UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2016
Commission File Number: 1-9852
CHASE CORPORATION
(Exact name of registrant as specified in its charter)
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Massachusetts |
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11-1797126 |
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(State or other jurisdiction of incorporation
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(I.R.S. Employer Identification No.) |
295 University Avenue, Westwood, Massachusetts 02090
(Address of Principal Executive Offices, Including Zip Code)
(781) 332-0700
(Registrant’s Telephone Number, Including Area Code)
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, and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☒ |
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Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
Smaller reporting company ☐ |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The number of shares of Common Stock outstanding as of December 31, 2016 was 9,344,559
CHASE CORPORATION
For the Quarter Ended November 30, 2016
2
Item 1 — Unaudited Condensed Consolidated Financial Statement s
CHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET S
(UNAUDITED)
In thousands, except share and per share amounts
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November 30, |
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August 31, |
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2016 |
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2016 |
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ASSETS |
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Current Assets |
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Cash & cash equivalents |
$ |
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$ |
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Accounts receivable, less allowance for doubtful accounts of $801 and $830 |
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Inventories |
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Prepaid expenses and other current assets |
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Due from sale of business |
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Assets held for sale |
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Total current assets |
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Property, plant and equipment, net |
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Other Assets |
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Goodwill |
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Intangible assets, less accumulated amortization of $35,112 and $33,352 |
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Cash surrender value of life insurance, less current portion |
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Restricted investments |
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Funded pension plan |
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Deferred income taxes |
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Other assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current Liabilities |
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Current portion of long-term debt |
$ |
— |
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$ |
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Accounts payable |
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Accrued payroll and other compensation |
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Accrued expenses |
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Dividend payable |
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— |
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Accrued income taxes |
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Total current liabilities |
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Long-term debt, less current portion |
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— |
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Deferred compensation |
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Accumulated pension obligation |
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Other liabilities |
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Accrued income taxes |
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Deferred income taxes |
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Commitments and Contingencies (Notes 10 and 18) |
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Equity |
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First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; none issued |
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Common stock, $.10 par value: Authorized 20,000,000 shares; 9,344,559 shares at November 30, 2016 and 9,278,486 shares at August 31, 2016 issued and outstanding |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total equity |
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Total liabilities and equity |
$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements
3
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION S
(UNAUDITED)
In thousands, except share and per share amounts
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Three Months Ended November 30, |
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2016 |
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2015 |
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Revenue |
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Sales |
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$ |
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$ |
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Royalties and commissions |
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Costs and Expenses |
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Cost of products and services sold |
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Selling, general and administrative expenses |
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Acquisition-related costs (Note 14) |
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— |
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Exit costs related to idle facility (Note 15) |
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— |
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Write-down of certain assets under construction (Note 8) |
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— |
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Operating income |
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Interest expense |
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Gain on sale of location (Note 9) |
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— |
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Gain on sale of business (Note 8) |
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— |
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Other income (expense) |
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Income before income taxes |
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Income taxes |
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Net income |
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$ |
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$ |
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Net income available to common shareholders, per common and common equivalent share |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted average shares outstanding |
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Basic |
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Diluted |
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Annual cash dividends declared per share |
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$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements
4
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOM E
(UNAUDITED)
In thousands, except share and per share amounts
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Three Months Ended November 30, |
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2016 |
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2015 |
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Net income |
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$ |
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$ |
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Other comprehensive income: |
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Net unrealized gain on restricted investments, net of tax |
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Change in funded status of pension plans, net of tax |
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Foreign currency translation adjustment |
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Total other comprehensive (loss) income |
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Comprehensive income |
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$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements
5
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EQUIT Y
THREE MONTHS ENDED NOVEMBER 30, 2016
(UNAUDITED)
In thousands, except share and per share amounts
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Additional |
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Accumulated Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Retained |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Income (loss) |
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Earnings |
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Equity |
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Balance at August 31, 2016 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Restricted stock grants, net of forfeitures |
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— |
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Amortization of restricted stock grants |
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Amortization of stock option grants |
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Exercise of stock options |
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Common stock received for payment of stock option exercises |
