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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, 1998
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. |X|
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $328,278,138 on March 29, 1999, 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 29, 1999 was 12,739,279 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
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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 48% of the sales
in the domestic armored cable market based upon Company estimates. The Company
has expanded its product lines through recent strategic acquisitions to include
flexible non-metallic polyvinyl chloride ("PVC") electrical conduit and rigid
PVC electrical conduit, photo controls for the lighting control and fixture
industries, electronic interfaces and connectors that facilitate data
communications and flexible hoses, ducting and connectors for diverse
applications.
In order to penetrate higher margin, specialty application niche markets,
the Company focuses 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 twenty 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 generally be separated into three broad
categories: (i) armored cable and related or similar products including flexible
conduit, specialty cables, rigid PVC electrical conduit and electrical fittings,
all manufactured by the Wire and Cable segment, (ii) flexible and premise wiring
systems and related products manufactured by the Modular Wiring and Components
segment and (iii) those products that are not manufactured by either of the
preceding segments and are monitored separately for financial reporting
purposes. These include specialty processed metals and flexible metal, fabric
and plastic hoses, ducting and connectors and are included in the Other Products
segment. The segments are vertically integrated in that many of the products
manufactured in the Modular Wiring and Components segment utilize components,
including cable remnants, produced in the Wire and Cable segment. Also included
in the Modular Wiring and Components segment are electronic interfaces and
connectors and photo controls and electrical devices for the lighting control
and fixture industries, all of which are manufactured by companies 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 segment. Wire and Cable segment 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 segment products consist primarily of armored cable,
flexible conduit, specialty cables and electrical fittings and connectors and
accounted for $203.1 million, or 74.5%, and $170.6 million, or 77.4%, of the
Company's net sales for the years ended December 31, 1998 and 1997,
respectively. The Company is the leading manufacturer of
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armored cable in the United States, with approximately 48% of the domestic
market based on current Company estimates. Wire and Cable segment 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 segment products also meet the standards of the Canadian
Standards Association ("CSA") where required. See "Quality Assurance."
Products manufactured by the Wire and Cable segment 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 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.
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.
Modular Wiring and Components segment. Modular Wiring and Components
segment 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. Modular
Wiring and Components segment 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. Modular Wiring and Components segment 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 Modular Wiring and
Components segment products were $47.2 million, or 17.3%, and $38.4 million, or
17.5%, of the Company's net sales for the years ended December 31, 1998 and
1997, respectively.
Products manufactured by the Modular Wiring and Components segment 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, a major manufacturer of raised
flooring and a renovator of retail stores in an effort to expand the
number of distribution channels for The Intelligent Ceiling and The
Intelligent Floor product offerings.
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
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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.
Other Products. Other products accounted for $22.5 million, or 8.2%, and
$11.3 million, or 5.1%, of the Company's net sales for the years ended December
31, 1998 and 1997, respectively. These other products include specialty
processed metals and flexible metal, fabric and plastic hoses, ducting and
connectors.
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, 1998, 78 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 Modular Wiring and
Components segment 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 segment 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 four 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 to adopt 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 80% and 81% of the Company's net sales during the years ended
December 31, 1998 and 1997, respectively. The Company's top ten customers
accounted for approximately 25% of the Company's gross sales for each of the
years ended December 31, 1998 and 1997. In addition to sales to distributors,
the Company directs significant marketing efforts toward DIY customers. Sales to
DIY customers accounted for approximately 6% of the Company's gross sales for
each of the years ended December 31, 1998 and 1997 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 Modular Wiring and Components
segment. 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 Modular
Wiring and Components segment. 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 in the Wire and Cable segment
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". Modular Wiring and Components segment manufacturing
operations primarily consist of metal stamping, riveting, custom wire cutting,
custom assembly and packaging operations. This segment utilizes proprietary
tooling in its assembly techniques. Manufacturing operations in the Company's
two segments 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 Modular Wiring and
Components segment uses remnants from the Wire and Cable segment in its
manufacturing process, thereby reducing the Company's overall scrap ratio.
Raw Materials
Copper, steel and aluminum used in manufacturing represented approximately
46% of cost of goods sold for the year ended December 31, 1998. 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, 1998, the Company had
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agreed to purchase the majority of its 1999 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.
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, 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 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 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 54 draftsmen and engineers and 63 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.
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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. There can be no assurance, however, that the Company's patents will
provide adequate protection against competitors who develop or patent similar
technology. The Company has recently filed suit against one of its competitors
for infringement of the Company's process-patented striped armored cable.
Although the Company has received a response to this claim, the outcome cannot
presently be determined. There can be no assurance, however, that the Company's
patent will not be successfully challenged and invalidated.
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 secrets.
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, 1998 the Company had approximately 1,331 full-time
employees, of which 531 employees were represented by labor unions. The
Company's union contracts expire June 30, 1999, February 4, 2000, February 23,
2001 and October 7, 2001. Of the Company's employees, 120 are in administration,
74 in sales and marketing, 117 in engineering and technical services, 917 in
manufacturing and 103 in distribution. The Company did experience a nine-week
work stoppage at its Burlington, New Jersey facility. The work stoppage,
however, was solely for economic reasons and the Company believes its current
relations with employees at all its facilities 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-Modular Wiring and
Components segment,
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 71,000 Owned
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
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Thomasville, GA Manufacturing-PVC Conduit,
Administration 150,000 Owned
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
</TABLE>
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<TABLE>
<CAPTION>
Owned/
Location Facility Type Square Feet Leased
- -------- ------------- ----------- ------
<S> <C> <C> <C>
Painesville, OH Manufacturing-Conduit, Administration 49,000 Owned
Bensalem, PA Manufacturing-Metal Processing 28,800 Leased
Montgomeryville, PA Manufacturing-Non-Metallic Conduit,
Administration 46,750 Leased
Providence, RI Administration 2,500 Leased
Garland, TX Manufacturing-Modular Wiring and
Components segment 45,300 Leased
</TABLE>
(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
10
<PAGE>
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, 1998, there is an
appeal pending with the U.S. Court of Appeals for the First Circuit.
On March 12, 1998, The Township of Independence, New Jersey (the
"Township"), named one of the Company's wholly owned subsidiaries, ALR, in a
suit seeking compensation for expenses allegedly incurred by the Township in
connection with environmental contamination apparently caused by the predecessor
operator of the business of ALR. The Company believes that any amounts recovered
by the Township and other costs and expenses associated with this action are,
subject to certain limitations, covered by indemnification from the predecessor
entity and its stockholders under the related asset purchase agreement.
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.
11
<PAGE>
12
<PAGE>
Item 4A. Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
Ralph R. Papitto 72 Chairman of the Board and Chief Executive Officer December 1989
Robert R. Wheeler 54 President and Chief Operating Officer October 1995
Raymond H. Keller 61 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.
13
<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>
1997
First Quarter......................... 21.40 16.00
Second Quarter........................ 22.40 15.50
Third Quarter......................... 28.40 21.10
Fourth Quarter........................ 31.88 22.50
1998
First Quarter......................... 40.13 27.00
Second Quarter........................ 40.25 31.69
Third Quarter......................... 38.38 19.25
Fourth Quarter........................ 36.50 21.75
</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 29, 1999, there were approximately 125 holders of record of
the Company's Common Stock and approximately 1,317 beneficial Shareholders.
14
<PAGE>
15
<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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales ............................ $ 114,386 $ 139,483 $ 161,868 $ 220,264 $ 272,792
Cost of Goods Sold ................... 82,497 107,087 118,487 156,479 188,067
--------- --------- --------- --------- ---------
Gross profit ......................... 31,889 32,396 43,381 63,785 84,725
Selling, general and administrative
Expenses ........................ 21,491 21,926 26,384 35,483 46,871
--------- --------- --------- --------- ---------
Income from operations ............... 10,398 10,470 16,997 28,302 37,854
Other income (expense), net .......... 160 39 (48) (192) (201)
Investment income .................... 80 3,001 2,339 2,141 4,598
Interest expense ..................... 176 614 728 620 744
--------- --------- --------- --------- ---------
Income before taxes .................. 10,462 12,896 18,560 29,631 41,507
Income taxes ......................... 4,269 4,791 7,100 11,392 16,322
--------- --------- --------- --------- ---------
Net income ........................... $ 6,193 $ 8,105 $ 11,460 $ 18,239 $ 25,185
========= ========= ========= ========= =========
Basic earnings per share (1) ......... $ 0.90 $ 0.92 $ 1.25 $ 1.71 $ 2.07
========= ========= ========= ========= =========
Basic average shares (1) ............. 6,881 8,851 9,134 10,664 12,183
========= ========= ========= ========= =========
Diluted earnings per share (1) ....... $ 0.90 $ 0.90 $ 1.23 $ 1.66 $ 2.00
========= ========= ========= ========= =========
Dilutive average shares (1) .......... 6,909 9,047 9,288 11,024 12,589
========= ========= ========= ========= =========
Balance Sheet Data:
Cash and cash equivalents ............ $ 2,571 $ 2,090 $ 980 $ 2,803 $ 2,968
Working capital ...................... 17,789 48,099 58,959 88,141 124,355
Total assets ......................... 50,254 84,784 97,923 161,129 241,547
Short-term debt ...................... 3,500 6,952 2,270 6,457 9,926
Long-term debt ....................... -- -- 3,300 3,893 11,098
Total liabilities .................... 19,867 23,473 24,933 37,994 55,416
Stockholders' equity ................. 30,387 61,311 72,990 123,135 186,131
</TABLE>
(1) Data for the years ended December 31, 1996, 1995 and 1994 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 10 and 11 to Consolidated Financial Statements.
16
<PAGE>
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."
Merger
On January 27, 1999, the Company entered into an agreement with Thomas
& Betts Corporation ("T&B") whereby the Company would become, through a
stock-for-stock merger, a wholly-owned subsidiary of T&B. The transaction is
intended to be accounted for as a pooling of interests. The transaction is
subject to the approval of the shareholders of both companies.
Acquisitions
As more fully discussed in Note 2 to Consolidated Financial Statements,
the Company completed the acquisitions of two companies during the fiscal year
ended December 31, 1998; Spiraduct, Inc. ("Spiraduct") and Georgia Pipe Company
("Georgia Pipe"). In 1997, AFC completed the acquisition of four companies; 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, Spiraduct and Georgia Pipe would contribute $23.6
million to net sales and $.17 to diluted earnings per share for the year ended
December 31, 1998. For the year ended December 31, 1997, all of the above
acquisitions would contribute $40.5 million to net sales and $.19 to diluted
earnings per share.
Results of Operations
Year Ended December 31, 1998 versus Year Ended December 31, 1997
Net Sales. Net sales for the year ended December 31, 1998 increased $52.5
million, or 23.8%, to $272.8 million from $220.3 million for the year ended
December 31, 1997. Net sales for the Wire and Cable segment increased by $32.5
million, or 19.1%, to $203.1 million for the year ended December 31, 1998 from
$170.6 million for the year ended December 31, 1997. This increase is
attributable to additional sales of the Company's traditional armored cable
products, higher margin specialty application cables and fittings and
connectors. Also contributing to the increase were sales of Spiraduct and
Georgia Pipe, which were acquired in May and October of 1998, respectively. Net
sales for the Modular Wiring and Components segment increased by $8.8 million,
or 22.9%, to $47.2 million for the year ended December 31, 1998 from $38.4
million for the year ended December 31, 1997. This increase is attributable to
increased sales of modular wiring systems as well as increased sales of
electronic interfaces and connectors. Sales of other products which, in the
prior year, were included in sales of the Wire and Cable segment but are now
segregated to conform to the manner in which segments are reported, increased
$11.2 million to $22.5 million for the year ended December 31, 1998 from $11.3
million for the year ended December 31, 1997. This increase was primarily
attributable to a year of sales of the line of flexible metal, fabric and
plastic hoses acquired in 1997.
Gross Profit. Gross profit for the year ended December 31, 1998 increased
$20.9 million, or 32.8% to $84.7 million from $63.8 million for the year ended
December 31, 1997. Gross margin increased to 31.1% for the year ended December
31, 1998 from 29.0% for the year ended December 31, 1997. This increase is
attributable to (i) improved operating efficiencies and the benefits of
increased output, (ii) more efficient material utilization resulting from
improved manufacturing processes and (iii) increased sales of the Company's
higher margin specialty application cables, modular wiring systems and
electronic interface products.
17
<PAGE>
Income From Operations. Income from operations for the year ended December
31, 1998 increased $9.6 million, or 33.9%, to $37.9 million from $28.3 million
for the year ended December 31, 1997. Income from operations as a percentage of
net sales increased to 13.9% for the year ended December 31, 1998 from 12.8% for
the year ended December 31, 1997. This increase resulted from improved gross
margin, partially offset by an increase in compensation and advertising
expenses, increases in freight costs and sales agent commissions, which
generally rise in proportion with net sales and higher selling, general and
administrative expenses as a percent of net sales for certain of the companies
acquired in 1997 and 1998.
Net Income. Net income for the year ended December 31, 1998 increased $7.0
million, or 38.5%, to $25.2 million from $18.2 million for the year ended
December 31, 1997. Net income as a percentage of net sales increased to 9.2% for
the year ended December 31, 1998 from 8.3% for the year ended December 31, 1997.
This increase was primarily due to increased income from operations and
investment income, partially offset by a 0.9% higher effective tax rate in 1998.
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 segment increased by $31.9
million, or 23.0%, to $170.6 million for the year ended December 31, 1997 from
$138.7 million for the year ended December 31, 1996. This increase was
attributable primarily to higher sales of the Company's traditional armored
cable and flexible conduit products, higher margin specialty application cables
and fittings and connectors. Net sales for the Modular Wiring and Components
segment 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 higher sales of modular wiring systems as well
as sales by ALR and B&B, both of which were acquired in January 1997. Net sales
for other products for the year ended December 31, 1997, including sales by
Federal Hose, a December 1997 acquisition, increased $4.8 million, or 73.8%, to
$11.3 million from $6.5 million for the year ended December 31, 1996.
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.
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.
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 and to supplement its growth
through acquisitions.
18
<PAGE>
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 1997 and 1998, supplemented by available borrowings under its revolving
line of credit and other borrowings. The excess proceeds from the 1997 and 1998
stock offerings are included in the Company's portfolio of marketable securities
at December 31, 1998. The Company expects that it will meet its ongoing working
capital needs for the next twenty-four months primarily with existing cash and
cash generated from operations.
Cash generated from operations totaled $29.0 million, $5.1 million and
$11.5 million for the years ended December 31, 1998, 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. Working capital on
December 31, 1998 was $124.4 million and the ratio of current assets to current
liabilities was 4.16 to 1.00 compared to 3.93 to 1.00 on December 31, 1997. The
Company's average inventory of $38.1 million for the year ended December 31,
1998 (including $3.5 million of inventories of companies acquired during such
period) represented an increase of $5.2 million over the average inventory of
$32.9 million for the year ended December 31, 1997 and an improvement in
turnover.
Accounts receivable at December 31, 1998 were $7.6 million higher than the
balance at December 31, 1997 due primarily to increased sales and to $3.7
million in accounts receivable of companies acquired in 1998. For the years
ended December 31, 1998 and 1997 there were 55 average days sales outstanding.
At December 31, 1998, accounts receivable over 60 days represented 4.1% of
accounts receivable.
Capital expenditures for the year ended December 31, 1998 of $13.1 million
were for (i) new or replacement production equipment to increase manufacturing
capacity, (ii) management information systems and (iii) real estate to enhance
the Company's distribution capabilities. Capital expenditures amounted to $7.7
million and $7.0 million for the years ended December 31, 1997 and 1996,
respectively. For the years ended December 31, 1998, 1997 and 1996, the Company
leased certain manufacturing equipment valued at $0.5 million, $0.1 million and
$1.7 million, respectively. Capital expenditures for 1999 are expected to be
approximately $13.6 million, primarily for the expansion of manufacturing
capacity and distribution space and to continue the upgrade of management
information systems.
At December 31, 1998, bank indebtedness under the Company's unsecured
revolving line of credit was $7.5 million. This revolving line of credit
terminates on March 31, 2002 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, 1998, letters of credit totaling
approximately $1.2 million were outstanding under the line of credit. Borrowings
under the line of credit averaged $4.6 million for the year ended December 31,
1998.
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 or twelve months. At December
31, 1998, the weighted average cost of borrowings under the line of credit was
5.8%. 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 3.59% and 3.75% for the years ended December 31, 1998 and 1997,
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.
19
<PAGE>
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, 1998. 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.
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.
The conversion to the Euro in January 1999 by member countries of the
European Union will not have a significant impact on the Company's results of
operations or financial condition.
Market Risk
The Company is exposed to market risk from changes in interest rates with
respect to its investments in marketable securities. Interest rate risk with
respect to the Company's short- and long-term debt is considered to be
immaterial.
The Company maintains an investment portfolio of various issuers, types
and maturities. These securities are classified as available-for-sale, and
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as Accumulated Other Comprehensive Income in
stockholders' equity, net of taxes. At any time, a sharp rise in interest
rates could adversely affect the fair value of the investment portfolio. The
Company currently does not hedge these interest rate exposures.
The table below presents principal amounts and related weighted average
interest rates by year of maturity and fair value for the debt securities
included in the Company's investment portfolio at December 31, 1998. Such debt
securities are principally fixed rate financial instruments. Mutual funds of
$31.4 million at December 31, 1998 are assumed to mature during the fiscal year
ended December 31, 1999. Equity securities with a fair value of approximately
$6.9 million are excluded from the table.
<TABLE>
<CAPTION>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale debt
securities $33,594 $9,906 $9,201 $10,034 $5,310 $990 $69,035 $68,631
Average interest rate 6.21% 5.67% 6.10% 6.24% 6.09% 9.30%
</TABLE>
Year 2000
The Company has identified four areas of the business on which the year
2000 ("Y2K") issue will have an impact. The company's work on the Y2K compliance
initiative began in 1997 with the assessment process which defined the following
four Y2K impact areas: computer systems and hardware, manufacturing support
processes, plant facility HVAC systems and manufactured products.
The risk assessment and exposure analysis was completed in 1997 and each
of the four areas was ranked as high, medium or low. The only high-risk area
identified was computer systems and hardware. As a result, the Company is
replacing its existing computer infrastructure with an Enterprise Resource
Planning ("ERP") information system. The software and computer hardware has been
installed and implementation configuration is in process with an anticipated
production date in the second quarter 1999. Additional software systems are
presently
20
<PAGE>
being upgraded to a Y2K compliant version of the currently operational software.
These systems were substantially compliant in the first quarter of 1999.
Project expenditures to date total approximately $2.0 million which
includes the purchase of new mainframe computer hardware, ERP application
software and consulting services. These costs have been funded through operating
cash flows and most have been capitalized. The Company expects to incur an
additional $1 million of incremental costs throughout the 1999 fiscal year. This
will cover hardware platforms, personnel costs related to software
configuration, conversion and training of the workforce. Management is currently
evaluating the need to have a contingency plan in place in the event the Company
does not complete all phases of the Y2K initiative with regard to computer
systems and hardware. Management feels that replacing the Company's information
system addresses the majority of the Company's Y2K computer issues, reducing
the likelihood that a contingency plan will be necessary.
The three remaining areas, manufacturing support processes, plant facility
HVAC systems and manufactured products, ranked low on our risk assessment and
exposure analysis. These areas are midway through the assessment and the
implementation phase and remediation are scheduled for completion by the middle
of the 1999 fiscal year without significant incremental costs. Based upon
progress to date, the Company currently does not anticipate the need to develop
an extensive contingency plan for these areas.
The Company's largest suppliers and customers are in their initial
certification process to validate that they will be Y2K compliant before the end
of calendar year 1999. A supplier survey is scheduled for completion by the
first half of calendar year 1999. Alternative suppliers will be identified for
those suppliers not expected to be compliant by the end of 1999. The Company's
financial institutions are currently being surveyed and the Company anticipates
that they are Y2K compliant, or will be before the end of the calendar year
1999.
The Company believes its Y2K program is adequate to detect year 2000
compliance issues, and that it has the necessary resources to remedy them.
However, the Y2K problem has many aspects and potential consequences, some of
which are not reasonably foreseeable. The Company could be adversely impacted by
the Y2K issue if suppliers, customers and other businesses do not address this
issue successfully. There can be no assurance that unforeseen circumstances will
not arise.
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 20% of cost of goods sold for the year
ended December 31, 1998. 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
$64.60 and $85.50, and $76.60 and $122.00 per 100 pounds in 1998 and 1997,
respectively). The Company's other principal raw materials include steel and
aluminum, which collectively accounted for approximately 27% of cost of goods
sold for the year ended December 31, 1998. 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 expires on December 31, 1999 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, 1999 that provides for technical
assistance and other special terms. The Company may engage in hedging activities
in the future as management deems appropriate.
21
<PAGE>
Management of Growth. The Company has experienced rapid growth,
particularly during the last five 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 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, 1998, the Company
acquired two 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
with respect to some of its manufacturing processes. Although the Company has
plans to expand some of its processes, there can be no assurance that these
expansions will be completed on time and/or on budget, that the Company will not
experience manufacturing delays or problems, or that adequate personnel will be
available to operate these additional processes. The additional 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
22
<PAGE>
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 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 43% of
sales for the year ended December 31, 1998. 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.
23
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information relating to Quantitative and Qualitative Disclosures about Market
Risk is included in Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
CONTENTS
Audited Consolidated Financial Statements
<TABLE>
<S> <C>
Consolidated Balance Sheets.............................................26
Consolidated Statements of Income.......................................28
Consolidated Statements of Shareholders' Equity.........................29
Consolidated Statements of Cash Flows...................................31
Notes to Consolidated Financial Statements..............................33
Report of Independent Auditors..........................................56
</TABLE>
25
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------
($ in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,968 $ 2,803
Marketable securities (Note 3) 75,510 40,434
Accounts receivable, net of allowance for
doubtful accounts and sales allowances of
$4,802 in 1998 and $3,870 in 1997 39,748 32,127
Inventories:
Finished goods 26,314 26,333
Work-in-process 7,386 7,385
Raw materials 7,477 6,219
---------------------------
41,177 39,937
Current deferred taxes (Note 9) 2,335 1,491
Other current assets 1,984 1,439
---------------------------
Total current assets 163,722 118,231
Property, plant and equipment:
Land 1,487 1,190
Buildings and improvements 12,440 10,173
Machinery and equipment 35,903 23,207
Furniture and fixtures 3,524 2,412
Construction in progress 4,243 364
---------------------------
57,597 37,346
Less accumulated depreciation 16,459 12,409
---------------------------
Net property, plant and equipment 41,138 24,937
Goodwill, net of accumulated amortization
of $886 in 1998 and $373 in 1997 34,230 16,497
Other long-term assets, net 2,457 1,464
---------------------------
Total assets $241,547 $161,129
===========================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------
($ in thousands)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Current portion of long-term debt $ 2,426 $ 227
Revolving credit note payable (Note 4) 7,500 6,230
Accounts payable 18,388 12,536
Accrued expenses:
Payroll and employee benefits 4,811 3,609
Other (Note 6) 6,242 7,488
---------------------------
Total accrued expenses 11,053 11,097
---------------------------
Total current liabilities 39,367 30,090
Long-term debt (Note 4) 11,098 3,893
Deferred income taxes (Note 9) 1,720 1,570
Other long-term liabilities 3,231 2,441
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, 50,000,000 and
15,000,000 shares authorized, 12,741,468
and 11,397,854 shares issued and
outstanding in 1998 and 1997, respectively 127 114
Paid-in capital 117,621 79,110
Accumulated other comprehensive income 580 1,021
Treasury stock, 14,137 and 6,411 shares in
1998 and 1997, respectively, at cost (364) (92)
Retained earnings 68,167 42,982
---------------------------
Total shareholders' equity 186,131 123,135
===========================
Total liabilities and shareholders' equity $241,547 $161,129
===========================
</TABLE>
See accompanying notes.
