FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. SUCH STATEMENTS ARE ONLY
EXPECTATIONS AND ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. FACTORS WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS ARE SET FORTH IN "FACTORS THAT MAY AFFECT FUTURE
PERFORMANCE."
ACQUISITIONS
As more fully discussed in Note 2 to Consolidated Financial Statements, the
Company completed the acquisitions of four companies in 1997, B&B Electronics
Manufacturing Company, Inc. ("B&B"), Area Lighting Research, Inc. ("ALR"),
Madison Equipment Company, Inc. (Madison) and Federal Hose Manufacturing, Inc.
("Federal Hose").
On a pro forma basis, the above acquisitions would contribute $15.1 million to
sales and $.04 to diluted earnings per share for the year ended December 31,
1997 and $35.6 million to sales and $.13 to diluted earnings per share for the
year ended December 31, 1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales for the year ended December 31, 1997 increased $58.4
million, or 36.1%, to $220.3 million from $161.9 million for the year ended
December 31, 1996. Net sales for the Wire and Cable Division increased by $36.7
million, or 25.4%, to $181.0 million for the year ended December 31, 1997 from
$144.3 million for the year ended December 31, 1996. Contributing to the
increase were additional sales of the Company's traditional armored cable and
flexible conduit products, increased sales of the Company's higher margin
specialty application cables, higher sales of fittings and connectors,
including sales by Madison, increased sales of the Company's line of
specialty coated metals products and sales by Federal Hose. Net sales for the
America Cable Systems Division increased by $21.7 million, or 129.9%, to
$38.4 million for the year ended December 31, 1997 from $16.7 million for the
year ended December 31, 1996. This increase is attributable to sales by ALR
and B&B as well as higher sales of modular wiring systems, including The
Intelligent Floor and The Intelligent Ceiling products.
GROSS PROFIT. Gross profit for the year ended December 31, 1997 increased
$20.4 million, or 47.0% to $63.8 million from $43.4 million for the year ended
December 31, 1996. Gross margin increased to 29.0% for the year ended December
31, 1997 from 26.8% for the year ended December 31, 1996. This increase is
attributable to (i) efficiencies arising from operating near manufacturing
capacity (ii) more efficient manufacturing processes resulting in better yields
on materials (iii) decreased cost of raw materials through better purchasing
practices (iv) increased sales of the Company's higher margin specialty
application cables and (v) higher margins on products sold by the companies
acquired in 1997.
13
<PAGE>
INCOME FROM OPERATIONS. Income from operations for the year ended December
31, 1997 increased $11.3 million, or 66.5%, to $28.3 million from $17.0 million
for the year ended December 31, 1996. Income from operations as a percentage of
net sales increased to 12.8% for the year ended December 31, 1997 from 10.5% for
the year ended December 31, 1996. This increase resulted from improved gross
margin, but was partially offset by an increase in selling, general and
administrative expenses attributable to increases in freight costs and sales
agent commissions, which generally rise in proportion with net sales, and
compensation expense.
NET INCOME. Net income for the year ended December 31, 1997 increased $6.7
million, or 59.2%, to $18.2 million from $11.5 million for the year ended
December 31, 1996. Net income as a percentage of net sales increased to 8.3% for
the year ended December 31, 1997 from 7.1% for the year ended December 31, 1996.
This increase was primarily due to increased income from operations.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for the year ended December 31, 1996 increased $22.4
million, or 16.1%, to $161.9 million from $139.5 million for the year ended
December 31, 1995. Net sales for the Wire and Cable Division increased by $19.9
million, or 16.0%, to $144.3 million for the year ended December 31, 1996 from
$124.4 million for the year ended December 31, 1995. Contributing to the
increase were additional sales of the Company's traditional armored cable and
flexible conduit products as well as increased sales of the Company's higher
margin specialty application cables. Also contributing to this increase were
higher sales of fittings and connectors and specialty coated metal products
introduced by the Company in early 1995. Net sales for the America Cable Systems
Division increased by $2.5 million, or 17.6%, to $16.7 million for the year
ended December 31, 1996 from $14.2 million for the year ended December 31, 1995.
This increase is attributable to improved demand for modular wiring systems,
including The Intelligent Floor and The Intelligent Ceiling products.
GROSS PROFIT. Gross profit for the year ended December 31, 1996 increased
$11.0 million, or 33.9%, to $43.4 million from $32.4 million for the year ended
December 31, 1995. Gross margin increased to 26.8% for the year ended December
31, 1996 from 23.2% for the year ended December 31, 1995. This increase is
attributable to (i) decreased cost of raw materials through more efficient
purchasing, lower market prices of commodities and improved manufacturing
processes resulting in better yields on materials and (ii) increased sales of
higher margin specialty application products.
INCOME FROM OPERATIONS. Income from operations for the year ended December
31, 1996 increased $6.5 million, or 62.3%, to $17.0 million from $10.5 million
for the year ended December 31, 1995. Income from operations as a percentage of
net sales increased to 10.5% for the year ended December 31, 1996 from 7.5% for
the year ended December 31, 1995. This increase resulted from improved gross
margin, but was partially offset by an increase in selling, general and
administrative expenses attributable to increases in freight costs, sales agent
commissions, compensation expense and fees for professional services.
NET INCOME. Net income for the year ended December 31, 1996 increased $3.4
million, or 41.4%, to $11.5 million from $8.1 million for the year ended
December 31, 1995. Net income as a percentage of net sales increased to 7.1% for
the year ended December 31, 1996 from 5.8% for the year ended December 31, 1995.
This increase was primarily due to increased income from operations, partially
offset by a slight decline in other income, which consisted primarily of income
on investments in securities, and a higher effective tax rate of 38.2% for the
year ended December 31, 1996 compared to 37.2% for the year ended December 31,
1995 which was due to a higher marginal tax rate in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term liquidity needs have generally consisted of
operating capital necessary to finance inventories and receivables. Long-term
liquidity needs generally relate to capital expenditures necessary to expand the
production capacity of its manufacturing operations. The Company has satisfied
its short- and long-term liquidity needs with cash generated from operations and
proceeds from the public offerings of its Common Stock in 1995 and 1997,
supplemented by available borrowings under its revolving line of credit. The
excess proceeds from the 1995 and 1997 stock offerings are included in the
Company's portfolio of marketable securities at December 31,
14
<PAGE>
1997. The Company expects that it will meet its ongoing working capital needs
for the next twenty-four months primarily with remaining stock offering proceeds
and cash generated from operations.
Cash generated from operations totaled $5.1 million and $11.5 million for
the years ended December 31, 1997 and 1996, respectively, and was attributable
primarily to increased profitability, although cash generated for the year ended
December 31, 1997 was partially offset by an increase in inventories and
accounts receivable. Cash used in operations was $1.3 million for the year ended
December 31, 1995, again primarily due to an increase in inventories and
accounts receivable. Working capital on December 31, 1997 was $88.1 million and
the ratio of current assets to current liabilities was 3.93 to 1.00. The
Company's average inventory of $32.9 million (including inventories of
companies acquired in 1997) for the year ended December 31, 1997 represented
an increase of $12.9 million over the average inventory of $20.0 million for
the year ended December 31, 1996.
Accounts receivable at December 31, 1997 were $8.2 million higher than the
balance at December 31, 1996 due primarily to increased sales and to accounts
receivable of companies acquired in 1997. For the year ended December 31, 1997
average day sales outstanding were 55 compared to 56 for the year ended December
31, 1996. At December 31, 1997, accounts receivable over 60 days represented
3.8% of accounts receivable.
Capital expenditures for the year ended December 31, 1997 of $7.7 million
were for new or replacement production equipment to increase manufacturing
capacity. Capital expenditures amounted to $7.0 million and $2.3 million for the
years ended December 31, 1996 and 1995, respectively. For the years ended
December 31, 1997, 1996 and 1995, the Company leased certain manufacturing
equipment valued at $0.1 million, $1.7 million and $2.0 million, respectively.
Capital expenditures for 1998 are expected to be approximately $11.0 million,
primarily for the expansion of manufacturing capacity and to upgrade management
information systems.
At December 31, 1997, bank indebtedness under the Company's unsecured
revolving line of credit was $6.2 million. This revolving line of credit
terminates on March 31, 1999 and provides for direct borrowings of up to $25.0
million, including letter of credit borrowings up to $3.0 million. Up to $10.0
million of the line of credit may be used without the lender's prior consent for
business acquisitions. At December 31, 1997, letters of credit totaling
approximately $0.8 million were outstanding under the line of credit.Borrowings
under the line of credit averaged $3.8 million for the year ended December 31,
1997.
Borrowings under the revolving line of credit are available at interest
rates equal to either the lender's base rate or the Eurodollar rate plus 0.5% to
1.25% for a fixed period of one, two, three, six months or one year. At December
31, 1997, the weighted average cost of borrowings under the line of credit was
8.5%. The line of credit contains certain restrictive covenants, including the
requirement that the Company maintain minimum levels of tangible capital funds
and meet other specified ratio requirements.
During 1996, the Company was loaned the proceeds from the issuance of
$3.57 million in Industrial Revenue Bonds by the Massachusetts Industrial
Finance Agency for the purpose of acquiring and refurbishing a 99,000
square-foot manufacturing facility in New Bedford, Massachusetts, which secures
the IRBs. The IRBs mature on July 24, 2016 and carry an average interest rate
adjustable on a weekly basis. The IRBs carried an average interest rate of
approximately 3.75% and 3.5% for the years ended December 31, 1997 and 1996,
respectively. In addition, an annual fee of 1.0% of the amount of an
unsecured stand-by letter of credit is payable to the bank holding the letter
of credit and also acting as trustee under the terms of the IRB issuance. The
Company has the right to convert from the variable interest rate to a fixed
rate established at the time of conversion. The bonds are payable in nineteen
annual installments of $180,000 with a final payment of $150,000 due at
maturity, all funded through monthly payments of $15,000 to the trustee over
the twelve months preceding the installment due dates.
INFLATION AND FOREIGN EXCHANGE FLUCTUATION
The Company believes that inflation has not had a material effect on its
business, operating results or financial condition during the three-year period
ended December 31, 1997. While the Company does not believe that its business is
highly sensitive to inflation, there can be no assurance that future increases
in the rate of inflation would not have a material adverse effect on the
Company's operations.
15
<PAGE>
The Company is currently not exposed to foreign exchange risk because
foreign sales are denominated in U.S. dollars to U.S.-based trading companies.
The Company may seek to manage any such future risk by entering into foreign
exchange contracts as management deems appropriate.
YEAR 2000
The Company continues to assess its exposure related to the impact of the
Year 2000 date issue. The Year 2000 date issue arises from the fact that many
computer programs use only two digits to identify a year in a date field, thus
computer programs having time-sensitive software will recognize a date using
"00" as the year 1900 rather than the year 2000. The Company's key financial and
operational systems are being reviewed and, where required, detailed plans have
been, or are being developed and implemented on a schedule intended to permit
the Corporation's computer systems and products to continue to function
properly. This effort has been combined with the upgrading or replacement of
current computer systems for infrastructure and technology enhancement reasons.
Maintenance or modification costs will be expensed as incurred, while the
costs of new information technology will be capitalized and amortized in
accordance with Company policy. Management does not believe the costs
associated with the information systems upgrades will have a material adverse
impact on the Company's financial position, results of operations or cash
flows. However, the Company could be adversely impacted by the Year 2000 date
issue if suppliers, customers and other businesses do not address this issue
successfully. Management continues to assess these risks and ensure Year 2000
compliance from the Company's suppliers and customers in order to reduce the
impact on the Company.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
SUBSTANTIAL PRICE COMPETITION, MARGIN MAINTENANCE AND PRICES OF RAW
MATERIALS. Price competition for the Company's core products is significant, and
the Company sells its products in accordance with prevailing market prices.
Copper rod is the principal raw material used in the Company's manufacturing
operations, accounting for approximately 28% of cost of goods sold for the year
ended December 31, 1997. The Company expects that copper will continue to
account for a significant portion of the cost of goods sold in the future.
Historically, the price of copper has fluctuated significantly (i.e. between
$76.60 and $122.00, and $86.85 and $130.10 per 100 pounds in 1997 and 1996,
respectively). The Company's other principal raw materials include steel and
aluminum, which collectively accounted for approximately 30% of cost of goods
sold for the year ended December 31, 1997. Although in the past these raw
materials have not been subject to the same degree of price volatility as
copper, there can be no assurance that significant fluctuations will not occur
in the future. The Company attempts to insulate its products from these price
fluctuations through improved purchasing procedures and appropriate selling
price adjustments. There can be no assurance, however, that the Company will be
able to maintain acceptable gross profit margins on product sales in the future
and, if it is unable to do so, its business, operating results and financial
condition could be adversely affected. The Company does not currently engage in
metal futures trading or other hedging activities, but does have a producer
supply contract, which currently expires on December 31, 1998 and under which
the Company purchases copper in any given month at a price equal to the average
copper selling prices, as determined by the New York Commodity Exchange, for the
month of shipment plus a premium. In addition, the Company has an aluminum
supply contract which expires on December 31, 1998 that provides for technical
assistance and other special terms. The Company may engage in hedging activities
in the future as management deems appropriate.
MANAGEMENT OF GROWTH. The Company has experienced rapid growth,
particularly during the last four years. The continued rapid growth of the
Company could place a significant strain on its management and other resources.
The Company anticipates that continued growth, if any, will require it to
continue to recruit, hire, train and retain a substantial number of new and
highly skilled product development, administrative, information technology,
finance, sales and marketing and support personnel. The Company's ability to
compete effectively and to manage future growth, if any, will depend on its
ability to continue to implement and improve operational, financial and
management information systems on a timely basis and to expand, train, motivate
and manage its work force. Should the Company continue to experience rapid
growth, there can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's operations or
that management will adequately anticipate all demands that growth will place on
the Company. If the Company's
16
<PAGE>
management is unable to manage growth effectively, the quality of the Company's
products and its business, operating results and financial condition could be
materially adversely affected. See "--Integration of Acquisitions."
INTEGRATION OF ACQUISITIONS. The Company intends to supplement its growth
by pursuing selective acquisitions of companies with products complementary to
its existing business. During the year ended December 31, 1997, the Company
acquired four companies and intends to consider future acquisitions in the
industry, some of which may be material to the Company. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, operating companies in different geographical
locations, and the potential loss of key employees of the acquired company.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect the Company's operating results
and financial condition. There can be no assurance that future acquisitions can
be successfully integrated or that management will be successful in managing the
combined operations. See "--Management of Growth."
DEPENDENCE ON NEW PRODUCTS AND PRODUCT IMPROVEMENTS. The commercial
construction industry and the evolution of the modern workstation are
characterized by advances in electrical distribution and communications systems
which require ongoing improvements in the capabilities of wire and cable
products. The Company believes that its future success will depend in part upon
its ability to enhance existing products and to develop and manufacture new
products that meet or anticipate such changes. The failure to introduce new or
enhanced products on a timely and cost competitive basis could have an adverse
impact on the Company's business, operating results or financial condition.
MANUFACTURING CAPACITY. The Company is currently operating near capacity
in some of its manufacturing facilities. Although the Company has plans to open
additional facilities and expand its capacity at others, there can be no
assurance that these additional facilities or expansions will be completed on
time and/or on budget, that the Company will not experience manufacturing delays
or problems, or that adequate equipment and personnel will be available to
operate these new facilities. The additional facilities and equipment will also
require substantial funds. The Company anticipates that borrowings and existing
cash will be adequate to fund its planned expansions. See "Management Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." If the Company experiences significant delays or problems in
implementing its current plans, such delays or problems could have a material
adverse effect on the Company's business, results of operations or financial
condition.
VOLATILITY OF NEW CONSTRUCTION MARKET. The volatility of the
nonresidential new construction market has a direct impact on sales of certain
of the Company's products. Certain regions of the United States have
experienced, and in the future may experience, significant economic recessions
that have reduced, or may reduce, the number of nonresidential new construction
projects, which in turn could adversely affect the Company's business, operating
results and financial condition. The Company has historically derived a
substantial portion of its sales from the building modernization market, which
has not been significantly adversely affected by downturns in the nonresidential
new construction market. There can be no assurance, however, that the
modernization market will not enter a downturn or that the Company's sales will
not be affected by future downturns in the nonresidential new construction
market. The Company's sales have also been impacted from time to time by
unseasonable and excessive weather conditions that delay new construction. There
can be no assurance that such conditions will not have a material adverse effect
on the Company's operating results in the future.
COMPETITION. The Company faces competition from a number of national and
regional competitors, both in the armored cable and pipe and wire industries,
some of which have greater financial, engineering, research and development,
manufacturing and other resources than the Company. The Company's competitors
can be expected to continue to improve the design and performance of their
products and to introduce new products with competitive price and performance
characteristics. Although the Company believes that it has certain technological
and other advantages over its competitors, maintaining and leveraging any such
advantages will require continued investment by the Company in design and
engineering, development, marketing and customer service and support. There can
be no assurance that the Company will have sufficient resources to continue to
make such investments or that the
17
<PAGE>
Company will be successful in maintaining and leveraging any such advantages.
See "--Management of Growth" and "Business--Competition."
RELIANCE ON INDEPENDENT SALES REPRESENTATIVES AND NONEXCLUSIVE
DISTRIBUTORS. The Company sells its products to distributors through a network
of independent sales representatives who generally work on a commission basis.
The Company's top ten sales representatives accounted for approximately 45% of
sales for the year ended December 31, 1997. These representatives are not under
direct control of the Company, are not subject to minimum purchase requirements
and are not contractually obligated to carry the Company's product lines
exclusively or for any period of time. Although the Company believes that the
loss of any one representative would not have a material adverse impact on the
Company's business, there can be no assurance that the Company will be able to
maintain its existing relationships with these representatives. In addition, the
distributors which ultimately sell the Company's products could purchase and
distribute products that compete with the Company's products or cease purchasing
the Company's products at any time. There can be no assurance that the
distributors will continue to distribute or recommend the Company's products or
do so successfully.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL. The Company's long-term success
and its growth strategy depend on its senior management, particularly Ralph R.
Papitto, the Company's Chairman and Chief Executive Officer, Robert R. Wheeler,
the Company's President and Chief Operating Officer, and Raymond H. Keller, the
Company's Chief Financial Officer. The loss of service of one or more of the
Company's key senior management personnel could have an adverse effect on the
Company's business, financial condition and results of operations. See
"Executive Officers of the Registrant."
ANTITAKEOVER PROVISIONS. Certain provisions of the Company's Restated
Certificate of Incorporation, as amended, and By-Laws and of the Delaware
General Corporation Law (the "DGCL") could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. Such
provisions, which include supermajority voting requirements for specified
business combinations, a staggered Board of Directors, and the right of the
Board of Directors, without further stockholder approval, to issue preferred
stock (the "Preferred Stock") upon such terms and conditions, and having such
rights, privileges and preferences as the Board of Directors may determine, may
have the effect of deferring hostile takeovers or delaying or preventing changes
in control or management of the Company. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of any
holders of Preferred Stock that may be issued in the future. The Company has no
present plans to issue any Preferred Stock.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................20
Consolidated Statements of Income......................................22
Consolidated Statements of Shareholders' Equity........................23
Consolidated Statements of Cash Flows..................................24
Notes to Consolidated Financial Statements.............................26
Report of Independent Auditors.........................................46
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (NOTE 1) $ 2,803 $ 980
Marketable securities (NOTE 3) 40,434 30,508
Accounts receivable, net of allowance for
doubtful accounts and sales allowances of
$3,870 in 1997 and $3,140 in 1996 32,127 23,919
Inventories:
Finished goods 26,333 11,559
Work-in-process 7,385 3,702
Raw materials 6,219 5,665
---------------------------
39,937 20,926
Current deferred taxes (NOTE 9) 1,491 637
Other current assets 1,439 1,121
---------------------------
Total current assets 118,231 78,091
Property, plant and equipment:
Land 1,190 510
Buildings and improvements 10,173 8,754
Machinery and equipment 23,207 16,050
Furniture and fixtures 2,412 1,791
Construction in progress 364 83
---------------------------
37,346 27,188
Less accumulated depreciation 12,409 9,482
---------------------------
Net property, plant and equipment 24,937 17,706
Goodwill, net of accumulated amortization
of $373 in 1997 and $122 in 1996 16,497 1,175
Other long-term assets, net 1,464 951
---------------------------
Total assets $161,129 $97,923
---------------------------
---------------------------
</TABLE>
20
<PAGE>
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
($ IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 227 $ 270
Revolving credit note payable (NOTE 4) 6,230 2,000
Accounts payable 12,536 12,471
Accrued expenses:
Payroll and employee benefits 3,609 2,506
Other (NOTE 6) 7,488 1,885
---------------------------
Total accrued expenses 11,097 4,391
---------------------------
Total current liabilities 30,090 19,132
Long-term debt (NOTE 4) 3,893 3,300
Deferred income taxes (NOTE 9) 1,570 1,547
Other long-term liabilities 2,441 954
Commitments and contingencies (NOTES 7 AND 8) -- --
Shareholders' equity (NOTE 10):
Preferred stock, $.01 par value,
1,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 15,000,000
shares authorized, 11,397,854 and 9,168,781
shares issued and outstanding in 1997 and
1996, respectively 114 73
Paid-in capital 79,110 48,011
Other 1,021 218
Treasury stock, 6,411 and 6,031 shares in
1997 and 1996, respectively, at cost (92) (82)
Retained earnings 42,982 24,770
---------------------------
Total shareholders' equity 123,135 72,990
---------------------------
Total liabilities and shareholders' equity $161,129 $97,923
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
21
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales $220,264 $161,868 $139,483
Cost of goods sold 156,479 118,487 107,087
----------------------------------------
Gross profit 63,785 43,381 32,396
Selling, general and
administrative expenses 35,483 26,384 21,926
----------------------------------------
Income from operations 28,302 16,997 10,470
Other income (expense):
Interest expense (620) (728) (614)
Investment income 2,141 2,339 3,001
Other, net (192) (48) 39
----------------------------------------
1,329 1,563 2,426
----------------------------------------
Income before income taxes 29,631 18,560 12,896
Income taxes (NOTE 9) 11,392 7,100 4,791
----------------------------------------
Net income $ 18,239 $ 11,460 $ 8,105
----------------------------------------
----------------------------------------
Basic earnings per common
share (NOTE 11) $1.71 $1.25 $.92
----------------------------------------
----------------------------------------
Diluted earnings per common
share (NOTE 11) $1.66 $1.23 $.90
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
22
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON PAID-IN TREASURY (ACCUMULATED
STOCK CAPITAL OTHER STOCK DEFICIT) TOTAL
-------------------------------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 55 $25,871 $ (744) $ -- $ 5,205 $ 30,387
Net income for 1995 -- -- -- -- 8,105 8,105
Proceeds from issuance of 2,203,125
shares of common stock 18 21,906 -- -- -- 21,924
Repurchase of restricted stock, net -- -- -- (30) -- (30)
Amortization of compensation (NOTE 10) -- -- 191 -- -- 191
Exercise of stock options (NOTE 10) -- 140 -- -- -- 140
Adjustment to unrealized gains (losses)
on available-for-sale securities, net
of tax -- -- 593 -- -- 593
Other -- 1 -- -- -- 1
--------------------------------------------------------------------------
Balance at December 31, 1995 73 47,918 40 (30) 13,310 61,311
Net income for 1996 -- -- -- -- 11,460 11,460
Repurchase of restricted stock, net -- -- -- (52) -- (52)
Amortization of compensation (NOTE 10) -- -- 189 -- -- 189
Cancellation of 32,375 restricted shares -- (276) 276 -- -- -
Exercise of stock options and related
tax benefit (NOTE 10) -- 369 -- -- -- 369
Adjustment to unrealized gains (losses)
on available-for-sale securities, net
of tax -- -- (287) -- -- (287)
--------------------------------------------------------------------------
Balance at December 31, 1996 73 48,011 218 (82) 24,770 72,990
Net income for 1997 -- -- -- -- 18,239 18,239
Proceed from issuance of 1,937,500
shares of common stock 16 27,552 -- -- -- 27,568
Repurchase of restricted stock, net -- -- -- (10) -- (10)
Amortization of compensation (NOTE 10) -- -- 15 -- -- 15
Employee stock awards 1 651 -- -- -- 652
Exercise of stock options and warrants
and related tax benefit (NOTE 10) -- 647 -- -- -- 647
Issuance of 136,364 shares of common
stock for acquisitions and related
fees (NOTE 2) 1 2,249 -- -- -- 2,250
Adjustment to unrealized gains (losses)
on available-for-sale securities, net
of tax -- -- 788 -- -- 788
Five-for-four stock split effected
in the form of a dividend 23 -- -- -- (27) (4)
--------------------------------------------------------------------------
Balance at December 31, 1997 $114 $79,110 $ 1,021 $(92) $42,982 $123,135
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
See accompanying notes.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net income $18,239 $11,460 $8,105
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 2,927 2,235 1,860
Amortization of intangibles 251 776 195
Net gain on sale of property,
plant and equipment -- (54) --
Net gain realized on
available-for-sale securities (88) (618) (1,720)
Deferred income taxes (428) 77 12
Provision for bad debts 209 263 76
Provision for sales allowances 193 719 480
Compensation expense for
restricted stock and
compensatory options 91 239 292
Increase (decrease) in cash
arising from changes in assets
and liabilities:
Accounts receivable (2,935) (4,326) (2,694)
Inventories (14,001) (1,564) (6,732)
Other current assets (197) (106) (289)
Other long-term assets (403) (431) (996)
Accounts payable (2,958) 631 899
Accrued payroll and employee
benefits 969 1,030 (80)
Other accrued liabilities 1,747 974 (703)
Other long-term liabilities 1,486 154 --
------------------------------------
Net cash provided by (used in)
operating activities 5,102 11,459 (1,295)
Investing activities
Acquisitions, including expenses,
less cash acquired (NOTE 2) (20,598) -- --
Capital expenditures, net (7,687) (6,970) (2,340)
Proceeds from sale of property, plant
and equipment -- 195 --
Purchase of available-for-sale
securities (47,505) (29,063) (44,907)
Proceeds from sale of
available-for-sale securities 40,350 24,349 22,601
------------------------------------
Net cash used in investing activities (35,440) (11,489) (24,646)
</TABLE>
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving line of
credit borrowings 94,375 60,615 52,948
Repayments of revolving line of
credit borrowings (90,145) (65,540) (49,523)
Proceeds from term loan -- 3,200 --
Repayment of term loan -- (3,200) --
Proceeds from long-term debt -- 3,570 --
Payments on long-term debt,
including current portion (271) -- --
Proceeds from issuance of common stock 28,212 327 22,065
Purchase of treasury stock (10) (52) (30)
------------------------------------
Net cash provided by (used in)
financing activities 32,161 (1,080) 25,460
------------------------------------
Net increase (decrease) in cash and
cash equivalents 1,823 (1,110) (481)
Cash and cash equivalents at
beginning of year 980 2,090 2,571
------------------------------------
Cash and cash equivalents at end of
year $ 2,803 $ 980 $ 2,090
-----------------------------------
-----------------------------------
Supplemental schedule of cash flow information:
Cash paid during the year for
interest $ 580 $ 814 $ 614
-----------------------------------
-----------------------------------
Cash paid during the year for
income taxes $ 10,103 $ 6,058 $ 5,863
-----------------------------------
-----------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
AFC Cable Systems, Inc. (the Company) is a manufacturer of electrical
distribution products, including prewired armored cable, flexible conduit and
modular wiring systems used in the nonresidential construction electrical wiring
industry. The Company, through its wholly-owned subsidiaries, also manufacturers
and distributes photo controls for the lighting control and fixture industries,
electronic interfaces and connectors that facilitate data communications, and
flexible hoses, ducting and connections for diverse applications. The Company's
customers primarily consist of electrical supply wholesalers located throughout
the United States. The Company performs credit evaluations on all new customers
and generally does not require collateral. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated.