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Common stock retained to pay statutory minimum withholding taxes on common stock |
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Cash dividend accrued, $0.70 per share |
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Change in funded status of pension plan, net of tax $78 |
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Foreign currency translation adjustment |
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Net unrealized gain on restricted investments, net of tax $7 |
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Net income |
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Balance at November 30, 2016 |
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$ |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements
6
CHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW S
(UNAUDITED)
In thousands, except share and per share amounts
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Three Months Ended November 30, |
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2016 |
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2015 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities |
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Gain on sale of location |
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— |
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Loss on write-down of certain assets under construction |
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— |
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Gain on sale of business |
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— |
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Depreciation |
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Amortization |
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Cost of sale of inventory step-up |
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— |
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(Recovery) provision for allowance for doubtful accounts |
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Stock-based compensation |
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Realized gain on restricted investments |
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Decrease in cash surrender value life insurance |
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— |
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Deferred taxes |
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— |
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Increase (decrease) from changes in assets and liabilities |
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Accounts receivable |
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Inventories |
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Prepaid expenses & other assets |
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Accounts payable |
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Accrued compensation and other expenses |
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Accrued income taxes |
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Deferred compensation |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property, plant and equipment |
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Cost to acquire intangible assets |
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— |
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Payments for acquisitions |
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— |
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Proceeds from sale of location |
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— |
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Net proceeds from sale of business |
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Increase in restricted investments |
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Proceeds from settlement of life insurance policies |
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— |
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Payments for cash surrender value life insurance |
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— |
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Net cash (used in) provided by investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Payments of principal on debt |
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Proceeds from exercise of common stock options |
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Payments of taxes on stock options and restricted stock |
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— |
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Net cash used in financing activities |
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INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS |
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Effect of foreign exchange rates on cash |
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CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD |
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CASH & CASH EQUIVALENTS, END OF PERIOD |
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$ |
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$ |
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Non-cash Investing and Financing Activities |
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Common stock received for payment of stock option exercises |
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$ |
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$ |
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Property, plant and equipment additions included in accounts payable |
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$ |
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$ |
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Annual cash dividend declared |
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$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements
7
Note 1 — Basis of Presentatio n
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all information and footnote disclosure necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. Chase Corporation (the “Company,” “Chase,” “we,” or “us”) filed audited consolidated financial statements, which included all information and notes necessary for such complete presentation for the three years ended August 31, 2016, in conjunction with its 2016 Annual Report on Form 10-K.
The results of operations for the interim period ended November 30, 2016 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2016, which are contained in the Company’s 2016 Annual Report on Form 10-K.
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of November 30, 2016, the results of its operations, comprehensive income and cash flows for the interim periods ended November 30, 2016 and 2015, and changes in equity for the interim period ended November 30, 2016.
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company uses the US dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s UK-based operations are measured using the UK pound sterling as the functional currency. The financial position and results of operations of the Company’s operations based in France are measured using the euro as the functional currency. The financial position and results of the Company’s Spray Products (India) Private Limited business in India are measured using the Indian rupee as the functional currency. The functional currency for all of our other operations is the US dollar. Foreign currency translation gains and losses are determined using current exchange rates for monetary items and historical exchange rates for other balance sheet items, and are recorded as a change in other comprehensive income. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of applicable operation are included in other income / (expense) on the condensed consolidated statements of operations and were $399, and ($96) for the three-month periods ended November 30, 2016 and 2015, respectively.
On September 30, 2016, the Company acquired certain assets of Resin Designs, LLC (“Resin Designs”), an advanced adhesives and sealants manufacturer, with locations in Woburn, MA and Newark, CA. The business was acquired for a purchase price of $30,435, pending any final working capital adjustment and excluding acquisition-related costs. As part of this transaction, Chase acquired all working capital and fixed assets of the business, and entered into multi-year leases at both locations. The Company expensed $584 of acquisition-related costs during the three-month period ended November 30, 2016 associated with this acquisition. The purchase was funded entirely with available cash on hand. Resin Designs is a formulator of customized adhesive and sealant systems used in high-reliability electronic applications. The acquisition broadens the Company’s adhesives and sealants product offering and manufacturing capabilities, and expands its market reach. The Company is currently in the process of finalizing purchase accounting, and anticipates completion within the first half of fiscal 2017. Since the effective date of the acquisition, the financial results of Resin Designs’ operations have been included in the Company’s financial statements within the electronic and industrial coatings product line, contained within the Industrial Materials operating segment. See Note 14 to the Condensed Consolidated Financial Statements for additional information on the acquisition of the assets and operations of Resin Designs.
8
On June 23, 2016, the Company acquired all the capital stock of Spray Products (India) Private Limited for $1,161, net of cash acquired. This acquired business works closely with our HumiSeal ® manufacturing operation in Winnersh, Wokingham, England. The acquisition in India enhances the Company’s ability to provide technical, sales, manufacturing, chemical handling, and packaging services in the region. Since the effective date for this acquisition, the financial results of the business have been included in the Company's financial statements within the Company’s Industrial Materials operating segment in the electronic and industrial coatings product line. Purchase accounting was completed in the quarter ended August 31, 2016.