27
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31
1998 1997 1996
----------------------------------------
($ in thousands, except per share data)
<S> <C> <C> <C>
Net sales $272,792 $220,264 $161,868
Cost of goods sold 188,067 156,479 118,487
----------------------------------------
Gross profit 84,725 63,785 43,381
Selling, general and
administrative expenses 46,871 35,483 26,384
----------------------------------------
Income from operations 37,854 28,302 16,997
Other income (expense):
Interest expense (744) (620) (728)
Investment income 4,598 2,141 2,339
Other, net (201) (192) (48)
----------------------------------------
3,653 1,329 1,563
----------------------------------------
Income before income taxes 41,507 29,631 18,560
Income taxes (Note 9) 16,322 11,392 7,100
----------------------------------------
Net income $ 25,185 $ 18,239 $ 11,460
========================================
Basic earnings per common
share (Note 11) $ 2.07 $ 1.71 $ 1.25
========================================
Diluted earnings per common
share (Note 11) $ 2.00 $ 1.66 $ 1.23
========================================
</TABLE>
See accompanying notes.
28
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-in Treasury Retained Comprehensive
Stock Capital Other Stock Earnings Income Total
------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 73 $ 47,918 $ (480) $ (30) $ 13,310 $ 520 $ 61,311
Net income for 1996 -- -- -- -- 11,460 -- 11,460
Unrealized gains (losses) on
available-for-sale securities, net of tax
effect ($154,000) and reclassification
adjustments for gains included in net income
of $618,000 ($401,000 net of tax) -- -- -- -- -- (287) (287)
-----------
Comprehensive income 11,173
Repurchase of 2,921 shares of restricted stock,
net -- -- -- (52) -- -- (52)
Amortization of compensation -- -- 189 -- -- -- 189
Cancellation of 32,375 restricted shares -- (276) 276 -- -- -- --
Exercise of stock options and related tax
benefit on 36,890 shares -- 369 -- -- -- -- 369
------------------------------------------------------------------------------
Balance at December 31, 1996 73 48,011 (15) (82) 24,770 233 72,990
Net income for 1997 -- -- -- -- 18,239 -- 18,239
Unrealized gains (losses) on
available-for-sale securities, net of tax
effect ($424,000) and reclassification
adjustments for gains included in net income
of $88,000 ($57,000 net of tax) -- -- -- -- -- 788 788
-----------
Comprehensive income 19,027
Proceeds from issuance of 1,937,500 shares of
common stock 16 27,552 -- -- -- -- 27,568
Repurchase of 380 shares of restricted stock, net -- -- -- (10) -- -- (10)
Amortization of compensation -- -- 15 -- -- -- 15
Issuance of 67,870 shares for employee
restricted stock awards 1 651 -- -- -- -- 652
Exercise of stock options and warrants and
related tax benefit on 87,339 shares -- 647 -- -- -- -- 647
Issuance of 136,364 shares of common stock for
acquisitions and related fees (Note 2) 1 2,249 -- -- -- -- 2,250
Five-for-four stock split effected in the form
of a dividend 23 -- -- -- (27) -- (4)
------------------------------------------------------------------------------
Balance at December 31, 1997 114 79,110 -- (92) 42,982 1,021 123,135
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-in Treasury Retained Comprehensive
Stock Capital Other Stock Earnings Income Total
----------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income for 1998 -- -- -- -- 25,185 -- 25,185
Unrealized gains (losses) on
available-for-sale securities, net of tax
effect ($237,000) and reclassification
adjustments for gains included in net income
of $202,000 ($131,000 net of tax) -- -- -- -- -- (441) (441)
------------
Comprehensive income 24,744
Proceeds from issuance of 1,100,000 shares of
common stock 11 34,734 -- -- -- -- 34,745
Repurchase of 7,726 shares of restricted stock,
net -- -- -- (272) -- -- (272)
Issuance of 53,376 shares for employee
restricted stock awards -- 821 -- -- -- -- 821
Exercise of 166,485 shares of stock options and
warrants 2 1,832 -- -- -- -- 1,834
Issuance of 31,479 shares of common stock for
acquisitions (Note 2) -- 1,124 -- -- -- -- 1,124
----------------------------------------------------------------------------------
Balance at December 31, 1998 $ 127 $ 117,621 $ -- $ (364) $ 68,167 $ 580 $ 186,131
==================================================================================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
30
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
1998 1997 1996
---------------------------------------
($ in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 25,185 $ 18,239 $ 11,460
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 3,954 2,927 2,235
Amortization of intangibles 573 251 776
Net (gain) loss on sale of
property, plant and equipment 69 -- (54)
Net gain realized on
available-for-sale securities (202) (88) (618)
Deferred income taxes (53) (428) 77
Provision for bad debts 194 209 263
Provision for sales allowances 511 193 719
Compensation expense for
restricted stock and
compensatory options 77 91 239
Increase (decrease) in cash
arising from changes in assets
and liabilities:
Accounts receivable (4,610) (2,935) (4,326)
Inventories 1,824 (14,001) (1,564)
Other current assets 172 (197) (106)
Other long-term assets (770) (403) (431)
Accounts payable 2,005 (2,958) 631
Accrued payroll and employee
benefits 985 969 1,030
Other accrued liabilities (1,696) 1,747 974
Other long-term liabilities 790 1,486 154
---------------------------------------
Net cash provided by operating
activities 29,008 5,102 11,459
Investing activities
Acquisitions, including expenses,
less cash acquired (Note 2) (24,317) (20,598) --
Capital expenditures, net (13,139) (7,687) (6,970)
Proceeds from sale of property, plant
and equipment -- -- 195
Purchase of available-for-sale
securities (92,874) (47,505) (29,063)
Proceeds from sale of
available-for-sale securities 57,108 40,350 24,349
---------------------------------------
Net cash used in investing activities (73,222) (35,440) (11,489)
</TABLE>
31
<PAGE>
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Years ended December 31
1998 1997 1996
----------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Financing activities
Proceeds from revolving line of credit borrowings 81,050 94,375 60,615
Repayments of revolving line of credit borrowings (79,780) (90,145) (65,540)
Proceeds from term loan -- -- 3,200
Repayment of term loan -- -- (3,200)
Proceeds from long-term debt 7,000 -- 3,570
Payments on long-term debt, including current portion (198) (271) --
Proceeds from issuance of common stock 36,579 28,212 327
Purchase of treasury stock (272) (10) (52)
----------------------------------------------------
Net cash provided by (used in) financing activities 44,379 32,161 (1,080)
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents 165 1,823 (1,110)
Cash and cash equivalents at beginning of year 2,803 980 2,090
----------------------------------------------------
Cash and cash equivalents at end of year $ 2,968 $ 2,803 $ 980
====================================================
Supplemental schedule of cash flow information:
Cash paid during the year for interest $ 599 $ 580 $ 814
====================================================
Cash paid during the year for income taxes $ 15,926 $ 10,103 $ 6,058
====================================================
</TABLE>
See accompanying notes.
32
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
1. Summary of Significant Accounting Policies
Business
AFC Cable Systems, Inc. (the Company) is a manufacturer of electrical, voice and
data distribution products, including prewired armored cable, flexible conduit
modular wiring systems and electrical fittings used in the nonresidential
construction electrical wiring industry. The Company also manufacturers and
distributes specialty coated metals, photo controls for the lighting control and
fixture industries, electronic interfaces and connectors that facilitate data
communications, rigid PVC electrical conduit and flexible hoses and ducting
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.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued)
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 the
accumulated other comprehensive income 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 accretion and amortization
is included in investment income. Realized gains and losses and 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:
<TABLE>
<S> <C>
Buildings and improvements 5 to 30 years
Machinery and equipment 3 to 10 years
Furniture and fixtures 5 to 10 years
</TABLE>
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.
34
<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 $2,603,000, $1,567,000, and
$950,000 in 1998, 1997 and 1996, respectively.
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.
Deferred Costs
The Company has deferred certain costs incurred in connection with the planned
pooling of interests which is more fully described in Note 13.
Recently Issued Accounting Pronouncements
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," for all periods presented. The basis for
determining the Company's operating segments is the manner in which financial
information is used by the Company in its operations.
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued)
As of January 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income." Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or stockholders' equity. Statement 130
requires unrealized gains or losses on the Company's available-for-sale
securities which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130.
In April 1998, the AcSEC issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" (SOP 98-5), which requires the costs of start-up
activities to be expensed as incurred. SOP 98-5 is required to be adopted for
years beginning after December 15, 1998. In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (Statement No. 133"), which is required to be adopted
for years beginning after June 15, 1999. Management of the Company does not
expect the adoption of SOP 98-5 and Statement No. 133 to have a material impact
on the Company's financial position and results from operations.
2. Acquisitions
During the years ended December 31, 1998 and 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
results of operations of each business from the date of acquisition.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Acquisitions (continued)
The Company completed two acquisitions during 1998 for a total of approximately
$27.1 million in cash, 15,000 shares ($518,000) of the Company's common stock
and $3.0 million payable over three years. On May 15, 1998, the Company acquired
all of the outstanding stock of Spiraduct, Inc., a manufacturer and distributor
of flexible polyvinyl chloride (PVC) electrical conduit. On October 30, 1998,
the Company acquired all of the outstanding stock of Georgia Pipe Company, a
manufacturer and distributor of rigid PVC electrical conduit. Contingent
consideration is payable in cash to the sellers in each of the above
acquisitions if certain financial targets are met in the future. Contingent
consideration payable for these acquisitions for the year ended December 31,
1998 is approximately $2.9 million and was recorded as additional purchase
price. Goodwill resulting from the above acquisitions approximated $18.1 million
and is being amortized over 40 years.
In 1997, the Company completed four acquisitions for approximately $22.0 million
in cash and 136,364 shares ($2,250,000) of the Company's common stock. On
January 28, 1997, the Company acquired all of the outstanding stock of B&B
Electronics Manufacturing Company, Inc. ("B&B"), a manufacturer and direct
marketer of electronic interfaces and connectors that facilitate data
communications. On January 31, 1997, the Company acquired certain assets and
assumed certain liabilities of Area Lighting Research, Inc. ("ALR"), a
manufacturer and distributor of photo controls and electrical devices for the
lighting control and fixture industries. On April 1, 1997, the Company acquired
all of the outstanding stock of Madison Sale Corporation ("Madison"), a supplier
of fittings for the electrical industry (the name of this company was changed to
Madison Equipment Company, Inc. upon purchase). On November 22, 1997, the
Company acquired the assets and assumed certain liabilities of Federal Hose
Manufacturing, Inc. ("FHI"), a manufacturer and distributor of flexible metal,
plastic and fabric hoses, ducting and connectors for diverse applications.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Acquisitions (continued)
Contingent consideration for a total of approximately $1.0 million, consisting
of approximately $469,000 in cash and 16,479 shares of the Company's common
stock, was paid in 1998 to the sellers of ALR & B&B based on financial targets
achieved by those companies in 1997. Contingent consideration is payable to the
sellers of B&B and FHI if certain financial targets are met in the future.
Contingent consideration is payable in cash to the sellers of B&B for the year
ended December 31, 1998 in the amount of $199,000. All contingent consideration
has been recorded as additional purchase price. Goodwill resulting from the
above acquisitions of approximately $15.7 million is being amortized over 40
years, with the exception of the goodwill from the acquisition of Madison, which
is being amortized over 20 years.
Pro forma income statement data assuming the acquisitions above were made at the
beginning of 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997
-----------------------------------------
($ in thousands,
except per share data)
<S> <C> <C>
Net sales $296,440 $260,813
Income from operations 41,634 32,397
Net income 27,415 20,466
Diluted earnings per common share $2.17 $1.85
</TABLE>
The above pro forma information does not purport to represent the Company's
results of operations that would have been attained had the above acquisitions
in fact occurred at the beginning of the periods indicated or to project the
Company's results for any future period.
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Marketable Securities
The following is a summary of securities held by the Company. All securities are
classified as available-for-sale.
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
----------------------------------------------------------------------
($ in thousands)
December 31, 1998
<S> <C> <C> <C> <C>
U.S. corporate debt securities $ 13,806 $ 117 $ (442) $ 13,481
U.S. treasury securities and
obligations of U.S. Government
agencies 55,229 108 (187) 55,150
Equity securities 6,002 1,193 (316) 6,879
----------------------------------------------------------------------
Total included in investments $ 75,037 $ 1,418 $ (945) $ 75,510
======================================================================
<CAPTION>
Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
----------------------------------------------------------------------
($ in thousands)
December 31, 1997
<S> <C> <C> <C> <C>
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>
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Marketable Securities (continued)
The cost and fair market value of debt securities at December 31, 1998 and 1997,
by contractual maturities, are shown below:
<TABLE>
<CAPTION>
Available-for-Sale
Fair Market
Cost Value
------------------------------------------
December 31, 1998 ($ in thousands)
<S> <C> <C>
Debt securities:
Maturing in one year or less $33,595 $33,075
Maturing between one year and five years 34,524 34,583
Maturing after five years 916 973
------------------------------------------
69,035 68,631
Equity securities 6,002 6,879
------------------------------------------
Total investments $75,037 $75,510
==========================================
<CAPTION>
Available-for-Sale
Fair Market
Cost Value
------------------------------------------
December 31, 1997 ($ in thousands)
<S> <C> <C>
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>
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
$226,000 and $(24,000), $173,000 and $(85,000) and $859,000 and $(241,000) in
the years ended December 1998, 1997 and 1996, respectively.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
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 $1,121,485 is outstanding at December 31, 1998. 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 6.3% and 8.5% at December 31, 1998
and 1997, respectively. The carrying value of the line of credit approximates
its fair value.
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 3.59% and 3.75% for the years ended December 31, 1998 and 1997,
respectively. Additionally, an annual fee of 1.0% on the letter of credit
securing the bonds ($3.6 million at December 31, 1998) is paid to the bank
acting as trustee in the issuance of the bonds. The Company has the right to
convert from
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Short and Long-term Debt (continued)
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, 1998 and 1997, $3.0 million and $3.1 million, respectively, of the total was
classified as long-term debt. The carrying amount of the bonds approximates fair
value at December 31, 1998.
In addition, $741,000 and $774,000 of the debt assumed in the B&B acquisition
was classified as long-term at December 31, 1998 and 1997, respectively. 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, 1998.
During 1998, the Company recorded an obligation relating to the Spiraduct
acquisition to pay to the seller a total of $3,000,000 in three annual
installments of $1,000,000 each commencing on May 16, 1999. The Company has
recorded this obligation at its present value of approximately $2,600,000 using
a discount rate of 7.5%.
During 1998, the Company received proceeds from a $7,000,000 promissory note
issued by a commercial bank. Principal is payable in 20 quarterly installments
of $350,000 plus interest commencing March 31, 1999, maturing December 31, 2003.
The promissory note will bear interest at the lower of the LIBOR or the
one-month certificate of deposit rate plus a rate adjustment of 1.10% to 1.30%.
The following is a schedule of the principal portion of long-term debt payments
for each of the five years ending December 31, and thereafter:
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
1999 $ 2,426
2000 2,485
2001 2,553
2002 1,626
2003 1,630
Thereafter 2,804
---------------------
$ 13,524
=====================
</TABLE>
42
<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, 1998 and 1997, the Company
has assets (market value of $1,963,000 and $1,304,000, respectively), segregated
in a trust, available to meet the obligations of the Plan. Expenses for this
plan were approximately $286,000 for the year ended December 31, 1998 and
$276,000 for each of the years ended December 31, 1997 and 1996. The total
liability under the plan was approximately $1,606,000 and $1,334,000 at December
31, 1998 and 1997, 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
$812,000, $699,000, and $449,000 for the years ended December 31, 1998, 1997,
and 1996, respectively.
6. Other Accrued Expenses
At December 31, 1998 and 1997, other accrued expenses consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
($ in thousands)
<S> <C> <C>
Accrued federal and state income taxes $ 917 $1,634
Investment margin liability 1,224 1,550
Other 4,101 4,304
==========================================
$6,242 $7,488
==========================================
</TABLE>
The investment margin liability, which bears interest (6.75% and 7.75% at
December 31, 1998 and 1997, respectively), represents borrowings secured by the
Company's marketable securities.
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Commitments
The Company has various operating lease agreements for buildings and equipment
extending through January 2008. The following is a schedule of the future
minimum rental payments due under these leases:
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
1999 $ 3,237
2000 2,831
2001 2,408
2002 2,027
2003 1,120
Thereafter 2,363
---------------------
$13,986
=====================
</TABLE>
Rent expense amounted to $4,644,310, $3,863,045, and $3,738,390 in 1998, 1997,
and 1996, respectively.
In the normal course of business, the Company enters into purchase agreements
with certain raw material vendors. At December 31, 1998, the Company has agreed
to purchase the majority of its 1999 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 their 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.
44
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Contingencies (continued)
Additionally, the Company is a party to an 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, 1998, there is an appeal pending with the U.S. Court
of Appeals for the First Circuit.
On March 12, 1998, a municipality named one of the Company's wholly-owned
subsidiaries in a suit seeking compensation for expenses allegedly incurred by
the municipality in connection with environmental contamination apparently
caused by the predecessor operator of the business. The Company believes that
any amounts recovered by the municipality and other costs and expenses
associated with this action are, subject to certain limitations, covered by
indemnification from the predecessor entity and its stockholders under the
related asset purchase agreement.
9. Income Taxes
Deferred income taxes are recognized for the expected effects 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 years ended December 31, 1998 and 1997, and
34% for the year ended December 31, 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
($ in ($ in ($ in
thousands) thousands) thousands)
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at
statutory rate $14,527 35.0% $10,371 35.0% $6,310 34.0%
State taxes, net of
federal benefit 1,638 4.0% 1,082 3.7% 666 3.6%
Other 157 .4% (61) (.2)% 124 .7%
----------------------------- ----------------------------- -----------------------------
$16,322 39.4% $11,392 38.5% $7,100 38.3%
============================= ============================= =============================
</TABLE>
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Income Taxes (continued)
The components of the provision for income taxes for the years ended December
31, 1998, 1997, and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Current:
Federal $13,824 $10,072 $6,018
State 2,551 1,748 1,005
----------------------------------------------------------
Total current 16,375 11,820 7,023
Deferred:
Federal (22) (344) 58
State (31) (84) 19
----------------------------------------------------------
Total deferred (53) (428) 77
----------------------------------------------------------
Total $16,322 $11,392 $7,100
==========================================================
</TABLE>
A summary of the significant components of the Company's deferred tax
liabilities and assets as of December 31, 1998 and 1997, follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
($ in thousands)
<S> <C> <C>
Deferred tax liabilities:
Fixed assets $ 3,079 $ 1,976
Marketable securities 377 604
Goodwill 387 -
--------------------------------------
Total deferred tax liabilities 3,843 2,580
Deferred tax assets:
Supplemental executive retirement plan 676 523
Goodwill - 34
Stock compensation 121 90
Inventory 711 702
Allowance for doubtful accounts 455 342
Accrued liabilities 1,431 810
Operating loss carryforwards acquired in 1998 1,064 -
--------------------------------------
Total deferred tax assets 4,458 2,501
--------------------------------------
Net deferred tax liabilities (assets) $ (615) $ 79
======================================
</TABLE>
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Income Taxes (continued)
A subsidiary of the Company which was acquired in 1998 has a net operating loss
carryforward available to offset future taxable income of such subsidiary as of
December 31, 1998. The net operating loss carryforward of approximately
$2,600,000 expires between 2005 and 2012. In addition, utilization of the net
operating loss carryfoward may be subject to loss limitations pursuant to
Internal Revenue Code Section 382.
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
were 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. The remaining warrants to purchase 129,328 shares
of common stock (after giving effect to the October 20, 1997 stock split) were
exercised in April 1998 on a cashless basis at a price of $9.60 per share. This
resulted in the issuance of 88,578 shares of common stock.
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 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.
47
<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.
On May 19, 1998, the Company completed the issuance of 875,000 shares of common
stock at a price of $33.75 per share. An option to purchase an additional
225,000 shares was granted by the Company to the underwriters to cover
over-allotments. This option was exercised in full on May 19, 1998. Also on May
19, 1998, 625,000 shares of common stock were sold to the public by certain
shareholders of the Company at a price of $33.75.
Stock Award Plans
The Company has three equity incentive plans covering employees of the Company;
the AFC Cable Systems, Inc. 1993 Equity Incentive Plans, the AFC Cable Systems,
Inc. 1997 Equity Incentive Plan, and the AFC Cable Systems 1998 Equity Incentive
Plan, which was approved by the Company's stockholders in May 1998
(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 1993
and 1997 Plans provides for the issuance of 500,000 shares of common stock. The
1998 plan provides for the issuance of 600,000 shares of common stock. Options
awarded under the Plans generally vest in equal annual installments over either
the three, four or 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.
48
<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, 1998, 1997 and 1996, and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------- ------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 901,251 $13.80 400,000 $ 9.03 370,000 $8.42
Granted 350,500 34.13 557,500 16.70 100,000 10.80
Exercised (77,967) 12.48 (39,062) 8.61 (40,000) 8.20
Canceled - - (17,187) 8.71 (30,000) 8.40
--------------------------------- ------------------------------- -------------------------------
Outstanding at end
of year 1,173,784 $20.72 901,251 $13.80 400,000 $9.03
================================= =============================== ===============================
Options exercisable
at year end 323,156 $12.01 174,062 $ 8.53 128,125 $8.19
================================= =============================== ===============================
Weighted-average fair
value of options
granted during year $7.13 $6.98 $4.47
===================== =================== ==================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of December 31 Contractual Exercise December 31 Exercise
Exercise Prices 1998 Life (Yrs.) Price 1998 Price
- ---------------------------- ------------------------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C>
$5.60 to $10.60 222,502 5.84 $ 7.87 165,000 $ 7.44
$12.00 to $18.80 526,407 8.00 16.67 143,906 15.95
$19.40 to $34.125 424,875 9.01 32.47 14,250 25.21
================ ================
1,173,784 323,156
================ ================
</TABLE>
As discussed above, common stock may be granted to officers and key employees on
a restricted or unrestricted basis. At December 31, 1998, 1997, and 1996,
restricted stock awards covering 87,051, 67,350, and 1,250 shares, respectively,
were outstanding.