CASH EQUIVALENTS
Cash equivalents are defined as all short-term, highly-liquid investments with
an original maturity of three months or less.
MARKETABLE SECURITIES
Management determines the appropriate classification of marketable securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. All debt and equity securities have been classified as available-for-sale.
Available-for-sale securities are carried at fair value based on quoted market
prices, with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains and
losses and
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost of substantially all
of the inventory is determined on a first-in, first-out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at cost. Depreciation is computed on
the straight-line method over the estimated lives of the assets as follows:
Buildings and improvements 5 to 30 years
Machinery and equipment 3 to 10 years
Furniture and fixtures 5 to 10 years
GOODWILL
Goodwill consists of the excess cost over the fair value of the assets of
acquired businesses (see Note 2) and is being amortized using the straight-line
method over periods of twenty to forty years.
SELF-INSURANCE
The Company is self-insured for its employee health and workers' compensation
plans. The plans, which are administered by insurance companies, contain certain
stop loss provisions that limit the Company's liability in the event of
catastrophic losses. Claims are accrued for as incurred based on available claim
information and management's estimate of claims incurred but not yet reported.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees."
REVENUE RECOGNITION
The Company recognizes sales when goods are shipped to the customer.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $1,567,000, $950,000, and
$854,000 in 1997, 1996 and 1995, respectively.
EARNINGS PER SHARE
The Company has adopted Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share" ("FAS 128"), which was issued in 1997. FAS 128 requires the
presentation of "basic earnings per share" and "diluted earnings per share."
Basic earnings per share represents net income divided by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
per share represents net income divided by weighted average shares outstanding
adjusted for the dilutive effect of the assumed exercise of outstanding options
and warrants. Earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the requirements of FAS 128.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company is currently
evaluating the effects of implementing these statements which are effective
beginning in 1998.
RECLASSIFICATION
Certain reclassifications were made to the 1996 and 1995 financial statements in
order that they may be consistent with the 1997 presentation.
2. ACQUISITIONS
During the year ended December 31, 1997, the Company made the acquisitions set
forth below, each of which has been accounted for as a purchase. The
consolidated financial statements of the Company include the operating results
of each business from the date of acquisition.
B&B ELECTRONICS MANUFACTURING COMPANY, INC.
On January 28, 1997, the Company acquired all of the outstanding stock of
Illinois-based B&B Electronics Manufacturing Company, Inc. ("B&B"), a
manufacturer and distributor of electronic interfaces and connectors that
facilitate data communications. The cost of B&B consisted of $4.2 million in
cash, 75,000 shares of the Company's common stock ($960,000), plus fees of
approximately $73,000, and assumed debt. Contingent consideration, which is in
addition to the above acquisition costs, will be paid to the seller of B&B for
certain earnings targets achieved by B&B for the year ended December 31, 1997,
and will be payable for subsequent annual periods if certain earnings targets
are met for such periods. The contingent consideration payable for the period
ended December 31, 1997, is approximately $600,000. Contingent consideration is
recorded as additional purchase price when the future earnings targets have been
met.
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
AREA LIGHTING RESEARCH, INC.
On January 31, 1997, the Company acquired certain assets and assumed certain
liabilities of New Jersey-based Area Lighting Research, Inc. ("ALR"), a
designer, manufacturer and distributor of photo controls and electrical devices
for the lighting control and fixture industries. The cost of ALR consisted of
$7.7 million in cash plus 50,000 shares of common stock issued in payment of
fees (approximately $1 million). Contingent consideration, in addition to the
above costs, is payable to the seller of ALR for certain financial targets
achieved by ALR for the year ended December 31, 1997. The contingent
consideration payable for the year ended December 31, 1997, is approximately
$400,000 and was recorded as additional purchase price.
MADISON EQUIPMENT COMPANY, INC.
On April 1, 1997, the Company acquired all of the outstanding stock of
Ohio-based Madison Sale Corporation, a supplier of fittings for the electrical
industry. Upon purchase, the name of the company was changed to Madison
Equipment Company, Inc. ("Madison"). The cost of Madison consisted of $2.0
million in cash plus approximately $85,000 in fees.
FEDERAL HOSE MANUFACTURING, INC.
On November 22, 1997, the Company acquired the assets and assumed certain
liabilities of Ohio-based Federal Hose Manufacturing, Inc. ("FHI"), a
manufacturer and distributor of flexible metal, plastic and fabric hoses,
ducting and connectors for diverse applications. The cost of FHI consisted of
$7.2 million in cash, 11,364 shares of the Company's common stock ($300,000)
plus fees of approximately $265,000. Contingent consideration is payable to the
seller of FHI based upon future earnings targets through December 31, 2000. The
purchase price allocation of FHI is preliminary.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The goodwill resulting from the above acquisitions will be amortized over 40
years, with the exception of the goodwill from the Madison acquisition, which
will be amortized over a 20-year period. Pro forma income statement data
assuming the acquisitions above were made at the beginning of 1997 and 1996, is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------
($ IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales $235,356 $197,427
Income from operations 29,117 19,352
Net income 18,754 12,795
Diluted earnings per common share $1.70 $1.36
</TABLE>
The above pro forma information does not purport to represent the Company's
results of operations that would have been attained had the above acquisitions
in fact occurred at the beginning of the periods indicated or to project the
Company's results for any future period.
3. MARKETABLE SECURITIES
The following is a summary of securities held by the Company. All securities are
classified as available-for-sale.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. corporate debt
securities $ 9,464 $ 329 $ (3) $ 9,790
U.S. treasury securities
and obligations of
U.S. Government
agencies 24,713 55 (2) 24,766
Equity securities 4,894 1,096 (112) 5,878
------------------------------------------------
Total included in
investments $39,071 $1,480 $(117) $40,434
------------------------------------------------
------------------------------------------------
</TABLE>
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. MARKETABLE SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1996
U.S. corporate debt
securities $ 1,509 $ 92 $ -- $ 1,601
U.S. treasury securities
and obligations of
U.S. Government
agencies 26,193 52 (6) 26,239
Equity securities 2,576 168 (76) 2,668
------------------------------------------------
Total included in
investments $30,278 $ 312 $ (82) $30,508
------------------------------------------------
------------------------------------------------
</TABLE>
The cost and fair market value of debt securities at December 31, 1997 and 1996,
by contractual maturities, are shown below:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
FAIR MARKET
COST VALUE
-----------------------------
DECEMBER 31, 1997 ($ IN THOUSANDS)
<S> <S> <S>
Debt securities:
Maturing in one year or less $15,031 $15,296
Maturing between one year and five years 17,931 17,983
Maturing after five years 1,215 1,277
-----------------------------
34,177 34,556
Equity securities 4,894 5,878
-----------------------------
Total investments $39,071 $40,434
-----------------------------
-----------------------------
</TABLE>
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. MARKETABLE SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
FAIR MARKET
COST VALUE
-----------------------------
DECEMBER 31, 1996 ($ IN THOUSANDS)
<S> <C> <C>
Debt securities:
Maturing in one year or less $23,884 $23,948
Maturing between one year and five years 2,762 2,780
Maturing after five years 1,056 1,112
-----------------------------
27,702 27,840
Equity securities 2,576 2,668
-----------------------------
Total investments $30,278 $30,508
-----------------------------
-----------------------------
</TABLE>
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties. Realized gains and (losses) included in investment income amounted to
$173,000 and $(85,000) in 1997 and $859,000 and $(241,000) in 1996, and
$1,720,000 in 1995.
4. SHORT AND LONG-TERM DEBT
REVOLVING CREDIT NOTE PAYABLE
The Company has an unsecured revolving line of credit agreement which provides
for direct borrowings of up to $25,000,000 of which up to $10,000,000 is
available for business acquisitions, without the lender's prior consent. The
line of credit agreement provides for letter of credit borrowings of up to
$3,000,000, of which $821,000 is outstanding at December 31, 1997. A monthly fee
based on the unused portion of the credit facility is payable under the
agreement.
Borrowings under the line of credit are available at interest rates equal to
either the lender's base rate or the Eurodollar rate plus one half of one
percent to one and one quarter percent for a fixed period of one, two, three or
six months or one year. The Company has the option of electing the applicable
rate upon notification to the lender and as a result, portions of the
outstanding balance accrue interest at different rates. The weighted average
rate of outstanding short-term borrowings is 8.5% and 6.3% at December 31, 1997
and 1996, respectively. The carrying value of the line of credit approximates
its fair value.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHORT AND LONG-TERM DEBT (CONTINUED)
The line of credit contains certain restrictive covenants, which require that
the Company maintain minimum levels of tangible capital funds and meet other
specified ratio requirements.
LONG-TERM DEBT
During 1996, the Company received the proceeds from the issuance of $3.57
million in Industrial Revenue Bonds ("IRBs") through the Massachusetts
Industrial Finance Agency for the purpose of acquiring and refurbishing a 99,000
square-foot manufacturing facility in New Bedford, Massachusetts, which secures
the IRBs. The IRBs mature on July 24, 2016 and carry an interest rate adjustable
on a weekly basis. The IRBs carried an average interest rate of approximately
3.75% and 3.5% for the years ended December 31, 1997 and 1996, respectively.
Additionally, an annual fee of 1.0% on the letter of credit securing the bonds
($3.6 million at December 31, 1997) is paid to the bank acting as a trustee in
the issuance of the bonds. The Company has the right to convert from the weekly
interest rate to a fixed rate established at the time of conversion. The bonds
are payable in 19 annual installments of $180,000 with a final payment of
$150,000 due at maturity funded through monthly payments of $15,000 to the
trustee over the twelve months preceding the installment due dates. At December
31, 1997 and 1996, $3.1 million and $3.3 million, respectively, of the total was
classified as long-term debt. The carrying amount of the bonds approximates fair
value at December 31, 1997.
In addition, $774,000 of the $828,000 in debt assumed in the B&B acquisition was
classified as long-term at December 31, 1997. This represents a mortgage on the
facility occupied by B&B. The mortgage carries a fixed rate of 8% and matures on
February 20, 2012. The carrying amount approximates fair value at December 31,
1997.
The following is a schedule of the principal portion of long-term debt payments
for the years beginning December 31, 1997, and after:
<TABLE>
<CAPTION>
($ IN
THOUSANDS)
<S> <C>
1998 $ 227
1999 214
2000 218
2001 221
2002 224
Thereafter 3,016
--------------
$4,120
--------------
--------------
</TABLE>
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS
The Company sponsors a Supplemental Executive Retirement Plan ("the Plan") for
senior management. The Plan is a defined contribution plan whereby participant
accounts are credited in an amount equal to a percentage, determined by the
Company, of each participant's compensation plus the participant's allocable
share of net earnings of the Plan. At December 31, 1997 and 1996, the Company
has assets (market value of $1,304,000 and $900,000, respectively), segregated
in a trust, available to meet the obligations of the Plan. Expenses for this
plan were approximately $276,000 for each of the years ended December 31, 1997
and 1996, and $190,000 for the year ended December 31, 1995. The total liability
under the plan was approximately $1,334,000 and $976,000 at December 31, 1997
and 1996, respectively.
The Company also has seven defined contribution (401(k)) plans covering
substantially all employees. Contributions to the plans are based on a
percentage of the employee's compensation. The Company also participates in a
multi-employer defined contribution plan covering certain union employees. The
Company's expense under the 401(k) and multi-employer plans was approximately
$699,000, $449,000, and $437,000, for the years ended December 31, 1997, 1996,
and 1995, respectively.
6. OTHER ACCRUED EXPENSES
At December 31, 1997 and 1996, other accrued expenses consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
($ IN THOUSANDS)
<S> <C> <C>
Accrued federal and state income taxes $1,634 $ 257
Investment margin liability 1,550 --
Other 4,304 1,628
-----------------------------
$7,488 $1,885
-----------------------------
-----------------------------
</TABLE>
The investment margin liability, which bears interest, represents borrowings
secured by the Company's marketable securities.
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS
The Company has various operating lease agreements for buildings and equipment
extending through December 2006. The following is a schedule of the future
minimum rental payments due under these leases:
<TABLE>
<CAPTION>
($ IN
THOUSANDS)
<S> <C>
1998 $ 3,335
1999 2,535
2000 2,165
2001 1,862
2002 1,520
Thereafter 2,218
--------------
$13,635
--------------
</TABLE>
Rent expense amounted to $3,863,045, $3,738,390, and $3,088,056, in 1997, 1996,
and 1995, respectively.
In the normal course of business, the Company enters into purchase agreements
with certain raw material vendors. At December 31, 1997, the Company has agreed
to purchase approximately 100% of the 1998 copper usage from two vendors.
8. CONTINGENCIES
The Company is a defendant in certain claims that relate to matters that
occurred prior to the present ownership. In accordance with the purchase and
sale agreement of the Company, the prior owner has indemnified the Company for
such claims and, accordingly, the matters are being defended by the prior owners
and its insurance companies. Management is of the opinion that these claims
relate to the prior owners and therefore will not have a material adverse effect
on the Company's financial position or results of operations.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CONTINGENCIES (CONTINUED)
Additionally, the Company is a party to one environmental matter and certain
other legal proceedings not covered by the indemnification. In the environmental
matter, a number of responsible parties entered into a consent decree with the
EPA in 1991 and subsequently, such parties as plaintiffs have sought
contribution from the Company, which was not named as a responsible party by the
EPA. The Company has admitted that a predecessor of the business currently
operated by the Company had disposed of a de minimus amount of waste at the
site. On December 17, 1996, the U.S. District Court for the District of
Massachusetts entered a judgment in favor of the Company with respect to this
claim. As of December 31, 1997, there is an appeal pending with the U.S. Court
of Appeals for the First Circuit.
9. INCOME TAXES
Deferred income taxes are recognized for the expected consequences of temporary
differences by applying enacted statutory rates, applicable to future years, to
differences between the financial reporting basis and tax basis of assets and
liabilities.
The principal reasons that the aggregate income tax provisions differ from the
U.S. statutory rate of 35% for the year ended December 31, 1997, and 34% for the
years ended December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------- ------------------
($ IN ($ IN ($ IN
THOUSANDS) THOUSANDS) THOUSANDS)
<S> <C> <C> <C>
Income tax
provision at
statutory rate $10,371 35.0% $6,310 34.0% $4,385 34.0%
State taxes, net
of federal
benefit 1,082 3.7% 666 3.6% 380 3.0%
Other (61) (.2)% 124 .7% 26 .2%
------------------ ------------------- -----------------
$11,392 38.5% $7,100 38.3% $4,791 37.2%
------------------ ------------------- -----------------
------------------ ------------------- -----------------
</TABLE>
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The components of the provision for income taxes for the years ended December
31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $10,072 $6,018 $4,154
State 1,748 1,005 625
----------------------------------------
Total current 11,820 7,023 4,779
Deferred:
Federal (344) 58 53
State (84) 19 (41)
----------------------------------------
Total deferred (428) 77 12
----------------------------------------
Total $11,392 $7,100 $4,791
----------------------------------------
----------------------------------------
</TABLE>
A summary of the significant components of the Company's deferred tax
liabilities and assets as of December 31, 1997 and 1996, follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------
($ IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Fixed assets $1,976 $1,857
Marketable securities 604 134
---------------------------
Total deferred tax liabilities 2,580 1,991
Deferred tax assets:
Supplemental executive retirement plan 523 389
Goodwill 34 13
Stock compensation 90 19
Inventory 702 315
Allowance for doubtful accounts 342 142
Accrued liabilities 810 203
---------------------------
Total deferred tax assets 2,501 1,081
---------------------------
Net deferred tax liabilities $ 79 $ 910
---------------------------
---------------------------
</TABLE>
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY AND STOCK AWARD PLANS
SHAREHOLDERS' EQUITY
In the Company's Initial Public Offering in December 1993, the Company sold
to the underwriters warrants to purchase up to 206,925 shares of common stock
(prior to giving effect to the October 20, 1997 five-for-four stock split) at
an exercise price equal to $12.00 per share. Such warrants are not
transferable and are exercisable through December 14, 1998. During 1997,
warrants to purchase 103,462 shares (prior to giving effect to the October
20, 1997 five-for-four stock split) were exercised. After giving effect to
the October 20, 1997 stock split explained below, there are 129,328 shares of
common stock issuable upon exercise of remaining warrants at an exercise
price of $9.60 per share.
As more fully described below, on September 16, 1997, the Company's Board of
Directors authorized a five-for-four split of the Company's common stock. All
references to number of shares, per share amounts, stock option data and prices
of the Company's common stock have been restated to present the effect of the
stock split.
On February 9, 1995, the Company completed the issuance of 1,875,000 shares of
common stock at a price of $10.80 per share. As part of this offering, the
Company granted the underwriters an option to purchase a maximum of 328,125
additional shares to cover over-allotments, which was exercised on February 9,
1995. Also on February 9, 1995, 312,500 shares of common stock were sold to the
public by certain shareholders of the Company at a price of $10.80.
On April 23, 1997, the Company completed the issuance of 1,562,500 shares of
common stock at a price of $15.40 per share. As part of this offering, the
Company granted the underwriters an option to purchase a maximum of 375,000
additional shares to cover over-allotments which was exercised in full on April
29, 1997. Also, on April 23, 1997, 937,500 shares of common stock were sold to
the public by certain shareholders of the Company at a price of $15.40.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY AND STOCK AWARD PLANS (CONTINUED)
On September 16, 1997, the Company's Board of Directors authorized a
five-for-four split of the Company's common stock effected in the form a 25
percent stock dividend distributed on October 20, 1997, to shareholders of
record on October 6, 1997. Shareholders' equity has been adjusted by
reclassifying from retained earnings to common stock the par value of the
additional shares arising from the split. The amount of cash paid in lieu of
fractional shares resulting from the split was also charged to retained
earnings.
STOCK AWARD PLANS
The Company has two equity incentive plans covering employees of the Company;
the AFC Cable Systems, Inc. 1993 Equity Incentive Plan and the AFC Cable
Systems, Inc. 1997 Equity Incentive Plan (collectively, the "Plans"). Under the
Plans, the Company may grant stock options, stock appreciation rights,
restricted stock, unrestricted stock, deferred stock and performance stock
awards to key employees. Each of the Plans provides for the issuance of 500,000
shares of common stock. Options awarded under the Plans generally vest in equal
annual installments over either the four or the five years subsequent to the
date of grant. The options expire ten years after the date of grant.
The Company also has a stock plan covering non-employee directors; the AFC Cable
Systems, Inc. 1993 Stock Option Plan for Non-Employee Directors (the "Directors'
Plan"). Under the Directors' Plan, the Company may grant stock options to
non-employee directors which vest in equal annual installments over the five
years subsequent to the date of grant and expire ten years after date of grant.
The Directors' Plan provides for the issuance of 125,000 shares of common stock.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY AND STOCK AWARD PLANS (CONTINUED)
A summary of the status of stock options granted under all plans as of December
31, 1997, 1996 and 1995, and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 400,000 $ 9.03 370,000 $8.42 331,250 $ 7.98
Granted 557,500 16.70 100,000 10.80 56,250 10.80
Exercised (39,062) 8.61 (40,000) 8.20 (17,500) 8.00
Canceled (17,187) 8.71 (30,000) 8.40 -- --
------------------- --------------------- ---------------------
Outstanding at
end of year 901,251 $13.80 400,000 $9.03 370,000 $8.42
------------------- --------------------- ---------------------
------------------- --------------------- ---------------------
Options
exercisable
at year end 174,062 $ 8.53 128,125 $8.19 91,250 $7.99
------------------- --------------------- ---------------------
------------------- --------------------- ---------------------
Weighted-average
fair value of
options
granted
during year $6.98 $4.47 $4.46
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31 CONTRACTUAL EXERCISE DECEMBER 31 EXERCISE
EXERCISE PRICES 1997 LIFE (YRS.) PRICE 1997 PRICE
- ---------------------------- ------------------------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C>
$5.60 to $10.60 268,751 6.98 $ 8.14 142,812 $ 7.69
$12.00 to $17.80 556,250 8.96 15.06 31,250 12.38
$19.40 to $27.06 76,250 9.67 24.54 -- --
---------------- ----------------
901,251 174,062
---------------- ----------------
---------------- ----------------
</TABLE>
As discussed above, common stock may be granted to officers and key employees on
a restricted or unrestricted basis. At December 31, 1997, 1996, and 1995,
restricted stock awards covering 67,350, 1,250 and 61,875 shares, respectively,
were outstanding. During 1997, 1996 and 1995, the restrictions lapsed on 1,250,
28,250 and 29,375 shares, respectively, and 32,375 restricted shares were
forfeited during 1996.
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY AND STOCK AWARD PLANS (CONTINUED)
Employees vest in these restricted shares ratably over periods of two to three
years. The difference between the par value and the fair market value of the
stock on the date of grant was considered compensation and was amortized ratably
over the vesting period. The Company repurchased, at fair market value, 380
shares, 2,917 shares and 3,110 shares of vested restricted stock during 1997,
1996 and 1995, respectively, to provide certain employees with the funds
necessary to cover their tax withholdings from the receipt of vested restricted
shares.