In November 2015, the Company sold its RodPack ® wind energy business, contained within its structural composites product line, to an otherwise unrelated party (“Buyer”) for proceeds of $2,186. The Company’s structural composites product line is a part of the Company’s Industrial Materials operating segment.
Note 2 — Recent Accounting Standards
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which will replace most of the existing revenue recognition guidance under US Generally Accepted Accounting Principles (“GAAP”). The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. In March, April and May 2016, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” all of which provide further clarification to be considered when implementing ASU 2014-09. The ASU will be effective for the Company beginning September 1, 2018 (fiscal 2019), including interim periods in its fiscal year 2019, and allows for either retrospective or modified retrospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on the Company’s consolidated financial position, results of operations and cash flows.
In August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements: Going Concern (Subtopic 205-40),” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter (fiscal year 2017 for the Company). The adoption of ASU 2014-15, which occurred in the first quarter of fiscal 2017, did not have a material effect on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires that debt issue costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the amount of the debt liability, consistent with debt discounts and premiums. Amortization of such costs is still reported as interest expense. ASU 2015-03 is effective for fiscal years, and interim periods therein, beginning after December 15, 2015 (fiscal year 2017 for the Company). In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issue Costs Associated with Line-of-Credit Arrangements." ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issue costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. The adoption of ASU 2015-03 and ASU 2015-15, which occurred in the first quarter of fiscal 2017, did not have a material effect on the Company’s consolidated financial statements.
9
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Changes were made to align lessor accounting with the lessee accounting model and ASU No. 2014-09, “Revenue from Contracts with Customers.” The ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020). Early application is permitted for all public business entities upon issuance. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. We are currently evaluating the impact of the application of this ASU on our consolidated financial statements and disclosures thereto.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies the accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The required effective date for adoption of this guidance would be our fiscal year beginning September 1, 2017 (fiscal 2018), with early adoption allowed. The updated standard no longer requires cash flows related to excess tax benefits to be presented as a financing activity separate from other income tax cash flows. The update also allows entities to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments to taxing authorities made on an employee's behalf for withheld shares should be presented as a financing activity on the statement of cash flows, and provides for an accounting policy election to account for forfeitures as they occur. The Company early adopted this standard as of September 1, 2016 and during the first quarter of fiscal 2016 recognized an excess tax benefit from stock-based compensation of $794 within income tax expense on the condensed consolidated statement of operations (adopted prospectively). The adoption did not impact the existing classification of the awards. Excess tax benefits from stock based compensation is now classified in net income in the statement of cash flows instead of being separately stated in financing activities for the three months ended November 30, 2016 (adopted prospectively). Given the Company’s historical practice of including employee withholding taxes paid within financing activities in the statement of cash flows, no prior period reclassifications are required by the clarifications on classification provided by ASU No. 2016-09. Due predominately to the inclusion of the excess tax benefit, the effective tax rate for the first quarter of fiscal 2017 decreased to 29.3%, compared to effective tax rates of 36.0% and 34.5% recognized for the first quarter and whole year periods of fiscal 2016, respectively; further, the Company anticipates the potential for increased periodic volatility in future effective tax rates based on the continued application of the ASU No. 2016-09. Following the adoption of the new standard, the Company has elected to account for forfeitures as they occur.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” This ASU provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. The effective date for adoption of this guidance would be our fiscal year beginning September 1, 2018 (fiscal 2019), with early adoption permitted. The Company is currently evaluating the effect that ASU No. 2016-15 will have on its financial statements and related disclosures.