49
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
10. Shareholders' Equity and Stock Award Plans (continued)
During 1998, 1997 and 1996, the restrictions lapsed on 33,659, 1,250, and 28,250
shares, respectively, and 32,375 restricted shares were forfeited during 1996.
Employees vest in these restricted shares ratably over periods of two to three
years. The Company repurchased, at fair market value, 7,726 shares, 380 shares,
and 2,921 shares of vested restricted stock during 1998, 1997 and 1996,
respectively, to provide certain employees with the funds necessary to cover
their tax withholdings resulting from the receipt of vested restricted shares.
The 87,051 shares of restricted stock outstanding at December 31, 1998, which
represent performance-based compensation for 1997 and 1996, were awarded to
officers and key employees under the 1998 and 1997 Plans.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (FAS No. 123), "Accounting for Stock-Based
Compensation." Accordingly, compensation cost has been recognized in the
financial statements only for stock options that are compensatory as defined
under APB 25. Had compensation cost for the Company's three stock option plans
been determined based on the fair value at the grant date for awards made in
1998, 1997 and 1996 consistent with the provisions of FAS No. 123, the Company's
net earnings and earnings per share would have been the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -------------------
($ in thousands, except per share data)
<S> <C> <C> <C>
Net income, as reported $25,185 $18,239 $11,460
Net income, pro forma 24,081 17,765 11,383
Basic earnings per common share, as reported $2.07 $1.71 $1.25
Basic earnings per common share, pro forma 1.98 1.67 1.25
Diluted earnings per common share, as reported $2.00 $1.66 $1.23
Diluted earnings per common share, pro forma 1.93 1.62 1.23
</TABLE>
50
<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
1998, 1997 and 1996 stock option grants:
<TABLE>
<CAPTION>
1998 1997 1996
Grants Grants Grants
------------------ ------------------ -------------------
<S> <C> <C> <C>
Risk-free interest rate 4.7% 5.7% 5.8%
Expected option life 3 years 4.4 years 4.4 years
Expected market price volatility 42% 41% 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 is
not fully reflected until 1998.
Shares of capital stock reserved for possible future issuance are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------------------
<S> <C> <C>
Options granted 1,173,784 901,251
Options as yet ungranted 359,587 163,462
Qualified employee savings plans 625,000 625,000
------------------------------------------
2,158,371 1,689,713
==========================================
</TABLE>
51
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
11. 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.
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Net income (in thousands) $25,185 $18,239 $11,460
Basic average shares 12,183,296 10,663,876 9,133,650
Effect of dilutive securities:
Stock options and stock awards 362,014 263,505 90,874
Stock warrants 25,559 89,162 63,791
Contingently issuable shares 18,626 6,998 -
------------------ ------------------ -------------------
406,199 359,665 154,665
Dilutive average shares 12,589,495 11,023,541 9,288,315
================== ================== ===================
Basic earnings per share $2.07 $1.71 $1.25
================== ================== ===================
Diluted earnings per share $2.00 $1.66 $1.23
================== ================== ===================
</TABLE>
12. Segment Information
The Company has thirteen business units which have separate management teams and
infrastructures that in most cases offer different products and services. The
business units have been aggregated into two reportable segments, Wire and Cable
and Modular Wiring and Components.
52
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
12. Segment Information (continued)
The Wire and Cable segment produces armored cable, flexible conduit, specialty
cable, electrical fittings, and connectors. These products service electrical
distributors in the domestic market through a network of independent sales
representatives. The Modular Wiring and Components segment produces flexible and
premise wiring systems and related electrical components and lighting controls.
These products are primarily sold to electrical distributors in the domestic
market through a network of independent sales representatives, although some
products are sold directly to the end user.
Not included in the Company's two reportable segments are business units whose
revenue consists of the manufacturing and distribution of plastic and fabric
hoses and the manufacturing of special processed metal. These business units
along with corporate investments are included within the "all other" category in
the tables below.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on income before taxes of the respective business
units.
Intersegment sales, which are immaterial, are made on a basis intended to
reflect the market value of products recognizing prevailing market prices and
have been eliminated from sales data reported below.
Reportable Segment Data
<TABLE>
<CAPTION>
Wire and Modular Wiring All
Cable and Components Other Total
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
1998
Net sales $203,054 $47,235 $22,503 $272,792
Income before taxes 28,277 6,642 6,588 41,507
Segment assets 119,931 30,477 91,139 241,547
Depreciation 3,003 620 331 3,954
Capital expenditures 11,438 992 709 13,139
</TABLE>
53
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
12. Segment Information (continued)
Reportable Segment Data (continued)
<TABLE>
<CAPTION>
Wire and Modular Wiring All
Cable and Components Other Total
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
1997
Net sales 170,584 38,482 11,198 220,264
Income before taxes 22,119 5,211 2,301 29,631
Segment assets 79,900 30,102 51,127 161,129
Depreciation 2,284 460 183 2,927
Capital expenditures 6,511 922 254 7,687
1996
Net sales 138,688 16,681 6,499 161,868
Income before taxes 15,090 1,786 1,684 18,560
Segment assets 58,805 6,120 32,998 97,923
Depreciation 1,906 176 153 2,235
Capital expenditures 6,426 216 328 6,970
</TABLE>
13. Subsequent Event
On January 27, 1999, the Company entered into a definitive agreement with Thomas
& Betts Corporation ("T&B") whereby the Company would be acquired by T&B in a
stock-for-stock merger to be accounted for as a pooling of interests. The merger
agreement provides that each share of the Company's common stock outstanding
immediately prior to the merger, except for treasury stock or stock owned by T&B
(which immediately prior to the merger will be canceled and retired) will, at
the time of the merger, be converted into the right to receive .83 shares of T&B
common stock. The companies expect to complete the transaction in the first half
of 1999. Upon the consummation of the merger, the Company will pay a contingent
fee to its investment banker and recognize certain other merger-related costs.
54
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
14. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
1998 and 1997 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
March June September December Full
28 27 26 31 Year
------------------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
1998
Net sales $65,286 $69,466 $67,523 $70,517 $272,792
Gross profit 19,362 21,065 21,149 23,149 84,725
Net income 5,490 6,278 6,600 6,817 25,185
Basic earnings per common
share .48 .52 .52 .54 2.07
Diluted earnings per common
share .46 .50 .51 .52 2.00
<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
Gross profit 13,308 15,564 16,552 18,361 63,785
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>
55
<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, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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, 1999
Providence, Rhode Island
56
<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.
57
<PAGE>
CURRENT DIRECTORS
<TABLE>
<CAPTION>
Name, Age (as of March 31, 1999) Director Term
Business Experience and Current Directorships Since Expires
- --------------------------------------------- ----- -------
<S> <C> <C>
RALPH R. PAPITTO, 72, has been Chairman of the Board and 1989 1999
a Director of the Company since December 1989. Mr.
Papitto has been Chief Executive Officer since 1995.
Prior to December 1989, Mr. Papitto was the Chairman of
the Board, Chief Executive Officer and a director of
Nortek, Inc. ("Nortek"), an industrial conglomerate. Mr.
Papitto founded Nortek in 1967. In 1956, Mr. Papitto
founded Glass-Tite Industries, Inc., a manufacturer of
electronic semiconductor components. Mr. Papitto is also
a director of Lynch Corporation, a communications and
multi-media services company, and ACS Industries, Inc.,
a manufacturer of various industrial products, and is
also Chairman of the Board of Trustees of Roger Williams
University.
MALCOLM M. DONAHUE, 77, has been a Director of the 1996 2000
Company since March 1996. Mr. Donahue has been a
Professor of Law at Suffolk University Law School since
1956. From 1973 to 1991 Mr. Donahue was the Associate
Dean of Suffolk University Law School.
RAYMOND H. KELLER, 61, has been Vice President and Chief 1989 2000
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, Mr. Keller
served as Vice President and Chief Financial Officer of
the operating companies of Microdot, Inc. Mr. Keller had
been employed by Microdot, Inc. since 1972.
ANTHONY J. SANTORO, 56, has been a Director of the 1993 2001
Company since October 1993. Mr. Santoro has been
President of Roger Williams University and Roger
Williams University School of Law since August 1993 and
served as Dean of Roger Williams University School of
Law from July 1992 to August 1993. Prior to that time,
Mr. Santoro served as Dean and Professor of Law at
Widener University School of Law from 1983 to 1992,
Professor of Law at the University of Bridgeport School
of Law from 1976 to 1983 and Dean of the University of
Bridgeport School of Law from 1976 to 1980.
ROBERT R. WHEELER, 54, has been President and Chief 1996 2001
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 served as President
and Chief Executive Officer of The North American
Industrial Company of BICC Cable, Inc.
</TABLE>
58
<PAGE>
Item 11. Executive Compensation
The following tables set forth information with respect to the
compensation of the Named Executive Officers earned during fiscal 1998, 1997 and
1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------------- -----------------------
Restricted
Name and Principal Other Annual Stock All Other
Position Year Salary($) Bonus($) Compensation($)(1) Award($)(2) Options(#) Compensation($)(3)
- -------- ---- --------- -------- ------------------ ----------- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ralph R. Papitto 1998 360,000 687,500 200,000 3,324
Chairman of the 1997 300,000 280,000 143,750 310
Board and Chief 1996 252,501 100,000 10,914
Executive Officer
Robert R. Wheeler 1998 230,769 486,475 29,350 100,000 14,381
President and Chief 1997 200,000 332,199 356,846 100,000 14,710
Operating Officer 1996 190,769 81,680 9,131 377,150 50,000 11,251
Raymond H. Keller 1998 131,000 220,760 30,000 11,589
Vice President and 1997 131,000 140,056 207,569 18,750 11,484
Chief Financial 1996 131,000 64,479 127,585 11,223
Officer
</TABLE>
- -----
(1) The amounts reported for Mr. Wheeler in 1998 and 1996 represent relocation
expenses paid on his behalf.
(2) The restricted stock awards for Messrs. Wheeler and Keller in 1997
represent grants of restricted stock, at no cost, under the Company's 1993
and 1997 Equity Incentive Plans pursuant to the Company's 1997 Bonus Plan.
The dollar value of the restricted stock is based on the closing market
price of the Company's Common Stock on the date of grant. During 1997, the
Company granted an aggregate of 10,052 and 5,847 shares of restricted
stock to Messrs. Wheeler and Keller, respectively, in payment of 1997
incentive bonuses. Restrictions on this restricted stock lapse equally
over two years commencing March 13, 1999. The restricted stock awards for
Messrs. Wheeler and Keller in 1996 represent grants of restricted stock,
at no cost, under the Company's 1997 Equity Incentive Plan pursuant to the
Company's 1996 Bonus Plan. The dollar value of the restricted stock is
based on the closing market price of the Company's Common Stock on the
date of grant. During 1996, the Company granted an aggregate of 19,850 and
6,715 shares of restricted stock to Messrs. Wheeler and Keller,
respectively, in payment of 1996 incentive bonuses. Restrictions on this
restricted stock lapse equally over two years commencing March 11, 1998.
Shares of restricted stock are entitled to the same dividends as those
paid, if any, to holders of unrestricted shares.
(3) Includes insurance premiums paid by the Company on behalf of the named
executive and, for Messrs. Wheeler and Keller, employer contributions
under the Company's Nonunion Salaried and Hourly Employees 401(k) Savings
Plan.
59
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates
% of Total of Stock Price Appreciation
Options Granted for Option Term($)(2)
Options to Employees in Exercise Expiration ----------------------------
Name Granted(#) Fiscal Year(1) Price($/Sh) Date 5% 10%
---- ---------- -------------- ----------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Ralph R. Papitto 200,000(3) 57.1% $34.125 2/2/08 $4,292,000 $10,878,000
Robert R. Wheeler 100,000(4) 28.5% $34.125 2/2/08 $2,146,000 $ 5,439,000
Raymond H. Keller 30,000(5) 8.6% $34.125 2/2/08 $ 643,800 $ 1,631,700
</TABLE>
- -----
(1) During fiscal 1998, the Company granted to its employees options covering
350,500 shares of Common Stock.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%)
on the market value of the Company's Common Stock on the date of option
grant over the term of the options. These numbers are calculated based on
rules promulgated by the Securities and Exchange Commission and do not
reflect the Company's estimate of future stock price growth. Actual gains,
if any, on stock option exercises and Common Stock holdings are dependent
on the timing of such exercise and the future performance of the Company's
Common Stock. There can be no assurance that the rates of appreciation
assumed in this table can be achieved or that the amounts reflected will
be received by the individual.
(3) The option is exercisable on February 3, 1999 with respect to 66,667
shares, February 3, 2000 with respect to 66,666 shares, and February 3,
2001 with respect to 66,667 shares.
(4) The option is exercisable in on February 3, 1999 with respect to 33,334
shares and two annual increments of (4) 33,333 shares each commencing
February 3, 2000.
(5) The option is exercisable in three annual increments of 10,000 shares each
commencing February 3, 1999.
60
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at FY-End(#) FY-End($)(1)
Shares Acquired on Value --------------------- ---------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Ralph R. Papitto - - 43,750 100,000 648,594 1,482,500
- - 0 200,000 0 (100,000)
Robert R. Wheeler 18,750 419,625 9,375 9,375 225,234 225,234
12,500 274,750 0 12,500 0 295,313
5,000 96,900 5,000 15,000 105,125 315,375
13,750 227,975 11,250 75,000 166,781 1,111,875
- - 0 100,000 0 (50,000)
Raymond H. Keller - - 31,250 0 800,781 0
- - 25,000 6,250 540,625 135,156
- - 4,687 14,063 69,485 208,484
- - 0 30,000 0 (15,000)
</TABLE>
- -----
(1) The closing bid price for the Company's Common Stock on the Nasdaq
National Market on December 31, 1998, the last trading day of the fiscal
year, was $33.625 per share.
PENSION PLAN
The Company has in effect a Supplemental Executive Retirement Plan
("SERP") for certain key executives. The SERP is designed to supplement the
Company's Nonunion Salaried and Hourly Employees 401(k) Savings Plan and
primary Social Security benefits. Under the SERP, participating key
executives who retire at or after the age of 55 and have participated in the
SERP for at least 10 years are provided monthly benefits payable over a
period of 180 months after retirement. The benefits are based on
discretionary annual contributions made by the Company. Such contributions
represent a percent of the participants' annual compensation, which percent
is determined annually by the Company. Of the Names Executive Officers of the
Company, Messrs. Wheeler and Keller each participate in the SERP and their
respective estimated annual benefits payable upon normal retirement are
approximately $213,478 and $90,214, respectively.
COMPENSATION OF DIRECTORS
Directors who are not executive officers of the Company receive annual
compensation of $9,600, payable monthly, plus $500 for each board or
committee meeting attended in person and $250 for each telephonic board
meeting. Additionally, pursuant to the Company's 1993 Directors' Stock Option
Plan (the "Plan") each non-employee director of the Company is awarded a
stock option covering 10,000 shares of Common Stock on the date of his or her
first election as a director. The exercise price of all options granted under
the Plan may not be less than 100% of the fair market value of the Common
Stock on the date of the grant. Options expire 10 years after the date of
grant and become exercisable in equal installments over a five year period
starting with the first anniversary of the grant. No options were awarded under
the Plan during the year ended December 31, 1998.
61
<PAGE>
Change in Control Severance Benefit Plan
The Company has entered into severance agreements (the "Severance
Agreements") with Robert R. Wheeler and Raymond H. Keller (collectively the
"Employees" and each an "Employee"). The Severance Agreements provide that if
within twenty-four months following a Change in Control, the Employee's
employment is terminated for any reason, or if there is a material adverse
change (as defined therein) that entitles Employee to treat such change as a
termination, Employee shall be entitled to receive severance pay at an annual
rate equal to (i) his basic salary at the annual rate in effect immediately
prior to any such Change in Control (or, if higher, immediately prior to such
termination), plus (ii) the highest amount of bonus or incentive compensation
paid or payable in cash or stock (valued as of the date of such bonus) to
Employee (irrespective of any decision to defer any payment with respect
thereto) for any one of the three calendar years prior to such Change in
Control (or, if higher, immediately prior to such termination), such
severance pay to be paid for the twenty-four month period following such
termination in the same manner as Employee's basic salary was paid
immediately prior to such termination and to be subject to appropriate tax
withholding. The Company is obligated to provide the Employee with coverage
under the Company's group health plans or substantially similar plans for a
period of twenty-four months from the date of termination, unless Employee
elects to be paid the value of such benefits in cash.
Within thirty (30) days following a Change in Control, regardless of
whether an Employee's employment has been terminated, the Employee will be paid
20% of his basic salary immediately prior to the Change in Control. Payment of
such amount shall be considered severance pay in consideration of past services
during a period while any such Change in Control is pending and thereafter and
is not to be reduced by compensation or income received by Employee from any
other employment or other source.
A Change in Control is generally defined to include (i) certain changes in
the majority membership of the Board of Directors; (ii) the Company ceasing to
be a publicly-owned corporation having at least 500 stockholders; (iii) an event
required to be reported as a Change in Control in certain filings with the
Securities and Exchange Commission; (iv) certain situations in which the Company
executes an agreement of acquisition, merger or consolidation with respect to
substantially all of the business and/or assets of the Company; and (v) certain
acquisitions of securities representing 25% or more of votes that could be cast
for election of the Company's Board of Directors.
62
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table and notes thereto set forth certain information with
respect to the beneficial ownership of the Company's Common Stock as of March
30, 1999 by (i) each person who is known to the Company to beneficially own more
than 5% of the outstanding shares of Common Stock of the Company, (ii) each of
the chief executive officer and all other executive officers of the Company
whose total compensation exceeded $100,000 in fiscal 1998 (the "Named Executive
Officers") and each director of the Company, and (iii) all Named Executive
Officers and directors of the Company as a group. Except as otherwise indicated,
each of the stockholders named below has sole voting and investment power with
respect to the shares of Common Stock beneficially owned. Unless otherwise
indicated below, each person or entity listed maintains a mailing address of c/o
AFC Cable Systems, Inc., 55 Samuel Barnet Boulevard, New Bedford, MA 02745.
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned
----------------------------------------------
Percentage of
Names Number of Shares Outstanding Shares(1)
---------------- ------------------
<S> <C> <C>
Ralph R. Papitto*+(2) 2,015,324 15.8%
Robert R. Wheeler*+(3) 114,915 **
Raymond H. Keller*+(4) 89,526 **
Malcolm M. Donahue+(5) 5,874 **
Anthony J. Santoro+(6) 7,500 **
All Directors and Executive
Officers as a group (5 persons) 2,233,139 17.5%
FMR Corp. 1,908,425 15.0%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- -----
* Named Executive Officer
+ Director of the Company
** Less than 1 percent
- -----
(1) Percentage of ownership is based on 12,739,279 shares of Common Stock
outstanding as of March 30, 1999.
(2) Includes 135,417 shares subject to exercisable stock options.
(3) Includes 90,209 shares subject to exercisable stock options, 5,026 shares
of restricted stock on which forfeiture provisions will lapse on March 13,
2000, and 1,777 shares held pursuant to the Company's 401(k) plan.
(4) Includes 75,625 shares subject to exercisable stock options, 2,923 shares
of restricted stock on which forfeiture provisions will lapse on March 13,
2000 and 2,007 shares held pursuant to the Company's 401(k) plan.
(5) Includes 5,000 shares subject to exercisable stock options.
(6) Includes 6,250 shares subject to exercisable stock options.
63
<PAGE>
Item 13. Certain Relationships and Related Transactions
None
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, 1998 and 1997
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31,1998, 1997 and 1996
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.
(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 67.
64
<PAGE>
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, 1998
Deducted from asset accounts:
Allowance for doubtful accounts...... $ 893 $ 231 $ 260(3) $ 178(1) $1,206
Reserve for sales allowances......... 2,977 6,937 117(3) 6,435(2) 3,596
------ ------ ------ ------ ------
Totals............................... $3,870 $7,168 $ 377 $6,613 $4,802
====== ====== ====== ====== ======
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
====== ====== ====== ====== ======
</TABLE>
(1) Uncollectible accounts written off, net of any recoveries.
(2) Represents allowances given in the form of credit memos.
(3) Represents allowances attributable to companies acquired in 1998 and 1997,
respectively.
65
<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, 1999
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, 1999
- ---------------------------------- Executive Officer and Director
Ralph R. Papitto (Principal Executive Officer)
/s/ ROBERT R. WHEELER President and Director March 30, 1999
- ----------------------------------
Robert R. Wheeler
/s/ RAYMOND H. KELLER Vice President, Chief Financial March 30, 1999
- ---------------------------------- Officer and Director (Principal
Raymond H. Keller Financial and Accounting
Officer)
/s/ ANTHONY J. SANTORO Director March 30, 1999
- ----------------------------------
Anthony J. Santoro
/s/ MALCOLM M. DONAHUE Director March 30, 1999
- ----------------------------------
Malcolm M. Donahue
</TABLE>
66
<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"),
(xi) the Registrant's Registration Statement on Form S-3 (No. 333-23779)
(referred to herein below as "333-23779"), (xii) the Registrant's Form 10-K for
the year ended December 31, 1997 (File No. 0-23070) (referred to herein below as
"1997 10-K") and the Registrant's Registration Statement on Form S-3 (No.
333-50263) (referred to herein below as "333-50263").
<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
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
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
SEC Exhibit
Exhibit Number Docket
------- ------ ------
<S> <C> <C> <C>
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
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. 10.29 1997 10-K
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
SEC Exhibit
Exhibit Number Docket
------- ------ ------
<S> <C> <C> <C>
10.30 1998 Equity Incentive Plan 10.1 333-50263
10.31 Change in Control Severance Benefit Plan 10.2 333-50263
10.32 Stock Purchase Agreement dated October 8, 1998 between
the Registrant and the Shareholders of Georgia Pipe Company *
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
69
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT dated October 8, 1998 ("Agreement") between
AFC Cable Systems, Inc., a Delaware corporation ("Buyer"), on the one hand, and
Jaakko Uuranniemi, Teppo Uuranniemi and Heidi Uuranniemi, on the other hand
(collectively, the "Shareholders" and individually, a "Shareholder").
W I T N E S S E T H:
WHEREAS, Buyer wishes to buy from Shareholders, and Shareholders wish to
sell to Buyer, on the terms and for the consideration hereinafter provided,
capital stock of Georgia Pipe Company, a Georgia corporation (the "Company"),
which represents one hundred (100%) percent of the issued and outstanding
capital stock of the Company.
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 COMPANY STOCK.
1.1 Sale of Stock. Subject to the terms and conditions of this
Agreement, and in reliance upon the representations, warranties, covenants and
agreements of Buyer herein contained, Shareholders agree that they will sell,
convey, transfer, assign and deliver to Buyer at the Closing provided for in
Article 2, 1,000 shares of the Company's common stock, no par value per share,
(collectively, the "Company Stock"), representing one hundred (100%) percent of
the issued and outstanding capital stock of the Company.