The 67,350 shares of restricted stock outstanding at December 31, 1997, which
represent performance-based compensation for 1996, were awarded to officers and
key employees under the 1997 Plan.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (FAS No. 123), "Accounting for Stock-Based
Compensation." Accordingly, compensation cost has been recognized in the
financial statements only for stock options that are compensatory as defined
under APB 25. Had compensation cost for the Company's three stock option plans
been determined based on the fair value at the grant date for awards made in
1997, 1996 and 1995 consistent with the provisions of FAS No. 123, the Company's
net earnings and earnings per share would have been the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income, as reported $18,239 $11,460 $8,105
Net income, pro forma 17,765 11,383 8,093
Basic earnings per common share,
as reported $1.71 $1.25 $.92
Basic earnings per common share,
pro forma 1.67 1.25 .91
Diluted earnings per common
share, as reported $1.66 $1.23 $.90
Diluted earnings per common
share, pro forma 1.62 1.23 .90
</TABLE>
42
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY AND STOCK AWARD PLANS (CONTINUED)
The fair values of the options were estimated at the date of grant using the
Black-Scholes option pricing model. The following assumptions were used for the
1997, 1996 and 1995 stock option grants:
<TABLE>
<CAPTION>
1997 1996 1995
GRANTS GRANTS GRANTS
----------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.7% 5.8% 5.8%
Expected option life 4.4 years 4.4 years 4.3 years
Expected market price volatility 41% 40% 40%
Expected dividend yield 0% 0% 0%
</TABLE>
The effects on pro forma net income and earnings per common share of expensing
the estimated fair value of stock options are not necessarily representative of
the effects on reported net income for future years due to such things as the
vesting period of the stock options and the potential for issuance of additional
stock options in future years. Additionally, because FAS No. 123 is applicable
only to options granted subsequent to December 31, 1994, its pro forma effect
will not be fully reflected until 1998.
Shares of capital stock reserved for possible future issuance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
Options granted 901,251 400,000
Options as yet ungranted 163,462 108,625
Qualified employee savings plans 625,000 625,000
-----------------------------
1,689,713 1,133,625
-----------------------------
-----------------------------
</TABLE>
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net income (in thousands) $18,239 $11,460 $8,105
Basic average shares 10,663,876 9,133,650 8,851,403
Effect of dilutive securities:
Stock options and stock awards 263,505 90,874 132,312
Stock warrants 89,162 63,791 63,640
Contingently issuable shares 6,998 -- --
----------------------------------------
359,665 154,665 195,952
Dilutive average shares 11,023,541 9,288,315 9,047,355
----------------------------------------
----------------------------------------
Basic earnings per share $1.71 $1.25 $.92
----------------------------------------
----------------------------------------
Diluted earnings per share $1.66 $1.23 $.90
----------------------------------------
----------------------------------------
</TABLE>
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
1997 and 1996 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER FULL
29 28 27 31 YEAR
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales $47,787 $54,210 $56,704 $61,563 $220,264
Income from
operations 5,505 6,820 7,681 8,296 28,302
Net income 3,460 4,387 4,978 5,414 18,239
Basic earnings per
common share 0.37 0.41 0.44 0.48 1.71
Diluted earnings per
common share 0.36 0.40 0.43 0.46 1.66
</TABLE>
44
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER FULL
30 29 28 31 YEAR
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Net sales $33,885 $42,218 $41,559 $44,206 $161,868
Income from
operations 2,047 4,283 5,259 5,408 16,997
Net income 1,636 2,904 3,350 3,570 11,460
Basic earnings per
common share 0.18 0.32 0.37 0.39 1.25
Diluted earnings per
common share 0.18 0.31 0.36 0.38 1.23
</TABLE>
45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
AFC Cable Systems, Inc.
We have audited the accompanying consolidated balance sheets of AFC Cable
Systems, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial position of AFC
Cable Systems, Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
February 17, 1998
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the current executive officers of the Company is
included in Item 4A of Part I.
Information relating to the Directors of the Company is incorporated herein by
reference to the "Election of Directors" section of the Company's Proxy
Statement to be filed with the Commission in connection with the 1998 Annual
Meeting of Stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is incorporated herein by
reference to the "Executive Compensation" section of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership is incorporated herein by
reference to the "Security Ownership of Certain Beneficial Owners and
Management" section of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
incorporated herein by reference to the "Certain Relationships and Related
Transactions" section of the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The following financial statements of AFC Cable Systems, Inc. are
included in Item 8:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December
31,1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) The following financial statement schedule of AFC Cable Systems, Inc.
is included in Item 14(d):
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under related instructions or are inapplicable and therefore have
been omitted.
47
<PAGE>
(b) Reports on Form 8-K
None
(c) Exhibits--The response to this portion of Item 14 is submitted as a
separate section of this report. See Exhibit Index on page 49.
ITEM 14(d). FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------------------------------------------------
CHARGED TO
BALANCE CHARGE TO OTHER BALANCE
AT BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- --------- -------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts ............ $ 356 $ 209 $607(3) $ 279(1) $ 893
Reserve for sales allowances ............... 2,784 5,291 -- 5,098(2) 2,977
------ ------ ------ ------ ------
Totals ..................................... $3,140 $5,500 $607 $5,377 $3,870
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts ............ $ 300 $ 263 -- $ 207(1) $ 356
Reserve for sales allowances ............... 2,065 4,148 -- 3,429(2) 2,784
------ ------ ------ ------ ------
Totals ..................................... $2,365 $4,411 -- $3,636 $3,140
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts ............ $ 316 $ 76 -- $ 92(1) $ 300
Reserve for sales allowances ............... 1,585 3,008 -- 2,528(2) 2,065
------ ------ ------ ------ ------
Totals ..................................... $1,901 $3,084 -- $2,620 $2,365
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
- ---------------------
(1) Uncollectible accounts written off, net of any recoveries.
(2) Represents allowances given in the form of credit memos.
(3) Includes $607,000 of allowances attributable to companies acquired in 1997.
48
<PAGE>
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed herewith
of have heretofore been filed with the Securities and Exchange Commission under
the Securities Act of 1933 or the Securities Exchange Act of 1934 and are
referred to and incorporated herein by reference to such filings. As indicated,
various exhibits are incorporated herein by reference to (i) the Registrant's
Registration Statement on Form S-1 (No. 33-70234), (referred to herein below as
"33-70234"), (ii) the Registrant's Form 10-K for the year ended December 31,
1993 (File No. 0-23070) (referred to herein below as "1993 10-K"), (iii) the
Registrant's Form 10-Q for the quarter ended April 2, 1994 (File No.0-23070)
(referred to herein below as "4/2/94 10-Q"), (iv) the Registrant's Form 8-K
(File No. 023070) dated October 14, 1994 (referred to herein below as"10/14/94
8-K"), (v) the Registrant's Form 10-Q for the quarter ended October 1,1994 (File
No. 0-23070) (referred to herein below as "10/1/94 10-Q"), (vi) the Registrant's
Registration Statement on Form S-1 (No. 33-87884) (referred to herein below as
"33-87884"), (vii) the Registrant's Form 10-K for the year ended December 31,
1994 (File No. 0-23070) (referred to herein below as "1994 10-K"), (viii) the
Registrant's Form 10-K for the year ended December 31, 1995 (File No. 0-23070)
(referred to herein below as "1995 10-K"), (ix) the Registrant's Form 10-Q for
the quarter ended September 28, 1996 (File No. 0-23070) (referred to herein
below as "9/28/96 10-Q"), (x) the Registrant's Form 10-K for the year ended
December 31, 1996 (File No. 0-23070) (referred to herein below as "1996 10-K")
and (xi) the Registrant's Registration Statement on Form S-3 (No.
333-23779) (referred to herein below as "333-23779").
<TABLE>
<CAPTION>
SEC EXHIBIT
EXHIBIT NUMBER DOCKET
------- ------ ------
<S> <C> <C> <C>
Exhibit 3. Articles of Incorporation and Bylaws
3.1 Restated Certificate of Incorporation, as amended 3.1 33-87884
3.2 Bylaws of the Company 3.2 33-70234
Exhibit 4. Instruments defining the rights of security holders
4.1 Specimen Certificate of Common Stock 4.1 33-70234
Exhibit 10. Material Contracts
10.1 Representatives' Warrants 10.1 1993 10-K
10.2 Selective Retirement Plan of the Registrant, dated
December 31, 1991, including Trust Agreement relating thereto 10.2 33-70234
10.3 1993 Equity Incentive Plan 10.3 33-70234
10.4 1993 Directors' Stock Option Plan 10.4 33-70234
10.5 Lease dated November 1, 1988 (including amendment) between the
Registrant and Bensalem II Enterprises, relating to
property at State Road, Bensalem, PA 10.18 33-70234
10.6 Lease dated June 30, 1992 between the Registrant and E&M
Equities, relating to property at Edward Street, Linden, NJ 10.19 33-70234
10.7 Lease dated July 22, 1993 between the Registrant and Fleet
Center Associates, relating to property at Fleet Center,
Providence, RI 10.20 33-70234
10.8 Stock Purchase Agreement dated as of December 22, 1989 by
and between Nortek, Inc. and Bristol Industries, Inc. 10.22 33-70234
10.9 Lease dated December 21, 1993 between the Registrant and
Whitesell Enterprises, relating to property at Dulty's Lane,
Burlington, NJ 10.23 1993 10-K
10.10 Lease dated March 18, 1994 between the Registrant and
William L. Baker and Nancy A. Baker, relating to property at
Leyshon Drive, Byesville, OH 10.1 4/2/94 10-Q
10.11 Master Lease Agreement dated February 8, 1993 by and
between BancBoston Leasing, Inc. and the Registrant 10.5 4/2/94 10-Q
10.12 Equipment Acquisition Agreement dated April 15, 1994 by and
between BancBoston Leasing, Inc. and the Registrant 10.6 4/2/94 10-Q
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
SEC EXHIBIT
EXHIBIT NUMBER DOCKET
------- ------ ------
<S> <C> <C> <C>
10.13 Asset Purchase Agreement dated September 30, 1994 by and
among the Registrant, AFC Acquisition, Inc., Kaf-Tech, Inc.
and David Kruse 2.1 10/14/94 8-K
10.14 Lease dated as of September 30, 1994 by and between AFC
Acquisition, Inc. and Kaf-Tech, Inc., relating to property in
Largo, FL 10.1 10/1/94 10-Q
10.15 Lease dated February 1, 1995 by and between the Registrant
and H. Glenn Butler, relating to property at 2660 Brenner Dr.,
Dallas, TX 10.25 1994 10-K
10.16 Lease dated December 7, 1994 by and between the Registrant
and TRST Orange County, Inc. relating to property at 1425 S.
Acacia, Fullerton, CA 10.26 1994 10-K
10.17 Purchase and sale agreement dated March 7, 1996 by and
between the Registrant and L.J. Menco, Inc. 10.27 1995 10-K
10.18 Credit Agreement dated as of March 29 1996 by and between
the Registrant and Fleet National Bank 10.28 1995 10-K
10.19 Revolving Credit Note in the aggregate principal amount of
$25,000,000 dated as of March 29, 1996 by the Registrant to
Fleet National Bank 10.29 1995 10-K
10.20 Term Note in the amount of $3,200,000 dated as of March 29,
1996 by the Registrant to Fleet National Bank 10.30 1995 10-K
10.21 Loan and Trust Agreement among Massachusetts Industrial
Finance Agency, the Registrant and Fleet National Bank, as
Trustee, dated July 1, 1996 10.1 9/28/96 10-Q
10.22 Reimbursement Agreement between the Registrant and Fleet
National Bank, dated July 1, 1996 10.2 9/28/96 10-Q
10.23 Letter of Credit issued by Fleet National Bank for the account
of the Registrant, for the benefit of Massachusetts Industrial
Finance Agency, dated July 24, 1996 10.3 9/28/96 10-Q
10.24 Mortgage and Security Agreement issued by the Registrant to
Fleet National Bank, dated July 1, 1996 10.4 9/28/96 10-Q
10.25 Pledge Agreement by and between the Registrant and Fleet
National Bank, dated July 1, 1996 10.5 9/28/96 10-Q
10.26 Stock Purchase Agreement dated January 28, 1997 by and
between the Registrant and the Stockholders of B&B
Electronics Manufacturing Co., Inc. 10.26 1996 10-K
10.27 Asset Purchase Agreement dated January 31, 1997 by and
between AFC Acquisition, Inc. and Area Lighting Research, Inc. 10.27 1996 10-K
10.28 1997 Equity Incentive Plan 10.1 333-23779
10.29 Asset Purchase Agreement dated December 2, 1997 by and
among Flexfab Horizons International, Inc., the Registrant and
AFC Madison Acquisition Corp. *
Exhibit 21. Subsidiaries of the Registrant
21.1 Subsidiaries of the Registrant *
Exhibit 23. Consents of experts and counsel
23.1 Consent of Ernst & Young LLP *
</TABLE>
- ----------
* Filed herewith
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AFC CABLE SYSTEMS, INC.
BY: /s/ RALPH R. PAPITTO
--------------------------
Ralph R. Papitto
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
DATE: MARCH 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/RALPH R. PAPITTO Chairman of the Board, Chief March 30, 1998
- ----------------------------- Executive Officer and Director
Ralph R. Papitto (Principal Executive Officer)
/s/ROBERT R. WHEELER President and Director March 30, 1998
- -----------------------------
Robert R. Wheeler
/s/RAYMOND H. KELLER Vice President, Chief Financial March 30, 1998
- ----------------------------- Officer and Director (Principal
Raymond H. Keller Financial and Accounting
Officer)
/s/ANTHONY J. SANTORO Director March 30, 1998
- -----------------------------
Anthony J. Santoro
/s/MALCOLM M. DONAHUE Director March 30, 1998
- -----------------------------
Malcolm M. Donahue
</TABLE>
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") dated this 2nd day of
December, 1997 by and among FLEXFAB Horizons International, Inc., a Michigan
corporation (hereinafter referred to as "Seller"); AFC Cable Systems, Inc., a
Delaware corporation (hereinafter referred to as "AFC"); and AFC Madison
Acquisition Corp. , a Delaware corporation and a wholly-owned subsidiary of AFC
(hereinafter referred to as "Buyer").
W I T N E S S E T H:
WHEREAS, Seller, through its so-called "Federal Hose Division", is engaged
in the business of manufacturing and selling flexible hose and ducting products
in metal, PVC, plastic and fabric for various industrial applications and, more
particularly, to the electrical and utility industries (the business and assets
of Seller's Federal Hose Division are hereinafter referred to as the
"Business");
WHEREAS, Seller wishes (a) to sell to Buyer all or substantially all of
the business and assets of Seller used in the Business and (b) to have the Buyer
assume certain scheduled liabilities of the Seller; and
WHEREAS, the Buyer is desirous of purchasing such assets and assuming such
liabilities on the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the
representations and warranties, covenants and agreements hereinafter made, the
parties hereto do hereby agree as hereinafter set forth:
1. AGREEMENT TO BUY AND SELL ASSETS.
1.1 PURCHASE OF ASSETS. The Buyer agrees to buy from the Seller and
the Seller agrees to sell to the Buyer, all but not less than all, of the
business and assets of every kind and description owned by the Seller now and on
the Closing Date (as hereinafter defined) that are used in the Business of the
Seller, whether constituting real or personal, tangible or intangible property
and whether or not in the possession or control of the Seller, including,
without limitation:
(a) the cash balances (and cash equivalents) of the Business as
of the Closing Date as reflected on the Closing Date Balance Sheet (as defined
in Section 3.1 below);
(b) all machinery, equipment, plant and office furniture and
fixtures, vehicles and trailers and tools and dies of the Business ("Machinery
and Equipment") all of which is specifically identified on SCHEDULE 1.1(b);
<PAGE>
(c) all inventory of the Business, including, finished goods,
work-in-process and raw materials and supplies on hand, and all inventory
returned by customers subsequent to the Closing Date in the ordinary course of
business of the Business and consistent with past experience;
(d) all receivables of the Business as reflected on the Closing
Date Balance Sheet, including accounts receivable, contracts receivable, loans,
notes receivable and advances (collectively, the "Accounts") not collected prior
to the Closing Date (as hereinafter defined);
(e) customer lists, lists of suppliers, salesman's lists, sales
reports, cost sheets, bills of material, technical information, engineering
data, production data, blueprints and specifications, drawings, licenses,
license agreements, formulae, processes, trade secrets, software (including
documentation and source code), know-how and the Confidential Information (as
hereinafter defined in Section 15.2 hereof), and all files, financial and
business information and records (including computer software and records) of
the Seller used in the Business;
(f) all of the Seller's right, title and interest in and to the
name "Federal Hose", and any variation or derivation thereof, and all patents,
trademarks, trade names, service marks, brand names, logos, copyrights and
applications for any of the foregoing, used in the conduct of the Business, all
of which are listed on SCHEDULE 4.10 attached hereto;
(g) subject to Section 11.5 hereof, all right, title and
interest of the Seller in and to (A) the leases for real and personal property
and other contracts listed on SCHEDULE 1.1(g) attached hereto; (B) all purchase
orders given by the Seller in the ordinary course of business of the Business
consistent with past practices for the purchase of products, materials,
supplies, parts and other items used in the ordinary course of business with
respect to which the Seller has not received all of the goods or services
ordered on or prior to the Closing Date; and (C) all purchase orders submitted
to the Seller (and accepted by the Seller) by customers of the Seller in the
ordinary course of business of the Business and consistent with past practices
with respect to which the Seller has not received full payment thereon on or
prior to the Closing Date (all of such leases, contracts, purchase orders and
sales commitments specified in clauses (A), (B) and (C) of this Section 1.1(g)
are hereinafter referred to as the "Assumed Contracts");
(h) all transferable interests in all government licenses and
permits necessary to the conduct of the Business which are transferable to Buyer
with or without the consent of the issuing authority;
(i) such prepaid expenses and other assets of the Business as
are set forth on SCHEDULE 1.1(i) attached hereto;
(j) leasehold improvements on any real property which Seller,
as tenant, leases from others (whether affiliates or non-affiliates of Seller)
in the conduct of the Business;
<PAGE>
(k) the goodwill of the Business;
(l) all manufacturers', vendors' and suppliers' warranties, to
the extent assignable, with or without the consent of the manufacturer, vendor
or supplier, as the case may be, in respect of any asset used in the Business;
and
(m) general intangibles, contract claims and other rights and
all other property owned by the Seller and used in the Business except as
excluded in the proviso below;
PROVIDED, HOWEVER, that there shall be excluded from such purchase and sale the
following:
(a) the Seller's corporate franchise, stock record books,
corporate record books containing minutes of meetings of
directors and stockholders, Seller's corporate seal, and such
other records as have to do exclusively with the Seller's
organization or stock capitalization;
(b) income tax deposits, income tax refunds, and any prepaid
expenses not set forth on SCHEDULE 1.1(i) attached hereto;
(c) the Seller's tax returns;
(d) any real property in which Seller has fee simple title;
(e) Seller's employee benefit plan and the assets thereof;
(f) any assets of Seller used exclusively in Seller's
so-called "Flexfab Division" or Seller's so-called "FHI
Division" (together "Seller's Other Businesses"); and
(g) the assets of Seller specifically identified on SCHEDULE
1.1 proviso (g) attached hereto.
All of the Business assets of the Seller to be acquired by the Buyer are
hereinafter collectively referred to as the "Acquired Assets". All of the assets
of Seller mentioned in clauses (a) through (h) of the foregoing proviso of this
Section 1.1 as being excluded from the purchase and sale are hereinafter
collectively referred to as the "Excluded Assets".
1.2 ASSUMPTION OF CERTAIN COMMERCIAL OBLIGATIONS. On the Closing
Date, the Buyer shall assume and thereafter pay, perform or discharge when due
only the following commercial liabilities and obligations (collectively, the
"Assumed Liabilities") of the Seller:
(a) the trade accounts payable, accrued payroll, and other
accrued liabilities of the Seller arising from the operation of the Business in
the ordinary course of business, consistent (in type and amounts) with past
practices BUT ONLY OF THE TYPE reflected on
<PAGE>
the Interim Date Balance Sheet (as defined in Section 4.8 hereof) of the
Business AND ONLY TO THE EXTENT reflected dollar for dollar on the Closing Date
Balance Sheet referred to in Section 3.1 hereof, provided that Buyer shall not
assume any of the Excluded Liabilities as defined in Section 1.3 hereof and,
provided, further, that Buyer shall not assume any liability of Seller or its
stockholders for legal, accounting and other fees and expenses incurred in
connection with the transactions contemplated by this Agreement;
(b) the liabilities as of the Closing Date under the Assumed
Contracts except for any liability under any of the Assumed Contracts arising
out of the Seller's failure to perform its obligations thereunder to the extent
such performance is due on or prior to the Closing Date;
(c) the liability to customers of the Business to repair or
replace defective products manufactured or sold by Seller on or prior to the
Closing Date but only to the extent that the cost of making such repairs of
replacements does not exceed the warranty reserve to be set forth on the Closing
Date Balance Sheet; and
(d) any liabilities and obligations to be assumed and
performed by the Buyer under Section 11.9 hereof with respect to the Transferred
Employees.
Seller agrees that notwithstanding anything to the contrary herein or
elsewhere contained, all of the Assumed Liabilities which represent intercompany
indebtedness or liabilities of the Business to Seller or its affiliates shall be
paid within 30 days of the date hereof, without interest, except that a portion
thereof equal to US $120,000 may be paid within 5 business days following the
determination of the Final Net Book Value, together with interest thereon at the
Prime Rate per annum, as reported by The Wall Street Journal on the Closing
Date, from the Closing Date until the date such payment is made.
1.3 EXCLUDED LIABILITIES. With the exception of the Assumed
Liabilities, the Buyer assumes no liabilities or other obligations, commercial
or otherwise, of the Seller, known or unknown, fixed or contingent, choate or
inchoate, liquidated or unliquidated, secured or unsecured or otherwise (such
liabilities and obligations of Seller, other than the Assumed Liabilities, are
hereinafter referred to collectively as the "Excluded Liabilities" and
individually as an "Excluded Liability") including, without limitation, any
liability or obligation of Seller to any person with respect to the following:
(i) any transaction occurring after the Closing Date;
(ii) the transfer of the Acquired Assets pursuant hereto
including transfer taxes and stamp taxes;
(iii) income taxes or, except to the extent accrued dollar for
dollar on the Closing Date Balance Sheet, any state or local taxes, fees,
assessments or other similar charges (including, without limitation, franchise
taxes, real estate taxes, payroll taxes, personal property taxes and sales and
use taxes);
<PAGE>
(iv) except to the extent provided in Section 1.2(c), defects,
returns or allowances, losses, personal injury, property damage or other damages
of any kind whatsoever, whether suffered or incurred by the Seller's customer or
Buyer's customer or any other person, arising out of products manufactured or
sold by the Seller or services performed by the Seller on or prior to the
Closing Date, whether the occurrence giving rise to such liability occurs before
or after the Closing, whether the claim is asserted before or after the Closing;
(v) except for accrued payroll, vacation pay and sick pay
described in Section 1.2(a) hereof and reflected dollar for dollar on the
Closing Date Balance Sheet, any responsibility, liability or obligation with
respect to salary, wages, sick pay, vacation pay, severance pay, savings plans,
gainsharing plans, deferred compensation, the Seller's pension, profit-sharing,
retirement, and other fringe benefit plans, including but not limited to any
employee pension benefit plan as defined in Section 3(1) of ERISA (as
hereinafter defined in Section 4.15 hereof), or any other obligations for the
benefit of any personnel of the Seller, including but not limited to accrued
pension benefits (vested or unvested), arising out of their employment through
the Closing Date or the termination of their employment by the Seller upon the
consummation of the transactions contemplated hereby;
(vi) the environmental condition of the Real Property (as
hereinafter defined in Section 4.5 hereof) as it exists on the Closing Date or
the clean-up thereof, including, without limitation, the clean-up of any
Hazardous Materials (as hereinafter defined in Section 4.5 hereof) either on the
Real Property or originating on the Real Property;
(vii) the failure to comply with the requirements of all
applicable building, fire, zoning and Environmental Laws (as hereinafter defined
in Section 4.5 hereof), laws relating to occupational health and safety,
antitrust laws, and other laws applicable to the Seller or the conduct of the
Business prior to the Closing Date;
(viii) any Assumed Contract to the extent such liability arises
out of the Seller's failure to perform its obligations thereunder prior to the
Closing Date;
(ix) except for any intercompany indebtedness or liabilities of
the Business to Seller described in Section 1.2(a) hereof and recorded dollar
for dollar on the Closing Date Balance Sheet, any indebtedness for borrowed
money or intercompany transactions or indebtedness to Seller's shareholders and
affiliates;
(x) occurrences on the Real Property occurring prior to the
Closing Date;
(xi) Seller's employee health and dental plans, or any other
employee welfare benefit plan as defined in Section 3(1) of ERISA maintained by
Seller, arising out of or relating to, medical or dental services provided or
rendered to the Seller's employees with respect to claims incurred on or before
the Closing Date;
<PAGE>
(xii) any liability to pay a bonus to Mr. Ronald George, the
payment of which is contingent upon the consummation of the transactions
contemplated hereby; and
(xiii) the conduct of Seller's Other Businesses.
The Seller shall have any and all responsibility to all
creditors and all third parties and to the Buyer with respect to, and shall pay,
discharge and perform when due, all liabilities and obligations of the Seller
not expressly assumed by the Buyer and, without limiting the generality of
Section 12.1 hereof, shall indemnify and hold the Buyer harmless from and
against any and all damages, liabilities, losses and expenses arising from such
liabilities and obligations.
1.4 CONSIDERATION FOR SALE AND TRANSFER OF THE ACQUIRED ASSETS.
Subject to the terms and conditions of this Agreement and in reliance upon the
representations, warranties, agreements and covenants of Seller herein
contained, and in full consideration of such sale, conveyance, transfer,
assignment and delivery of the Acquired Assets to Buyer, Buyer agrees to pay and
deliver to Seller, in a combination of cash and stock of AFC as hereinafter
provided in Section 2.2 hereof, a purchase price in United States Dollars (the
"Purchase Price") equal to SEVEN MILLION FIVE HUNDRED THOUSAND UNITED STATES
DOLLARS (US $7,500,000) (which amount shall be subject to adjustment as provided
in Article 3).
1.5 ALLOCATION OF PURCHASE PRICE. The allocation of the Purchase
Price among the Acquired Assets shall be as set forth on SCHEDULE 1.5 attached
hereto and the parties agree to report the subject transaction for federal and
state income tax reporting purposes in a manner consistent therewith.
2. CLOSING AND PAYMENT OF THE PURCHASE PRICE.
2.1 CLOSING. The closing of the transactions contemplated hereby (the
"Closing") is being held at the offices of Adler Pollock & Sheehan Incorporated,
2300 Hospital Trust Tower, Providence, Rhode Island at the opening of business
on the date hereof, effective as of the close of business on Friday, November
21, 1997 (the close of business on Friday, November 21, 1997 is hereinabove and
hereinafter referred to as the "Closing Date").
2.2 PAYMENTS OF PURCHASE PRICE AT CLOSING. At the Closing, against
transfer of title to the Acquired Assets, the Buyer shall:
(a) assume the Assumed Liabilities;
(b) pay by wire transfer of immediately available United States
funds to Seller a portion of the Purchase Price equal to SIX MILLION FOUR
HUNDRED THOUSAND UNITED STATES DOLLARS (US $6,400,000);
(c) deliver to Seller stock certificate(s), issued in Seller's
name, representing Eleven Thousand Three Hundred Sixty Four (11,364) shares (or
the equivalent
<PAGE>
number of shares necessary to account for any stock split, stock dividend or
other recapitalization occurring after the signing of this Agreement and before
the Closing) of AFC's Common Stock, $0.01 par value per share ("Common Stock"),
which the parties agree shall have, for purposes of this Agreement, a value of
US $26.40 per share (the 11,364 shares of Common Stock to be delivered to Seller
are hereinafter referred to as the "Seller's AFC Shares"); and
(d) pay by wire transfer of immediately available United States
funds to State Street Bank and Trust Company (the "Escrow Agent") the sum of
EIGHT HUNDRED THOUSAND UNITED STATES DOLLARS (US $800,000) (representing the
balance of the Purchase Price), which shall be held by the Escrow Agent and
administered and disposed of by the Escrow Agent in accordance with the terms
and provisions of an escrow agreement by and among Seller, Buyer and Escrow
Agent in the form of EXHIBIT A attached hereto (the "Escrow Agreement"). To the
extent that distributions from the funds under the Escrow Agreement are
insufficient to pay Buyer any amounts payable to Buyer under any of Sections
3.2, 4.4(e) or 12.1 hereof, Seller shall immediately pay any deficiencies to
Buyer.
Following the Closing, the payments made pursuant to this Section 2.2 shall be
adjusted as provided in Article 3 hereof.
2.3 TRANSFER OF ACQUIRED ASSETS. At the Closing, the Seller shall
transfer to the Buyer all right, title and interest in and to the Acquired
Assets free and clear of all claims, liens, pledges, encumbrances, mortgages,
charges, security interests, options, rights, restrictions or any other
interests or imperfections of title whatsoever. Said transfer shall be effected
by the delivery to the Buyer of fully executed bills of sale, endorsements,
assignments and other good and sufficient instruments of conveyance and
transfer, in form and substance satisfactory to the Buyer and its counsel.
3. POST CLOSING DETERMINATION OF FINAL NET BOOK VALUE AND ADJUSTMENT OF
PAYMENT MADE AT CLOSING; AND CONTINGENT EARNOUT PAYMENT.
3.1 DETERMINATION OF FINAL NET BOOK VALUE. The payment made by Buyer
pursuant to Section 2.2 hereof is subject to possible adjustment following the
Closing (as provided in Section 3.2 hereof) based upon the Final Net Book Value
as determined pursuant to this Section 3.1. For purposes hereof, the term "Final
Net Book Value" shall mean the net book value of the Acquired Assets less the
net book value of the Assumed Liabilities of the Seller as of the Closing Date,
determined in accordance with United States generally accepted accounting
principles ("US GAAP"), consistently applied with prior periods. For purposes of
determining the Final Net Book Value, inventory will be physically taken by
Seller, and Buyer and Buyer's accountants shall be entitled to participate in
the physical inventory. Seller, at Seller's sole expense, shall prepare a
balance sheet of the Business of Seller (the "Closing Date Balance Sheet") as of
the Closing Date, together with statements of the results of operations and
changes in financial position of the Business of Seller for the period ended on
the Closing Date, including the related notes. The Closing Date Balance Sheet
and the related statements of the results of operations and changes in financial
position, and related notes, shall be prepared in accordance
<PAGE>
with US GAAP, consistently applied with prior periods and shall, consistent
therewith, include a reserve for doubtful accounts (the "Reserve for Doubtful
Accounts") and a warranty reserve to cover only the cost of repair and
replacement of defective or non-conforming products. Not later than sixty (60)
days after the Closing, Seller will furnish to Buyer (1) the Closing Date
Balance Sheet, together with an unqualified auditor's report of Seller's current
auditors (the "Auditor") (whose fees shall be paid by Seller) opining that the
Closing Date Balance Sheet has been prepared in accordance with the requirements
of this Section 3.1 and (2) a statement showing the Final Net Book Value,
together with a certificate of the Auditor and Seller's Chief Financial Officer
that the Final Net Book Value has been prepared in accordance with this Section
3.1 hereof. Buyer will give representatives of Seller access to Buyer's premises
and to all of its books and records for purposes of preparing the Closing Date
Balance Sheet and will cause appropriate Buyer personnel to assist Seller and
its representatives, at no cost to Seller, in the preparation of the Closing
Date Balance Sheet. Seller agrees to cause the Auditor to afford to Buyer and
Buyer's accountants access to the Auditor's workpapers at reasonable times
during the ten (10) day period referred to in the immediately next succeeding
sentence. Unless Buyer notifies Seller in writing that Buyer or Buyer's
accountants disagrees with the Closing Date Balance Sheet and the statement of
the Final Net Book Value within ten (10) days after receipt thereof, the Closing
Date Balance Sheet and the statement of the Final Net Book Value shall be
conclusive and binding on Buyer and Seller. If Buyer notifies Seller in writing
of its disagreement with the Closing Date Balance Sheet and the statement of the
Final Net Book Value within such 10-day period, then Buyer and Seller shall
attempt to resolve their differences with respect thereto within thirty (30)
days after Seller's receipt of Buyer's written notice of disagreement. For
purposes of consideration of such disapproval by Buyer or Buyer's accountants,
materiality of items shall not be deemed a consideration for rejection of
modifications requested by Buyer (whether or not materiality might otherwise be
a consideration under US GAAP). Any disputes not resolved by Buyer and Seller
within such 30-day period regarding the Closing Date Balance Sheet or the Final
Net Book Value will be resolved by an accounting firm mutually acceptable to
both parties or, in the absence of agreement, by a "big-six" accounting firm
selected by lot after eliminating Seller's and Buyer's principal outside
accountants and one additional firm designated as objectionable by each of
Seller and Buyer. The determination of any accounting firm so selected, and the
Closing Date Balance Sheet and the Final Net Book Value (with such modifications
therein, if any, as reflect such determination), shall be conclusive and binding
upon the parties. The fees and expenses of such accounting firm in acting under
this Section shall be borne equally by Seller and Buyer.
3.2 ADJUSTMENT OF PAYMENTS MADE AT CLOSING. If the Final Net Book
Value is less than ONE MILLION NINE HUNDRED TWENTY THOUSAND UNITED STATES
DOLLARS (US $1,920,000), Seller shall pay to Buyer the amount of the shortfall.
The amount, if any, payable from Seller to Buyer pursuant to this Section 3.2,
together with interest thereon at the Prime Rate per annum, as reported by THE
WALL STREET JOURNAL on the Closing Date, from the Closing Date until the date
such payment is made, shall be paid by Seller to Buyer as soon as possible but
in any event not more than five business days following the final determination
of the Final Net Book Value; PROVIDED, HOWEVER, at Buyer's election, all or any
portion of any amount payable by Seller to Buyer under this Section 3.2 shall be
paid by the Escrow Agent to
<PAGE>
Buyer out of the Price Adjustment/Receivables Fund (as defined in the Escrow
Agreement) as provided in the Escrow Agreement.
3.3 CONTINGENT EARNOUT PAYMENTS.
(a) EARNOUT PAYMENTS FORMULA. Following the Closing, as
contingent additional purchase price, Buyer will pay to Seller earnout payments
(the "Earnout Payments") as follows:
(i) after the end of calendar year 1998, Buyer will
pay to Seller three (3) times the amount, if any, by which "EBIT" (as defined
below) of the Business for calendar year 1998 exceeds US $1,200,000;
(ii) after the end of calendar year 1999, Buyer will
pay to Seller three times the amount, if any, by which EBIT of the Business for
calendar year 1999 exceeds THE GREATER OF US $1,200,000 or EBIT of the Business
for calendar year 1998; and
(iii) after the end of calendar year 2000, Buyer will
pay to Seller three times the amount, if any, by which EBIT of the Business for
calendar year 2000 exceeds THE GREATEST OF (aa) US $1,200,000, (bb) EBIT of the
Business for calendar year 1998 or (cc) EBIT of the Business for calendar year
1999.
(b) DEFINITIONS. As used in this Section 3.3, "EBIT" of the
Business shall mean earnings BEFORE (i) interest (except to the extent
hereinafter expressly provided) and taxes, (ii) amortization of intangibles
arising solely from the sale of the Business from Seller to Buyer and (iii) any
costs and expenses incurred by AFC or its affiliates for and on behalf of the
Business including, without limitation, management time, travel expenses and the
fees and expenses of attorneys, accountants and other third persons, BUT AFTER
(aa) a fixed corporate charge or allocation equal to one half of one percent
(0.5%) of net sales (of the Business for the calendar year for which EBIT is
being calculated), (bb) any interest expense incurred by AFC or the Buyer in
connection with any loan or investment made by AFC to or in the Buyer, or any
loan made by a financial institution to Buyer, in either case, only to the
extent the proceeds of such loan or investment are used for the purpose of
financing the growth or working capital requirements of the Business and (cc)
rental or interest expense in connection with the leasing or mortgage financing
of the Real Property (as defined in Section 4.5(a) hereof) owned or leased by
Buyer or any of its affiliates after the Closing. Except as otherwise provided
by this definition, EBIT shall be calculated in accordance with US GAAP,
consistently applied with prior periods.
As used in this Section 3.3 only, the term "BUSINESS" shall mean only the
"Business" as defined in the preamble to this Agreement, as the same shall be
carried on and conducted by Buyer (or any affiliate of Buyer) using the Acquired
Assets after the Closing, whether as an unincorporated division or as a stand
alone entity, AND AS THE SAME MAY GROW OR BE EXPANDED BY CAPITAL IMPROVEMENTS,
THE DEVELOPMENT AND SALE OF NEW PRODUCTS, THE ENTRY INTO NEW GEOGRAPHIC MARKETS
OR OTHERWISE, BUT SPECIFICALLY EXCLUDING HOWEVER the business of any going
concern acquired by Buyer or any of its affiliates after the Closing (whether
such acquisition is by purchase of stock,
<PAGE>
purchase of assets, merger or otherwise) as long as the costs of acquiring such
going concern are excluded from the calculation of EBIT.
(c) DETERMINATION OF EBIT. After the end of each of calendar
years 1998, 1999, and 2000, Buyer shall prepare and will furnish to Seller, not
later than seventy five (75) days following the end of such calendar year, a
statement showing Buyer's determination of the EBIT of the Business for such
calendar year ("Buyer's Determination"), together with a certificate of Buyer's
chief financial officer that the EBIT of the Business for such calendar year has
been prepared and calculated in accordance with this Section 3.3 hereof. Unless
Seller notifies Buyer in writing that Seller disagrees with Buyer's
Determination within ten (10) days after receipt thereof, Buyer's Determination
shall be conclusive and binding on Buyer and Seller. Buyer agrees to cause its
auditor and other related personnel and employees to afford to Seller and
Seller's accountants access to all work papers related to the determination of
the applicable EBIT at reasonable times during the ten day period referred to in
the next preceding sentence. If Seller notifies Buyer in writing of its
disagreement with Buyer's Determination within such ten (10) day period, then
Buyer and Seller shall attempt to resolve their differences with respect thereto
within thirty (30) days after Buyer's receipt of Seller's written notice of
disagreement. Any disputes not resolved by Buyer and Seller within such thirty
(30) day period regarding the EBIT of the Business will be resolved by an
accounting firm mutually acceptable to both parties or, in the absence of
agreement, by a "big-six" accounting firm selected by lot after eliminating
Seller's and Buyer's principal outside accountants and one additional firm
designated as objectionable by each of Seller and Buyer. The determination of
EBIT of the Business made by any accounting firm so selected shall be conclusive
and binding upon the parties. The fees and expenses of such accounting firm in
acting under this Section shall be borne equally by Seller and Buyer.
(d) TIME AND METHOD OF PAYMENT OF EARNOUT PAYMENTS. Following
the end of each of calendar years 1998, 1999 and 2000, within ten (10) days
following the final determination of EBIT of the Business for such calendar
year, Buyer shall pay Seller the amount of any Earnout Payment earned by Seller
in such calendar year, in immediately available United States funds by cashier's
check or by wire transfer to an account designed by Seller, provided that, with
respect to any Earnout Payment earned by Seller in calendar year 1998 only,
Buyer may elect to pay such Earnout Payment either: (i) entirely in cash or (ii)
in a combination of cash and AFC Common Stock (provided that the AFC Common
Stock may not comprise more than fifty (50%) percent of the value of the Earnout
Payment). Any portion of such Earnout Payment payable in cash shall be paid in
immediately available United States funds by cashier's check or by wire transfer
to an account designated by Seller. Any portion of the Earnout Payment payable
in AFC Common Stock shall be paid by delivery from Buyer to Seller of stock
certificate(s), issued in Seller's name, representing a number of shares of AFC
Common Stock having a value (as hereinafter determined) equal to such portion of
the Earnout Payment. The number of shares of AFC Common Stock to be delivered to
Seller shall be determined by dividing the portion of the Earnout Payment which
is to be paid in AFC Common Stock by the arithmetic average of the mean of the
closing bid and asked prices for AFC Common Stock on the NASDAQ National Market,
or such other nationally recognized market in which such Common Stock trades if
such Common Stock is no longer listed on the NASDAQ National
<PAGE>
Market, for the twenty (20) trading days falling within the calendar year in
respect of which the Earnout Payment is to be made comprised of the last ten
(10) trading days in the month of July and the last ten (10) trading days in the
month of October.
(e) In the event that all or substantially all of the business
and assets of the Business shall be sold after the Closing Date, but prior to
December 31, 2000 (the period between the Closing Date and December 31, 2000 is
hereinafter referred to as the "Earnout Period"), to a person not affiliated
with Buyer, then, unless Seller shall timely make the election referred to in
the immediately following sentence, Buyer shall cause the purchaser of the
Business to assume Buyer's obligation to pay the Earnout Payments to Seller as
provided above, and no such sale of the Business or assumption of Buyer's
obligation to pay the Earnout Payments shall have the effect of changing the
formula for the calculation of the Earnout Payments or the dates for payment
thereof or of relieving Buyer of its obligation to Seller in respect thereof.
Notwithstanding anything to the contrary contained in this Section 3.3, if all
or substantially all of the business and assets of the Business shall be sold
during the Earnout Period to a person not affiliated with Buyer, Buyer shall
give Seller notice of such sale within ten (10) days of the closing thereof; and
if Seller shall, within fifteen (15) days of being notified of such sale, give
Buyer notice of Seller's desire to receive payment of the Liquidated Amount (as
hereinafter defined) in lieu of any further Earnout Payments, then, within
thirty (30) days of Buyer's receipt of Seller's notice, Buyer shall pay to
Seller, in lieu of any further payments of Earnout Payments which might
otherwise be earned in the calendar year in which the sale occurs or in any
subsequent calendar year during the Earnout Period, an amount (the "Liquidated
Amount") equal to the sum of (A) the PRODUCT of (i) US $400,000 MULTIPLIED BY
(ii) a fraction, the numerator of which is the number of days between the date
of the closing of the sale of the Business and the end of the calendar year in
which the sale occurs, and the denominator of which is 365 plus (B) US $400,000
for each full calendar year during the Earnout Period which begins after the
date of the closing of the sale.
(f) Until the earlier of December 31, 2000 or (if applicable)
the date upon which Buyer pays the entire Liquidated Amount to Seller, Buyer
covenants and agrees with Seller that Buyer will run the Business in a
businesslike manner, in accordance with sound business practices and in
accordance with the best business judgment of Buyer's officers and directors.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLER
As of the date hereof and as of the Closing Date, Seller represents
and warrants to Buyer as follows:
4.1 ORGANIZATION AND QUALIFICATION OF THE SELLER. The Seller is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. The Seller has the requisite corporate power
and authority to own or lease all of the Acquired Assets and to conduct the
Business in the manner and in the places where the Acquired Assets are owned or
leased or the Business is now conducted. The Seller is duly qualified, licensed
and authorized to do business as a foreign corporation and is in good standing
as a foreign
<PAGE>
corporation in the jurisdictions, if any, shown on SCHEDULE 4.1, and such
jurisdictions are the only jurisdictions wherein Seller is required to be so
qualified, licensed and authorized to do business, other than where the failure
to be so qualified, licensed and authorized, as the case may be, would not have
a Material Adverse Effect. "Material Adverse Effect" as used in this Agreement
means any change or effect that would be materially adverse to the financial
condition or operations of the Business.
4.2 AUTHORITY OF SELLER. This Agreement and each of the other
agreements, documents and instruments required to be executed by Seller pursuant
to this Agreement will constitute, when delivered, the valid and binding
obligations of Seller and shall be enforceable in accordance with their
respective terms, subject to bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting the enforcement of creditors' rights and to the
application of equitable principles. The execution, delivery and performance of
this Agreement and each such other agreement, document and instrument have been
duly authorized by all necessary corporate action of Seller.
The execution, delivery and performance by Seller of this Agreement
and each such other agreement, document and instrument, except as specifically
identified on SCHEDULE 4.2, does not and will not with the passage of time or
the giving of notice or both:
(a) result in a breach of or constitute a default by the Seller
or result in any right of termination or other effect adverse to the Seller
under any indenture or loan or credit agreement of the Seller, or any other
agreement, lease or instrument to which the Seller is a party or by which the
Acquired Assets are bound or affected;
(b) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance or claim of any nature whatsoever on the Acquired Assets;
(c) result in a violation of or default under any law, rule, or
regulation, or any order, writ, judgment, injunction, decree, determination or
award, now in effect to which Seller is a party or by which Seller or the
Acquired Assets are bound;
(d) violate any provisions of the Articles of Organization, or
equivalent, or Bylaws of the Seller, as amended;
(e) require any approval, consent or waiver of, or filing with,
any person; or
(f) contravene any applicable law or regulation, except that
Seller makes no representation or warranty with respect to antitrust laws.
<PAGE>
4.3 INTENTIONALLY LEFT BLANK
4.4 ASSETS.
(a) Except for the Excluded Assets, the Acquired Assets
constitute all of the assets and rights associated with, and necessary to
operate and conduct, the Business as now operated and conducted by Seller.
(b) The machinery and equipment included within the Acquired
Assets: (i) is in a good state of operating condition and repair; (ii) has been
maintained in accordance with a regular preventative maintenance program; (iii)
is adequate for the Business's current production levels; and (iv) conforms with
all applicable laws, ordinances and regulations.
(c) Except as listed on SCHEDULE 4.4(c) attached hereto, the
Seller has good and marketable title to all of the Acquired Assets, free and
clear of all claims, liens, pledges, charges, mortgages, security interests,
encumbrances, equities or other imperfections of title of any nature whatsoever,
except for liens for current taxes and assessments not yet due and payable.
(d) The inventories of the Business reflected on the Closing
Date Balance Sheet, after giving effect to any inventory reserve set forth
therein, are of a quality and quantity saleable or useable in the ordinary
course of business of the Business, are valued at the lower of cost or market
and, except as may be modified as a result of the determination of the Final Net
Book Value in accordance with Article 3 hereof, reflect write-downs to
realizable values in the case of items which have become obsolete, unusable or
unsaleable (except at prices less than cost) through regular distribution
channels in the Seller's business. Subject to write-downs complying with the
preceding sentence and any inventory reserve set forth on the Closing Date
Balance Sheet, the values of the inventories of the Business stated in the
Closing Date Balance Sheet reflect the Seller's normal inventory valuation
policies and were determined in accordance with US GAAP, practices and methods
consistently applied. Purchase commitments for raw materials and inventory are
not, individually or in the aggregate, in excess of normal requirements and, to
the best of Seller's knowledge, none are at prices in excess of the lowest
prices reasonably available in the current market. Sales commitments for
finished goods are all at prices in excess of prices used in valuing inventory
items or of estimated costs of manufacture of items not in inventory after
allowing for selling expenses and a normal profit margin except in instances of
sale promotions or product introductions consistent with past practices. Since
the Interim Date, no inventory items have been sold or disposed of except
through sales in the ordinary course of business.
Of the goods and products of the Business sold before the Closing (other
than those that are non-conforming), none were sold upon terms and conditions
which permit the customer to return the same for exchange or credit. None of the
products of the Business are sold on consignment.
<PAGE>
(e) All of the Accounts arose from bona fide transactions in
the ordinary course of business of the Business, consistent with past practices,
represent accounts validly due for goods sold or services rendered or validly
incurred indebtedness on the part of those obligated thereon, and are fully
collectible dollar for dollar within one hundred eighty (180) days after the
Closing Date in the aggregate face amounts thereof without offset, counterclaim
or resort to litigation net of the Reserve for Doubtful Accounts (as defined in
Section 3.1 hereof). There has not been asserted any counterclaim or claim for
offset against any of the Accounts.