1.2 Consideration for Sale and Transfer of the Company Stock.
Subject to the terms and conditions of this Agreement and in reliance upon the
representations, warranties, covenants and agreements of Shareholders herein
contained, and in full consideration of such sale, conveyance, transfer,
assignment and delivery of the Company Stock to Buyer, Buyer agrees to pay and
deliver to Shareholders a purchase price (the "Purchase Price") equal to the sum
of:
<PAGE>
(a) the difference between (i) US $24,500,000 and (ii) the sum
of (aa) the fair market value of the Uuranniemi Parcel (as defined in Section
4.7 hereof) as jointly determined by Buyer and Shareholders (the "Real Estate
Fair Market Value") based upon a mutually satisfactory appraisal thereof
conducted as of a recent date prior to the Closing plus (bb) the book value of
any titanium dioxide inventory of the Company on hand as of the Closing (the
"Excluded Inventory Value") plus
(b) an amount equal to the "Earnings of the Company for the
Seven Month Period Beginning June 1, 1998 and Ending December 31, 1998" (as
defined in Section 2.4(d) hereof) .
The Purchase Price shall be paid as provided in Sections 2.2 and 3 hereof.
The Purchase Price shall be subject to possible adjustment as provided in
Section 2.4 hereof.
1.3 Section 338(h)(10) Election. (a) The parties intend and agree
that, if requested by Buyer in writing no later than ten (10) days prior to the
Closing Date (as hereinafter defined) (the "Notice"), the transactions provided
for herein shall be covered by an election under Section 338(h)(10) of the
Internal Revenue Code of 1986, as amended (the "Code"). All of the parties
hereto agree that they will, if so requested by Buyer, before and after the
Closing, file such elections and take such other actions, and cause the Company
to file such elections and take such other actions, as and when Buyer shall deem
necessary to make a timely and effective election under Section 338(h)(10) of
the Code (the "Election") in connection with the transactions contemplated by
this Agreement.
(b) The allocation of the Purchase Price (the "Purchase Price
Allocation") for federal and state income tax purposes shall be as specified by
Buyer and provided to Shareholders, and the parties agree to file all returns,
reports and elections required by law in a manner consistent therewith. The
interim calculation referenced in Section 1.3(d)(i) below shall be based on the
initial Purchase Price Allocation provided by Buyer to Shareholders. To enable
Buyer to formulate its initial Purchase Price Allocation, Shareholders will give
to Buyer and its advisers access to the Company's books and records, the
Company's auditors and such other information as Buyer may reasonably request.
Such initial Purchase Price Allocation may be refined to a final Purchase Price
Allocation by Buyer prior to payment of the Section 1.2(b) amount to reflect
more current and accurate information. The Purchase Price Allocation shall be
prepared in compliance with applicable provisions of the Code.
(c) In the event that the Election is made pursuant to this Section
1.3, the Purchase
<PAGE>
Price shall be adjusted (the "338(h)(10) Adjustment"), as provided in Sections
1.3(d) and 1.3(e) herein for the amount of any additional federal and state
income taxes which the Shareholders may be required to pay in connection with
the transactions contemplated by this Agreement and which arise solely as a
result of the making of the Election, so as to ensure that the Shareholders' net
after tax proceeds are no less than the net after tax proceeds the Shareholders
would have otherwise realized in the absence of the making of the Election.
(d)(i) Within five (5) days after receipt by Shareholders of the
Notice and initial Purchase Price Allocation from Buyer, Shareholders shall
prepare or cause to be prepared a calculation of the 338(h)(10) Adjustment with
respect to the payment to be made pursuant to Section 1.2(a) hereof, and shall
provide such calculation to Buyer. Such calculation shall be an interim
calculation based on the initial Purchase Price Allocation, but shall be binding
on Buyer and Shareholders at the Closing, and the amount of such 338(h)(10)
Adjustment shall be paid to Shareholders at Closing, unless Buyer, prior to
Closing, notifies Shareholders in writing that it has determined not to file the
Election. In such event, the Notice shall be deemed withdrawn and no Election
shall be filed.
(ii) In the event the decision is made to file the Election,
then with respect to the calculation of the 338(h)(10) Adjustment to the
payments to be made under Section 1.2(a) and Section 1.2(b) hereof, the
following procedures shall apply: within 10 days after determination of the
amount to be paid pursuant to Section 1.2(b), Shareholders shall prepare or
cause to be prepared a calculation of the final 338(h)(10) Adjustment with
respect to the Section 1.2(a) and Section 1.2(b) amounts reflecting the final
Purchase Price Allocation, and shall provide such calculations to Buyer. Such
calculations shall each be final, conclusive and binding on Buyer and
Shareholders, unless Buyer, within ten (10) days after receipt of the
calculation notifies Shareholders of its disagreement in writing with either or
both of the calculations. If Buyer notifies Shareholders in writing of its
disagreement with Shareholder's calculations within such ten (10) day period,
the Buyer and Shareholders shall attempt to resolve their differences with
respect thereto within 10 business days after Shareholder's receipt of Buyer's
written notice of disagreement. In this regard, Buyer and Shareholders shall
each make available to the other their respective accountants for consultation
with one another. Any disputes not resolved by Buyer and Shareholders within
such 10 day period will be resolved by an accounting firm mutually acceptable to
both parties or, in the absence of agreement as to the selection of such
accounting firm, by a "big five" accounting firm selected by lot after
eliminating any of such firms then or previously engaged by Buyer or any of the
Shareholders. The determination of the calculations by any accounting firm so
selected shall be final, conclusive and binding upon the parties. The fees and
expenses of such accounting firm in acting under this section shall be borne
one-half by the Shareholders, on the one hand, and one-half by the Buyer on the
other hand. Upon final determination, the remaining 338(h)(10) Adjustment amount
(which amount shall be
<PAGE>
adjusted to reflect any appropriate adjustments resulting from differences
between the initial and final Purchase Price Allocation and/or the procedures
for review and resolution of disputes provided for in this subsection (d)(ii))
shall be paid promptly to Shareholders. Simultaneously therewith, Shareholders
will pay to Buyer interest on the amount of the 338(h)(10) Adjustment paid by
Buyer to Shareholders at Closing, at the prime rate of interest published in the
Wall Street Journal on the Closing Date, for the period from the Closing Date
until the date such 338(h)(10) Adjustment is paid to the appropriate taxing
authority or authorities. In addition, when the Shareholders remit to the
appropriate taxing authority the 338(h)(10) Adjustment to be paid by Buyer to
Shareholders in respect of the payment made under Section 1.2(b) hereof,
Shareholders shall simultaneously (with such remittance to the taxing authority)
pay to Buyer interest thereon at the aforesaid prime rate for the period from
the date such 338(h)(10) Adjustment is paid to Shareholders until the date of
such remittance.
(e) In determining the 338(h)(10) Adjustment, the parties
specifically agree that the following assumptions shall be used:
(i) The Purchase Price Allocation shall be as specified by
Buyer pursuant to Section 1.3(b) hereof.
(ii) It shall be assumed that the applicable federal ordinary
income tax rate is 39.6% and that the applicable federal capital gains tax rate
is 20%.
(iii) It shall be assumed that the applicable state income tax
rate or rates are the highest stated marginal tax rates of the applicable state
net of any federal tax benefits derived from the payment of state tax, assuming:
(i) that the state tax is paid in the year of receipt of the income upon which
the state tax is so payable, (ii) the state tax for 1998 shall be deductible for
federal income tax purposes without regard to the alternative minimum tax and
(iii) the state tax for 1999 shall be deductible for federal income tax purposes
subject to the alternative minimum tax, if applicable, as documented by
Shareholders.
(iv) It shall be assumed that the State of Georgia would not
impose any taxes on the transactions contemplated by this Agreement in the
absence of a Section 338(h)(10) election, and, accordingly, that any 338(h)(10)
Adjustment shall include, at a minimum, additional Georgia state income taxes.
(v) All calculations shall be "grossed up" to reflect the
taxes that would be payable on each 338(h)(10) Adjustment amount itself so that
the net after tax proceeds to the Shareholders in the event of the Election are
no less than the net after tax proceeds to the Shareholders without an Election.
<PAGE>
(f) Notwithstanding any provision of this Section 1.3 to the
contrary, in the event that the federal or state individual income tax return of
any Shareholder for the calendar years 1998 or 1999 is finally adjusted after
examination by the relevant taxing authority, and a final determination of taxes
is made (whether by agreement, compromise, or as the result of litigation),
then, upon presentation to Buyer of the appropriate documentation, Buyer shall
promptly reimburse the Shareholder for any additional federal and state income
taxes, penalties and interest which the Shareholder may be required to pay, and
Shareholders shall promptly reimburse Buyer for any refunds of federal or state
income taxes which Shareholders may be entitled to receive, in connection with
the transactions contemplated by this Agreement and which arise solely as a
result of making the Election, so as to ensure that the Shareholders net after
tax proceeds are no less than the net after tax proceeds the Shareholders would
otherwise have realized in the absence of making the Election.
2. CLOSING AND PAYMENT OF A PORTION OF THE PURCHASE PRICE.
2.1 Closing. Subject to the satisfaction of the conditions precedent
of Buyer and Shareholders set forth in Article 9 and Article 10 hereof, the
closing of the transactions contemplated hereby (the "Closing") shall be held at
the offices of Adler Pollock & Sheehan P.C., 2300 BankBoston Plaza, Providence,
Rhode Island at 10:00 A.M. on Friday, October 30, 1998 or on such later time and
date, not to exceed November 30, 1998, as the conditions specified in Articles 9
and 10 hereof shall have been satisfied or waived. The time and date of the
Closing is herein called the "Closing Date".
2.2 Payment of a Portion of Purchase Price. At the Closing, against
transfer of title to the Company Stock from Shareholders to Buyer, the Buyer
shall:
(a) pay by wire transfer of immediately available United
States funds to Shareholders (to and among them in proportion to their relative
percentage ownership interests in the Company Stock) a portion of the Purchase
Price equal to the difference between (i) US $24,500,000 and (ii) the sum of
(aa) the Real Estate Fair Market Value plus (bb) the Excluded Inventory Value
plus (cc) US $1,500,000;
(b) pay by wire transfer of immediately available United
States Funds to State Street Bank and Trust Company (the "Escrow Agent") a
portion of the Purchase Price equal to ONE MILLION FIVE HUNDRED THOUSAND UNITED
STATES DOLLARS (US $1,500,000), 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 Shareholders, Buyer and
Escrow Agent in the form of Exhibit A attached hereto (the
<PAGE>
"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 4.10(d) or 12.1 hereof, Shareholders, jointly and
severally, shall immediately pay any deficiencies to Buyer.
The balance of the Purchase Price shall be paid as provided in Section 3
hereof, and the Purchase Price shall be subject to possible adjustment as
provided in Section 2.4 hereof. The parties intend that all amounts of cash and
stock payable to Shareholders under this Section 2.2 hereof and Section 3
hereof, and all incentive compensation payable to Jaakko Uuranniemi, Teppo
Uuranniemi and Tuula Uuranniemi under their respective Employment Agreements (as
defined in Section 9.14 hereof), shall be treated as purchase price for tax and
book accounting purposes.
2.3 Transfer of Company Stock. At the Closing, Shareholders shall
transfer to Buyer or its nominee all right, title and interest in the Company
Stock as provided herein. Said transfer shall be effected by delivery to Buyer
of the stock certificates representing the Company Stock accompanied by stock
assignment forms executed by Shareholders in favor of Buyer.
2.4 Possible Adjustment to Purchase Price.
(a) Following the Closing, if the "Net Worth" (as defined in
Section 2.4(d) hereof and determined as hereinafter provided) of the Company as
of the Closing Date is less than an amount (the "Minimum Net Worth") equal to
the sum of (1) US $11,317,683 plus (2) "Net Income" of the Company (as defined
in Section 2.4(d) hereof and determined as hereinafter provided) for the period
between June 30, 1998 and the Closing Date, then the Purchase Price shall be
adjusted by an amount equal to, and Shareholders shall pay Buyer (by wire
transfer of immediately available United States funds) an amount equal to, the
difference between (i) the Minimum Net Worth and (ii) the Net Worth of the
Company as of the Closing Date. Shareholders shall pay the amount of any such
payment to Buyer within ten (10) business days following the final determination
of both (i) the Net Worth of the Company as of Closing Date and (ii) Net Income
of the Company for the period between June 30, 1998 and the Closing Date,
determined as hereinafter provided.
(b) Within forty-five (45) days after the Closing,
Shareholders shall prepare or cause to be prepared and will furnish to Buyer:
(1) unaudited but reviewed statements of income and retained earnings of the
Company for the period between June 30, 1998 and the Closing Date, which shall
have
<PAGE>
been prepared in accordance with United States generally accepted accounting
principles ("US GAAP"), consistently applied with prior periods, (2) an
unaudited but reviewed balance sheet of the Company as of the Closing Date,
which shall have been prepared in accordance with US GAAP, consistently applied
with prior periods, (3) an unqualified report of the Company's presently serving
auditors stating that they have reviewed such statements of income and balance
sheet in accordance with the generally accepted standards for a review, (4) a
statement showing Shareholders' determination and calculation ("Shareholders'
Determination") of: (i) Net Income of the Company for the period beginning June
30, 1998 and ending on the Closing Date and (ii) the Net Worth of the Company as
of the Closing Date, and (5) a certificate of the Company's presently serving
auditors certifying that the foregoing financial statements and Shareholders'
Determination have been prepared in accordance with the requirements of this
Section 2.4. For purposes of preparing the balance sheet referred to in clause
(2) above, inventory shall be physically taken as of the Closing Date by
Shareholders, and Buyer shall be entitled to participate therein.
(c) Following Shareholders' delivery to Buyer of the
statements, reports and certificates to be delivered by Shareholders to Buyer
pursuant to subsection (b) of this Section 2.4 hereof, unless Buyer notifies
Shareholders in writing that Buyer disagrees with Shareholder's Determination
within 20 business days after Buyer's receipt thereof, Shareholder's
Determination shall be final, conclusive and binding on Buyer and Shareholders.
If Buyer notifies Shareholders in writing of its disagreement with the
Shareholder's Determination within such 20 day period, then Buyer and
Shareholders shall attempt to resolve their differences with respect thereto
within 30 business days after Shareholder's receipt of Buyer's written notice of
disagreement. Any disputes not resolved by Buyer and Shareholders within such 30
day period will be resolved by an accounting firm mutually acceptable to both
parties or, in the absence of agreement as to the selection of such accounting
firm, by a "big five" accounting firm selected by lot after eliminating any of
such firms then or previously engaged by Buyer or any of the Shareholders. The
determination of any accounting firm so selected as to the Net Worth of the
Company as of the Closing Date and/or Net Income of the Company for the period
between June 30, 1998 and the Closing Date, either or both, as applicable, shall
be final, conclusive and binding upon the parties. The fees and expenses of such
accounting firm in acting under this section shall be borne one-half by
Shareholders, on the one hand, and one-half by Buyer on the other hand.
(d) As used herein, (1) "Net Worth" of the Company shall mean
the Total Stockholders' Equity of the Company, calculated in accordance with US
GAAP, consistently applied with prior periods, (2) "EBIT" of the Company shall
mean earnings before interest and taxes, calculated in accordance with US GAAP,
consistently applied with prior periods, (3) "Net Income" of the Company shall
mean Net Income, calculated in accordance with US GAAP, consistently applied
with prior periods, and (4) "Earnings of the Company for the Seven Month Period
Beginning June 1, 1998 and Ending December 31, 1998" shall mean the sum of (a)
Net Income of the Company for the period between June 1, 1998 and the Closing
Date plus (b) EBIT of the Company for the period between the Closing Date and
December 31, 1998.
<PAGE>
(e) For purposes of Section 2.4 and 3.3 hereof, and without
impairment of or departure from the procedures therein set forth: (A)
Shareholders shall be entitled to consult with, and engage the assistance of,
the Company's presently serving auditors in taking any action or making any
decision required to be taken or made by Shareholders, and (B) Buyer shall be
entitled to consult with, and engage the assistance of, Buyer's auditors in
taking any action or making any decision required to be taken or made by Buyer.
In addition, the parties agree to cause their respective auditors to make
available to each other, at all reasonable times, their respective workpapers,
if any, relating to the financial statements, reports and certificates to be
prepared and delivered pursuant to Sections 2.4 and 3.3. For purposes of
Sections 2.4 and 3.3 hereof, and notwithstanding any other provisions of this
Agreement, any required calculations shall be made as if no election under Code
Section 338, including but not limited to the Election under 338(h)(10), had
been made.
3. POST CLOSING PAYMENT OF BALANCE OF PURCHASE PRICE.
3.1 Payment of Balance of Purchase Price; and Time of Payment.
Following the Closing, Buyer shall also pay to Shareholders (to and among them
in proportion to their relative percentage ownership interests in the Company
Stock) the balance of the Purchase Price which shall be equal to Earnings of the
Company for the Seven Month Period Beginning June 1, 1998 and Ending December
31, 1998 (as defined in Section 2.4(d) hereof), determined as hereinafter
provided. The balance of the Purchase Price shall be paid to Shareholders within
ten (10) business days following the final determination of EBIT of the Company
for such period.
3.2 INTENTIONALLY LEFT BLANK.
3.3 Determination of Earnings of the Company for the Seven Month
Period Beginning June 1, 1998 and Ending December 31, 1998.
(a) After the end of calendar year 1998, Buyer shall prepare
or caused to be prepared and will furnish to Shareholders not later than
February 28, 1999: (1) statements of income of the Company for the 7 month
period beginning June 1, 1998 and ending December 31, 1998, which shall have
been prepared in accordance with US GAAP, consistently applied with prior
periods, (2) a statement showing Buyer's determination and calculation ("Buyer's
Determination") of Earnings of the Company for the Seven Month Period Beginning
June 1, 1998 and Ending December 31, 1998 and (3) a certificate of Buyer's Chief
Financial Officer certifying that the foregoing financial statements and Buyer's
Determination have been prepared in accordance with this Section 3 hereof.
<PAGE>
(b) Following Buyer's delivery to Shareholders of the
statements and certificates to be delivered by Buyer to Shareholders pursuant to
subsection (a) of this Section 3.3 hereof, unless Shareholders notify Buyer in
writing that Shareholders disagree with Buyer's Determination within twenty (20)
business days after Shareholders' receipt thereof, Buyer's Determination shall
be final, conclusive and binding on Buyer and Shareholders. If Shareholders
notify Buyer in writing of their disagreement with the Buyer's Determination
within such twenty (20) day period, then Buyer and Shareholders shall attempt to
resolve their differences with respect thereto within thirty (30) business days
after Buyer's receipt of Shareholders' written notice of disagreement. Any
disputes not resolved by Buyer and Shareholders within such thirty (30) day
period will be resolved by an accounting firm mutually acceptable to both
parties or, in the absence of agreement as to the selection of such accounting
firm, by a "big five" accounting firm selected by lot after eliminating any of
such firms then or previously engaged by Buyer or any of the Shareholders. The
determination of any accounting firm so selected, as to the amount of Earnings
of the Company for the Seven Month Period Beginning June 1, 1998 and Ending
December 31, 1998, shall be final, conclusive and binding upon the parties. The
fees and expenses of such accounting firm in acting under this section shall be
borne one-half by Shareholders, on the one hand, and one-half by Buyer on the
other hand.
3.4 Form of Payments. All payments of the Purchase Price payable by Buyer
to Shareholders shall be paid by wire transfer of immediately available United
States funds. Notwithstanding the foregoing or anything to the contrary
elsewhere herein contained, Buyer may elect to pay all or a portion of the
balance of the Purchase Price (payable following the Closing pursuant to Section
3.1 hereof) in either of, or in a combination of: (i) shares of Buyer's Common
Stock, $0.01 par value per share ("Common Stock") or (ii) Buyer's two-year,
unsecured promissory notes bearing interest at the prime rate, with interest
paid quarterly, provided that shares of Buyer's Common Stock and Buyer's
promissory notes may not be used to pay more than US $3,300,000 of such balance
of the Purchase Price. Any portion of the balance of the Purchase Price which
Buyer elects to pay in shares of Buyer's Common Stock shall be paid by delivery
from Buyer to Shareholders of stock certificates, representing a number of
shares of Buyer's Common Stock having a value (as hereinafter determined) equal
to the portion of the balance of the Purchase Price which Buyer elects to pay in
shares of Buyer's Common Stock. In the case of any portion of the balance of the
Purchase Price which Buyer elects to pay in shares of Buyer's Common Stock, the
number of shares of Buyer's Common Stock to be delivered to Shareholders to pay
such portion of the balance of the Purchase Price shall be determined by
dividing the portion of the balance of the Purchase Price which is to be paid in
Buyer's Common Stock by a price per share (the "Stipulated Value Per Share")
which is equal to the arithmetic average of the mean of the closing bid and
asked prices for Buyer's Common Stock on the NASDAQ National Market, or such
other nationally recognized market in which the Common Stock trades if such
Common Stock is no longer listed on the NASDAQ National Market, for the
<PAGE>
twenty (20) trading days consisting of the last ten (10) trading days in October
1998 and the first ten (10) trading days in March 1999. Any portion of the
balance of the Purchase Price which Buyer elects to pay with Buyer's promissory
notes shall be paid by delivery from Buyer to Shareholders of promissory notes
of Buyer in the form of Exhibit B attached hereto (the "Buyer's Promissory
Notes").
3.5 Purchase of Additional Shares by Shareholders. If the balance of
the Purchase Price payable pursuant to Section 3.1 hereof is less than US
$3,300,000, and if Buyer elects to pay the entire balance of the Purchase Price
in shares of Buyer's Common Stock, then, if so directed by Buyer, Shareholders
will purchase from Buyer, at the same time that Buyer pays the balance of the
Purchase Price pursuant to Section 3.1 hereof, a number of shares of Buyer's
Common Stock (the "Number of Additional Shares") equal to (A) the difference
between US $3,300,000 and the balance of the Purchase Price payable pursuant to
Section 3.1 hereof divided by (B) the Stipulated Value Per Share. For each such
share of Buyer's Common Stock to be purchased by Shareholders, Shareholders will
pay Buyer a purchase price per share equal to the Stipulated Value Per Share,
payable in full in United States Dollars, against simultaneous delivery from
Buyer to Shareholders of stock certificates representing a number of shares of
Buyer's Common Stock as is equal to the Number of Additional Shares.
The number of shares of Buyer's Common Stock to be issued by Buyer to
Shareholders pursuant to Sections 3.4 and 3.5 hereof and the Stipulated Value
Per Share shall be equitably adjusted to reflect any stock split or
recapitalization by Buyer occurring at any time (i) during or after the last 10
trading days in October 1998 and (ii) up to and including the date of issuance
of Buyer's Common Stock pursuant to Sections 3.4 and 3.5 hereof.