Following the Closing, within ten (10) business days after
Buyer delivers to Seller a schedule of all of the Accounts which remain unpaid
after the expiration of a collection period commencing on the Closing Date and
expiring one hundred eighty (180) days thereafter, at Buyer's election, if the
aggregate face amount of such unpaid Accounts exceeds the Reserve for Doubtful
Accounts (as defined in Section 3.1 hereof), Seller will immediately pay to
Buyer, without regard to the Deductible, an amount equal to the difference
between (A) the aggregate face amount of such unpaid Accounts and (B) the amount
of the Reserve for Doubtful Accounts set forth on the Closing Date Balance
Sheet, against simultaneous delivery by Buyer to Seller of an appropriate bill
of sale conveying the unpaid Accounts to Seller and entitling Seller to collect
such Accounts in its own name. Notwithstanding the foregoing, at Buyer's
election, all or any portion of any amount payable by Seller to Buyer under this
subsection 4.4(e) shall be paid by the Escrow Agent to Buyer out of the Price
Adjustment/Receivables Fund (as defined in the Escrow Agreement) in the manner
provided in the Escrow Agreement. Any and all payments received by Buyer after
the collection period for which Buyer has heretofore been reimbursed by Seller
shall promptly be paid over to Seller. Buyer shall exercise reasonable efforts
to collect all such unpaid Accounts consistent with past practices before the
end of the aforesaid period; however, Buyer will not be required to initiate
legal proceedings for this purpose. For purposes of determining payment of a
receivable under this guaranty of payment, all amounts paid by a customer after
the Closing shall first be applied to the specific receivable account, if any,
identified by the customer with the payment or, failing such identification, as
otherwise determined by company personnel.
(f) All of the personal property leased by the Seller in the
conduct of the Business is listed on SCHEDULE 4.4(f) attached hereto, and copies
of all of the lease documents have been delivered to the Buyer. All such lease
documents are unmodified and in full force and effect, and there are no other
agreements, written or oral, between the Seller and any third parties claiming
an interest in the Seller's interest in any leased property or otherwise
relating to the Seller's use thereof, and all covenants, conditions,
restrictions and similar matters affecting the leased property have been
complied with by the Seller.
(g) Except as described on SCHEDULE 4.4(g) attached hereto, all
of the Acquired Assets of the Seller are located on the premises owned or leased
by the Seller as set forth on SCHEDULE 4.5 and all the assets located on such
premises are owned or leased by the Seller.
<PAGE>
4.5 REAL PROPERTY AND ENVIRONMENTAL CONDITION THEREOF.
(a) With the exception of the real property owned and leased by
the Seller described on SCHEDULE 4.5 attached hereto, the Seller does not own,
lease or otherwise use any real property in the conduct of the Business. (Such
real property owned and leased by the Seller, together with the buildings and
improvements thereon, is herein referred to as the "Real Property"; and, solely
for purposes of SECTION 4.5(b) hereof and Articles 11 and 12 hereof, the term
"Real Property" shall also include any other real property previously owned,
operated or leased by the Seller in the conduct of the Business.) The legal
description of the Real Property is set forth on SCHEDULE 4.5.
(b) To the best of Seller's knowledge, except as otherwise
specifically disclosed on SCHEDULE 4.5, PRIOR TO OR ON THE CLOSING DATE: (i) the
Real Property, and the operations thereon and the uses made thereof, are in
compliance with all, and are not in violation of any, Environmental Laws (as
hereinafter defined); (ii) there has been no generation, use, treatment,
handling, storage or disposal, or arrangement for the use, treatment, handling,
storage or disposal, of Hazardous Materials on, or release or transportation of
Hazardous Materials to or from, the Real Property by any person (including,
without limitation, the Seller and the past and present officers, employees and
agents of the Seller and all past and present owners, operators and lessees of
the Real Property) at any time except in full compliance with all Environmental
Laws; (iii) the Real Property has not been used at any time by any person in
such a manner as to cause a violation of any Environmental Law or to potentially
give rise to any liability or obligation for the remediation or restoration of
the Real Property or for the treatment, storage, removal, disposal, release,
arrangement for removal or disposal or transportation of any Hazardous
Materials; (iv) no such violation, liability or obligation has been created by
the removal, disposal or transportation by any person at any time of any
Hazardous Materials to or from the Real Property; (v) Seller has received no
notice of, and no circumstances exist that could form the basis of, an
Environmental Action (as hereinafter defined) arising out of or relating to the
Real Property or the generation, use, treatment, handling, storage or disposal,
or arrangement for the use, treatment, handling, storage or disposal, of
Hazardous Materials thereon, or the release or transportation of Hazardous
Materials thereto or therefrom; (vi) the Real Property is not listed or proposed
for listing on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, or
on the Comprehensive Environmental Response, Compensation and Liability
Information System maintained by the Environmental Protection Agency or any
analogous state list of sites requiring investigation or clean-up; (vii) none of
the buildings and improvements included within the Real Property contain
asbestos other than non-friable asbestos that may be used at the time of the
Closing in compliance with Environmental Laws and other than asbestos that may
be naturally occurring, and there are no underground storage tanks or
polychlorinated biphenyl (PCBs) located on or at the Real Property other than
totally enclosed PCBs that may be used at the time of the Closing in compliance
with Environmental Laws; (viii) the Seller has obtained all permits, approvals,
identification numbers, licenses and other authorizations, and renewals thereof,
required under Environmental Laws; all of the same are currently effective; and
Seller is complying in all respects therewith; (ix) no employees of the Seller
have been exposed to Hazardous Materials other than in compliance with
Environmental Laws in effect at the time of
<PAGE>
such exposure; and (x) the Seller has delivered to Buyer true, complete and
correct copies or results of any and all reports, studies or tests in the
possession of or initiated by the Seller pertaining to the existence of
Hazardous Materials and other environmental concerns on any part of the Real
Property or concerning compliance with or liability under Environmental Laws in
the operation of the business of the Seller or as conducted by any prior owner,
operator or lessee of the Real Property.
Seller and the Business have fully complied with all of their obligations under
that certain Stipulation and Order entered in the Matter of Federal Hose
Manufacturing, California EPA Docket DO94/95-5-287, entered into in full
settlement of the Enforcement Order issued by the Department of Toxic Substances
Control on November 14, 1994, and no violations specified in such Enforcement
Order remain outstanding and uncured.
As used in this Section 4.5 and elsewhere in this Agreement: (1) "ENVIRONMENTAL
ACTION" means any action, suit, demand, demand letter, claim, notice of
non-compliance or violation, investigation, proceeding, consent order or consent
agreement relating in any way to any Environmental Law, including, without
limitation (a) any claim by any governmental or regulatory authority for
enforcement, clean-up, removal, response, remedial or other actions or damages
pursuant to any Environmental Law and (b) any claim by any third party seeking
damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Materials or arising from alleged
injury or threat of injury to the environment; (2) "ENVIRONMENTAL LAWS" and
"ENVIRONMENTAL LAW" means any federal, state or local law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award relating to
the environment or Hazardous Materials, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, the
Resource Conservation and Recovery Act, the Hazardous Materials Transportation
Act, the Clean Water Act, the Toxic Substances Control Act, the Clean Air Act,
the Safe Drinking Water Act, the Atomic Energy Act and the Federal Insecticide,
Fungicide and Rodenticide Act, in each case, as amended from time to time; and
(3) "HAZARDOUS MATERIALS" means (a) petroleum or petroleum products, natural or
synthetic gas, asbestos in any form that is or could become friable, urea
formaldehyde foam insulation and radon gas, (b) any substances defined as or
included in the definition of "hazardous substances," "hazardous wastes,"
"hazardous materials" "extremely hazardous wastes," "restricted hazardous
wastes," "toxic substances," "toxic pollutants" "contaminants" or "pollutants"
or words of any similar import, under any Environmental Law and (c) any other
substance exposure to which is regulated under any Environmental Law.
(c) The Real Property, and the operations thereon and the uses
made thereof, are in compliance with all fire, building and zoning laws,
statutes, ordinances, codes, rules, regulations and decrees.
(d) No notice of violation of any applicable federal, state, or
local statute, ordinance, order, requirement, law, rule, regulation (including,
without limitation, any Environmental Law), or of any covenant, condition,
restriction or easement affecting the Real Property with respect to the use or
occupancy of the Real Property has been given to the Seller by any person having
jurisdiction over the Real Property or by any other person entitled to
<PAGE>
enforce the same, or by any private citizen or citizen action group and, to the
best of Seller's knowledge, no such notice has been given to any other person.
(e) To Seller's knowledge, there is no plan, study or effort by
any governmental authority or any other person which may prevent or hinder
Buyer's continued use of the Real Property as heretofore used in the conduct of
the Business by the Seller.
(f) There is not (i) to Seller's knowledge, any intended or
proposed federal, state, or local statute, ordinance, order, requirement, law,
rule or regulation (including, but not limited to, zoning changes) which may
prevent or hinder Buyer's continued use of the Real Property as heretofore used
in the conduct of the Business by the Seller or (ii) any suit, action, claim or
legal, administrative, arbitration or other proceeding or governmental
investigation (other than Environmental Actions) pending or threatened or
contemplated against or affecting either the Real Property or the use thereof.
(g) There is no existing or, to Seller's knowledge, proposed or
contemplated eminent domain proceeding that would result in the taking of all or
any part of the Real Property that would prevent or hinder Buyer's continued use
of the Real Property as heretofore used in the conduct of the Business by the
Seller.
(h) To the best of Seller's knowledge, there are no
encroachments onto the Real Property by any improvements on any adjoining
property.
(i) To the best of Seller's knowledge, there are no
encroachments onto any adjoining property by any improvements on the Real
Property.
(j) There are no unpaid taxes, local improvement levies,
assessments (special, general or otherwise) or bonds of any nature related to
Real Property or any portion thereof.
(k) Neither the Seller nor, to Seller's knowledge, any owner of
the Real Property has subjected the Real Property to any lease, sublease,
tenancy, concession, license, occupancy agreement or similar right other than
the Seller's leasehold interest in that portion of the Real Property leased by
Seller.
(l) With respect to any part of the Real Property owned by
Seller, Seller owns good and marketable fee simple absolute title thereto, free
and clear of any and all mortgages, deeds of trust, liens, encumbrances, claims,
charges, security interests, equities, covenants, conditions, restrictions,
easements, rights of way or other matters, whether or not of records, except as
set forth on Schedule 4.5.
(m) Except as set forth on SCHEDULE 4.2, neither this Agreement
nor anything provided to be done under this Agreement violates or shall violate
any contract, document, understanding, agreement, arrangement or instrument
affecting the Real Property.
<PAGE>
4.6 CONDUCT OF THE BUSINESS. Except as provided in SCHEDULE 4.6, the
Seller is not a party to, or subject to or bound by, nor are any of its assets
subject to or bound by, any agreement, oral or written, or any order, writ,
injunction or decree of any court or governmental or administrative body which
prohibits or adversely affects or upon the consummation of the transactions
contemplated hereby would prohibit or adversely affect: (i) the use of any or
all of the Acquired Assets in the conduct of the Business in the ordinary course
of business; or (ii) the conduct of the Business in the same manner as such
business has been conducted by Seller. No supplier, distributor or customer of
the Business of Seller has notified the Seller that it intends to discontinue
its relationship with the Seller.
4.7 PERMITS AND LICENSES. SCHEDULE 4.7 attached hereto contains a
list of all consents, authorizations, licenses, permits, orders, certificates,
registrations, security and other clearances, and qualifications which are
necessary to the conduct of the Business as heretofore conducted or required by
applicable laws (including, without limitation, Environmental Laws); and, except
as set forth on SCHEDULE 4.7, the Seller has obtained all of such consents,
authorizations, licenses, permits, orders, certificates, registrations, security
and other clearances and qualifications, and the same are valid and subsisting.
Seller has no reason to believe that Buyer will not be able to obtain or retain
all such required consents, authorizations, licenses, permits, orders,
certificates, registrations, security and other clearances and qualifications.
The Seller is not required to have any form of security clearance from any
governmental agency in order to conduct the Business in the manner it is
presently conducted.
4.8 FINANCIAL STATEMENTS AND UNDISCLOSED LIABILITIES.
(a) The Seller has delivered to Buyer (1) the unaudited balance
sheets of Seller as of August 29, 1997, and unaudited statements of income and
retained earnings of Seller for the interim period then ended, (2) the audited
balance sheets of Seller as of September 27, 1996, September 29, 1995, and
September 30, 1994, and audited statements of income and retained earnings of
Seller for each of the fiscal years then ended, including, in each case, the
related notes, (3) the unaudited balance sheets of the Business as of September
26, 1997, and unaudited statements of income and retained earnings of the
Business for the interim period then ended and (4) the unaudited balance sheets
of the Business as of September 27, 1996, September 29, 1995 and September 30,
1994, and unaudited statements of income and retained earnings of the Business
for each of the fiscal years then ended. All of the foregoing financial
statements and notes of Seller are collectively referred to herein as the
"Financial Statements". As used herein, (1) the term "Interim Date Balance
Sheet" shall mean the balance sheet of the Business as of September 26, 1997 and
(2) the term "Interim Date" shall mean September 26, 1997.
(b) All of the Financial Statements: (i) are true, complete and
correct and present fairly the financial position of the Seller and the
Business, as applicable, as of the dates thereof and the results of operations
for the respective periods covered by such statements; (ii) are consistent with
the books and records of the Seller; and (iii) have been prepared in accordance
with US GAAP applied on a consistent basis with prior years, except, with
respect to interim unaudited statements, normal year-end adjustments and without
footnotes.
<PAGE>
(c) The Seller, as of the Interim Date and the Closing Date,
has no material indebtedness, liability, claim or obligation of any nature,
fixed or contingent, choate or inchoate, liquidated or unliquidated, secured or
unsecured or otherwise of any kind or nature which in accordance with US GAAP
should be recorded on a balance sheet or disclosed in a footnote to financial
statements, except: (i) liabilities specifically described and reflected dollar
for dollar on the Financial Statements; (ii) liabilities incurred in the
ordinary course of business since the Interim Date, in kind and amounts
consistent with past practices; (iii) commercial obligations to perform pursuant
to executory obligations entered into in the ordinary course of business
consistent with past practices, and not in default, or (iv) liabilities, if any,
specifically disclosed and reflected dollar for dollar on SCHEDULE 4.8(c)
attached hereto.
4.9 COMPLIANCE WITH LAWS. Except as set forth on SCHEDULE 4.9
attached hereto, the Seller has been and is, and the Business has been and is
being conducted and operated, in compliance with all requirements of all
applicable statutes, laws, ordinances, regulations, rules, codes or decrees,
whether foreign or domestic, federal, state or local, which affect the Seller,
the Business or the Acquired Assets, or to which the Seller is subject,
including, without limitation, those relating to fair labor practices and
standards; equal employment practices; occupational safety and health;
export/import licenses or controls; foreign exchange controls; restraint of
trade and unfair competition; immigration; federal procurement; and
Environmental Laws. Except as set forth on SCHEDULE 4.9, the Seller has not
received any notice or other communication from any person with respect to an
alleged, actual or potential violation and/or failure to comply with any of the
foregoing.
4.10 PATENTS, TRADE NAMES, TRADEMARKS AND COPYRIGHTS. All patents,
patent applications, trade names, registered or common law trademarks, trademark
applications and registered copyrights owned by or licensed to or used by the
Seller in the Business are listed on SCHEDULE 4.10 and have been duly registered
in, filed in or issued by the United States Patent and Trademark Office, the
United States Register of Copyrights or the corresponding offices of other
countries, states or other jurisdictions to the extent set forth on said
SCHEDULE 4.10, and have been properly maintained and renewed in accordance with
all applicable provisions of law and administrative regulations in the United
States and each such country, state or other jurisdiction. Except as set forth
in said SCHEDULE 4.10, the Seller's use of said patents, trade names, trademarks
or copyrights does not require the consent of any third party and the same are
freely transferable and are owned exclusively by the Seller free and clear of
any attachments, liens, royalties, encumbrances, adverse claims, licenses or any
other ownership or other interest of any other person whatsoever. Except as
described in SCHEDULE 4.10, no person has a license to use any of such patents,
trade names, trademarks or copyrights or applications therefor. No order,
decree, judgment or stipulation has ordered, decreed, adjudged, stipulated,
found or determined that Seller or any of its affiliates, in connection with the
conduct of the Business, has infringed any adversely held patent, trade name,
trademark or copyright; and no claim or proceeding charging the Seller or any of
its affiliates, in connection with the conduct of the Business, with
infringement of any adversely held patent, trade name, trademark or copyright,
has been asserted or served upon the Seller or its affiliates at any time during
the six (6) year period prior to and ending upon the Closing Date or, to
Seller's knowledge, is threatened to be asserted or filed; and the conduct of
the Business, as heretofore conducted by the Seller, does not infringe any
patents,
<PAGE>
patent applications, trade names, trademarks, copyrights or other rights owned
by or owed to any third person. Except as set forth on SCHEDULE 4.10, to
Seller's knowledge after a review of the current files of the Seller and its
affiliates, no person is infringing upon the patents, trade names, trademarks or
copyrights or applications therefor set forth on SCHEDULE 4.10. Except as
specifically disclosed on SCHEDULE 4.10, the Seller has not used any patent,
trade name, trademark or copyright in order to conduct the Business as presently
being conducted.
Except as set forth on SCHEDULE 4.10, the Seller owns and has the
right to use, free and clear of any claims or rights of any other person,
including without limitation, any affiliate of the Seller, all trade secrets,
customer lists, secret processes, technology, know-how and any other
confidential information required for or used in the manufacture, sale,
distribution or marketing of all products either being, or proposed to be,
manufactured, sold, distributed or marketed by the Seller in the conduct of the
Business, including, without limitation, any products licensed by the Seller
from others. The Seller is not in any way making any unlawful or wrongful use of
any trade secrets, customer lists, manufacturing processes, secret processes,
technology, know-how or any other confidential information of any other person,
including, without limitation, any former employer of any present or past
employee of the Seller. All manufacturing processes, secret processes, know-how,
and any other intellectual property and confidential information resulting from
the development activities engaged in by any employees of the Seller is the
property of the Seller. No Business Employee (as defined below) is a party to
any non-competition agreement, non-disclosure agreement, or similar agreement
with any other person.
4.11 LIST OF CONTRACTS. Except for the contracts, commitments, plans,
agreements and licenses described in SCHEDULE 4.11 attached hereto and those
which relate exclusively to Seller's Other Businesses, with respect to the
Business, the Seller is not a party to nor is it or any of the Acquired Assets
subject to or otherwise bound by any oral or written:
(a) Contract for the employment of any officer or employee;
(b) Collective bargaining agreement (or any side agreement,
local understanding or settlement agreement relating to such collective
bargaining agreement) or any agreement or contract with any labor union or other
employees' association;
(c) Lease or agreement to it or by it of real property or
personal property;
(d) Any individual contract, agreement, order, commitment or
letter of intent involving more than $10,000 for the future purchase of
commodities, materials, ingredients, supplies, merchandise, services or
equipment;
(e) Bonus, pension, profit-sharing, stock option, retirement,
deferred compensation, hospitalization, insurance or similar plan or practice,
or sick pay, vacation pay, severance pay or other policy or practice, formal or
informal, in effect with respect to employees or any other person or entity;
<PAGE>
(f) Franchise, dealer, distribution, sales or agency contract
or commitment;
(g) Any individual contract of sale, letter of intent, order or
commitment involving more than $10,000 creating any obligation of the Seller to
manufacture, sell or distribute products or services;
(h) Guarantees or indemnities, direct or indirect, current or
contingent, of the obligations of customers or any other person or entity;
(i) Advertising contract or commitment;
(j) License agreement (as licensor or licensee);
(k) Real estate mortgage, loan or credit agreement with any
lender, indenture, pledge, conditional sale or title retention agreement,
equipment obligation or lease, or lease purchase agreement;
(l) Any agreement which restricts in any way the ability of
Seller to engage in business or to use information in the possession of Seller;
or
(m) Other material contract affecting the Business.
Except as set forth on SCHEDULE 4.11, all the Assumed Contracts are
valid and binding obligations of, and enforceable against, the Seller and, to
Seller's knowledge, the other parties thereto in accordance with their
respective terms and conditions.
There has been no uncured breach or default of any provision of any
Assumed Contract by the Seller or, to the knowledge of Seller, any other party
thereto, and nothing has occurred which with lapse of time or the giving of
notice or both would constitute a breach or default by the Seller or, to the
knowledge of Seller, by any other party thereto with respect to any such
contract or which would cause acceleration of any obligation of any party
thereto or the creation of any lien, encumbrance, security interest in or upon
the Acquired Assets. Buyer has been furnished with true and complete copies of
all scheduled contracts and commitments in writing except for customer orders
which have been made available for review by Buyer.
4.12 LITIGATION. Except as set forth on SCHEDULE 4.12 attached
hereto, there is no action, suit, investigation (whether formal or informal),
subpoena or proceeding pending or, to the best of Seller's knowledge, threatened
against the Seller which either (i) relates to the Business or (ii) might
reasonably be expected to have a material adverse effect on the Seller.. Except
as set forth on SCHEDULE 4.12, no order, writ, injunction, subpoena or decree
has been issued by or requested of any court or governmental agency which might
either (i) adversely affect the Business or the transactions contemplated by
this Agreement or (ii) materially adversely affect the Seller. The Seller has
never been subject to nor is it a party as a debtor to any bankruptcy or other
insolvency or similar proceeding.
<PAGE>
4.13 ABSENCE OF CHANGES. Since the Interim Date, the Seller has
conducted the Business only in the ordinary course, and, except as set forth on
SCHEDULE 4.13 and SCHEDULE 4.8(d) attached hereto, the Seller has not, in
connection with the Business, as of the date hereof and as of the date of the
Closing, either directly or indirectly since the Interim Date:
(a) except for changes in the ordinary course of business
consistent with past practice which have not had, and will not have, a Material
Adverse Effect, suffered any change in the condition (financial or otherwise),
properties, assets, liabilities, business, operations, affairs or prospects of
the Business, which change by itself or in conjunction with any or all other
such changes has been or may be adverse with respect to the condition (financial
or otherwise), properties, assets, liabilities, business, operations, affairs or
prospects of the Business;
(b) INTENTIONALLY LEFT BLANK;
(c) mortgaged, pledged or subjected to lien, charge or any
encumbrance or other imperfection of title any of the Acquired Assets;
(d) written up or down the value of any inventory or other
assets or written off as uncollectible any notes or accounts receivable or any
portion thereof, except in amounts which, in the aggregate, are not in excess of
pre-existing reserves therefor or taken or set aside any reserves or charges in
its books against earnings or assets or reversed any reserves;
(e) (i) purchased, sold, assigned, transferred, abandoned or
otherwise disposed of any assets other than in the ordinary course of its
business consistent with past practices, or (ii) canceled any debts or claims,
other than in the ordinary course of business consistent with past practices;
(f) entered into any transaction or agreement other than in the
ordinary course of business consistent with past practices;
(g) entered into any compromise or settlement of any
litigation, proceeding or governmental investigation relating to the Business or
the Acquired Assets;
(h) failed to pay, satisfy, perform or otherwise discharge any
debt, lien, obligation or liability as the same may have become due and payable
unless such debt, lien, obligation or liability was or is being contested in
good faith and is disclosed on SCHEDULE 4.13 attached hereto;
(i) suffered any damage, destruction or loss to the Acquired
Assets, whether or not covered by insurance, which adversely affects the
condition (financial or otherwise), properties, assets, liabilities, business,
operations, affairs or prospects the Business;
<PAGE>
(j) except for those made or suffered in the ordinary course of
business consistent with past practice which have not had, and will not have, a
Material Adverse Effect, made or suffered any amendment, modification or
termination of any of the Assumed Contracts which adversely affects the
condition (financial or otherwise), properties, assets, liabilities, business,
operations, affairs or prospects of the Business;
(k) received notice or acquired knowledge of any labor trouble,
difficulty, dispute or organizing effort involving employees of the Seller;
(l) formed any subsidiaries or merged or consolidated, or
obligated itself to do so, with or into any other person;
(m) waived any rights, contractual or otherwise, except in the
ordinary course of business consistent with past practice;
(n) changed the compensation payable or to become payable by
the Seller to any Business Employees other than, normal merit increases and
bonuses made in accordance with (and consistent in amount with) its usual
practices;
(o) INTENTIONALLY LEFT BLANK;
(p) incurred any obligation or liability on behalf of the
Seller to any of its officers, directors, employees, shareholders or affiliates,
or any loans or advances made by the Seller to any of its officers, directors,
employees, shareholders or affiliates, except in the ordinary course of business
consistent with past practices and amounts;
(q) entered into any lease or sublease, pledge or hypothecation
of the Acquired Assets; or
(r) suffered any loss of employees, customers or suppliers that
adversely affects the Business, or been advised by any customer or supplier that
such customer or supplier intends to discontinue its relationship with the
Seller.
4.14 INSURANCE. The Business and the Acquired Assets are and have
been, during the last three (3) years, insured by such insurers, under such
policies, against such risks, in such amounts, and upon such other terms and
conditions as are set forth on SCHEDULE 4.14 attached hereto.
4.15 EMPLOYEE BENEFIT PLANS. SCHEDULE 4.15 attached hereto sets forth
a description of all employee benefit plans, agreements, policies, arrangements
and understandings (whether or not written) and all collective bargaining
agreements relating to employee benefits with respect to which the Seller has or
may incur any future or contingent obligations with respect to Business
Employees, including, without limitation, all plans, agreements, arrangements,
policies or understandings relating to sick pay, vacation pay or severance pay,
deferred compensation, pensions, profit sharing, retirement income or other
benefits, stock
<PAGE>
purchase and stock option plans, bonuses, severance arrangements, health
benefits, disability benefits, insurance benefits and all other employee
benefits or fringe benefits, including any employee welfare benefit plans and
employee pension benefit plans within the meaning of Sections 3(1) and 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
(individually referred to as a "Plan" and collectively referred to as the
"Plans"). Except as set forth in SCHEDULE 4.15:
(a) True, correct and complete copies of each such Plan (or in
the case of any unwritten Plan, a description thereof), the most recent
actuarial reports and trustee's reports relating thereto (if applicable), the
most recent annual report on Form 5500 filed with the Internal Revenue Service
for any Plan (if applicable), the most recent summary plan description for each
Plan for which a summary plan description is required by law, and each trust
agreement, insurance contract or other funding vehicle relating to any Plan,
have been furnished to Buyer;
(b) Each Plan has been administered and operated in accordance
with its terms and applicable law, and each Plan that is an employee pension
benefit plan under ERISA is "qualified" within the meaning of Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code") and each related
trust is exempt from tax under Section 501(a) of the Code, and each qualified
plan has been amended in a timely manner to conform to the requirements of
applicable legislation. No Plan that is an employee pension benefit plan under
ERISA which is so qualified has been amended since the date of its most recent
determination letter in any respect that would adversely affect its
qualification or materially increase its costs. No liability under ERISA or
otherwise has been incurred or, based upon existing facts, may be expected to be
incurred with respect to any Plan;
(c) All reports and disclosures relating to such Plans required
to be filed or distributed as of the Closing Date have been filed or distributed
in compliance with applicable law;
(d) None of such Plans, any trusts related thereto, any trustee
or administrator thereof, any "party in interest" or any "disqualified person"
with respect thereto has engaged in any nonexempted "prohibited transaction"
under section 4975 of the Code or section 406 of ERISA with respect to such
Plans or has acted or failed to act in a manner that could subject the Seller or
any Plan to any liability for breach of fiduciary duty under ERISA or any other
applicable law;
(e) No liability to the Pension Benefit Guaranty Corporation
("PBGC") has been or is expected to be incurred with respect to any Plan by the
Seller and PBGC has not instituted proceedings to terminate any Plan. No
reportable event within the meaning of Section 4043(b) of ERISA has occurred
with respect to any Plan. There exists no condition or set of circumstances
which presents a risk of the termination or partial termination of any Plan;
(f) The Seller has received determination letters from the
Internal Revenue Service that each Plan which is an employee pension benefit
plan is qualified under
<PAGE>
section 401(a) of the Code (if applicable) and such determination letters are in
effect, and Seller does not know of any fact which would adversely affect the
qualified status of any such Plan;
(g) Full payment has been made of all amounts which the Seller
was required under the terms of any of the Plans to have paid as contributions
to such Plans on or prior to the date hereof, and no accumulated funding
deficiencies (as defined in Section 302 of ERISA and Section 412 of the Code),
whether or not waived, exist with respect to any such Plan;
(h) Other than for claims in the ordinary course for benefits
under the Plans, there are no actions, suits, claims or proceedings, pending or,
to the best of Sellers' knowledge, threatened, nor, to the best of Sellers'
knowledge does there exist any basis therefor, which would result in any
liability with respect to any Plan of the Seller;
(i) The current value of vested accrued benefits under each
Plan which is subject to Title IV of ERISA does not exceed the current value of
all of the assets of such Plan allocable to such vested accrued benefits. For
purposes of the representations in the preceding sentences, the terms "current
value" and "accrued benefit" have the meanings specified in Section 3 of ERISA;
(j) The Seller is not a participant in any Multiemployer Plan
within the meaning of Section 3(37) of ERISA. The Seller has not, with respect
to any Multiemployer Plan, suffered or otherwise caused a "complete withdrawal"
or "partial withdrawal," as such terms are respectively defined in Sections 4203
and 4205 of ERISA. In the event that the Seller were to withdraw from any of
such Multiemployer Plans set forth on Schedule 4.15 as of the Closing Date,
there would be no withdrawal liability, so-called, or any corresponding
obligation to post a bond, letter of credit or other collateral to secure future
payment obligations. To the knowledge of Seller after making reasonable inquiry
of the Plan Administrator and the Plan Investment Manager(s), if any, each such
Multiemployer Plan was determined to be a "qualified plan" under Code Section
401(a), a determination letter having been issued by the Internal Revenue
Service to such effect and no fact or circumstance which should have been known
by Seller, including those discoverable by reasonable inquiry, exists which
would affect the status of the Plan as a "qualified plan" or which would subject
the Plans to "excise taxes";
(k) There are no accrued liabilities under any Plans, programs
or practices maintained on behalf of the employees of the Seller which are not
provided for on their books or financial statements or which have not been fully
provided for by contributions to such Plans, programs, or practices;
(l) The Seller does not maintain any employee welfare benefit
plans, as defined in Section 3(1) of ERISA, which provide post-retirement
benefits to employees;
(m) The Seller has complied with the health care coverage
continuation requirements of the Consolidated Omnibus Budget Reconciliation Act
of 1985 to the extent applicable to Seller;
<PAGE>
(n) All accrued liabilities of the Seller with respect to sick
pay, vacation pay, severance pay, deferred compensation, or other obligations
for the benefit of any personnel of the Seller including pension benefits
(vested or unvested) have been reflected dollar for dollar in accordance with US
GAAP on the Financial Statements of the Seller and will be so reflected on the
Closing Date Balance Sheet; and
(o) Each Plan (including any Plan covering retirees or former
employees) may be amended or terminated at any time after the Closing Date
without liability to the Seller.
4.16 GOVERNMENTAL AND OTHER APPROVALS. Under existing law, the Seller
is not required to obtain or make any approval, license, permit or other action
by or filing with, any foreign or domestic, federal, state, municipal or other
governmental body, commission, board, department or agency in order to execute
this Agreement and consummate the transactions contemplated hereby in accordance
with applicable laws and regulations.
4.17 BROKERAGE. Seller has not dealt with any broker or finder in
connection with the transactions contemplated herein, and Seller agrees to
indemnify and hold Buyer harmless in connection with any claims for commissions
or other compensation made by any broker or finder claiming to have been
employed by or on behalf of Seller in connection with the transactions
contemplated herein.
4.18 LABOR RELATIONS. There is no unfair labor practice complaint
against the Seller pending or, to the best of Seller's knowledge, threatened
relating to Business Employees. There are no proceedings pending or, to the best
of Seller's knowledge, threatened before the National Labor Relations Board
relating to Business Employees. There is no labor strike or similar dispute
pending or, to the best of Seller's knowledge, threatened. There is no pending
or past representation question involving an attempt to organize a bargaining
unit including any employees of the Seller and no labor grievance has been filed
within the past 12 months relating to Business Employees. The Seller is not a
party to or bound by any collective bargaining agreement with any employees of
the Business, and no collective bargaining agreement is currently being
negotiated by the Seller with respect to employees of the Business.
4.19 DISCRIMINATION CHARGES. There are no discrimination charges
(relating to sex, age, race, national origin, handicap or veteran status)
pending or, to the best of Seller's knowledge, threatened against the Seller, or
involving the Seller, before any federal, state, county or local agency, board,
commission, authority or other subdivision thereof relating to Business
Employees.
4.20 STOCKHOLDERS. Except as set forth on SCHEDULE 4.20 attached
hereto, the Seller has no stockholders.
4.21 TAXES. The Seller has filed all federal, state, county, local
and foreign income, franchise, excise, sales, use, property, withholding,
unemployment and other tax returns or information which are required to be filed
by it in all countries, states, cities and towns and
<PAGE>
other jurisdictions in which it is incorporated or is qualified to do business
as a foreign corporation or otherwise transacts business up to and including the
Closing Date, and has paid all taxes which are required to be paid, whether or
not shown on such returns, or which have become due pursuant to such returns or
any assessment which has been received by it and will continue to do so up to
the Closing Date.
4.22 INVESTMENT REPRESENTATION. Seller: (A) is acquiring the Seller's
AFC Shares (and any further shares of Common Stock which may hereafter be issued
to Seller pursuant to Section 3.3 hereof, the "Earnout Shares") for Seller's own
account, for investment only, and not with a view to, or for sale in connection
with, any distribution in violation of the Securities Act of 1933, as amended
(the "Securities Act") or any rule or regulation under the Securities Act, (B)
is a sophisticated investor and has sufficient knowledge and experience in
financial and business matters to be able to evaluate the merits and risks of
its investment in the Seller's AFC Shares (and any Earnout Shares), (C)
acknowledges that Seller has been furnished with copies of: (i) AFC's annual
report on Form 10-K for the year ended December 31, 1996; AFC's first and second
quarter 1997 reports on Form 10-Q; and AFC's Proxy Statement for the Annual
Meeting of Stockholders held on May 6, 1997, all as filed with the Securities
and Exchange Commission (the "Commission") and [(ii) copies of AFC's press
releases issued in 1997,] (D) acknowledges that AFC has made available to Seller
the opportunity to ask questions of AFC's officers and directors and to acquire
such additional information about AFC as Seller has requested and as is
necessary for Seller to evaluate the merits and risks of its investment in AFC,
(E) understands that the Seller's AFC Shares (and any Earnout Shares) have not
been registered under the Securities Act or under any state securities laws; are
being offered and sold to Seller in reliance on exemptions from the registration
requirements of the Securities Act and such state securities laws; are
"restricted securities" within the meaning of Rule 144 under the Securities Act;
and may not be sold, transferred or otherwise disposed of unless they are
subsequently registered under the Securities Act and applicable state securities
laws or an exemption from registration is then available, (F) is able to bear
the economic risk and lack of liquidity inherent in holding the Seller's AFC
Shares (and any Earnout Shares), (G) understands that any sale of the Seller's
AFC Shares (or any Earnout Shares) which might be made by it in reliance upon
Rule 144 under the Securities Act may be made only in compliance with the terms
and conditions of that Rule and (H) is an "accredited investor" within the
meaning of Regulation D under the Securities Act.
Seller agrees that (A) Seller will not make any offer, sale, transfer, pledge,
hypothecation or other disposition of the Seller's AFC Shares (or any Earnout
Shares) unless they have been registered under the Securities Act and applicable
state securities laws or unless AFC is furnished with an opinion of counsel
satisfactory to AFC that the proposed offer, sale, transfer, pledge,
hypothecation or other disposition is exempt from registration and (B) AFC may
effect a "stop transfer" as to the Seller's AFC Shares (or any Earnout Shares)
in order to reflect the undertakings herein set forth, and may impress a legend
on any certificates for such shares as follows:
<PAGE>
"The securities represented hereby have not been registered
under the Securities Act of 1933, as amended, or under state
securities laws. The holder hereof has represented to the
issuer that he or she has acquired these securities for
investment and not with a view to the distribution thereof,
and they have been issued in reliance on that representation.
These shares may, therefore, not be sold, transferred,
pledged, hypothecated or otherwise disposed of unless they
have been registered under said Act and state securities laws
or unless counsel satisfactory to the Company has given an
opinion that registration is not required."
4.23 DEFINITION OF KNOWLEDGE. With respect to any representation and
warranty herein which is made "to the best of Seller's knowledge" or "to
Seller's knowledge", Seller shall be deemed to have knowledge of any matter or
fact if any of Douglas A. DeCamp, Willard G. Pierce or Ronald George has actual
personal knowledge of such matter or fact.
5. REPRESENTATIONS AND WARRANTIES OF AFC AND BUYER.
As of the date hereof and as of the Closing Date, AFC and Buyer,
jointly and severally, represent and warrant to Seller as follows:
5.1 ORGANIZATION AND QUALIFICATION. Each of AFC and Buyer is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
own or lease all of its properties and to conduct its business in the manner and
in the places where such properties are owned and leased or such business is now
conducted by it and to enter into and perform the transactions contemplated by
this Agreement.
5.2 AUTHORITY. This Agreement and each of the other agreements,
documents and instruments required to be executed by AFC and/or Buyer pursuant
to this Agreement will constitute, when delivered, the valid and binding
obligations of AFC and Buyer (either or both, as applicable) and shall be
enforceable in accordance with their respective terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting the
enforcement of creditors' rights and to the application of equitable principles.
The execution, delivery and performance of this Agreement and each such other
agreement, document and instrument has been, or prior to the Closing will have
been, duly authorized by all necessary corporate action of AFC and Buyer. The
execution, delivery and performance by AFC and/or Buyer (either or both, as
applicable) of this Agreement and each such other agreement, document and
instrument does not and will not with the passage of time or the giving of
notice or both:
(a) result in a breach of or constitute a default by AFC or
Buyer or result in any right of termination or other effect adverse to AFC or
Buyer under any indenture or loan or credit agreement of AFC or Buyer, or any
other agreement, lease or instrument to which AFC or Buyer is a party or by
which the property of AFC or Buyer is bound or affected;
<PAGE>
(b) result in a violation of or default under any order, writ,
judgment, injunction, decree, determination or award, now in effect to which AFC
or Buyer is a party or by which it is bound;
(c) violate any provisions of the Certificate of Incorporation,
or equivalent, or By-Laws of AFC or Buyer, as amended; or
(d) require any approval, consent or waiver of, or filing with,
any person.
5.3 GOVERNMENTAL AND OTHER APPROVALS. Under existing law, neither AFC
nor Buyer is required to obtain or make any approval, license, permit or other
action by or filing with, any foreign or domestic, federal, state, municipal or
other governmental body, commission, board, department or agency in order to
execute this Agreement and consummate the transactions contemplated hereby in
accordance with applicable laws and regulations.
5.4 BROKERAGE. Neither AFC nor Buyer has dealt with any broker or
finder in connection with the transaction contemplated herein and each agrees to
indemnify and hold Seller harmless in connection with any claims or commissions
or other compensation made by any broker or finder claiming to have been
employed by or on behalf of AFC or Buyer in connection with the transactions
contemplated herein.
5.5 LITIGATION. There is no action, suit, investigation (whether
formal or informal), subpoena or proceeding pending, or to the best of AFC's or
Buyer's knowledge, threatened against AFC or Buyer, nor has any order, writ,
injunction, subpoena or decree been issued by or requested of any court or
governmental agency, which, in either case, seeks to enjoin or might adversely
affect the transactions contemplated by this Agreement.
5.6 CAPITALIZATION. On the date hereof, the authorized capital stock
of AFC consists of (1) 15,000,000 shares of common stock, $0.01 par value per
share, of which 11,385,359 shares were issued and outstanding as of September
27, 1997 and (2) 1,000,000 shares of preferred stock, $0.01 par value per share,
none of which are issued and outstanding. The authorized capital stock of Buyer
consists of 1000 shares of common stock, $1.00 par value per share, all of which
are owned by AFC. All of Seller's AFC Shares (and any Earnout Shares) which are
to be issued to Seller pursuant to this Agreement will be, when issued in
accordance with this Agreement, duly authorized, validly issued, fully paid and
nonassessable and free of all preemptive rights.
6. INTENTIONALLY LEFT BLANK
7. INTENTIONALLY LEFT BLANK
8. INTENTIONALLY LEFT BLANK
<PAGE>
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER TO CLOSE.
The obligation of Buyer to acquire the Acquired Assets and assume the
Assumed Liabilities as contemplated hereby, and to perform its other obligations
hereunder to be performed on or after the Closing, shall be subject to the
fulfillment, on or prior to the Closing Date, unless otherwise waived in writing
by Buyer, of the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Seller set forth in Article 4 hereof shall be true and correct in
all material respects when made and shall be true and correct in all material
respects on the Closing Date as if made on and as of such date.
9.2 PERFORMANCE OF COVENANTS. Seller shall have performed in all
material respects all of its obligations contained in this Agreement to be
performed on or prior to the Closing Date, and Buyer shall have received a
certificate to such effect, executed by Seller and dated as of the Closing Date,
in form satisfactory to Buyer. Notwithstanding the provisions of Section 9.1 and
9.2 hereof, Buyer shall be entitled to enforce, without regard to materiality,
the representations, warranties, agreements, covenants and obligations which are
made by Seller herein and which are not, by their terms, qualified as to
materiality.
9.3 THREATENED OR PENDING PROCEEDINGS. No proceedings shall have been
initiated or threatened by any person seeking to enjoin or otherwise restrain or
to obtain an award for damages in connection with the consummation of the
transactions contemplated hereby.
9.4 CORPORATE AUTHORIZATION. All corporate action, necessary to
authorize (i) the execution, delivery and performance by Seller of this
Agreement and any other agreements or instruments contemplated hereby to which
Seller is a party; and (ii) the consummation of the transactions contemplated
hereby and thereby, shall have been duly and validly taken by Seller, and Buyer
shall have been furnished with copies of all applicable resolutions certified by
the Secretary or Assistant Secretary of Seller.
9.5 DELIVERY OF CERTIFICATES AND DOCUMENTS TO BUYER. Seller shall
have delivered, or cause to be delivered, to Buyer the certificates as to the
legal existence and corporate and tax good standing of the Seller and copies of
its Articles of Organization, or equivalent, as amended, issued or certified by
the appropriate governmental official of the state of its incorporation and the
states where the Seller is qualified to transact business as a foreign
corporation.
9.6 INTENTIONALLY LEFT BLANK
9.7 INTENTIONALLY LEFT BLANK
<PAGE>
9.8 CERTIFIED FINANCIAL STATEMENTS. The Chief Financial Officer of
the Seller shall execute and deliver to Buyer a certificate in a form
satisfactory to Buyer certifying to the matters addressed in Section 4.8(b).
9.9 INTENTIONALLY LEFT BLANK
9.10 CONSENTS. Buyer and Seller shall have obtained the approvals,
consents and authorizations of all third persons and governmental agencies
necessary for the consummation of the transactions contemplated hereby in
accordance with the requirements of applicable laws and agreements, including,
without limitation, the consents identified on SCHEDULE 4.2.
9.11 DAMAGE OR DESTRUCTION. The Seller shall not have suffered prior
to the Closing Date any loss on account of fire, flood, accident or any other
calamity or casualty to an extent that would materially interfere with the
conduct of the Business or materially impair the value of the Business as a
going concern, regardless of whether any such loss or losses have been insured
against.
9.12 INTENTIONALLY LEFT BLANK
9.13 LEASE. Buyer's affiliate, AFC Realty Holding Corp. ("AFC
Realty"), and Federal Realty, Inc. ("Federal Realty") shall have entered into a
Lease (the "Lease"), providing that AFC Realty shall lease from Federal Realty
the Real Property at Painesville, Ohio, that is used in the Business, for a
rental and upon such other terms and conditions as are set forth in the form of
Lease attached hereto as EXHIBIT B and made a part hereof.
9.14 EMPLOYMENT AGREEMENT. Buyer and Ronald George shall have entered
into an Employment Agreement (the "Employment Agreement") pursuant to which
Ronald George will serve as President of the Business upon such terms and
conditions as are mutually satisfactory to Buyer and Mr. George.
9.15 HSR ACT. If applicable, Buyer and Seller shall each have timely
filed all information, reports, applications or notices and satisfied all
requests for additional information pursuant to the HSR Act, and the applicable
waiting period shall have expired.
9.16 SUPPLY AGREEMENT. Buyer and Seller shall have entered into a
supply agreement (the "Supply Agreement") upon such terms and conditions as are
set forth in the form of Supply Agreement attached hereto as EXHIBIT C and made
a part hereof.
9.17 SEPTEMBER 30, 1997 YEAR END AUDIT. Seller shall have delivered
to Buyer the Financial Statements referred to in the second sentence of section
4.8(a) hereof.
9.18 ESCROW AGREEMENT. Seller, Buyer and the Escrow Agent shall have
executed and delivered the Escrow Agreement.
<PAGE>
9.19 REGISTRATION RIGHTS AGREEMENT. AFC and Seller shall have entered
into a registration rights agreement (the "Registration Rights Agreement")
granting piggyback registration rights to Seller with respect to the Seller's
AFC Shares upon the terms and conditions set forth in the Registration Rights
Agreement attached hereto as EXHIBIT D and made a part hereof.
9.20 TRANSITION SERVICES AGREEMENT. Seller and Buyer shall have
entered into a Transition Services Agreement (the "Transition Services
Agreement") upon such terms and conditions as are set forth in the form of
Transition Services Agreement attached hereto as EXHIBIT E and made a part
hereof.
9.21 PERSONAL GUARANTEE. Each of Douglas A. DeCamp and Willard G.
Pierce shall have executed and delivered to Buyer his personal guarantee upon
such terms and conditions as are contained in the form of Guarantee attached
hereto as EXHIBIT F and made a part hereof.
9.22 CLARIFICATION. The condition set forth in Section 9.1 hereof
shall not be fulfilled if there has been a material breach of a single
representation and warranty made by Seller in Article 4 hereof or if there has
been a breach of two or more of the representations and warranties made by
Seller in Article 4 hereof which, taken together, are material. The condition
set forth in Section 9.2 hereof shall not be fulfilled if there has been a
material breach of any single obligation of Seller hereunder to be performed on
or prior to the Closing Date or if there has been a breach of two or more of the
obligations of Seller hereunder to be performed on or prior to the Closing Date
which, taken together, are material.
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER TO CLOSE.
The obligation of Seller to sell the Acquired Assets as contemplated
hereby shall be subject to the fulfillment, on or prior to the Closing Date,
unless otherwise waived in writing by Seller, of the following conditions:
10.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Buyer set forth in Article 5 hereof shall be true and correct in
all material respects when made and shall be true and correct in all material
respects on the Closing Date as if made on and as of such date.
10.2 PERFORMANCE OF COVENANTS. Buyer shall have performed in all
material respects all of its obligations contained in this Agreement to be
performed on or prior to the Closing Date and Seller shall have received a
certificate to such effect, executed by Buyer and dated as of the Closing Date,
in form satisfactory to Seller. Notwithstanding the provisions of Section 10.1
and Section 10.2 hereof, Seller shall be entitled to enforce, without regard to
materiality, the representations, warranties, agreements, covenants and
obligations which are made by Buyer herein and which are not, by their terms,
qualified as to materiality.
<PAGE>
10.3 THREATENED OR PENDING PROCEEDINGS. No proceedings shall have
been initiated or threatened by any person seeking to enjoin or otherwise
restrain or to obtain an award for damages in connection with the consummation
of the transactions contemplated hereby.
10.4 CORPORATE AUTHORIZATION. All corporate action, necessary to
authorize (i) the execution, delivery and performance by Buyer and AFC of this
Agreement and any other agreements or instruments contemplated hereby to which
Buyer or AFC is a party; and (ii) the consummation of the transactions
contemplated hereby and thereby, shall have been duly and validly taken by Buyer
and AFC, and Seller shall have been furnished with copies of all applicable
resolutions adopted by the Board of Directors of Buyer and AFC, certified by the
Secretary or Assistant Secretary.
10.5 DELIVERY OF CERTIFICATES AND DOCUMENTS TO SELLER. Buyer shall
have delivered, or cause to be delivered, to Seller certificates as to the legal
existence and corporate good standing of each of Buyer and AFC and copies of its
Articles of Incorporation, or the equivalent, as amended, issued or certified by
the appropriate governmental official of the state of its incorporation.
10.6 LEASE. AFC Realty and Federal Realty shall have entered into the
Lease.
10.7 TRANSITION SERVICES AGREEMENT. Seller and Buyer shall have
entered into the Transition Services Agreement.
10.8 CONSENTS. Buyer and Seller shall have obtained the approvals,
consents and authorizations of all third persons and governmental agencies
necessary for the consummation of the transactions contemplated hereby in
accordance with the requirements of applicable laws and agreements, including,
without limitation, the consents identified on SCHEDULE 4.2.