3.6 Interim Covenants. Until Buyer has paid to Shareholders the
balance of the Purchase Price pursuant to Section 3.1 hereof, Buyer will: (a)
not sell the Company to a person not affiliated with Buyer, (b) operate the
Company's business in substantially the same manner as currently operated, (c)
not terminate the employment of Jaako Uuranniemi, Teppo Uuranniemi, Tuula
Uuranniemi or any other Shareholder employed by the Company after the Closing
(except that nothing herein shall prevent a termination "for cause") and (d)
without Shareholders' prior approval not to be unreasonably withheld or delayed,
and for so long as Jaakko Uuranniemi is President of the Company not (i) make
any material change to the Company's management team or (ii) reduce the salary
and bonus compensation payable to any of Matti Rajala, Ronnie Miller and Ulysses
Smith below the levels specified on Schedule 4.13 attached hereto (except that
nothing herein shall prevent a termination "for cause"). For the purpose of this
Section 3.6 only, any portion of the balance of the Purchase Price which Buyer
elects to pay with Buyer's Promissory Notes shall be deemed paid upon the
delivery of such notes to the Shareholders.
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS.
Except as any representations and warranties in this Section 4 may
be qualified by disclosures made in the Schedules attached to this Agreement,
Shareholders, jointly and severally, represent, warrant and agree to and with
Buyer as of the date hereof and as of the Closing Date as follows:
4.1 Organization and Qualification of the Company. The Company is
duly organized and validly existing under the laws of the State of Georgia. The
Company has the requisite corporate power and authority to own or lease all of
its properties and assets and to conduct its business in the manner and in the
places where such properties are owned or leased or such business is now
conducted. The Company is duly qualified, licensed and authorized to do business
as a foreign corporation and is in good standing as a foreign corporation in
each jurisdiction where such qualification, licensing or authorization is
required.
4.2 Authority of Shareholders and the Company. This Agreement and
each of the other agreements and other documents and instruments delivered or to
be delivered to Buyer pursuant to or in contemplation of this Agreement will
constitute, when so delivered, the valid and binding obligations of such of the
Company and the Shareholders as are parties thereto and shall be enforceable
against such parties in accordance with their respective terms .except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally, or by the
exercise of judicial discretion in accordance with general equitable principles.
Each of the Shareholders has full power and authority to execute, deliver and
perform his or her obligations under this Agreement and each of the other
agreements and other documents and instruments to be delivered hereunder and to
perform his or her obligations.
The execution, delivery and performance of this Agreement or any
such other agreement, document or instrument by the Company or Shareholders,
except as specifically identified on the Schedule of Breaches, Defaults and
Required Consents attached hereto as 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
Shareholders or the Company or result in any right of termination or other
effect adverse to the Company or Shareholders under any indenture or loan or
credit agreement of Shareholders or the Company, or any other agreement, lease
or instrument to which Shareholders or the Company is a party or by which the
property of the Company or Shareholders is bound or affected;
(b) result in, or require, the creation or imposition of any
mortgage, deed of
<PAGE>
trust, pledge, lien, security interest or other charge or encumbrance or claim
of any nature whatsoever on the assets of the Company or on the Company Stock;
(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 having applicability to Shareholders, the Company or the
Company Stock;
(d) violate any provisions of the Articles of Incorporation or
By-Laws of the Company, as amended; or
(e) except as disclosed on Schedule 4.2 hereof, require any
approval, consent or waiver of, or filing with, any person.
4.3 Subsidiaries. The Company has no subsidiaries and does not own
any securities issued by any other individual, corporation, partnership, joint
venture, trust, association, estate, joint stock company or organization, except
temporary investments in the ordinary course of business.
4.4 Capitalization. The authorized capital stock of the Company
consists of: 100,000 shares of common stock, no par value per share, of which
1,000 shares are issued and outstanding and no shares are held in the treasury.
All of the Company's issued and outstanding shares of capital stock are
hereinafter collectively referred to as the "Company Stock." The Company Stock
has been duly and validly authorized, and the Company Stock is duly and validly
issued, fully paid and non-assessable; and was issued in compliance with federal
and applicable state securities laws. Except as set forth on Schedule 4.4
hereto, the Company Stock is owned by Shareholders free and clear of any and all
claims, liens, pledges, charges, encumbrances, mortgages, security interests,
options, restrictions on transfer (other than any restrictions under federal and
state securities laws), rights of first refusal, preemptive or other rights or
other interests or equities or imperfections of title whatsoever. There are no
other equity or debt securities of the Company authorized or issued and
outstanding on the date hereof and there are no existing warrants, preemptive or
other rights, options, calls, commitments, conversion privileges, or other
agreements obligating the Company to issue any capital stock, or any security
convertible into and/or exchangeable for capital stock of the Company.
4.5 Valid Title to Company Stock. Except as disclosed on Schedule
4.5, shareholders have and Buyer will receive at the Closing valid and
marketable title to the Company Stock, free and clear of any claims, liens,
pledges, charges, encumbrances, mortgages, security interests, options,
restrictions on transfer, rights of first refusal, preemptive or other rights or
other agreements, interests or equities or any other imperfections of title
whatsoever.
<PAGE>
4.6 Assets.
(a) Except for assets disposed of since the Interim Date (as
hereinafter defined in Section 4.10 hereof) in the ordinary course of business
consistent with past practice, the Company owns, or has enforceable rights to
use under valid and binding leases with third parties, all assets included in
the Interim Date Balance Sheet (as hereinafter defined in Section 4.10 hereof)
and such assets constitute all assets necessary to the business and operations
of the Company as presently conducted. Except as set forth on the Schedule of
Machinery and Equipment attached hereto as Schedule 4.6(a), the machinery and
equipment owned or leased by the Company (i) is in an operating condition
suitable to the conduct of the Company's business, subject to normal wear and
tear; (ii) has been maintained in accordance with normal industry practice;
(iii) is adequate for the Company's current needs and the Company's current
production levels; and (iv) conforms with all applicable laws, ordinances and
regulations.
(b) Except as listed on the Schedule of Liens and Encumbrances
attached hereto as Schedule 4.6(b) and except for assets disposed of since the
Interim Date in the ordinary course of business consistent with past practice,
the Company has good and marketable title to all of its assets (including,
without limitation, those reflected in the Interim Date Balance Sheet), 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.
(c) The inventories of the Company reflected on the Interim
Date Balance Sheet and the inventories of the Company existing on the date
hereof and on the Closing Date are of a quality and quantity saleable in the
ordinary course of the Company's business at prevailing market prices, are
valued at the lower of cost or market and 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
Company's business. Subject to write-downs complying with the preceding
sentence, the values of the inventories stated in the Interim Date Balance Sheet
reflect the Company'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 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
<PAGE>
business.
(d) All of the personal property leased by the Company is
listed on the Schedule of Personal Property Leases attached hereto as Schedule
4.6(d), and true and complete 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 Company and any third parties claiming an interest in the Company's interest
in any leased property or otherwise relating to the Company's use and occupancy
thereof, and all covenants, conditions, restrictions, easements and similar
matters affecting the leased property have been complied with by the Company.
(e) Except for the assets located at the premises described on
the Schedule of Assets at Other Locations attached hereto as Schedule 4.6(e),
all of the assets of the Company are located on the Real Property (as defined in
Section 4.7 hereof), and all the assets located on such other premises are owned
or leased by the Company.
4.7 Real Property.
(a) With the exception of the real estate and building and
improvements thereon which the Company leases at 1206-08 Sunset Drive,
Thomasville, Georgia (the "Uuranniemi Parcel") and the other real property and
buildings and improvements thereon which the Company leases as disclosed on the
Schedule of Real Property attached hereto as Schedule 4.7, the Company does not
own, lease or otherwise use any real estate in the conduct of its business. (All
of such real property owned or leased by the Company, including but not limited
to the Uuranniemi Parcel, together with the buildings and improvements thereon,
is herein referred to as the "Real Property"; and, solely for purposes of this
Section 4.7 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
Company.) The legal description of the Uuranniemi Parcel is set forth on
Schedule 4.7.
(b) Except as otherwise specifically disclosed on Schedule
4.7: (i) the Real Property, and the operations thereon and the uses made
thereof, and the Company's business, 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 at any time by the Company or any of its past or present
officers, employees, agents or independent contractors or, to the best of
Shareholders' knowledge, any other person, except in full compliance with all
Environmental Laws; (iii) the Real Property has not been used at any time by the
Company or
<PAGE>
any of its past or present officers, employees, agents or independent
contractors or, to the best of Shareholders' knowledge, any other person, in
such a manner as to cause a violation of any Environmental Law or to 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 of any Hazardous Materials to or from the Real
Property at any time by the Company or any of its past or present officers,
employees, agents or independent contractors or, to the best of Shareholders'
knowledge, any other person; (v) neither the Company nor any of the Shareholders
has received notice 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 and is not adjacent to any such property; (vii) none of the
buildings and improvements included within the Real Property contain asbestos,
and there are no underground storage tanks or polychlorinated biphenyl (PCBs)
located on or at the Real Property; (viii) the Company 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 the Company is complying in all respects therewith;
(ix) no employees of the Company have been exposed to Hazardous Materials in
violation of any Environmental Laws; and (x) the Shareholders have delivered to
Buyer true, complete and correct copies or results of any and all reports,
studies or tests in the possession of the Shareholders or the Company 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 Company.
As used in this Section 4.7 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 under 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,
<PAGE>
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 received by the Shareholders
or the Company.
(e) To the best of Shareholders' knowledge, there is no plan,
study or effort by any governmental authority or any other person which may
prevent or hinder the continued use of the Real Property as heretofore used in
the conduct of the business by the Company.
(f) There is not (i) to the best of Shareholders' 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 the continued use of the Real Property as
heretofore used in the conduct of the business by the Company or (ii) any suit,
action, claim or legal, administrative, arbitration or other proceeding or
governmental investigation (other than Environmental Actions) pending or, to the
best of Shareholders' knowledge, threatened or contemplated against or affecting
either the Real Property or the use thereof.
(g) There is no existing or, to the best of Shareholders'
knowledge, proposed or contemplated eminent domain proceeding that would or
could result in the taking of
<PAGE>
all or any part of the Real Property that would prevent or hinder the continued
use of the Real Property as heretofore used in the conduct of the business by
the Company.
(h) Except as set forth on Schedule 4.7, there are no
encroachments onto the Real Property by any improvements on any adjoining
property.
(i) Except as set forth on Schedule 4.7, 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 affecting the
Real Property or any portion thereof.
(k) Except as set forth on Schedule 4.7, neither the Company
nor, to the best of Shareholders' 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 Company's leasehold
interest in the Real Property.
(l) Mr. Jaakko Uuranniemi owns good and marketable fee simple
absolute title to the Real Property, 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 record, except as set forth on Schedule 4.7.
(m) To the best of Shareholders' knowledge, all covenants,
conditions, restrictions, easements and similar matters affecting the Real
Property have been complied with.
(n) 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.
(o) The buildings and improvements included among the Real
Property are in a state of condition, maintenance and repair suitable to the
conduct of the Company's business, subject to normal wear and tear.
4.8 Conduct of the Business. Neither Shareholders nor the Company is
a party to, or subject to or bound by, nor are any of the Company's assets
subject to or bound by, any agreement, oral or written, or any judgment, law,
rule, regulation, order, writ, injunction or decree of any court or governmental
or administrative body which prohibits or adversely affects
<PAGE>
or upon the consummation of the transactions contemplated hereby would prohibit
or adversely affect: (i) the use of any or all of the assets and property of the
Company necessary for its operation in the ordinary course of business; or (ii)
the conduct of the business and operations of the Company, in each case in
substantially the same manner as such business has heretofore been conducted by
it. Shareholders have no specific knowledge that business relations currently
maintained with the suppliers, customers and persons having business relations
with the Company will not be similarly maintained after the date hereof and the
date of the Closing. Without limiting the generality of the foregoing, no
supplier, distributor or customer of the Company has notified the Company or any
of the Shareholders that it intends to discontinue its relationship with the
Company.
4.9 Permits and Licenses. Except as set forth on the Schedule of
Regulatory Licenses, Consents, Permits and Authorizations attached hereto as
Schedule 4.9, the Company is not required by any person, entity or governmental
authority, foreign or domestic, federal, state or local, to obtain or maintain
any consents, authorizations, licenses, permits, orders, certificates,
registrations, security and other clearances, and qualifications which are
necessary to the conduct of its business as presently conducted or required by
applicable laws. Except as set forth on Schedule 4.9, the Company has obtained
all such consents, authorizations, licenses, permits, orders, certificates,
registrations, security and other clearances, and qualifications which are
necessary to the conduct of its business or required by applicable laws; and the
same are valid and subsisting. The Company is not required to have any form of
security clearance from any governmental agency in order to conduct its business
and operations in the manner it is presently conducted.
4.10 Financial Statements and Undisclosed Liabilities.
(a) Shareholders have delivered to Buyer (1) the regularly
prepared unaudited balance sheets of the Company as of May 31, 1998 and June 30,
1998, and regularly prepared unaudited statements of income of the Company for
each of the interim periods then ended, (2) restated unaudited balance sheets of
the Company as of May 31, 1998 and June 30, 1998, and restated unaudited
statements of income of the Company for each of the interim periods then ended,
(3) the audited balance sheets of the Company as of December 31 , 1997, December
31, 1996 and December 31, 1995, and the audited statements of income and
retained earnings and cash flows of the Company for each of the fiscal years
then ended, including, in each case, the related notes and (4) a restated
balance sheet of the Company as of December 31, 1997, and restated statements of
income of the Company for the fiscal year then ended, (all of which financial
statements and notes referred to in clauses (1), (2), (3) and (4) of this
subsection (a) of this section 4.10 hereof are collectively referred to as the
"Financial Statements"). The regularly prepared balance sheet of the Company as
of May 31, 1998 is hereinbefore and hereinafter referred to as the "Interim Date
Balance Sheet", and May 31, 1998 is hereinbefore and
<PAGE>
hereinafter referred to as the "Interim Date". Prior to the Closing,
Shareholders will promptly furnish to Buyer both regularly prepared and
similarly restated balance sheets and income statements of the Company as of and
for the period ending at the end of each month following June 30, 1998 which
ends prior to the Closing.
(b) All of the Financial Statements: (i) are true, complete
and correct and present fairly the financial position of the Company as of the
dates thereof and the results of operations and changes in financial position
for the respective periods covered by such statements; (ii) are consistent with
the books and records of the Company; and (iii) have been prepared in accordance
with US GAAP applied on a consistent basis except, with respect to interim
statements, normal year-end adjustments.
(c) The Company, as of the Interim Date and the Closing Date,
has no indebtedness, liability, claim or obligation of any nature, fixed or
contingent, choate or inchoate, liquidated or unliquidated, secured or unsecured
or otherwise, except: (i) liabilities specifically described and reflected
dollar for dollar on the Interim Date Balance Sheet; (ii) fixed liabilities
incurred in the ordinary course of business on commercially reasonable terms
since the Interim Date, in kind and amounts consistent with past practices;
(iii) fixed commercial obligations to perform pursuant to executory contracts
entered into in the ordinary course of business, consistent with past practices,
and not in default, as disclosed pursuant to Section 4.13; and (iv) liabilities
specifically disclosed and reflected dollar for dollar on the Schedule of
Liabilities attached hereto as Schedule 4.10(c). There is no existing condition,
situation or set of circumstances which will result in any such liabilities
except for the liabilities identified in clauses (i) through (iv) of this
Section 4.10(c).
(d) All receivables of the Company including accounts
receivable, contracts receivable, loans receivable, notes receivable and
advances shown on the Interim Date Balance Sheet or those acquired after the
Interim Date and, in either case, not collected on or prior to the Closing Date
(collectively, the "Accounts") arose from bona fide transactions in the ordinary
course of business, 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 in the normal course of
business in the aggregate face amounts thereof without offset, counterclaim or
resort to litigation, except to the extent of an allowance for doubtful accounts
equal to US $4,491 (the "Reserve for Doubtful Accounts"). There has not been
asserted nor does there exist any counterclaim or claim for offset against any
of the Accounts. None of the Accounts have been outstanding for more than one
hundred (120) days from the date of the respective invoice.
<PAGE>
At Buyer's election, following the Closing, within ten (10) business days after
Buyer delivers to Shareholders 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 twenty (120) days thereafter, Shareholders will
immediately pay to Buyer an amount equal to the difference between (A) the
aggregate face amount of such unpaid Accounts (less the aggregate amount of any
unpaid Accounts forgiven by Buyer) and (B) the Reserve for Doubtful Accounts,
against simultaneous delivery by Buyer to Shareholders of an appropriate bill of
sale conveying the unpaid Accounts to Shareholders and entitling Shareholders to
collect such Accounts in their own name. Any and all payments received by Buyer
or the Company after the collection period for which Buyer has heretofore been
reimbursed by Shareholders shall promptly be paid over to Shareholders. Buyer
shall cause the Company to exercise its reasonable best efforts to collect all
such unpaid Accounts consistent with past practices before the end of the
aforesaid collection period; however, the Company 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, applied to the oldest outstanding receivable account of such
customer.
(e) Since the Interim Date, there have been no reserves taken
or reversed or assets written down or written up except as set forth on the
Schedule of Reserves Taken and Assets Written Down or Up attached hereto as
Schedule 4.10(e).
4.11 Compliance with Laws. Except as set forth on the Schedule of
Noncompliance with Laws attached hereto as Schedule 4.11 and excluding
Environmental Laws, the Company has been and is, and its business has been and
is being conducted and operated, in compliance with the requirements of all
applicable statutes, laws, ordinances, regulations, rules, codes or decrees,
whether foreign or domestic, federal, state or local, which affect the Company
or its business or to which the Company 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 and federal procurement. Except as set forth on Schedule 4.11,
neither the Company nor the Shareholders has 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.
4.12 Patents, Trade Names, Trademarks and Copyrights. All patents,
patent applications, trade names, registered or common law trademarks, trademark
applications, registered copyrights, unregistered copyrights and copyright
applications owned by or licensed to or used by the Company are listed on the
Schedule of Patents, Trademarks and Copyrights
<PAGE>
attached hereto as Schedule 4.12 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 4.12, 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
4.12, the Company'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 Company free and clear of any
attachments, liens, royalties, encumbrances, adverse claims, licenses or any
other ownership or other interest of any other person whatsoever (including,
without limitation, Shareholders). Except as described in Schedule 4.12, 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 the Company
or any of the Shareholders has infringed any adversely held patent, trade name,
trademark or copyright; and no claim or proceeding charging the Company or any
of the Shareholders with infringement of any adversely held patent, trade name,
trademark or copyright, has been asserted or served upon the Company or the
Shareholders at any time during the six (6) year period prior to and ending upon
the Closing Date or, to the best of Shareholders' knowledge, is threatened to be
asserted or filed; and the conduct of the business of the Company, as heretofore
conducted by the Company, and the manufacture and sale by the Company of its
products and services, as heretofore manufactured and sold by the Company, do
not and will not infringe any patents, patent applications, trade names,
trademarks, copyrights or other rights of any third person. Except as set forth
on Schedule 4.12, to the best of Shareholders' knowledge after a review of the
current files of the Company, no person is infringing upon the patents, trade
names, trademarks or copyrights or applications therefor set forth on Schedule
4.12. Except as specifically disclosed on Schedule 4.12, the Company has not
used any patent, trade name, trademark or copyright in order to conduct its
business as presently being conducted.
The Company owns and has the right to use, free and clear of any
claims or rights of any other person, including without limitation, Shareholders
or any affiliate thereof, all trade secrets, customer lists, manufacturing
processes, secret processes, technology, know-how and any other confidential
information (collectively, the "Trade Secrets") required for or used in the
manufacture or marketing of all products either being, or proposed to be, sold
or manufactured by the Company, including, without limitation, any products
licensed by the Company from others. No person or entity is now infringing upon
or misappropriating, or has in the past infringed upon or misappropriated, any
of the Trade Secrets. The Company is not in any way making any unlawful or
wrongful use of any trade secrets, customer lists, manufacturing processes,
secret processes, 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
<PAGE>
Company. All inventions, 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 Company (including
without limitation the Shareholders) and relating to or used in, or useful to,
the Company's business is the property of the Company. Neither the Company nor
any officer, director or key employee of the Company is a party to any
non-competition agreement, non-disclosure agreement, or similar agreement with
any other person.
4.13 List of Contracts. Except for the contracts, commitments,
plans, agreements and licenses described in the Schedule of Contracts,
Commitments and Intercompany Transactions attached hereto as Schedule 4.13, the
Company is not a party to nor is it or any of its properties or assets or the
Stock 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 $25,000 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;
(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 $25,000 creating any obligation of the Company
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;
<PAGE>
(i) Advertising contract or commitment;
(j) License agreement (as licensor or licensee);
(k) Insurance policy;
(l) Bank account, lock box or similar depository arrangements;
(m) 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; or
(n) Other material contract affecting the Company.
All the contracts and commitments listed in said Schedule 4.13 are
valid and binding obligations of the Company and, to Shareholders' knowledge, of
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
such contract, commitment, lease or other agreement by the Company, or to the
knowledge of Shareholders, 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 Company, or to the knowledge of Shareholders, by any
other party thereto with respect to any such contract or commitment 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 assets of the Company
or the Stock. Buyer has been furnished with true and complete copies of all
scheduled contracts and commitments marked for identification.
Except for the contracts and transactions described on Schedule 4.13
and except as otherwise disclosed on any other Schedule to this Agreement, (i)
the Company is not a party to nor is it or any of its properties or assets or
the Company Stock subject to or otherwise bound by any existing contracts,
whether oral or written, between the Company, on the one hand, and Shareholders
or any of Shareholders' or the Company's affiliates, on the other hand, (ii) the
Company has no asserted or unasserted claims against Shareholders or any of
Shareholders' or the Company's affiliates, and (iii) none of Shareholders or any
of Shareholders' or the Company's affiliates has any asserted or unasserted
claims against the Company.
4.14 Litigation. Except as set forth on the Schedule of Litigation
attached hereto as Schedule 4.14, there is no action, suit, investigation
(whether formal or informal), subpoena or
<PAGE>
proceeding pending against the Company, and, to the best of Shareholders'
knowledge, there is no threatened action, suit, investigation (whether formal or
informal), subpoena or proceeding against the Company or any basis therefor, nor
have Shareholders or the Company received any actual written or oral notice of
any such action, suit, investigation, subpoena or proceeding. Except as set
forth on Schedule 4.14, no subpoena, order, writ, injunction or decree has been
issued by, or requested of any court or governmental agency, foreign or
domestic, federal, state or local, which pertains to the Company or which will,
or which could reasonably be expected to, result in an adverse change in the
business, property or assets or in the condition, financial or otherwise, of the
Company or which might adversely affect the transactions contemplated by this
Agreement. The Company has never been subject to or a party to any bankruptcy or
other insolvency proceedings.