10.9 HSR ACT. If applicable, Buyer and Seller shall each have timely
filed all information, reports, applications or notices and satisfied all
requests for additional information pursuant to the HSR Act, and the applicable
waiting period shall have expired.
10.10 ESCROW AGREEMENT. Seller, Buyer and the Escrow Agent shall have
entered into the Escrow Agreement.
10.11 REGISTRATION RIGHTS AGREEMENT. AFC and Seller shall have
entered into the Registration Rights Agreement.
10.12 CLARIFICATION. The condition set forth in Section 10.1 hereof
shall not be fulfilled if there has been a material breach of a single
representation and warranty made by Buyer in Article 5 hereof or if there has
been a breach of two or more of the representations and warranties made by Buyer
in Article 5 hereof which, taken together, are material. The condition set forth
in Section 10.2 hereof shall not be fulfilled if there has been a material
breach of any single obligation of Buyer hereunder to be performed on or prior
to the Closing Date or if there
<PAGE>
has been a breach of two or more of the obligations of Buyer hereunder to be
performed on or prior to the Closing Date which, taken together, are material.
11. CERTAIN RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING.
11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AGREEMENTS, COVENANTS
AND OBLIGATIONS. All representations and warranties contained in Sections 4.1
through 4.23 hereof, inclusive, and in Sections 5.1 through 5.6 hereof,
inclusive, and all agreements and covenants contained anywhere else in this
Agreement or in any other agreement delivered by either party to the other party
incident to the transactions contemplated hereby, shall be deemed to have been
relied upon by the other party, shall survive the execution and delivery of this
Agreement, any investigation made by any party hereto, and the sale and purchase
of the Acquired Assets and payment therefor; PROVIDED, HOWEVER, that (a) the
representations and warranties of Seller contained in Section 4.5(b) (with
respect to, among other things, the Real Property and compliance with
Environmental Laws) shall expire and terminate on the fifth (5th) anniversary of
the Closing Date, (b) all of the other representations and warranties made by
Seller in Sections 4.1 through 4.23 hereof, inclusive, (with the exception of
the representations and warranties of Seller contained in Sections 4.1, 4.2
(first paragraph only), 4.4(c) and 4.5(a) which shall survive indefinitely)
shall expire and terminate on the second (2nd) anniversary of the Closing Date
and (c) all of the representations and warranties made by Buyer in Sections 5.1
through 5.6 hereof, inclusive, (with the exception of the representations and
warranties of Buyer contained in Sections 5.1 and 5.2 which shall survive
indefinitely) shall expire and terminate on the second (2nd) anniversary of the
Closing Date. Any matter disclosed in any numbered Schedule attached hereto
which qualifies a correspondingly numbered Section of Article 4 hereof shall be
deemed disclosed on and with respect to all other relevant numbered Schedules
corresponding to other Sections of Article 4 hereof PROVIDED THAT the relevance
of such matter to such other Schedules and such other Sections of Article 4
hereof is plainly apparent.
11.2 FURTHER ASSURANCES. From time to time after the Closing and
without further consideration, the parties will execute and deliver, or arrange
for the execution and delivery of, such other instruments of conveyance and
transfer and take such other action or arrange for such other actions as may
reasonably be requested to more effectively complete any of the transactions
provided for in this Agreement or any document annexed hereto.
11.3 PUBLICITY AND DISCLOSURES. No press release or any public
disclosure or further disclosure to Seller's or Buyer's employees and
representatives, either written or oral, of the transactions contemplated by
this Agreement shall be made without the prior knowledge and written consent of
Seller and Buyer, provided that any of Seller, Buyer and AFC may make (a) such
disclosures as are required by law or stock exchange rule after notice to, and
consultation with, the other and (b) disclosures to its own employees and
representatives on a need-to-know basis.
11.4 FURTHER COOPERATION OF SELLER. Following the Closing, the Seller
and Buyer agree to use reasonable efforts to secure the transfer to the Buyer or
the reissuance or issuance in the name of the Buyer of all consents, licenses
and permits required under applicable law or
<PAGE>
regulation, federal, state and local, or necessary to the ownership of the
Acquired Assets or the operation of the Business.
11.5 CONSENTS OF THIRD PARTIES. To the extent that any transfer or
assignment of any contract, license, lease, commitment, or right to be
transferred and assigned to the Buyer as provided herein, shall require the
consent of the other party thereto, or of any other person, this Agreement shall
not constitute an agreement to assign the same unless and until such consent
shall have been obtained. Seller agrees that it will use its reasonable efforts,
before and after the Closing, to obtain and deliver the consent of the other
parties and the approvals of other persons or authorities, to the extent
necessary, to the assignment of all such contracts, leases, licenses,
commitments or rights to the Buyer. Until such consent or approval is obtained,
the Seller shall act as the Buyer's agent in order to obtain for it the benefits
thereunder and the Seller will cooperate with the Buyer in any reasonable
arrangement designed to provide for the Buyer all benefits under any such
contracts, leases, licenses, commitments or rights. Seller will bear any
reasonable incidental costs associated with performing its obligations
hereunder. The obligations of Seller hereunder with respect to any such
contract, license, lease, commitment or right shall survive until the expiration
or termination of the same in accordance with the terms thereof.
11.6 TRANSFER TAXES. In no event will the Buyer be liable for any
sales, use, transfer or stamp taxes which may be imposed either on the sale from
Seller to Buyer of the Acquired Assets or as a result of the transfer from
Seller to Buyer of the Acquired Assets.
11.7 TAX RETURNS. The Seller will file all tax and information
returns due with respect to the Seller for all periods ended on or prior to the
Closing Date and pay all taxes, if any, shown to be due on such returns.
11.8 MAIL RECEIVED AFTER CLOSING.
(a) In the event that Buyer receives after the Closing any mail
or other communications addressed to Seller, Buyer may open such mail or other
communications and deal with the contents thereof in its discretion to the
extent that such mail or other communications and the contents thereof relate to
any of the Acquired Assets or to any of the Assumed Liabilities, including the
right to endorse without recourse the name of Seller on any check received by
Buyer with respect to the Acquired Assets, and to deal with the proceeds in
accordance with the terms of this Agreement. Buyer agrees to deliver or cause to
be delivered to Seller all other mail and the contents thereof which does not
relate to the Acquired Assets or the Assumed Liabilities.
(b) In the event that Seller receives after the Closing Date
mail or other communications addressed to Seller which relate to any of the
Acquired Assets or the Assumed Liabilities, Seller shall promptly deliver or
cause to be delivered all such mail and the contents thereof to Buyer. Seller
agrees to cooperate with Buyer and to make arrangements (including "lock box"
and other banking arrangements) reasonably necessary in order to properly deal
with checks addressed to Seller but which belong to Buyer pursuant to this
Agreement, and to properly direct the proceeds thereof to Buyer.
<PAGE>
11.9 EMPLOYMENT OF BUSINESS EMPLOYEES BY BUYER.
(a) Buyer shall, as of and subject to the Closing, offer
employment to all of Seller's currently active employees of the Business listed
on SCHEDULE 11.9 (collectively, the "Business Employees"). The Buyer's offer of
employment shall consist of salary and bonus or incentive equivalent to that
currently being paid by Seller, together with benefits substantially comparable
to those benefits currently provided by Seller to the Business Employees,
provided that in no event will Buyer have any obligation to provide retiree
health benefits. Such former Business Employees who accept Buyer's offers of
employment are referred to herein as "Transferred Employees". Buyer shall
promptly inform Seller of any of the Business Employees who do not accept
Buyer's offer of employment. Seller shall assign to Buyer all confidentiality
and non-compete covenants of all Business Employees.
(b) Buyer shall recognize all Transferred Employees' service
with Seller for (i) purposes of eligibility and vesting, but not for purposes of
benefit calculation, under the AFC Cable Systems, Inc. Non-Union Salaried and
Hourly Employees 401(k) Savings Plan, and Transferred Employees meeting the
eligibility requirements of such plan shall participate in such plan effective
January 1, 1998 or upon the first subsequent entry date after meeting the
applicable eligibility requirements, and (ii) all purposes (including
eligibility, benefit entitlement, and benefit calculation purposes) under AFC's
other employee benefit plans which are set forth on SCHEDULE 11.9. Seller shall
fully vest all Business Employees under Seller's tax qualified employee pension
benefit plans effective as of the Closing.
(c) For injuries arising out of employment by Seller on or
prior to the Closing Date, Seller shall be liable for any damages, costs,
losses, expenses or liabilities including, without limitation, any workers'
compensation (including weekly benefits, medical and rehabilitation expenses and
any other expenses or obligations) payable under tort, occupational health and
safety laws or otherwise in respect of Seller's Business Employees. Buyer shall
be liable for any such damages, costs, losses, expenses or liabilities payable
for injuries arising out of employment of Transferred Employees by Buyer after
the Closing Date. In the event a Transferred Employee presents a claim after the
Closing Date for an occupational disease, as opposed to a specific injury, the
liability with respect thereto shall be apportioned between Buyer and Seller in
the proportion that the respective length of exposure with Seller (and its
predecessors in interest) prior to the Closing Date, and with the Buyer
following the Closing Date, bears to the combined length of exposure of the
Transferred Employee with both Seller (and its predecessors in interest) and
Buyer.
(d) Buyer shall have no liabilities or obligations under or
with respect to any of Seller's Plans (as defined in Section 4.15 of this
Agreement). With respect to Seller's employee welfare benefit plans, except for
the accruals on the Closing Date Balance Sheet specified in Section 11.10(b)
hereof, Seller shall be solely responsible for all costs and liabilities
relating to claims incurred on or before the Closing Date.
<PAGE>
(e) Buyer shall have no liabilities or obligations with respect
to Seller's employees other than Transferred Employees, and Seller shall be
solely responsible for such other employees for all purposes, including, without
limitation, any health benefit continuation rights under federal or state law.
(f) Except as otherwise set forth in this Section 11.9, Seller
shall have no obligation with respect to any of the Transferred Employees with
respect to any claim arising from acts or omissions of Buyer occurring after the
Closing Date, and Buyer shall have no obligation with respect to any of the
Transferred Employees with respect to any claims arising from acts or omissions
of Seller occurring on or before the Closing Date.
11.10 ADMINISTRATION OF SELLER'S PLANS BEFORE AND AFTER THE CLOSING.
(a) After the Closing, Seller will administer all of its Plans (as defined in
Section 4.15 hereof) and distribute benefits therefrom to the Business Employees
in accordance with the terms and provisions of such Plans and applicable laws
and regulations.
(b) During the week commencing November 24, 1997, Seller made
matching contributions to the FHI Retirement Savings Plan for Business Employees
in respect of employee contributions made through the Closing Date in accordance
with plan provisions. Accruals will be made in the Closing Date Balance Sheet
with respect to Business Employees for (i) discretionary profit sharing
contributions under the FHI Retirement Savings Plan in the amount of two percent
(2%) of participant compensation through the Closing Date, and (ii) incentive
bonuses under Seller's Jackson Gainsharing Plan for all periods ending on or
before the Closing Date; and Buyer agrees to make payment of such accrued
amounts to the FHI Retirement Savings Plan and Business Employees, respectively,
in the ordinary course following the Closing Date.
11.11 INVENTORY REPURCHASE. One hundred eighty (180) days after the
Closing, at Buyer's election, Seller will repurchase any unsold or unused
inventory of heavy duty silicone truck products which are sold to the
aftermarket through Seller's HD representatives and which is reflected on the
Closing Date Balance Sheet for a purchase price payable in cash equal to the
value thereof as shown on the Closing Date Balance Sheet, against delivery of a
bill of sale therefor from Buyer to Seller.
12. INDEMNIFICATION.
12.1 INDEMNIFICATION BY SELLER. Seller agrees to defend, indemnify
and hold Buyer, its officers, directors, affiliates, employees and agents,
harmless from and against any claims by third persons (including, without
limitation, the Environmental Protection Agency or any other federal, state or
local government agency, board, department or body having jurisdiction over
environmental matters or Environmental Laws), damages, liabilities, losses and
expenses (including, without limitation, reasonable attorney's fees incurred in
seeking indemnification hereunder or defending any claim by a third person,
amounts paid in settlement of any claim or suit and costs of clean-up,
restoration, remediation and removal), taxes, fines, penalties and interest, of
any kind or nature whatsoever which may be sustained or suffered by
<PAGE>
Buyer or its officers, directors, affiliates, employees or agents, arising out
of, based upon, or by reason of:
(a) a breach of any representation or warranty made by Seller
in Sections 4.1 through 4.23 hereof, inclusive, or a failure to perform any
agreement or covenant made by Seller anywhere else in this Agreement,
(b) any claim, action or proceeding asserted or instituted
growing out of any matter or thing covered by such breached representation,
warranty, agreement or covenant,
(c) any liability that is an Excluded Liability,
(d) The Tommy Tilley product liability claim described in the
FHI Memorandum attached to Schedule 4.12 attached hereto and the violations of
Environmental Laws specified in the Enforcement Order issued by the Department
of Toxic Substances Control of the California Environmental Protection Agency on
November 14, 1994 in the matter of Federal Hose Manufacturing,
(e) the generation, use, treatment, handling, storage or
disposal, or arrangement for the use, treatment, handling, storage or disposal,
of Hazardous Materials on, or release of Hazardous Materials to or from, the
Real Property permitted, taken or made by any person whomsoever, at any time
prior to the Closing, whether or not in compliance with Environmental Laws then
in force,
(f) the removal of Hazardous Materials from the Real Property
and/or the ultimate disposition of such Hazardous Materials, by any person
whomsoever, at any time prior to the Closing, whether or not in compliance with
Environmental Laws then in force,
(g) the use of the Real Property by any person whomsoever, at
any time prior to the Closing, in such a manner as to cause a violation of any
Environmental Law or to potentially give rise to any liability or obligation for
the remediation or restoration of the Real Property or any other affected
property, or for the treatment, storage, removal, disposal, release, arrangement
for removal or disposal or transportation of any Hazardous Materials,
(h) any violations of Environmental Laws in relation to the
Real Property occurring at any time prior to the Closing,
(i) a failure by any person, at any time prior to the Closing,
to obtain, maintain current, and comply with the terms and conditions of, all
permits, approvals, identification numbers, licenses and other authorizations,
and renewals thereof, required under Environmental Laws for the use and
operation of the Real Property, and
(j) the exposure of employees of any owner, operator or lessee
of the Real Property to Hazardous Materials on or in relation to the Real
Property occurring at any time prior to the Closing;
<PAGE>
PROVIDED, HOWEVER, that (i) no indemnification shall be payable by Seller with
respect to any claim for breach of any representation or warranty made by Seller
in Sections 4.1 through 4.23 hereof, inclusive, asserted by Buyer after the
expiration or termination date, if any, prescribed for such representation or
warranty in the proviso of the first sentence of Section 11.1 hereof, provided
that once notice of any claim has been timely given, additional related claims
arising out of substantially the same circumstances may be made at any time
prior to the final resolution of such claim (by means of a final, non-appealable
judgment of a court of competent jurisdiction, a binding arbitration decision or
a settlement approved by the parties involved) even if such resolution occurs
after the expiration or termination date, if any, prescribed for such
representation or warranty in the proviso of the first sentence of Section 11.1
hereof, (ii) no indemnification shall be payable by Seller with respect to any
claim under any of clauses (e) through (j) of this Section 12.1 asserted by
Buyer after the fifth (5th) anniversary of the Closing Date, provided that once
notice of any such claim has been timely given, additional related claims
arising out of substantially the same circumstances may be made at any time
prior to the final resolution of such claim (by means of a final, non-appealable
judgment of a court of competent jurisdiction, a binding arbitration decision or
a settlement approved by the parties involved) even if such resolution occurs
after the fifth (5th) anniversary of the Closing Date, (iii) no indemnification
shall be payable by Seller with respect to any claim for breach of any
representation or warranty made by Seller in Sections 4.1 through 4.23 hereof,
inclusive, or with respect to any claim under any of clauses (e) through (j) of
this Section 12.1 hereof, until the total of such claims for indemnification
shall exceed US $75,000 (the "Deductible"), in which event Buyer shall be
entitled to recover the amount of such claims in excess of the Deductible and
(iv) the aggregate liability of Seller for indemnification payable hereunder
with respect to any and all claims by Buyer for breach of the representations
and warranties made by Seller in sections 4.1 through 4.23 hereof, inclusive,
and with respect to any claims under any of clauses (e) through (j) of this
Section 12.1 hereof, shall not exceed US $2,000,000 (the "Indemnity Cap
Amount"). For clarification and the avoidance of doubt, the limitations on
liability for indemnification set forth in clauses (i), (ii), (iii) and (iv) of
the proviso of the immediately preceding sentence shall not apply to claims
under clause (c) of this Section 12.1 hereof in respect of Excluded Liabilities
or claims under clause (d) of this Section 12.1. Any indemnification due from
Seller to Buyer shall be paid in United States dollars. Buyer may recover
indemnification claims: (i) from the Indemnity Fund (as defined in the Escrow
Agreement) as provided in the Escrow Agreement, (ii) by proceeding directly
against Seller, (iii) in any other manner or (iv) by any combination of the
foregoing. The indemnification provided by this Article 12 shall be the sole and
exclusive remedy of the Buyer and its related parties set forth above in this
Section 12.1 with respect to the matters covered by this Section 12.1.
12.2 INDEMNIFICATION BY AFC AND BUYER. AFC and Buyer, jointly and
severally, agree to defend, indemnify and hold Seller, its officers, directors,
affiliates, employees and agents, harmless from and against any claims by third
persons, damages, liabilities, losses and expenses (including, without
limitation, reasonable attorneys' fees incurred in seeking indemnification
hereunder or defending any claim by a third person, and amounts paid in
settlement of any claim or suit) of any kind or nature whatsoever which may be
sustained or
<PAGE>
suffered by Seller or its officers, directors, affiliates, employees or agents,
arising out of, based upon, or by reason of:
(a) a breach of any representation or warranty made by AFC or
Buyer in Sections 5.1 through 5.7 hereof, inclusive, or a failure to perform any
agreement or covenant made by AFC or Buyer anywhere else in this Agreement,
(b) any claim, action or proceeding asserted or instituted
growing out of any matter or thing covered by such breached representation,
warranty, agreement or covenant or
(c) any liability that is an Assumed Liability;
PROVIDED, HOWEVER, that (i) no indemnification shall be payable by AFC or Buyer
with respect to any claim for breach of any representation or warranty made by
AFC or Buyer in Sections 5.1 through 5.6 hereof, inclusive, asserted by Seller
after the expiration or termination date, if any, prescribed for such
representation or warranty in the proviso of the first sentence of Section 11.1
hereof, provided that once notice of any claim has been timely given, additional
related claims arising out of substantially the same circumstances may be made
at any time prior to the final resolution of such claim (by means of a final,
non-appealable judgment of a court of competent jurisdiction, a binding
arbitration decision or a settlement approved by the parties involved) even if
such resolution occurs after the expiration or termination date, if any,
prescribed for such representation or warranty in the proviso of the first
sentence of Section 11.1 hereof and (ii) no indemnification shall be payable by
AFC or Buyer with respect to any claim for breach of any representation or
warranty made by AFC or Buyer in Sections 5.1 through 5.6 hereof, inclusive,
until the total of such claims for indemnification shall exceed the Deductible,
in which event Seller shall be entitled to recover the amount of such claims in
excess of Deductible and (iii) the aggregate liability of Buyer for
indemnification payable hereunder with respect to any and all claims by Seller
for breach of the representations and warranties made by Buyer in Sections 5.1
through 5.6 hereof, inclusive, shall not exceed the Indemnity Cap Amount.. For
clarification and the avoidance of doubt, the limitations on liability for
indemnification set forth in clauses (i), (ii) and (iii) of the proviso of the
immediately preceding sentence shall not apply to claims under clause (c) of
this Section 12.2 hereof in respect of Assumed Liabilities. Any indemnification
payments due from AFC or Buyer to Seller shall be paid in United States dollars.
The indemnification provided by this Article 12 shall be the sole and exclusive
remedy of the Seller and its related parties set forth above in this Section
12.2 with respect to the matters covered by this Section 12.2.
12.3 NOTICE, DEFENSE OF CLAIMS. (a) Each party to this Agreement
shall give prompt written notice to the other party to this Agreement of each
claim for indemnification hereunder specifying the amount and nature of the
claim, and of any matter which is likely to give rise to an indemnification
claim. Failure to give timely notice of a matter which may give rise to an
indemnification claim shall not affect the rights of the indemnified party to
collect such claim from the indemnifying party except to the extent that failure
to so notify materially adversely affects the indemnifying party's ability to
defend such claim against a third party. In any case in which a claim for
indemnification involves a claim brought by a third party ("Third
<PAGE>
Party Claim") and the indemnifying party has not exercised its rights to assume
and control the defense of such matter as provided under subparagraph (b) of
this Section 12.3, the indemnified party shall have the right (but not the
obligation) to assume and control the defense of any such matter or its
settlement, provided that the indemnifying party may participate in the defense
at its own expense and provided, further, that the indemnified party shall keep
the indemnifying party informed as to the status of the defense and shall not
take any significant action in the defense thereof or consent to entry of
judgment or enter into any settlement thereof without the consent of the
indemnifying party which shall not be unreasonably withheld or delayed. Where
the indemnified party does not exercise its right to assume and control the
defense of such matter or its settlement or the indemnifying party has exercised
its rights to assume and control the defense of such matter as provided under
subparagraph (b) of this Section 12.3, the indemnifying party shall assume and
control the defense of such matter or its settlement at its own expense,
provided that the indemnified party may participate in the defense at its own
expense and, provided, further, that the indemnifying party will keep the
indemnified party informed as to the status of the defense and will not, except
with the consent of the indemnified party (which shall not be unreasonably
withheld or delayed), consent to entry of any judgment or enter into any
settlement which involves more than the payment of money or which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect of such
claim or litigation.
(b) The indemnifying party will thirty (30) days (or ten (10)
days in the case of a Third Party Claim with respect to which a complaint has
been filed) after receipt by the indemnifying party of the written notification
from the indemnified party of the Third Party Claim advise the indemnified party
whether the indemnifying party elects to assume and control the defense and
settlement of the Third Party Claim. If the indemnifying party elects to assume
and control the defense and settlement of the Third Party Claim, the
indemnifying party shall provide to the indemnified party at the time of such
election the following documents: (i) written notice that the indemnifying party
undertakes such obligations and (ii) an agreement to indemnify the indemnified
party for all damages, liabilities, losses and expenses with respect to such
Third Party Claim in accordance with the terms of this Article 12. Upon the
delivery of the above items, the indemnifying party will have the right to
diligently, through counsel of its own choice, control the good faith defense or
settlement of such Third Party Claim provided the indemnified party will have
the right to participate in such defense and settlement discussions, through
counsel of its own choice and at its own expense, and the indemnified party will
have the right to approve any proposed settlement to the extent provided for in
Section 12.3(a). Any failure on the part of the indemnifying party of notifying
the indemnified party within the time period provided above regarding the
election shall be deemed an election by the indemnifying party not to assume and
control the defense and settlement of the Third Party Claim.
12.4 TAX EFFECT; INSURANCE EFFECT. (a) The indemnifying party shall
make any indemnification payments determined to be payable to the indemnified
party hereunder promptly after such determination is made, without delay, and
without regard to any expectation that the indemnified party will receive a tax
benefit of any kind as a direct result of the matter giving rise to the claim
for which indemnification payments are to be made. The indemnified party shall
nevertheless exercise commercially reasonable efforts to claim any tax benefit
as a result of any
<PAGE>
matter giving rise to an indemnification claim of the indemnified party against
the indemnifying party. If the indemnified party files a federal income tax
return claiming a tax benefit as a direct result of the matter giving rise to
any indemnification claim of the indemnified party against the indemnifying
party prior to the date upon which the indemnifying party is given notice of the
claim, the indemnifying party's indemnification obligation with respect to such
claim shall be reduced by the amount of any such tax benefit so claimed by the
indemnified party. If the indemnified party files a federal income tax return
claiming any such tax benefit as a direct result of the matter giving rise to
any indemnification claim of the indemnified party against the indemnifying
party after the indemnifying party has paid such indemnification claim to the
indemnified party, then the indemnified party shall promptly pay to the
indemnifying party the amount of any such tax benefit claimed by the indemnified
party to the extent of the payments made by the indemnifying party to the
indemnified party on the claim.