4.15 Absence of Changes. Since the Interim Date, the Company has
conducted its business only in the ordinary course, and, except as set forth in
this Agreement and on the Schedule of Changes attached hereto as Schedule 4.15,
the Company has not, as of the date hereof or the date of the Closing, either
directly or indirectly since the Interim Date:
(a) suffered any change in the condition (financial or
otherwise), properties, assets, liabilities, net worth, business, operations,
earnings, affairs or prospects of the Company, whether or not in the ordinary
course of business, which change by itself or in conjunction with any or all
other such changes has had, or will or could reasonably be expected to have, a
material adverse effect on the condition (financial or otherwise), properties,
assets, liabilities, net worth, business, operations, earnings, affairs or
prospects of the Company;
(b) incurred any obligation or liability (absolute, accrued,
contingent or otherwise) outside the ordinary course of business other than as
permitted by Section 4.10(c);
(c) mortgaged, pledged or subjected to lien, charge or any
encumbrance or other imperfections of title any of its assets, tangible or
intangible;
(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) purchased, sold, assigned, transferred, abandoned or
otherwise disposed of any assets other than in the ordinary course of its
business, or cancelled any debts or claims, other than in the ordinary course of
business and in amounts which in the aggregate are not in excess of US $25,000;
<PAGE>
(f) INTENTIONALLY LEFT BLANK;
(g) entered into any transaction or agreement other than in
the ordinary course of business consistent with past practice;
(h) issued any stock, bonds, convertible securities or other
securities, or become obligated to issue any such securities or granted any
stock options, warrants, calls, conversion privileges, commitments or rights
with respect to such securities;
(i) entered into any compromise or settlement of any
litigation, proceeding or governmental investigation relating to the Company or
its assets, properties, rights or business or the Stock;
(j) declared, set aside or paid any dividend on, or any other
distribution made in respect of, the capital stock of the Company or made any
direct or indirect redemption, purchase or other acquisition by the Company of
its own capital stock (or entered into any agreement under which the Company has
become obligated to do any of the foregoing);
(k) changed or amended its Articles of Incorporation, or
equivalent, or Bylaws;
(l) failed to pay, satisfy, perform or otherwise discharge any
debt, lien, obligation or liability shown on the Interim Date Balance Sheet or
incurred thereafter 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 4.15 attached hereto;
(m) suffered any damage, destruction or loss whether or not
covered by insurance which has had, or will or could reasonably be expected to
have, a material adverse effect upon the condition (financial or otherwise),
properties, assets, liabilities, business, operations or affairs of the Company;
(n) made or suffered any amendment, modification or
termination of any contract or agreement which has had, or will or could
reasonably be expected to have, a material adverse effect upon the condition
(financial or otherwise), properties, assets, liabilities, business, operations
or affairs of the Company;
(o) received notice or acquired knowledge of any labor dispute
or organizing effort involving employees of the Company;
<PAGE>
(p) except as set forth on Schedule 4.15, made any loans
(other than travel expense advances) to any stockholders, directors, officers or
employees of the Company;
(q) changed the number or kind of shares of capital stock
authorized, issued or outstanding;
(r) formed any subsidiaries or merged or consolidated, or
obligated itself to do so, with or into any other person;
(s) repaid any loans or other advances from stockholders or
repaid any indebtedness of the Company for which any stockholder was a guarantor
or was otherwise directly or indirectly liable;
(t) INTENTIONALLY LEFT BLANK;
(u) changed the compensation payable or to become payable by
the Company to any of its officers, directors, employees or agents other than
normal merit increases and bonuses made for the benefit of non-shareholder
employees in accordance with (and consistent in amount with) its usual
practices;
(v) paid or discharged a lien or liability of the Company
which was not shown on the Interim Date Balance Sheet or incurred in the
ordinary course of business thereafter;
(w) incurred any obligation or liability on behalf of the
Company to any of its officers, directors, employees or Shareholders or any
loans or advances made by the Company to any of its officers, directors,
employees or stockholders except normal compensation and expense allowances
payable to such persons in the ordinary course of business consistent with past
practice;
(x) entered into any lease or sublease, pledge or
hypothecation of real or personal property or of the assets of the Company;
(y) forgiven or cancelled any debts or claims, or waived any
rights, except in the ordinary course of business; or
(z) suffered any loss of employees, except for normal employee
turnover in the ordinary course of business or, to the knowledge of the
Shareholders suffered any loss of
<PAGE>
suppliers or customers.
4.16 Insurance. The physical properties, business, operations and
assets of the Company are insured by such insurers, under such policies, against
such risks, in such amounts, and upon such other terms and conditions as are
disclosed in the Schedule of Insurance attached hereto as Schedule 4.16, and all
other insurance policies and similar arrangements of the Company are disclosed
in said Schedule. Said insurance policies and arrangements are, and through the
Closing Date will be, in full force and effect. Except as specifically
identified and disclosed dollar for dollar on the Interim Date Balance Sheet or
on Schedule 4.16, the Company has no liability, whether fixed or contingent or
otherwise, under any workers' compensation or other insurance policy, in respect
of the current policy periods or prior periods, for premiums, retrospective
rating adjustments or additional premiums which may arise out of subsequent
audits of such policy periods or otherwise.
4.17 INTENTIONALLY LEFT BLANK.
4.18 Employee Benefit Plans. The Schedule of Employee Benefit Plans
attached hereto as Schedule 4.18 sets forth a complete and accurate description
of all employee benefit plans, agreements, policies and arrangements (whether or
not written) and all existing collective bargaining agreements relating to
employee benefits with respect to which the Company has incurred any past,
current or contingent obligations, including, without limitation, all plans,
agreements, arrangements or policies relating to sick pay, vacation pay or
severance pay, deferred compensation, pensions, profit sharing, retirement
income or other benefits, stock 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 4.18:
(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
<PAGE>
terms and applicable law, and to the extent applicable, each Plan 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. No Plan 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
Company 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
Company 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 Company has received determination letters from the
Internal Revenue Service that each of such Plans is qualified under section
401(a) of the Code (if applicable) and such determination letters are in effect,
and the Company 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
Company 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 Shareholders' knowledge, threatened, nor, to the best of
Shareholders' knowledge does there exist any basis therefor, which would result
in any liability with respect to any Plan of the Company;
<PAGE>
(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 Company is not a participant in any Multiemployer Plan
within the meaning of Section 3(37) of ERISA. The Company 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 Company were to withdraw from any of
such Multiemployer Plans set forth on Schedule 4.18 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 the Company 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 the Company, 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 Company 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 Company 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 Company has complied with the health care coverage
continuation requirements of the Consolidated Omnibus Budget Reconciliation Act
of 1985;
(n) All accrued liabilities of the Company with respect to
sick pay, vacation pay, severance pay, deferred compensation, or other
obligations for the benefit of any personnel of the Company including pension
benefits (vested or unvested) have been reflected dollar for dollar in
accordance with GAAP on the Financial Statements of the Company; and
(o) Each Plan (including any Plan covering retirees or former
employees)
<PAGE>
may be amended or terminated at any time after the Closing Date without
liability to the Company.
4.19 Governmental and Other Approvals. Except for any information
reports, applications or notices required to be filed under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
regulations promulgated thereunder (the "HSR Act"), under existing law, neither
Shareholders nor the Company are 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/or consummate the
transactions contemplated hereby in accordance with applicable laws and
regulations.
4.20 Brokerage. Shareholders have not dealt with any broker or
finder in connection with the transactions contemplated herein, and Shareholders
agree 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 Shareholders in connection with the
transactions contemplated herein.
4.21 Labor Relations. There is no unfair labor practice complaint
against the Company pending or, to the best of Shareholders' knowledge,
threatened. There are no proceedings pending or, to the best of Shareholders'
knowledge, threatened before the National Labor Relations Board with respect to
the Company. There is no labor strike or similar dispute pending or, to the best
of Shareholders' knowledge, threatened against or involving the Company. There
is no pending or past representation question involving an attempt to organize a
bargaining unit including any employees of the Company and no labor grievance
has been filed within the past 12 months with the Company. The Company is not a
party to or bound by any collective bargaining agreement. No collective
bargaining agreement is currently being negotiated by the Company with respect
to employees of the Company.
4.22 Discrimination Charges. There are no discrimination charges
(relating to sex, age, race, national origin, handicap or veteran status)
pending or, to the best of Shareholders' knowledge, threatened against the
Company, or involving the Company, before any federal, state, county or local
agency, board, commission, authority or other subdivision thereof.
4.23 Related Transactions. Except as specifically disclosed on the
Schedule of Affiliation attached hereto as Schedule 4.23 or on Schedule 4.13,
and except for payment by the Company of normal compensation to regular
employees of the Company on a current basis (and not in arrears) in the ordinary
course of business, in kind and amounts consistent with past practices, no
current or former director, officer, employee or shareholder of the Company, or
any
<PAGE>
of their affiliates or family members or any other person in which any of them
has any beneficial interest (other than an investment in a publicly held
corporation not exceeding 1% of the outstanding capital stock of such
corporation), is, or since January 1, 1997 has been: (i) a party to any
transaction with the Company or its affiliates (including but not limited to any
contract, agreement, commitment or other arrangement providing for the
furnishing of services by or to, or rental of real or personal property to or
from, or otherwise requiring payments to or from, any such director, officer,
employee or shareholder of the Company or any of their affiliates or family
members or any other person in which any of them has any beneficial interest
(other than an investment in a publicly held corporation not exceeding 1% of the
outstanding capital stock of such corporation)); (ii) entitled to receive any
fee or other payment of consideration in connection with this Agreement and/or
the consummation of the transactions contemplated herein; (iii) the direct or
indirect owner of any interest in any corporation, firm, association or business
organization which is a present competitor of, customer of or supplier of
products and/or services to the Company or (iv) the recipient of income from any
source other than the Company which relates to the business of, or should
properly accrue to, the Company.
4.24 Shareholders. Except as set forth on the Schedule of
Shareholders attached hereto as Schedule 4.24, the Company has no shareholders.
4.25 Taxes.
(a) The amounts set up as accruals for federal, state, county,
local and foreign taxes on the Interim Date Balance Sheet will be sufficient to
cover in full the payment of all unpaid federal, state, county, local and
foreign taxes (including, without limitation, income, excise, sales, use,
property, franchise, withholding, unemployment and FICA taxes, and any interest
and penalties thereon) of Company accrued for or applicable to the periods ended
on the Closing Date and all years and periods prior thereto, including, without
limitation, taxes arising out of the consummation of the transactions
contemplated hereby.
(b) Set forth on Schedule 4.25 is a list of all federal,
state, county, local and foreign income, excise, property, franchise, sales,
use, withholding, unemployment and other tax returns or information which have
been filed by the Company for all taxable years beginning on May 9, 1990 and
continuing through December 31, 1997. The Company 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 to any assessment which has been received by it
and will continue to do so up to the Closing Date. Such returns are true,
complete and correct in all respects and copies of the same for the six (6)
years ended December 31, 1996 have been delivered to Buyer.
<PAGE>
(c) The federal income tax returns of the Company have been
audited by the Internal Revenue Service or are closed by the applicable statute
of limitations for all taxable periods through December 31, 1994. All
deficiencies asserted as a result of such examinations have been paid and no
extension of time for the assessment of deficiencies for any such year is in
effect. There is no current audit of any of the Company's tax returns. The
Company has not given nor been requested to give waivers of any statutes of
limitations relating to the payment of taxes of the Company for taxable periods
for which the applicable statutes of limitations have not expired. The
provisions for federal taxes reflected in the above-mentioned Financial
Statements are adequate to cover any and all federal tax liabilities of the
Company in respect of its business, property and operations. Neither the
Internal Revenue Service nor any other taxing authority is now asserting or, to
the best of Shareholders' knowledge, threatening to assert against the Company
any deficiency or claim for additional taxes or interest thereon or penalties in
connection therewith. The Company has made adequate provisions for all current
taxes, and there will not be any additional assessments for any fiscal periods
prior to and including the date hereof and the Closing Date in excess of the
amounts reserved therefor. Copies of all audit reports prepared by Internal
Revenue Service agents or state or local tax examiners in connection with any
tax audit conducted on the Company have been delivered to Buyer.
(d) On May 9, 1990, the Company filed an election pursuant to
Section 1362 of the Internal Revenue Code of 1986, as amended, to be treated as
an "S" corporation for federal income tax purposes, and such election is valid
and effective for all taxable years of the Company beginning on May 9, 1990 and
continuing through the Closing Date.
4.26 Product Warranties. Set forth on the Schedule of Product
Warranties attached hereto as Schedule 4.26 are the standard forms of product
warranties and guarantees used by the Company in the conduct of its business.
Except as specifically disclosed on said Schedule 4.26, the Company has not
given, used or made any product warranties or guarantees. Except as specifically
described on Schedules 4.26, no product warranty or similar claims have been
made against the Company except routine claims as to which, in the aggregate,
losses and expenses in respect of repair or replacement of merchandise do not
and will not exceed the warranty reserve reflected on the Interim Date Balance
Sheet. The aggregate loss and expense attributable to all product warranty and
similar claims now pending or hereafter asserted with respect to products
manufactured on or prior to the Closing Date will not exceed the warranty
reserve reflected on the Interim Date Balance Sheet. No person or party
(including, but not limited to, governmental agencies of any kind) has any
claim, or basis for any action or proceeding, against the Company under any U.S.
federal, state or local law or foreign law applicable to product warranties or
guarantees used by the Company.
4.27 Product Liability Claims. Except as described on the Schedule
of Product
<PAGE>
Liability Claims attached hereto as Schedule 4.27, the Company has not received
notice or information as to any claim or allegation of personal injury, death,
or property or economic damages, any claim for punitive or exemplary damages,
any claim for contribution or indemnification, or any claim for injunctive
relief in connection with any product manufactured, sold or distributed by or in
connection with any service provided by the Company.
4.28 Product Safety Authorities. No person has been required to file
any notification or other report with or provide information to any governmental
agency or product safety standards group concerning actual or potential defects
or hazards with respect to any product manufactured, sold or distributed by the
Company, and there exists no grounds for the recall of any products of the
Company.
4.29 Investment Representation. Each Shareholder: (A) is acquiring
his proportionate part of any shares of Buyer's Common Stock issued pursuant to
Section 3 hereof (collectively the "AFC Shares") for his 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) alone
or together with his or her personal representative, 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 his investment in the AFC Shares,
(C) acknowledges that he has been furnished with copies of Buyer's annual report
to shareholders/Form 10-K for the year ended December 31, 1997; Buyer's first
and second quarter 1998 reports on Form 10-Q; Buyer's Proxy Statement for the
Annual Meeting of Stockholders held on May 27, 1998, and the final prospectus
dated May 12, 1998 for Buyer's most recently completed public offering, all as
filed with the Securities and Exchange Commission (the "Commission"), (D)
acknowledges that Buyer has made available to him the opportunity to ask
questions of (and to receive answers from) Buyer's officers and directors about
Buyer and the AFC Shares and to acquire such additional information about Buyer
as he has requested and as is necessary for him to evaluate the merits and risks
of his investment in Buyer and to verify the accuracy of the information
contained in the aforesaid documents filed with the Commission, (E) understands
that the AFC Shares have not been registered under the Securities Act or under
any state securities laws; are being offered and sold to him 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 AFC Shares, (G) understands that any sale of the AFC Shares which
might be made by him 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"
<PAGE>
within the meaning of Regulation D under the Securities Act.
Each Shareholder agrees that (A) he will not make any offer, sale, transfer,
pledge, hypothecation or other disposition of the AFC Shares unless they have
been registered under the Securities Act and applicable state securities laws or
unless Buyer is furnished with an opinion of counsel satisfactory to Buyer that
the proposed offer, sale, transfer, pledge, hypothecation or other disposition
is exempt from registration and (B) Buyer may effect a "stop transfer" as to the
AFC Shares and may, in order to reflect the undertakings herein set forth,
impress a legend on any certificates for such shares as follows:
"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."
4.30 Disclosure. No representation or warranty in this Article 4,
and no statement contained elsewhere in this Agreement or in any Schedule,
Exhibit or Certificate furnished or to be furnished to Buyer pursuant hereto or
in connection with the transactions contemplated under this Agreement contains
or will contain any untrue statement of a material fact or omits or will omit to
state a material fact or any fact necessary to make the statements contained
therein not misleading. With respect to any representation and warranty herein
which is made "to the best of Shareholders' knowledge" or "to the knowledge of
the Shareholders", each and all of the Shareholders shall be deemed to have
knowledge of any matter or fact: (a) if any Shareholder has actual personal
knowledge of such matter or fact or (b) if any of the Company's senior
management has actual personal knowledge of such matter or fact.
5. REPRESENTATIONS AND WARRANTIES OF BUYER.
As of the date hereof and as of the Closing Date, Buyer represents
and warrants to Shareholders as follows:
5.1 Organization of Buyer. Buyer is duly organized, validly existing
and in
<PAGE>
good standing under the laws of the State of Delaware. Buyer has full corporate
power and authority to (i) 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 and (ii) to enter into and perform the
transactions contemplated by this Agreement.
5.2 Authority of Buyer. This Agreement and each of the other
agreements and documents and instruments delivered or to be delivered by Buyer
pursuant to or in contemplation of this Agreement will constitute, when so
delivered, the valid and binding obligation of Buyer and shall be enforceable
against Buyer in accordance with their respective terms except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally, or by the
exercise of judicial discretion in accordance with general equitable principles.
The execution, delivery and performance of this Agreement and each such other
agreement, document and instrument has been duly authorized by all necessary
corporate action of Buyer and is within Buyer's corporate powers. The execution,
delivery and performance by Buyer 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 Buyer or result in
any right of termination or other effect adverse to Buyer under any indenture or
loan or credit agreement of Buyer, or any other agreement, lease or instrument
to which Buyer is a party or by which the property of Buyer is bound or
affected;
(b) 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 having applicability to Buyer;
(c) violate any provisions of the Certificate of Incorporation, or
equivalent, or By-Laws of Buyer, as amended; or
(d) require any approval, consent or waiver of, or filing with, any
person.
5.3 Governmental Approvals. Except for any information reports,
applications or notices required to be filed under the HSR Act, under existing
law, Buyer 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/or consummate the transactions contemplated
hereby in accordance with applicable laws and regulations.
5.4 Brokerage. Buyer has not dealt with any broker or finder in
connection
<PAGE>
with the transaction contemplated herein and agrees to indemnify and hold
Shareholders 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 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 Buyer's
knowledge, threatened against Buyer, nor has any order, writ, injunction,
subpoena or decree been issued by any court or governmental agency to Buyer
which, in either case, prohibits or seeks to enjoin the transactions
contemplated by this Agreement.
5.6 Capitalization. On the date hereof, the authorized capital stock
of Buyer consists of (1) 50,000,000 shares of common stock, $0.01 par value per
share, of which 12,740,968 shares were issued and outstanding as of July 23,
1998 and (2) 1,000,000 shares of preferred stock, $0.01 par value per share,
none of which are issued and outstanding. All of the AFC Shares which are to be
issued to Shareholders 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.
5.7 Buyer's Investigation of Company. Buyer acknowledges that it has
had the opportunity to meet with each of Shareholders and the officers and
representatives of the Company to discuss the business and the assets,
liabilities, financial condition, cash flow and operations of the Company. All
materials and information requested of the Company or Shareholders by Buyer have
been provided to Buyer's reasonable satisfaction.
5.8 Investment Representation. Buyer represents that it is acquiring
the Company Stock for its 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 or any rule or regulation thereunder.
5.9 Disclosure. No representation or warranty in this Article 5, and
no statement contained elsewhere in this Agreement or in any Schedule, Exhibit
or Certificate furnished or to be furnished to Shareholders pursuant hereto or
in connection with the transactions contemplated under this Agreement contains
or will contain any untrue statement of a material fact or omits or will omit to
state a material fact or any fact necessary to make the statements contained
therein not misleading.
6. COVENANTS OF SHAREHOLDERS PRIOR TO CLOSING.
Shareholders, jointly and severally, covenant and agree with Buyer as follows
throughout the
<PAGE>
period from the date hereof through and including the Closing:
6.1 Restrictions. Shareholders shall cause the Company to conduct
its business and operations only in the ordinary course of business, in
substantially the manner in which such business and operations have been
previously conducted prior to the date hereof and consistently with those
practices, policies, customs and usages which were in effect from time to time
throughout that period and which remained in effect as of the Interim Date and,
furthermore, without limiting the generality of the foregoing, Shareholders
shall not permit the Company to (except with the prior written consent of
Buyer):
(a) Redeem, purchase, repurchase or retire any of the capital
stock of the Company, or declare or pay any dividends (including stock
dividends), or make any other payments or distribution upon any of the capital
stock of the Company;
(b) Make any change in the nature of its business or cease in
whole or in part its present business; or engage in any other activities apart
from its present business or enter into any transaction not in the ordinary
course of business;
(c) Enter into any sale-leaseback transaction; or sell, lease,
transfer or otherwise dispose of all or any portion of its assets including,
without limitation, rights to patents, know-how, intellectual property or other
intangible assets or cancel any debts or claims, except sales of inventory in
the ordinary course of business and except as contemplated by this Agreement;
(d) Incur, enter into, create, assume or permit to exist any
indebtedness or liability for borrowed money or any other indebtedness except:
(i) financing arrangements in existence at the date hereof which have heretofore
been disclosed to Buyer in writing; (ii) indebtedness to Buyer; or (iii) trade
accounts payable incurred in the ordinary course of business;
(e) Enter into, amend, modify or terminate any material
contract or agreement to which the Company is a party;
(f) Increase or commit to increase, the compensation
(including fringe benefits) payable to any officer, director, employee or agent
of the Company other than routine salary increases for non-shareholder employees
made in the ordinary course of business; or enter into any agreement with
respect to the employment of any employee;
(g) Make any change in the Articles of Incorporation or Bylaws
of the Company;
<PAGE>
(h) Make any change in the authorized or issued and
outstanding capital stock of the Company including any changes involving
treasury shares;
(i) Grant any options, warrants, rights or any similar
securities or instruments to purchase directly or indirectly any securities of
the Company;
(j) Make any alteration in the manner of keeping the books,
accounts or records of the Company, or in the accounting practices therein
reflected;
(k) Enter into any transaction in which any officer or
director of the Company or any record or beneficial holder of any securities of
the Company has any interest, directly or indirectly;
(l) Suffer or permit any event or condition, whether or not
occurring in the ordinary course of business, which event or condition by itself
or in conjunction with any or all other such events or conditions, will have, or
could reasonably be expected to have, a material adverse effect on the condition
(financial or otherwise), properties, assets, liabilities, business, operations,
affairs or prospects of the Company;
(m) Effect any dissolution, winding up, liquidation or
termination of the Company or the business of the Company;
(n) Effect any merger or consolidation of the Company whether
or not it is the survivor thereof or effect any reorganization or
recapitalization;
(o) Terminate the employment of the auditors of the Company;
(p) Effect any acquisition by the Company of any interest or
participation in any entity of any kind, whether represented by shares or
otherwise, or effect the formation of a subsidiary or purchase or otherwise
invest in or hold securities, non-operating real estate or other non-operating
assets, except direct obligations of the United States of America, or
Certificates of Deposit or equivalent securities issued by financial
institutions;
(q) Mortgage, pledge, grant or permit to exist a security
interest in or lien or encumbrance on any of its assets or property, real or
personal, tangible or intangible, now owned or hereafter acquired except: (i)
liens in favor of Buyer; (ii) liens in existence at the date hereof which have
been disclosed to Buyer on Schedule 4.6(b) hereof; and (iii) liens arising by
operation of law with respect to obligations of the Company not yet due and
payable;
<PAGE>
(r) Make any investment in, or make any loan, advance or
credit to any person, including, without limitation, officers, stockholders or
directors of the Company, other than credits to customers and distributors in
the ordinary course of business and travel advances to officers, directors and
employees of the Company made in the ordinary course of business in amounts
consistent with past practices;
(s) Assume, endorse, guarantee or otherwise become liable for
or upon the obligation of any person (other than endorsements for deposit in the
ordinary course of business);
(t) Delegate to any person or entity any of the powers of the
Board of Directors;
(u) Effect any agreement for (i) the leasing or hire of any
real property or (ii) the leasing or hire of any personal property outside the
ordinary course of business consistent with past practice;
(v) Make any change in the executive management or the key
personnel of the Company;
(w) Without a demonstrably valid business reason, accelerate
or defer any item of income or expense of the Company; or
(x) Institute, settle or dismiss any litigation, claim or
other proceeding before any court or governmental agency.
6.2 Notice of Breach. To the extent Shareholders obtain knowledge
that any of the representations or warranties contained in Article 4 hereof
would be incorrect in any respect were those representations or warranties made
immediately after such knowledge was obtained, Shareholders shall notify Buyer
in writing promptly of such fact and exercise their commercially reasonable
efforts to remedy same.
6.3 Access. Shareholders will permit Buyer, its counsel, auditors,
environmental consultants, appraisers and other advisers and representatives to
review, inspect and copy all financial and business records and documents
relating to the Company in the Company's and/or Shareholders' custody, care or
control and to have access to the Company's customers and all places of the
Company's business throughout all regular business hours, provided that, in the
reasonable opinion of the Shareholders, the same will not disrupt the conduct of
the Company's business.
<PAGE>
6.4 No Transfer of Interest. Shareholders shall not sell, transfer,
assign, alienate, encumber, pledge or otherwise convey to any person or entity
other than Buyer any of the Company Stock, or any interest therein.
6.5 Authorization from Others. Shareholders shall use their
commercially reasonable efforts and due diligence to obtain all authorizations,
consents and approvals of third persons and governmental authorities that may be
required to permit the consummation of the transactions contemplated by this
Agreement.
6.6 Consummation of Agreement. Shareholders shall use their
commercially reasonable efforts and due diligence to satisfy all conditions to
the Closing that are within their control to the end that the transactions
contemplated by this Agreement shall be fully carried out.
6.7 Business Intact; Relationships with Customers and Suppliers.
Shareholders shall use their commercially reasonable efforts and due diligence
to keep intact the business of the Company, to keep available its key employees
and to maintain the goodwill of its customers, distributors and suppliers and
other persons having business dealings with it.
6.8 Air Permit. Without impairing or derogating from their
indemnification obligations herein set forth, Shareholders shall cause the
Company to apply for, as soon as practicable and prior to the Closing, any air
or other permits required for the conduct of the Company's business which have
not been obtained.
7. COVENANTS OF BUYER.
Buyer covenants and agrees with Shareholders as follows throughout
the period from the date hereof through and including the Closing:
7.1 Notice of Breach. To the extent Buyer obtains knowledge that any
of the representations or warranties contained in Article 5 hereof would be
incorrect in any respect were those representations or warranties made
immediately after such knowledge was obtained, Buyer shall notify Shareholders
in writing promptly of such fact and exercise its commercially reasonable
efforts to remedy same.
7.2 Authorization from Others. Buyer shall use its commercially
reasonable efforts to obtain all authorizations, consents and approvals of third
persons and governmental authorities that may be required to permit the
consummation of the transactions contemplated by this Agreement.
<PAGE>
7.3 Consummation of Agreement. Buyer shall use its commercially
reasonable efforts to satisfy all conditions to the Closing that are within its
control to the end that the transactions contemplated by this Agreement shall be
fully carried out.
8. MUTUAL COVENANTS OF SHAREHOLDERS AND BUYER.
8.1 Regulatory Filings. Each of the parties hereto will furnish to
the other party hereto such necessary information and reasonable assistance as
such other party may reasonably request in connection with its preparation of
filings or submissions to any governmental agency required in connection with
this Agreement and the transactions contemplated hereby. Without limiting the
generality of the foregoing, Buyer and Shareholders each agree to timely file
any information reports, applications or notices required to be filed in
connection with the transaction contemplated by this Agreement by the HSR Act
and as appropriate to procure early termination of the waiting period
thereunder.
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER TO CLOSE.
The obligation of Buyer to acquire the Company Stock as contemplated
hereby, and to perform its other obligations hereunder to be performed on or
after the Closing, shall be subject to the fulfillment, which Shareholders agree
to use their commercially reasonable efforts to fulfill, 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 Shareholders 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, and
Buyer shall have received a certificate to such effect, executed by each of the
Shareholders and dated as of the Closing Date, in form satisfactory to Buyer.
Shareholders shall be entitled to update the Schedules attached to this
Agreement prior to the Closing, provided that no such update (or disclosures
contained therein) shall cure the failure of Shareholders to satisfy the
condition set forth in this Section 9.1 hereof.
9.2 Performance of Covenants. Shareholders shall have performed in
all material respects all of their 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 each of the Shareholders and dated as of
the Closing Date, in form satisfactory to Buyer.
<PAGE>
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 Delivery of Certificates and Documents to Buyer. Shareholders
shall have delivered, or cause to be delivered, to Buyer the certificates as to
the legal existence and tax good standing of the Company and copies of its
Articles of Incorporation, or equivalent, as amended, issued or certified by the
appropriate governmental official of the state of its incorporation..
9.5 Legal Opinion. The Buyer shall have received the written opinion
of counsel to Shareholders, dated as of the Closing Date, in form reasonably
acceptable to Buyer and its counsel.
9.6 Resignation of Directors and Officers. Each member of the Board
of Directors of the Company and each officer of the Company, except those
designated by Buyer, shall have tendered to the Company a written resignation as
a director and/or officer of the Company, as the case may be, effective as of
the Closing.
9.7 Minute Books. Shareholders shall have delivered to Buyer all
minute books and stock ledgers for the Company.
9.8 Consents. Buyer, Shareholders and the Company 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.
9.9 Damage or Destruction. The Company shall not have suffered prior
to the Closing Date any loss on account of fire, flood, accident or any other
calamity to an extent that would materially adversely affect the conduct of its
business or materially adversely impair the value of the Company as a going
concern, regardless of whether any such loss or losses have been insured
against.
9.10 Releases. Shareholders shall have executed and delivered to the
Company a general release in form and substance reasonably satisfactory to
Shareholders and Buyer and their respective counsel.
9.11 Delivery of Company Stock. All of the Company Stock shall have
been
<PAGE>
delivered to Buyer as required by Sections 1.1 and 2.3 hereof.
9.12 INTENTIONALLY LEFT BLANK.
9.13 Payment in Full and Discharge of Intercompany Items. All
indebtedness owing from any of the Shareholders and their affiliates to the
Company, and all indebtedness owing from the Company to the Shareholders and
their affiliates, shall have been paid in full in cash, and the Company shall
have no bank debt (and all liens on the Company's assets securing any
preexisting bank debt shall have been released).
9.14 Employment Agreements. The Company and Mr. Jaakko Uuranniemi
shall have entered into an employment agreement in the form of Employment
Agreement attached hereto as Exhibit C and made a part hereof; the Company and
Mr. Teppo Uuranniemi shall have entered into an employment agreement in the form
of Employment Agreement attached hereto as Exhibit D and made a part hereof; and
the Company and Tuula Uuranniemi shall have entered into an employment agreement
in the form of Employment Agreement attached hereto as Exhibit E and made a part
hereof (these three employment agreements are hereinafter collectively referred
to as the "Employment Agreements").
9.15 Sale of Residence. The Company shall have conveyed its entire
right, title and interest in the residence at 141 Nottingham Drive, Thomasville,
Georgia, to one or more of the Shareholders or their designee, by quitclaim
deed, on an "as is" basis; and, in exchange therefor, the Company shall have
received US $227,500 in cash.
9.16 Escrow Agreement. Buyer, Shareholders and Escrow Agent shall
have entered into the Escrow Agreement.
9.17 Employment and Non-competition agreement. Matti Rajala shall
have entered into an employment and non-competition agreement with the Company
upon terms and conditions reasonably satisfactory to the Buyer and Jaakko
Uuranniemi.
9.18 Conveyance of Uuranniemi Parcel to Buyer's designee. Mr. Jaakko
Uuranniemi shall have conveyed, by warranty deed, his entire right, title and
interest in the Uuranniemi Parcel to either AFC Realty Holding Corp., a Delaware
corporation and a wholly-owned subsidiary of Buyer, or such other person as may
be designated by Buyer, against simultaneous payment to Mr. Jaako Uuranniemi of
a purchase price equal to the Real Estate Fair Market Value (as defined in
Section 1.2 hereof) and, in addition:
<PAGE>
Buyer shall have received: (1) evidence satisfactory to Buyer that the
Uuranniemi Parcel, the improvements thereon and the use of same are not in
violation of the zoning and other ordinances, rules and regulations of the City
of Thomasville, County of Thomas and/or State of Georgia; (2) a current survey
satisfactory to Buyer (including confirmation that the Uuranniemi Parcel is
abutting and has access to a public street), certified to Buyer, containing no
statement or facts which are not reasonably satisfactory to Buyer; (3) a
commitment of Chicago Title Insurance Company to issue its Owner's Policy in the
amount of the Real Estate Fair Market Value, at standard premium rates, upon
recording of the deed, such title policy to have no standard exceptions and no
other exceptions other than those set forth in Chicago Title Insurance Company
Commitment No. 11-0857-0006, at Schedule B2, Items 6 and 7; and such title
insurance policy to also insure, in addition to the Uuranniemi Parcel, the
Encroachment Easement Agreement with the City of Thomasville referenced in said
item 7 and also title to that property which is subject to a Lease dated January
27, 1998 (the "Autry Petroleum Lease") between Autry Petroleum Company and the
Company; (4) such other documents as may be reasonably required by Buyer's title
insurer including, but not limited to: (i) an instrument terminating the Lease
Agreement between Jaako Uuranniemi, as Lessor, and the Company, as Lessee, dated
March 7, 1991 and (ii) discharges and/or releases of all mortgages, security
deeds and assignments encumbering the Uuranniemi Parcel; and
(B) Buyer shall be satisfied that following the Closing the
Company will have the right to continue to use, upon
terms and conditions reasonably satisfactory to Buyer,
the sidetrack and related facilities heretofore used by
the Company.
9.19 HSR Act. If applicable, Buyer and Shareholders shall each have
timely filed all information, reports, application or notices and satisfied all
requests for additional information pursuant to the HSR Act, and the applicable
waiting periods shall have expired.
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF SHAREHOLDERS TO CLOSE.
The obligation of Shareholders to sell the Company Stock as
contemplated hereby, and to perform their other obligations hereunder to be
performed on or after the Closing, shall be subject to the fulfillment, which
Buyer agrees to use its commercially reasonable efforts to fulfill, on or prior
to the Closing Date, unless otherwise waived in writing by Shareholders, of the
following conditions:
10.1 Representations and Warranties. The representations and
warranties of Buyer
<PAGE>
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, and the Shareholders shall have received
a certificate to such effect, executed by a duly authorized officer of Buyer and
dated as of Closing Date, in form satisfactory to the Shareholders.
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 the Shareholders shall have
received a certificate to such effect, executed by a duly authorized officer of
the Buyer and dated as of the Closing Date, in form satisfactory to
Shareholders.
10.3 Corporate Action. All corporate action necessary to authorize
(i) the execution, delivery and performance by Buyer of this Agreement and any
other agreements or instruments contemplated hereby to which Buyer is a party;
and (ii) the consummation of the transactions contemplated hereby and thereby,
shall have been duly and validly taken by Buyer, and Shareholders shall have
been furnished with copies of all applicable resolutions adopted by the Board of
Directors of Buyer, certified by the Secretary or Assistant Secretary of Buyer.
10.4 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.
10.5 Delivery of Certificates and Documents to Shareholders. Buyer
shall have delivered, or cause to be delivered, to Shareholders certificates as
to the legal existence and corporate good standing of Buyer and copies of its
Certificate of Incorporation issued or certified by the appropriate governmental
official of the state of its incorporation.
10.6 Legal Opinion. Shareholders shall have received the opinion of
counsel to Buyer, dated as of the Closing Date, in form reasonably acceptable to
Shareholders and their counsel.
10.7 Consents. Buyer, the Company and Shareholders 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.
10.8 Certain Agreements. Each of the Employment Agreements and the
Escrow Agreement shall have been entered into by the parties thereto.
<PAGE>
10.9 HSR Act. If applicable, Buyer and Shareholders 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 periods shall have expired.
10.10 Transfer of Certain Inventory from Company to Shareholders.
The Company shall have executed and delivered to the Shareholders or their
designee a bill of sale, in form and substance satisfactory to the Shareholders
and their counsel, transferring from the Company to the Shareholders, on an "as
is" basis, all of the Company's right, title and interest in and to any titanium
dioxide inventory of the Company on hand as of the Closing; and Shareholders
shall have obtained the right to market and sell such inventory under the NSF
International Listing Mark heretofore utilized by the Company.
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 4.30 hereof, inclusive, and in Sections 5.1 through 5.9 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 Company Stock and payment therefor; provided, however, that (a) the
representations and warranties of Shareholders contained in Section 4.7(a) and
4.7(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) the representations and warranties of
Shareholders contained in Section 4.25 (with respect to taxes) shall expire, as
they relate to any taxable year of the Company, sixty (60) days after the
expiration of the statute of limitations applicable to the making of adjustments
or assessments by any taxing authority as the same may be extended by the Buyer
or the Company, (c) all of the other representations and warranties made by
Shareholders in Sections 4.1 through 4.30 hereof, inclusive, (with the exception
of the representations and warranties of Shareholders contained in Sections 4.1,
4.2, 4.3, 4.4 and 4.5, which shall survive indefinitely) shall expire and
terminate on February 28, 2001, and (d) all of the representations and
warranties made by Buyer in Sections 5.1 through 5.9 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 February 28, 2001.
11.2 Rule 144 Requirements. With a view to making available to the
Shareholders the benefits of Rule 144 promulgated under the Securities Act and
any other rule or regulation of the
<PAGE>
Commission that may at any time permit the Shareholders to sell any AFC Shares
acquired hereunder to the public without registration, the Buyer agrees to use
its reasonable efforts to do the following until the second (2nd) anniversary of
the Closing Date:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) file with the Commission in a timely manner all reports and
other documents required of the Buyer under the Securities Act and the Exchange
Act; and
(c) furnish to any of the Shareholders upon request a written
statement by the Buyer as to its compliance with the reporting requirements of
said Rule 144, and of the Securities Act and the Exchange Act, a copy of the
most recent annual or quarterly report of the Buyer, and such other reports and
documents of the Buyer as such holder may reasonably request to avail itself of
any similar rule or regulation of the Commission allowing it to sell any such
securities without registration.
11.3 Registration Rights. (a) Registration on Form S-3. Subject to
the limitations hereinafter set forth in this Section 11.3, prior to the
issuance by Buyer to Shareholders of any AFC Shares pursuant to Section 3, Buyer
shall cause a Registration Statement (the "Registration Statement") to be filed
with Commission on Form S-3 (or a substantially equivalent successor Form, any
such successor Form being included for purposes of this Section within the
definition of "Form S-3") in order to permit the offering of all AFC Shares
issued to the Shareholders pursuant to this Agreement (collectively, the
"Registrable Securities") on a continuous basis pursuant to Rule 415 of the
General Rules and Regulations under the Securities Act. Buyer shall use its best
efforts to cause the Registration Statement to become effective as soon as
practicable following such filing and to maintain the effectiveness of the
Registration Statement until the earlier of (i) the expiration of a period of
ninety (90) days following the effective date thereof, not counting any period
during which the holders of the Registrable Securities are obligated to refrain
from selling in accordance with the provisions hereof or (ii) the date when all
AFC Shares issued to the Shareholders pursuant to this Agreement registered
thereunder have been sold. None of the Shareholders shall sell any shares of
Buyer's Common Stock prior to the effective date of the Registration Statement,
and during the period of effectiveness of the Registration Statement shall sell
AFC Shares only pursuant to the Registration Statement. Buyer will notify the
Shareholders of the effectiveness of the Registration Statement. Buyer shall
supply to each Shareholder a number of Prospectuses for delivery under said
Registration Statement which shall be reasonably sufficient to meet such
Shareholder's requirements for delivery in connection with sales of AFC Shares
under said Registration Statement.
<PAGE>
Buyer, at its option, may register under the Registration Statement any
number of unissued shares of Buyer's Common Stock or any shares owned by any
shareholder of Buyer other than a Shareholder. Notwithstanding the foregoing, in
no event shall less than all of the Registrable Securities be registered under
the Registration Statement filed in accordance with this Section 11.3.
(b) Limitations on Obligation to Register. (i) Except as provided in
this Section 11.3, Buyer will have no obligation to the Shareholders to register
under the Securities Act any shares of Buyer's Common Stock. Buyer shall have
such obligation with respect to the filing and effectiveness of one Registration
Statement with respect to an offering which may or may not be underwritten, at
the option of a majority in interest of the Shareholders, subject to the
approval of Buyer in the case of an underwritten offering. The underwriter or
underwriters of an underwritten offering shall be selected by the Shareholders,
subject to Buyer's satisfaction with the proposed underwriter. After the filing
and effectiveness of one Registration Statement in conformity with the
foregoing, Buyer shall have no further obligation to register any such shares.
(ii) INTENTIONALLY LEFT BLANK.
(iii) INTENTIONALLY LEFT BLANK.
(iv) Buyer's obligation to register the Registrable Securities
under this Section 11.3 shall be further subject to the condition that each
Shareholder shall have provided such information and executed such documents as
may reasonably be required in connection with such registration.
(v) The Buyer may, by written notice to the Shareholders,
delay the filing or effectiveness of, or suspend, the Registration Statement,
and require that the Shareholders immediately cease sales of shares pursuant to
such Registration Statement, in any period during which the Buyer is engaged in
any activity or transaction or preparations or negotiations for any activity or
transaction ("Buyer Activity") that the Buyer desires to keep confidential for
business reasons, if the Board of Directors of Buyer determines in good faith
that the public disclosure requirements imposed on the Buyer under the
Securities Act in connection with such Registration Statement would require
disclosure of the Buyer Activity; provided, however, that (i) the Buyer shall
use commercially reasonable efforts to minimize the length of any such period of
delay or suspension; and (ii) the Buyer shall not be permitted to so delay or
suspend the Registration Statement for a period of more than 60 days in any 12
month period.
(vi) If the Buyer delays or suspends the Registration
Statement or requires the Shareholders to cease sales of shares pursuant to
paragraph (v) above, the Buyer
<PAGE>
shall, as promptly as practicable following the termination of the circumstance
which entitled the Buyer to do so, take such actions as may be necessary to file
or reinstate the effectiveness of such Registration Statement and/or give
written notice to all Shareholders authorizing them to resume sales pursuant to
such Registration Statement. If as a result thereof the prospectus included in
such Registration Statement has been amended to comply with the requirements of
the Securities Act, the Buyer shall enclose such revised prospectus with the
notice to Shareholders given pursuant to this paragraph (vi), and the
Shareholders shall make no offers or sales of shares pursuant to such
Registration Statement other than by means of such revised prospectus.
(c) Expenses. The expenses of the registration to be made pursuant
to this Section 11.3 (including, without limitation, any printing, legal and
accounting expenses incurred by Buyer but excluding any underwriting discounts
or commissions) shall be paid by Buyer, and each Shareholder shall be
responsible for his own legal and accounting expenses, any underwriting
discounts or commissions attributable to his shares being registered and other
expenses incurred by such Shareholder for his own account.
(d) State Securities Laws. In connection with the registration to be
made pursuant to this Section 11.3, Buyer will take such action as may be
necessary to qualify or register, or obtain exemptions from such registration or
qualification of, the shares to be sold under the securities or "blue sky" laws
of such jurisdictions as the Shareholders may reasonably request; provided,
however, that Buyer will not be obligated to qualify as a foreign corporation to
do business under the laws of any such jurisdiction in which it is not then
qualified or to file any general consent to service of process.
(e) Subject to the provisions of subsection (b) of this Section
11.3, upon the happening of any event which makes any statement made in the
Registration Statement untrue or which requires the making of any changes
therein so that it will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein, the Buyer shall
prepare and file with the Commission, as promptly as practicable thereafter, a
supplement or amendment to the Registration Statement so that it will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading. If the Buyer has
delivered preliminary or final prospectuses to the Shareholders and after having
done so the prospectus is amended to comply with the requirements of the
Securities Act, the Buyer shall promptly notify the Shareholders and, if
requested by the Buyer, the Shareholders shall immediately cease making offers
or sales of shares under such Registration Statement and return all prospectuses
to the Buyer. The Buyer shall promptly provide the Shareholders with revised
prospectuses and, following receipt of the revised prospectuses, the
Shareholders shall be free to resume making offers and sales under such
Registration Statement.
<PAGE>
(f) Registration Procedures. In connection with effecting the
registration of the Registrable Securities pursuant to subsection 11.3(a) of
this Agreement, Buyer shall (subject to subsection 11.3(b) above) as
expeditiously as possible:
(i) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement, effective for
so long as such registration statement is required to remain effective pursuant
to the terms of this Agreement and to cause the prospectus to comply with the
provisions of the Securities Act and the rules and regulations of the Commission
thereunder with respect to the disposition of all securities covered by such
registration statement;
(ii) furnish to each Shareholder and underwriter, if any,
prior to filing the Registration Statement or Prospectus or any amendment or
supplement thereto, if requested, copies of such Registration Statement as
proposed to be filed and thereafter furnish to such Shareholder and underwriter,
if any, such number of copies of such Registration Statement, each amendment and
supplement thereto (in each case including all exhibits thereto), the prospectus
included in such Registration Statement (including each preliminary prospectus)
and such documents incorporated by reference therein as such Shareholder or
underwriter may reasonably request in order to facilitate the disposition of the
Registrable Securities;
(iii) use its commercially reasonable efforts to cause such
Registrable Securities to be registered with or approved by such other
governmental agencies or authorities, if any, as may be necessary by virtue of
the business and operations of the Buyer or its subsidiaries to enable the
Shareholders to consummate the disposition of such Registrable Securities;
(iv) promptly notify each Shareholder, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the occurrence of an event requiring the preparation of a supplement or
amendment to such registration statement or prospectus (including any request by
the commission for the amending or supplementing of such registration statement
or prospectus) and thereafter prepare and file, as promptly as practicable, any
such necessary amendments or supplements.