(b) The indemnifying party shall make any indemnification
payments determined to be payable to the indemnified party hereunder promptly
after such determination is made, without delay, and without regard to any
expectation that the indemnified party will recover insurance proceeds as a
direct result of the matter giving rise to the claim for which indemnification
payments are to be made. The indemnified party shall nevertheless exercise
commercially reasonable efforts to seek to recover or make a claim for insurance
proceeds as a result of any matter giving rise to an indemnification claim of
the indemnified party against the indemnifying party, and if the indemnified
party receives any insurance proceeds as a direct result of the matter giving
rise to any indemnification claim of the indemnified party against the
indemnifying party prior to the date upon which the indemnifying party is given
notice of the claim, the indemnifying party's indemnification obligation with
respect to such claim shall be reduced by the amount of any such insurance
proceeds actually received by the indemnified party. If the indemnified party
receives any insurance proceeds as a direct result of the matter giving rise to
any indemnification claim of the indemnified party against the indemnifying
party after the indemnifying party has paid such indemnification claim to the
indemnified party, then the indemnified party shall promptly turn over any such
insurance proceeds received to the indemnifying party to the extent of the
payments made by the indemnifying party to the indemnified party on the claim.
Notwithstanding the foregoing, (i) the indemnified party shall have no
obligation whatsoever to seek to recover or make a claim for insurance proceeds
insofar as and to the extent the indemnified party is "self insured" and, (ii)
as used in this section 12.4 hereof, the term "insurance proceeds" shall mean
and refer to payments made by an insurer in the nature of "true insurance"
(excluding any payments, proceeds or recoveries under a so-called "self
insurance" system).
13. INTENTIONALLY LEFT BLANK
14. NON-COMPETITION COVENANT.
14.1 NON-COMPETITION. Seller covenants and agrees with Buyer and AFC
that Seller and its affiliates will not, without the prior written consent of
Buyer or AFC, directly or indirectly, during the period commencing on the date
hereof and expiring on the fifth (5th) anniversary of the date hereof (the
"Restrictive Period"):
<PAGE>
(1) form, acquire, invest in, finance, own, operate, manage, or
provide premises to, directly or indirectly, an enterprise (a "Competing
Business") which is engaged either (a) anywhere in North America in the business
of manufacturing or selling in the industrial aftermarket: (i) any products or
services now manufactured by the Business (individually and collectively the
"Existing Products"), (ii) any enhancements or derivatives of the Existing
Products, (iii) any products or services which advance the state of the art of
the Existing Products or (iv) any products or services which are competitive
with the Existing Products or the products and services referred to in clauses
(ii) or (iii) above or (b) anywhere in the world in the business of
manufacturing or selling in the industrial aftermarket: (i) any flexible metal
hose products or services now manufactured by the Business (the "Existing
Flexible Metal Hose Products"), (ii) any enhancements or derivatives of the
Existing Flexible Metal Hose Products, (iii) any products or services which
advance the state of the art of the Existing Flexible Metal Hose Products or
(iv) any products or services which are competitive with the Existing Flexible
Metal Hose Products or the products and services referred to in clauses (ii) or
(iii) above;
(2) sell Products (as defined in the Supply Agreement) to the
industrial distributor market (except (i) as and to the extent not inconsistent
with the Supply Agreement and (ii) to those specific distributors to whom Seller
is now selling the Products);
(3) interfere with or attempt to interfere with any officers,
employees, representatives or agents of Buyer, or any of its affiliates, or
induce or attempt to induce any of them to leave the employ of Buyer or any of
its affiliates, or violate the terms of their contract with any of them; or
(4) for the purpose of conducting or engaging in a Competing
Business, call upon, solicit, advise or otherwise do, or attempt to do, business
with any clients, suppliers, customers or accounts of the Business or the Buyer
or any of its affiliates or take away or interfere or attempt to interfere with
any custom, trade, business or patronage of the Business or the Buyer or any of
its affiliates;
PROVIDED, HOWEVER, that (A) nothing herein shall prevent Seller from
manufacturing and selling Heavy Duty Silicone Truck Products (as defined in
Section 1.1 hereof) to the aftermarket through Seller's HD representatives and
(B) the prohibition contained in clause (2) above shall continue only for so
long as the Supply Agreement is in effect.
14.2 INJUNCTIVE RELIEF. The parties hereto acknowledge and agree
that any breach of the restrictive covenant contained in this Article 14 would
cause irreparable injury to Buyer and AFC and that the remedy at law for any
such breach would be inadequate, and Seller agrees and consents that, in
addition to any other available remedy, temporary and permanent injunctive
relief may be granted in any proceeding which may be brought by AFC or Buyer to
enforce such restrictive covenant without necessity of proof that any other
remedy at law is inadequate.
<PAGE>
14.3 ENFORCEMENT. The parties intend that the covenants of Section
14.1 shall be deemed to be a series of separate covenants, one for each county
or province of each and every state, territory or jurisdiction of each country
included within the Territory and one for each month of the Restrictive Period.
If, in any judicial proceeding, a court shall refuse to enforce any of such
covenants, then such unenforceable covenants shall be deemed eliminated from the
provisions hereof for the purpose of such proceeding to the extent necessary to
permit the remaining separate covenants to be enforced in such proceeding. If,
in any judicial proceeding, a court shall refuse to enforce any one or more of
such separate covenants because the total time thereof is deemed to be excessive
or unreasonable, then it is the intent of the parties hereto that such
covenants, which would otherwise be unenforceable due to such excessive or
unreasonable period of time, be in force for such lesser period of time as shall
be deemed reasonable and not excessive by such court.
15. NON-DISCLOSURE COVENANT.
15.1 NON-DISCLOSURE OF INFORMATION. It is understood that the
Business to be acquired by Buyer hereunder is of a confidential nature. Prior to
the date hereof there may have been revealed and on or after the date hereof
there may be revealed to Seller and its affiliates Confidential Information (as
hereinafter defined) concerning the Business of the Seller. Seller for itself
and its affiliates and employees agrees with AFC and Buyer that, following the
Closing, Seller and its affiliates and employees will never divulge or
appropriate to their own use, or to the use of any third party, any Confidential
Information.
15.2 DEFINITION OF CONFIDENTIAL INFORMATION. As used herein, the
term "Confidential Information" means the following oral or written information
used exclusively in the Business: know-how, technology, inventions, designs,
methodologies, trade secrets, patents, secret processes and formulae,
information and data relating to the development, research, testing,
manufacturing, marketing, sale, distribution and uses of products and services,
sources of supplies, budgets and strategic plans, the identity and special needs
of customers, plants and other properties, and any other information which may
give the Seller an opportunity to obtain an advantage over its competitors who
do not know or use such information, PROVIDED THAT the term "Confidential
Information" shall not include (i) any such information that, prior to its use
or disclosure by Seller or its affiliates or employees, can be shown to have
been in the public domain or generally known or available to customers,
suppliers or competitors of the Business through no breach of the provisions of
this Article 15 or other non-disclosure covenants or duties; (ii) any such
information that, prior to its use or disclosure by Seller or its affiliates or
employees, was rightfully in the receiving party's possession, without violation
of the provisions of this Article 15 or other non-disclosure covenants or
duties; and (iii) any such information that, prior to its use or disclosure by
Seller or its affiliates or employees, was independently developed by the
receiving party without violation of the provisions of this Article 15 or other
non-disclosure covenants or duties.
15.3 INJUNCTIVE RELIEF. The parties hereto acknowledge and agree
that the breach of the restrictive covenant contained in this Article 15 would
cause irreparable injury to AFC and Buyer and that the remedy at law for any
such breach would be inadequate, and Seller
<PAGE>
agrees and consents that, in addition to any other available remedy, temporary
and permanent injunctive relief may be granted in any proceeding which may be
brought by AFC or Buyer to enforce such restrictive covenant without necessity
of proof that any other remedy at law is inadequate.
16. MISCELLANEOUS.
16.1 EXPENSES. Buyer and Seller shall pay the fees and expenses of
their respective accountants and legal counsel incurred in connection with the
transactions contemplated by this Agreement.
16.2 NOTICES. Any notice or other communication required or permitted
to be given to any party hereunder shall be in writing and shall be given to
such party at such party's address set forth below or such other address as such
party may hereafter specify by notice in writing to the other party. Any such
notice or other communication shall be addressed as aforesaid and given by (1)
certified mail, return receipt requested, with first class postage prepaid, (2)
hand delivery, (3) reputable overnight courier or (4) facsimile transmission.
Any notice or other communication will be deemed to have been duly given (1) on
the fifth day after mailing, provided receipt of delivery is confirmed, if
mailed by certified mail, return receipt requested, with first class postage
prepaid, (2) on the date of service if served personally, (3) on the business
day after delivery to an overnight courier service, provided receipt of delivery
has been confirmed or (4) on the date of transmission if sent via facsimile
transmission, provided confirmation of receipt is obtained promptly after
completion of transmission.
To Seller: c/o Flexfab Horizons International, Inc.
102 Cook Road
Hastings, Michigan 49058-9628
Attn: Douglas A. DeCamp, President
Fax: (616) 945-3442
With a copy to: Varnum, Riddering, Schmidt and Howlett LLP
333 Bridge Street, Suite 1600
Grand Rapids, MI 49503
Attn: Scott Huizenga, Esquire
Fax: (616)336-7000
To AFC or Buyer: c/o AFC Cable Systems, Inc.
50 Kennedy Plaza
Suite 1250
Providence, Rhode Island 02903
Attn: Ralph R. Papitto,
Chairman and Chief Executive Officer
Fax: (401) 453-2009
<PAGE>
With a copy to: Adler Pollock & Sheehan
Incorporated
2300 Hospital Trust Tower
Providence, RI 02903
Attn: Stephen Geanacopoulos, Esq.
Fax: (401) 751-0604
16.3 WAIVER. The failure of any party hereto at any time or times
hereafter to exercise any right, power, privilege or remedy hereunder or to
require strict performance by the other or another party of any of the
provisions, terms or conditions contained in this Agreement or in any other
document, instrument or agreement contemplated hereby or delivered in connection
herewith shall not waive, affect, or diminish any right, power, privilege or
remedy of such party at any time or times thereafter to demand strict
performance thereof; and no rights of any party hereto shall be deemed to have
been waived by any act or knowledge of such party, or any of its agents,
officers or employees, unless such waiver is contained in an instrument in
writing, signed by such party. No waiver by any party hereto of any of its
rights on any one occasion shall operate as a waiver of any of its other rights
or any of its rights on a future occasion.
16.4 SECTION HEADINGS. The section headings in this Agreement are for
convenience of reference only and shall not be deemed to be a part of this
Agreement or to alter or affect any provisions, terms or conditions contained
herein.
16.5 EXHIBITS AND SCHEDULES. Any exhibits, schedules, financial
statements and other documents referenced herein shall be deemed to be attached
hereto and made a part hereof.
16.6 SEVERABILITY. Wherever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law. If any provision of this Agreement is declared illegal,
invalid or unenforceable for any reason in any jurisdiction, then such
declaration shall have no effect upon the remaining provisions of this Agreement
which shall continue in full force and effect as if this Agreement had been
executed with the invalid provision hereof deleted. Furthermore, the entirety of
this Agreement shall continue in full force and effect in all other
jurisdictions.
16.7 ENTIRE UNDERSTANDING. This Agreement sets forth the entire
agreement and understanding between the parties with respect to the subject
matter hereof and merges any and all discussions, negotiations, letters of
intent or agreements in principle between them. Neither of the parties shall be
bound by any conditions, warranties, understandings or representations with
respect to such subject matter other than as expressly provided herein, or as
duly set forth on or subsequent to the date hereof in writing and signed by a
duly authorized officer of the party to be bound thereby.
16.8 BINDING EFFECT. This Agreement shall be binding upon and shall
inure to the exclusive benefit of the parties hereto and their respective heirs,
executors, administrators,
<PAGE>
legal representatives, successors and permitted assigns. Except as otherwise
expressly provided in this Agreement, this Agreement is not intended to, nor
shall it, create any rights in any other person.
16.9 GOVERNING LAW. This Agreement is and shall be deemed to be a
contract entered into and made pursuant to the laws of the State of Rhode
Island, U.S.A. and shall in all respects be governed, construed, applied and
enforced in accordance with the laws of said State, without reference to its
conflict of laws principles.
16.10 CHOICE OF FORUM AND CONSENT TO JURISDICTION. Any action arising
out of or under this Agreement, any other document, instrument or agreement
contemplated herein or delivered pursuant hereto, or the transactions
contemplated by this Agreement or any of such other documents, instruments or
agreements, shall be brought only in a federal or state court having
jurisdiction and venue in Ohio, U.S.A., and each of the parties hereto hereby
irrevocably submits to the jurisdiction of such courts and agrees that venue in
Ohio is proper. Seller hereby irrevocably designates, appoints and empowers
Varnum Riddering Schmidt & Howlett LLP, P.O. Box 352, Grand Rapids, Michigan
49501 and its successors as its authorized special agent to receive, for and on
behalf of Seller and its affiliates, service of process in any such legal action
or proceeding, a copy of such process to be sent in the manner required above
for notices to such party. Buyer hereby irrevocably designates, appoints and
empowers Adler Pollock & Sheehan Incorporated, 2300 Hospital Trust Tower,
Providence, Rhode Island 02903 and its successors, as its authorized special
agent to receive, for and on behalf of Buyer and its affiliates, service of
process in any such legal action or proceeding, a copy of such process to be
sent in the manner require above for notices to such party. To the extent
permitted by applicable law, final judgment against such party (a certified copy
of which shall be conclusive evidence of the fact and of the amount of any
indebtedness of such party hereunder) in any such legal action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on an
unsatisfied judgment or similar proceeding. Each of the parties hereto hereby
irrevocably waives and agrees not to assert, by way of motion, as a defense, or
otherwise, in any legal action or proceeding, any defense or any claim that it
is not personally subject to the jurisdiction of the above-named Ohio courts for
any reason, including claims that such party may be immune from the
above-described legal process (whether through service or notice, attachment
prior to judgment, attachment in aid of execution, or otherwise), or that such
proceeding is brought in an inconvenient or otherwise improper forum or that
this Agreement or any of the other aforementioned documents, instruments or
agreements, or the subject matter hereof or thereof, may not be enforced in or
by such courts, or that the same are governed by the laws of a jurisdiction
other than Rhode Island. Each of the parties hereby specifically agrees that it
shall not bring any actions, suits or proceedings arising out of or under this
Agreement, any other document, instrument or agreement contemplated herein or
delivered pursuant hereto, or the transactions contemplated by this Agreement or
any of such other documents, instruments or agreements, in the courts of any
jurisdiction other than the above-named courts of Ohio, that any such action
brought by either party shall be dismissed upon the basis of the agreements,
terms and provisions set forth in this Section 16.10, and that any order or
judgment obtained in any such action from a court other than the courts of Ohio
shall be void ab initio provided that, notwithstanding the foregoing provisions
of this Section 16.10, either party may bring and
<PAGE>
enforce an action seeking injunctive or other equitable relief in any court of
competent jurisdiction.
16.11 ASSIGNABILITY. Neither party may assign all or any of its
rights and/or obligations hereunder without the prior written consent of the
other party, except that (a) Buyer may at any time, without the consent of
Seller, assign all or any part of its rights and/or obligations under this
Agreement to any affiliate of Buyer, and any such assignee of Buyer shall
succeed to and be possessed of the rights of Buyer hereunder to the extent of
the assignment made, provided that any such assignment shall not relieve Buyer
of its obligations hereunder and (b) after the Closing Buyer may, without
Seller's consent, assign all or any part of its rights and/or obligations
hereunder to any person who acquires all or a major part of the assets of the
Business from Buyer, provided that any such assignment shall not relieve Buyer
of its obligations hereunder.
16.12 COUNTERPARTS; DELIVERY BY FACSIMILE. This Agreement may be
executed in counterparts and by each party hereto on a separate counterpart, all
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement. Delivery of an
executed counterpart of a signature page to this Agreement by telecopier or
facsimile transmission shall be effective as delivery of a manually executed
counterpart of this Agreement.
16.13 BULK SALES LAWS. The Buyer hereby waives compliance by the
Seller prior to Closing with the applicable bulk sales law of the State of Ohio
and any other State where the Uniform Commercial Code has been adopted in which
the Seller was doing business, or has property located. The Seller hereby agrees
to indemnify and hold harmless the Buyer in respect of all losses, damages,
costs, liabilities and expenses, including, without limitation, reasonable
attorneys' fees and costs of investigation, relating to or arising out of any
cause of action or other claim for relief arising out of or based upon the laws
of any jurisdiction relating to sales of property in bulk, whether asserted
prior to or subsequent to the Closing Date.
16.14 CERTAIN DEFINITIONS. For the purposes of this Agreement: (a) an
"AFFILIATE" of any specified person shall mean and include any person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such person, (b) an "AFFILIATE"
of any specified natural person shall also include the members of such person's
immediate family and (c) a "PERSON" shall mean and include any natural person,
firm, partnership, association, corporation, limited liability company, company,
unincorporated organization, trust, public body or government or any department,
board, commission or agency thereof.
16.15 PRONOUNS AND PLURALS. All pronouns used herein shall be deemed
to refer to the masculine, feminine, neuter, singular or plural as the identity
of the person or persons may require in the context, and the singular form of
nouns, pronouns and verbs will include the plural, and vice versa, whichever the
context may require.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers or signatories as of the date first written
above.
FLEXFAB HORIZONS INTERNATIONAL, INC.
By: /s/ D.A.DeCamp
-----------------------------------
Name: D.A. DeCamp
---------------------------------
Title: President and CEO
--------------------------------
AFC MADISON ACQUISITION CORP.
By: /s/ Raymond H. Keller
-----------------------------------
Name: Raymond H. Keller
---------------------------------
Title: Vice President and Treasurer
---------------------------------
AFC CABLE SYSTEMS, INC.
By: /s/ Raymond H. Keller
-----------------------------------
Name: Raymond H. Keller
---------------------------------
Title: Vice President and CFO
---------------------------------
<PAGE>
SCHEDULES
Schedule 1.1(b) - Schedule of Machinery and Equipment
Schedule 1.1(g) - Schedule of Assumed Contracts
Schedule 1.1(i) - Schedule of Prepaid Expenses and Other Assets
Schedule 1.1 proviso(g) - Schedule of Certain Excluded Assets
Schedule 1.5 - Schedule of Allocation of Purchase Price
Schedule 4.1 - Schedule of Jurisdictions
Schedule 4.2 - Schedule of Breaches, Defaults and Required Consents
Schedule 4.4(c) - Schedule of Liens and Encumbrances
Schedule 4.4(f) - Schedule of Personal Property Leases
Schedule 4.4(g) - Schedule of Assets at Other Locations
Schedule 4.5 - Schedule and Condition of Real Property
Schedule 4.6 - Schedule of Agreements and Other Matters Restricting
Conduct of Business
Schedule 4.7 - Schedule of Regulatory Licenses,
Consents, Permits and Authorizations
Schedule 4.8(c) - Schedule of Liabilities
Schedule 4.9 - Schedule of Noncompliance with Laws
Schedule 4.10 - Schedule of Patents, Trademarks and
Copyrights
Schedule 4.11 - Schedule of Contracts, Commitments and Intercompany
Transactions
Schedule 4.12 - Schedule of Litigation
Schedule 4.13 - Schedule of Changes
Schedule 4.14 - Schedule of Insurance
Schedule 4.15 - Schedule of Employee Benefit Plans
Schedule 4.20 - Schedule of Stockholders
Schedule 11.9 - Seller's Business Employees
EXHIBITS
Exhibit A - Escrow Agreement
Exhibit B - Lease
Exhibit C - Supply Agreement
Exhibit D - Registration Rights Agreement
Exhibit E - Transition Services Agreement
Exhibit F - Guaranty
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
OTHER
SUBSIDIARY STATE OF ORGANIZATION TRADE NAME
---------- --------------------- ----------
<S> <C> <C>
AFC FITTINGS, INC. DELAWARE NONE
AFC INVESTMENTS, INC. MASSACHUSETTS NONE
KAF-TECH, INC. DELAWARE NONE
TKN, INC. RHODE ISLAND NONE
WPFY, INC. DELAWARE NONE
AREA LIGHTING RESEARCH, INC. DELAWARE NONE
B&B ELECTRONICS
MANUFACTURING COMPANY ILLINOIS NONE
MADISON EQUIPMENT
COMPANY, INC. DELAWARE NONE
FEDERAL HOSE
MANUFACTURING, INC DELAWARE NONE
AFC REALTY HOLDING CORP. DELAWARE NONE
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-76298) pertaining to the 1993 Equity Incentive Plan and the 1993
Stock Option Plan for Non-Employee Directors of AFC Cable Systems, Inc, the
Registration Statement (Form S-8 No. 33-83420) pertaining to the 401(k) Savings
and Profit Sharing Plans and the Registration Statement (Form S-8 No. 33-28313)
pertaining to the 1997 Equity Incentive Plan of AFC Cable Systems, Inc. of our
report dated February 17, 1998, with respect to the consolidated financial
statements and schedule of AFC Cable Systems, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Providence, Rhode Island
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1997 SEP-27-1997 JUN-28-1997 MAR-29-1997
<CASH> 2,803 1,046 483 605
<SECURITIES> 40,434 38,291 37,414 18,893
<RECEIVABLES> 35,997 35,624 35,582 33,063
<ALLOWANCES> 3,870 3,207 2,999 2,922
<INVENTORY> 39,937 38,312 36,776 27,545
<CURRENT-ASSETS> 118,231 111,945 109,547 79,054
<PP&E> 37,346 35,957 33,530 31,067
<DEPRECIATION> 12,409 12,638 11,864 10,937
<TOTAL-ASSETS> 161,129 146,442 142,313 109,873
<CURRENT-LIABILITIES> 30,090 22,290 23,075 23,463
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 114 114 91 75
<OTHER-SE> 123,021 116,864 111,690 79,141
<TOTAL-LIABILITY-AND-EQUITY> 161,129 146,442 142,313 109,873
<SALES> 220,264 158,701 101,997 47,787
<TOTAL-REVENUES> 220,264 158,701 101,997 47,787
<CGS> 156,479 113,277 73,125 34,479
<TOTAL-COSTS> 156,479 113,277 73,125 34,479
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 209 116 66 33
<INTEREST-EXPENSE> 620 431 272 131
<INCOME-PRETAX> 29,631 20,853 12,757 5,624
<INCOME-TAX> 11,392 8,028 4,910 2,164
<INCOME-CONTINUING> 18,239 12,825 7,847 3,460
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 18,239 12,825 7,847 3,460
<EPS-PRIMARY> 1.71 1.22 .78 .37
<EPS-DILUTED> 1.66 1.19 .76 .36
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-28-1996 JUN-29-1996 MAR-30-1996
<CASH> 980 2,961 334 1,010
<SECURITIES> 30,508 28,733 28,609 25,374
<RECEIVABLES> 27,059 28,110 28,222 23,722
<ALLOWANCES> 3,140 2,168 1,394 2,352
<INVENTORY> 20,926 18,269 19,907 21,307
<CURRENT-ASSETS> 78,091 77,895 77,374 70,401
<PP&E> 27,188 25,157 23,601 23,103
<DEPRECIATION> 9,482 8,998 8,435 7,877
<TOTAL-ASSETS> 97,923 96,518 95,027 88,132
<CURRENT-LIABILITIES> 19,132 21,429 26,934 23,047
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 73 73 73 73
<OTHER-SE> 72,917 69,186 65,612 62,695
<TOTAL-LIABILITY-AND-EQUITY> 97,923 96,518 95,027 88,132
<SALES> 161,868 117,662 76,103 33,885
<TOTAL-REVENUES> 161,868 117,662 76,103 33,885
<CGS> 118,487 86,880 57,166 25,901
<TOTAL-COSTS> 118,487 86,880 57,166 25,901
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 263 154 103 51
<INTEREST-EXPENSE> 728 633 429 164
<INCOME-PRETAX> 18,560 12,776 7,299 2,606
<INCOME-TAX> 7,100 4,886 2,759 970
<INCOME-CONTINUING> 11,460 7,890 4,540 1,636
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 11,460 7,890 4,540 1,636
<EPS-PRIMARY> 1.25 .87 .50 .18
<EPS-DILUTED> 1.23 .85 .49 .18
</TABLE>