(v) promptly notify the Shareholders of any stop order issued
or threatened by the Commission and take all commercially reasonable steps
required to prevent the entry of such order or to remove it if entered;
(vi) prepare and file with the Commission such amendments or
<PAGE>
supplements to such registration statement or prospectus as may be necessary to
correct any statements or omissions if at the time when a prospectus relating to
such securities is required to be delivered under the Securities Act, any event
shall have occurred as the result of which such prospectus as then in effect
would include an untrue statement of a material fact necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading:
(vii) enter into customary agreements (including an
underwriting agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of such
Registrable Securities;
(viii) use its commercially reasonable efforts to cause all
such Registrable Securities to be listed on each securities exchange or
authorized to be quoted on the Nasdaq National Market, as applicable, on which
similar securities issued by Buyer are then listed or authorized for quotation;
and
(ix) cooperate with each Shareholder and each underwriter, if
any, participating in the disposition of such Registration Securities and their
respective counsel in connection with any filings required to be made with the
National Association of Securities Dealers, Inc. (the "NASD").
(g) Indemnification. (i) Buyer will indemnify and hold harmless each
of the Shareholders against any losses, claims, damages or liabilities, joint or
several, to which such Shareholder may become subject, under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any preliminary prospectus or prospectus filed as a part thereof, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each of the Shareholders for any legal or other expenses
reasonably incurred by such Shareholder in connection with investigating or
defending any such action or claim; provided, however, that Buyer shall not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission made in the Registration Statement, any preliminary
prospectus or the prospectus or any such amendment or supplement in reliance
upon and in conformity with information furnished to Buyer expressly for use
therein by the Shareholder claiming indemnification.
(ii) Each of the Shareholders will indemnify and hold harmless
Buyer
<PAGE>
against any losses, claims, damages or liabilities to which Buyer may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus or the prospectus or any such
amendment or supplement in reliance upon and in conformity with information
furnished to Buyer by such Shareholder expressly for use therein; and will
reimburse Buyer for any legal or other expenses reasonably incurred by Buyer in
connection with investigating or defending any such action or claim.
(h) Rights Non-Assignable. No Shareholder may assign any of his or
her rights under this Section 11.3.
(i) Specific Performance. In addition to any other remedies which
Shareholders may have at law or in equity, Buyer hereby acknowledges that the
registration rights provided pursuant to this Section 11.3 are unique, and that
the harm to the Shareholders resulting from a breach by Buyer of its obligation
to register the Registrable Securities as provided herein, or for the term of
the registration, as extended pursuant to subsection 11.3(a) if applicable,
cannot be adequately compensated by damages. Accordingly, Buyer agrees that the
Shareholders shall have the right to have this Section 11.3 specifically
performed by Buyer and hereby agrees not to asset any objections to the
imposition of the remedy of specific performance or any other equitable remedy
by any court of competent jurisdiction.
11.4 Shared Space and Rent. With respect to the premises at 311 Industrial
Boulevard, Thomasville Georgia, which the Company now leases from Harry M.
Tomlinson on a month-to-month basis: (a) Shareholders shall be entitled to use
the portion of such premises not currently used by the Company until such time
as Buyer notifies Shareholders that the Company intends to occupy all of such
premises and (b) until such time as Buyer so notifies the Shareholders,
Shareholders will promptly, on a monthly basis, reimburse the Company for
one-half of all rent and other charges paid by the Company pursuant to such
tenancy at will, provided that upon 60 days' written notice to Buyer and removal
of Shareholders' personal property on such premises, Shareholders shall have no
further obligations to Buyer with respect to such space.
12. INDEMNIFICATION.
<PAGE>
12.1 Indemnification by Shareholders. Shareholders, jointly and
severally, agree to defend, indemnify and hold Buyer, the Company and their
respective 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, diminution in value, 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 Buyer or the
Company or their respective 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
Shareholders in Sections 4.1 through 4.30 hereof, inclusive, or a failure to
perform any agreement or covenant made by Shareholders anywhere else in this
Agreement or in any other agreement delivered hereunder,
(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) the matters, if any, set forth on the Schedule of
Specifically Indemnified Matters attached hereto as Schedule 12.1,
(d) INTENTIONALLY LEFT BLANK,
(e) any claim made by any person to, for or in respect of
shares of the Company's capital stock or any interest therein or payment
therefor,
(f) 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 the Company or any of its past or
present officers, employees, agents or independent contractors, at any time
prior to the Closing, whether or not in compliance with Environmental Laws then
in force,
(g) the removal of Hazardous Materials from the Real Property
and/or the
<PAGE>
ultimate disposition of such Hazardous Materials, by the Company or any of its
past or present officers, employees, agents or independent contractors, at any
time prior to the Closing, whether or not in compliance with Environmental Laws
then in force,
(h) the use of the Real Property by the Company or any of its
past or present officers, employees, agents or independent contractors, at any
time prior to the Closing, in such a manner as to cause a violation of any
Environmental Law or to 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,
(i) any violations by the Company of Environmental Laws in
relation to the Real Property occurring at any time prior to the Closing Date,
(j) a failure by the Company, 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,
(k) the exposure of employees of the Company to Hazardous
Materials on or in relation to the Real Property occurring at any time prior to
the Closing Date, and
(l) any claim alleging that this Agreement or the consummation
of the transactions contemplated hereby violates any obligation or duty owed by
the Company or any of Shareholders to any person (other than Buyer and its
affiliates) who was previously involved in discussions or negotiations with the
Company or any of Shareholders for the acquisition by such person of the Company
or its business.
provided, however, that (A) no indemnification shall be payable by Shareholders
with respect to any claim by Buyer for breach of any representation or warranty
made by Shareholders in Sections 4.1 through 4.30 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, (B) no indemnification shall be payable by
Shareholders with respect to any claim by
<PAGE>
Buyer under any of clauses (f) through (k) of this Section 12.1 hereof 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, (C) INTENTIONALLY LEFT
BLANK, (D) no indemnification shall be payable by Shareholders with respect to
any claim by Buyer for breach of any representation or warranty made by
Shareholders in Sections 4.1 through 4.30 hereof, inclusive (with the exception,
however, of the representations and warranties in Sections 4.7(a), 4.7(b) and
4.25 hereof) until the total of such claims for indemnification shall exceed US
$100,000 (the "Deductible"), in which event Buyer shall be entitled to recover
the amount of such claims in excess of the Deductible, and (E) the aggregate
liability of Shareholders for indemnification payable hereunder shall not exceed
the Purchase Price. Any indemnification due from Shareholders to Buyer shall be
paid in United States dollars. Notwithstanding anything to the contrary
elsewhere herein contained, and without otherwise affecting the joint and
several obligations of the Shareholders hereunder, neither Teppo Uuranniemi nor
Heidi Uuranniemi shall have any liability or indemnification obligation to Buyer
arising out of a breach of the representation and warranty made by Shareholders
in subsection 4.7(l) hereof, it being the intention of the parties that only
Jaakko Uuranniemi shall be responsible for any breach of subsection 4.7(l)
hereof.
12.2 Indemnification by Buyer. Buyer agrees to defend, indemnify and
hold Shareholders, their officers, directors, affiliates, employees and agents,
harmless from and against any claims by third persons, damages, diminution in
value, 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
suffered by Shareholders or their 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 Buyer in Sections 5.1 through 5.9 hereof,
inclusive, or a failure to perform any agreement or covenant made by Buyer
anywhere else in this Agreement or in any other agreement delivered hereunder
and (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; provided, however, that (A) no indemnification shall be payable by
Buyer with respect to any claim for breach of any representation or warranty
made by Buyer in Sections 5.1 through 5.9 hereof, inclusive, asserted by
Shareholders 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
<PAGE>
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, (B) no indemnification
shall be payable by Buyer with respect to any claim for breach of any
representation or warranty made by Buyer in Sections 5.1 through 5.9 hereof,
inclusive, until the total of such claims for indemnification shall exceed the
Deductible, in which event Shareholders shall be entitled to recover the amount
of such claims in excess of the Deductible, and (C) the aggregate liability of
Buyer for indemnification payable hereunder shall not exceed the Purchase Price.
Any indemnification payments due from Buyer to Shareholders shall be paid in
United States dollars.
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 causes actual prejudice to 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 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 at the
indemnifying party's reasonable expense, 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
<PAGE>
claim or litigation.
(b) The indemnifying party will within 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, diminution in value,
liabilities, losses and expenses with respect to such Third Party Claim in
accordance with this Section 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 No Tax Effect; Insurance Effect. (a) Indemnification for
damages, liabilities, losses and expenses payable pursuant to the
indemnification provisions in this Article 12 shall be on a dollar for dollar
basis and shall be determined without regard to deductibility for tax purposes
or other tax benefits to the indemnified party or any other person or entity
resulting therefrom.
(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 have no obligation
whatsoever 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. Notwithstanding the foregoing, (1) 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 an indemnification payment
in respect of such claim becomes due and payable, the indemnifying party's
indemnification
<PAGE>
obligation with respect to such claim shall be reduced by the amount of any such
insurance proceeds actually received by the indemnified party and (2) 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. As used in this Section 12.4(b), 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. TERMINATION OF AGREEMENT.
13.1 Termination. At any time prior to the Closing Date, this
Agreement may be terminated (i) by the consent of Buyer and Shareholders; (ii)
by Shareholders if there has been a material misrepresentation, breach of
warranty or breach of agreement or covenant by Buyer in its representations,
warranties, agreements and covenants set forth herein; (iii) by Buyer if there
has a been a material misrepresentation, breach of warranty or breach of
agreement or covenant by Shareholders in their representations, warranties,
agreements and covenants set forth herein; (iv) by Shareholders if the
conditions stated in Article 10 have not been satisfied at or prior to the
Closing Date; (v) by Buyer if the conditions stated in Article 9 have not been
satisfied at or prior to the Closing Date; or (vi) by Buyer or Shareholders if
the Closing has not occurred before the close of business on November 30, 1998.
13.2 Effect of Termination. If this Agreement shall be terminated as
above provided, all obligations of the parties hereunder shall terminate without
liability of any party to the other; provided however, that nothing in this
Section 13.2 shall prevent any party from seeking or obtaining damages or
appropriate equitable relief for the breach of any representation, warranty,
agreement or covenant made by any other party hereto.
13.3 Right to Proceed. Anything in this Agreement to the contrary
notwithstanding, if any of the conditions specified in Article 9 hereof have not
been satisfied at or prior to the Closing, Buyer shall have the right to proceed
with the transactions contemplated hereby without waiving any of its rights
hereunder, and if any of the conditions specified in Article 10 hereof have not
been satisfied at or prior to the Closing, Shareholders may determine to proceed
with the transactions contemplated hereby without waiving any of their rights
hereunder.
<PAGE>
14. HEIDI UURANNIEMI NON-COMPETITION COVENANT.
14.1 Non-Competition. Heidi Uuranniemi agrees and covenants with
Buyer and the Company that, for a period (the "Restrictive Period") from the
date hereof until the third (3rd) anniversary of the Closing Date, she will not,
without the prior written consent of Buyer and Company, directly or indirectly:
(a) form, acquire, finance, assist, support, provide premises, facilities, goods
or services to, represent as a distributor or otherwise, or become associated in
any capacity or to any extent, directly or indirectly with, an enterprise (a
"Competing Business") which is engaged in the business of manufacturing, selling
or distributing PVC pipe and/or pipe fittings anywhere within the territory (the
"Territory") consisting of the United States of America and Canada; (b)
interfere with or attempt to interfere with any officers, employees,
representatives or agents of Buyer or the Company, or any of their affiliates,
or induce or attempt to induce any of them to leave the employ of Buyer or the
Company or any of their affiliates, or violate the terms of their contract with
any of them; or (c) 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 Buyer or the Company or
any of their affiliates or take away or interfere or attempt to interfere with
any custom, trade, business or patronage of Buyer or the Company or any of their
affiliates.
14.2 Injunctive Relief. The parties hereto acknowledge and agree
that any breach by any of Shareholders or his or her affiliates of the
restrictive covenant contained in this Article 14 would cause irreparable injury
to Buyer and/or the Company and that the remedy at law for any such breach would
be inadequate, and Shareholders agree and consent that, in addition to any other
available remedy, temporary and permanent injunctive relief may be granted in
any proceeding which may be brought by Buyer or the Company to enforce such
restrictive covenant without necessity of proof that any other remedy at law is
inadequate.
14.3 Enforcement. Buyer and Shareholders 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.
<PAGE>
15. SHAREHOLDERS' NON-DISCLOSURE COVENANT.
15.1 Non-Disclosure of Confidential Information. It is understood
that the business of the Company acquired by Buyer hereunder is of a
confidential nature. Prior to the date hereof the Company may have revealed and
on or after the date hereof the Company may reveal to Shareholders Confidential
Information (as hereinafter defined) concerning the Company or any of its
affiliates which, if known to competitors thereof, would damage the business and
operations of the Company. Each of the Shareholders agrees with Buyer and the
Company that, for a period of five (5) years following the later of the Closing
or the termination of his or her employment with the Company, he or she will not
divulge or appropriate to his or her own use, or to the use of any third person,
any Confidential Information.
15.2 Definition of Confidential Information. As used herein, the
term "Confidential Information" means the following oral or written information
relating to the Company: 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, 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 Company 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 a Shareholder, can be shown to have been in the public domain
or generally known or available to customers, suppliers or competitors of the
Company through no breach of the provisions of this Article 15 or other
non-disclosure covenants; (ii) any such information that, prior to its
disclosure by a Shareholder, was rightfully in the receiving third party's
possession, without violation of the provisions of this Article 15 or other
non-disclosure covenants; and (iii) any such information that, prior to its
disclosure by a Shareholder, was independently developed by the receiving third
party without violation of the provisions of this Article 15 or other
non-disclosure covenants.
15.3 Injunctive Relief. The parties hereto acknowledge and agree
that the breach by a Shareholder of the restrictive covenant contained in this
Article 15 would cause irreparable injury to Buyer and/or the Company and that
the remedy at law for any such breach would be inadequate, and Shareholders
agree and consent that, in addition to any other available remedy, temporary and
permanent injunctive relief may be granted in any proceeding which may be
brought by Buyer or the Company to enforce such restrictive covenant without
necessity of proof that any other remedy at law is inadequate.
<PAGE>
16. MISCELLANEOUS.
16.1 Expenses.
(a) Buyer and Shareholders shall pay the fees and expenses of
their respective accountants and legal counsel incurred in connection with the
transactions contemplated by this Agreement.
(b) Shareholders represent that no legal or accounting fees
incurred in connection with the transactions contemplated hereby have been or
will be paid by the Company.
(c) Buyer will pay the filing fee required in connection with
any filing made under the HSR Act, provided that if this Agreement shall be
terminated for any reason (whether by Buyer or Shareholders or both), or if the
transactions contemplated hereby are not consummated for any reason, then, in
either case, Shareholders shall promptly reimburse Buyer for one-half of such
filing fee even if Buyer is in breach hereof or otherwise at fault.
(d) Shareholders agree to pay one-half of the cost of any
environmental site assessment of the Real Property undertaken in connection with
the transactions contemplated hereby, provided that the amount required to be
paid by Shareholders under this subsection (d) of this Section 16.1 shall not in
any event exceed US $3,500.
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.
If to Shareholder c/o Jaakko Uuranniemi
or Shareholders: 4401 South Ocean Boulevard, Lot No. 10
Highland Beach, FLA 33487
Fax: ___________________
<PAGE>
With a Copy to: Alexander & Van
P.O. Box 1479
Thomasville, GA 31799
Attn: Hill Smith
FAX: 912-228-0444; and
Troutman Sanders LLP
5200 NationsBank Building
600 Peachtree Street, NE
Atlanta, GA 30308
Attn: Stanley Hackett
Fax: 404-885-3995
To Buyer: 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
With a copy to: Adler Pollock & Sheehan P.C.
2300 BankBoston Plaza
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 other of its rights
or any of its rights on a future occasion.
<PAGE>
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 and schedules referenced
herein shall be deemed to be attached hereto and made a part hereof. All
references herein to this Agreement shall include all such exhibits and
schedules. Any matter or fact which is disclosed in any numbered Schedule
attached hereto by way of qualifying a correspondingly numbered representation
and warranty made by Shareholders in Section 4 hereof shall be deemed to be
disclosed in any other relevant Schedule attached hereto and to qualify the
correspondingly numbered other representation and warranty made by Shareholders
in Section 4 hereof if the relevance of such matter or fact to such other
Schedule (and the correspondingly numbered other representation and warranty
made by Shareholders in Section 4 hereof) is plainly apparent.
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 portion of this Agreement is declared invalid for
any reason in any jurisdiction, such declaration shall have no effect upon the
remaining portions of this Agreement which shall continue in full force and
effect as if this Agreement had been executed with the invalid portions thereof
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. Shareholders shall not
be deemed to have made to Buyer any representation or warranty other than as
expressly made by Shareholders herein. Without derogating from or impairing the
representations and warranties made by Shareholders in Sections 4.1 through 4.30
hereof, inclusive, Buyer acknowledges that Shareholders make no representation
or warranty to Buyer with respect to any projections, estimates or budgets,
whether written or oral, heretofore delivered to or made available to Buyer, of
future revenues, expenses or expenditures or future results of operations.
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, legal
<PAGE>
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 person other than the parties hereto and the Company.
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
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 Assignability. Neither this Agreement nor any rights or
obligations hereunder are assignable by Shareholders without the prior written
consent of Buyer. Buyer may at any time, without Shareholders' consent, assign
all or any part of the rights and/or obligations of Buyer under this Agreement
to any affiliate of Buyer, and any assignee of Buyer shall succeed to and be
possessed of the rights of Buyer hereunder to the extent of the assignment made,
provided, however, that any such assignment by Buyer shall not relieve Buyer of
its obligations hereunder. In addition, at any time after the Closing, Buyer
may, without Shareholders' consent, assign all or any part of its rights and/or
obligations under this Agreement to any person who acquires either the stock of
Buyer or the Company, or substantially all of the assets of the Company, by
sale, merger or otherwise; provided, however, that any such assignment by Buyer
shall not relieve Buyer of its obligations hereunder.
16.11 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.
16.12 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 mean and include not only any persons
specified in clause (a) above but also 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,
enterprise, unincorporated organization, trust, public body or government or any
department, board, commission or agency thereof.
16.13 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
<PAGE>
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.
16.14 Public Announcements. No announcement of the transactions
contemplated hereby shall be made publicly by any party hereto without the
advance written approval of Buyer and Shareholders, except such notice as is
required by law. The content or text of such announcement shall be agreed upon
by the Buyer and Shareholders, except such notice as is required by law where
each party shall use its reasonable efforts to obtain the prior consent of the
other party.
16.15 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 Rhode Island or Georgia, U.S.A., and each of the
parties hereto hereby irrevocably submits to the jurisdiction of such courts and
agrees that venue in Rhode Island and Georgia is proper. Shareholders hereby
irrevocably designate, appoint and empower Troutman Sanders LLP, 5200
NationsBank Building, 600 Peachtree Street NE, Atlanta, Georgia 30308, and its
successors as their authorized special agent to receive, for and on behalf of
Shareholders and their 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 P.C., 2300 BankBoston Plaza, 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 Rhode Island or Georgia 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
<PAGE>
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 Rhode Island and Georgia, 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 16.15, and that any
order or judgment obtained in any such action from a court other than the courts
of Rhode Island or Georgia, shall be void ab initio provided that,
notwithstanding the foregoing provisions of this Section 16.15, either party may
bring and enforce an action seeking injunctive or other equitable relief in any
court of competent jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
BUYER:
AFC CABLE SYSTEMS, INC.
By:______________________________
Print Name:_______________________
Title:_____________________________
SHAREHOLDERS:
Jaakko Uuranniemi
Teppo Uuranniemi
______________________________
Heidi Uuranniemi
<PAGE>
SCHEDULES
Schedule 4.2 - Schedule of Breaches, Defaults and Required Consents
Schedule 4.4 - Capitalization
Schedule 4.5 - Valid Title to Company Stock
Schedule 4.6(a) - Schedule of Machinery and Equipment
Schedule 4.6(b) - Schedule of Liens and Encumbrances
Schedule 4.6(d) - Schedule of Personal Property Leases
Schedule 4.6(e) - Schedule of Assets at Other Locations
Schedule 4.7 - Schedule of Real Property
Schedule 4.9 - Schedule of Regulatory Licenses, Consents, Permits
and Authorizations
Schedule 4.10(c) - Schedule of Liabilities
Schedule 4.10(e) - Schedule of Reserves Taken and Assets Written Down or Up
Schedule 4.11 - Schedule of Noncompliance with Laws
Schedule 4.12 - Schedule of Patents, Trademarks and Copyrights
Schedule 4.13 - Schedule of Contracts, Commitments and Intercompany
Transactions
Schedule 4.14 - Schedule of Litigation
Schedule 4.15 - Schedule of Changes
Schedule 4.16 - Schedule of Insurance
Schedule 4.18 - Schedule of Employee Benefit Plans
Schedule 4.23 - Schedule of Affiliation
Schedule 4.24 - Schedule of Shareholders
Schedule 4.25 - Taxes
Schedule 4.26 - Schedule of Product Warranties
Schedule 4.27 - Schedule of Product Liability Claims
Schedule 12.1 - Schedule of Specifically Indemnified Matters
EXHIBITS
Exhibit A - Escrow Agreement
Exhibit B - Form of Buyer's Promissory Notes
Exhibit C - Employment Agreement for Jaako Uuranniemi
Exhibit D - Employment Agreement for Teppo Uuranniemi
Exhibit E - Employment Agreement for Tuula Uuranniemi
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF ORGANIZATION OTHER 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 ILLINOIS NONE
MANUFACTURING COMPANY
MADISON EQUIPMENT DELAWARE NONE
COMPANY, INC.
FEDERAL HOSE DELAWARE NONE
MANUFACTURING, INC
AFC REALTY HOLDING CORP. DELAWARE NONE
SPIRADUCT, INC. PENNSYLVANIA NONE
GEORGIA PIPE COMPANY GEORGIA NONE
</TABLE>
<PAGE>
Exhibit 23
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, the Registration Statement (Form
S-8 No. 33-28313) pertaining to the 1997 Equity Incentive Plan of AFC Cable
Systems, Inc., and the Registration Statement (Form S-8 No. 333-59373)
pertaining to the 1998 Equity Incentive Plan of AFC Cable Systems, Inc. of
our report dated February 17, 1999, 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, 1998.
ERNST & YOUNG LLP
Providence, Rhode Island
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,968
<SECURITIES> 75,510
<RECEIVABLES> 44,550
<ALLOWANCES> 4,802
<INVENTORY> 41,177
<CURRENT-ASSETS> 163,722
<PP&E> 57,597
<DEPRECIATION> 16,459
<TOTAL-ASSETS> 241,547
<CURRENT-LIABILITIES> 39,367
<BONDS> 0
0
0
<COMMON> 127
<OTHER-SE> 186,004
<TOTAL-LIABILITY-AND-EQUITY> 241,547
<SALES> 272,792
<TOTAL-REVENUES> 272,792
<CGS> 188,067
<TOTAL-COSTS> 188,067
<OTHER-EXPENSES> 46,871
<LOSS-PROVISION> 194
<INTEREST-EXPENSE> 744
<INCOME-PRETAX> 41,507
<INCOME-TAX> 16,322
<INCOME-CONTINUING> 25,185
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,185
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.00
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