10
Note 3 — Inventories
Inventories consist of the following as of November 30, 2016 and August 31, 2016:
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|
November 30, |
|
August 31, |
||
|
|
|
|
2016 |
|
2016 |
||
|
Raw materials |
|
|
$ |
|
|
$ |
|
|
Work in process |
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|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
Total Inventories |
|
|
$ |
|
|
$ |
|
Note 4 — Net Income Per Share
The Company has unvested share-based payment awards with a right to receive non-forfeitable dividends which are considered participating securities under ASC Topic 260, “Earnings Per Share.” The Company allocates earnings to participating securities and computes earnings per share using the two class method. The determination of earnings per share under the two class method is as follows:
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Three Months Ended November 30, |
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||||
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|
2016 |
|
2015 |
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||
|
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|
|
|
|
|
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|
|
Basic Earnings per Share |
|
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|
|
|
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|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
$ |
|
|
|
Less: Allocated to participating securities |
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|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
|
|
$ |
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|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
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|
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|
|
|
|
Net income per share - Basic |
|
$ |
|
|
$ |
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|
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|
Diluted Earnings per Share |
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|
|
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|
|
|
|
|
|
Net income |
|
$ |
|
|
$ |
|
|
|
Less: Allocated to participating securities |
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
|
|
$ |
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|
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|
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|
|
|
|
Basic weighted average shares outstanding |
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|
Additional dilutive common stock equivalents |
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|
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|
|
|
Diluted weighted average shares outstanding |
|
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|
|
|
|
|
|
Net income per share - Diluted |
|
$ |
|
|
$ |
|
|
For the three months ended November 30, 2016 and 2015, stock options to purchase 38,591 and 31,485 shares, respectively, of common stock were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive. Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options.
11
Note 5 — Stock-Based Compensation
In August 2015, the Board of Directors of the Company approved the fiscal year 2016 Long Term Incentive Plan (“2016 LTIP”) for the executive officers and other members of management. The 2016 LTIP is an equity-based plan with a grant date of September 1, 2015 and contains a performance and service-based restricted stock grant of 6,962 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2018. Based on the fiscal year 2016 financial results, 6,277 additional shares of restricted stock (total of 13,239 shares) were earned and granted subsequent to the end of fiscal year 2016 in accordance with the performance measurement criteria. No further performance-based measurements apply to this award. Compensation expense is being recognized on a ratable basis over the vesting period.
In August 2016, the Board of Directors of the Company approved the fiscal year 2017 Long Term Incentive Plan (“2017 LTIP”) for the executive officers and other members of management. The 2017 LTIP is an equity-based plan with a grant date of September 1, 2016 and contains the following equity components:
Restricted Shares — (a) a performance and service-based restricted stock grant of 5,399 shares in the aggregate, subject to adjustment based on fiscal 2017 results, with a vesting date of August 31, 2019. Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments; (b) a time-based restricted stock grant of 5,367 shares in the aggregate, with a vesting date of August 31, 2019. Compensation expense is recognized on a ratable basis over the vesting period.
Stock options — options to purchase 15,028 shares of common stock in the aggregate with an exercise price of $64.37 per share. The options will vest in three equal annual installments beginning on August 31, 2017 and ending on August 31, 2019. Of the options granted, 5,596 options will expire on August 31, 2026, and 9,432 options will expire on September 1, 2026. Compensation expense is recognized over the period of the award consistent with the vesting terms.
In August 2016, the Board of Directors of the Company approved equity retention agreements with certain executive officers. The equity-based retention agreements have a grant date of September 1, 2016 and contain the following equity components: (a) time-based restricted stock grant of 16,312 shares in the aggregate, with 7,768 shares having a vesting date of August 31, 2019, and 8,544 shares having a vesting date of August 31, 2021; (b) options to purchase 23,563 shares of common stock in the aggregate with an exercise price of $64.37 per share (the options will cliff vest on August 31, 2019 and will expire on August 31, 2026). Compensation expense for both the restricted stock and the stock option components of the equity retention agreements is recognized on a ratable basis over the vesting period.
During the first quarter of fiscal 2016, additional grants totaling 8,805 shares of restricted shares were issued to non-executive members of management with a vesting date of August 31, 2021. Compensation expense is recognized on a ratable basis over the vesting period.
Note 6 — Segment Data & Foreign Operations
The Company is organized into two operating segments, an Industrial Materials segment and a Construction Materials segment. The segments are distinguished by the nature of the products and how they are delivered to their respective markets.
The Industrial Materials segment includes specified products that are used in, or integrated into, another company’s product, with demand typically dependent upon general economic conditions. Industrial Materials products include insulating and conducting materials for wire and cable manufacturers, moisture protective coatings for electronics, laminated durable papers, laminates for the packaging and industrial laminate markets, pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines, cover tapes essential to delivering semiconductor components via tape and reel packaging, composite materials and elements, glass-based
12
strength element products designed to allow fiber optic cables to withstand mechanical and environmental strain and stress, microspheres, sold under the Dualite brand, and polyurethane dispersions. Further, beginning June 23, 2016, and September 30, 2016, respectively, the Industrial Materials segment includes the acquired operations of Spray Products (India) Limited and of Resin Designs, LLC . Both were obtained through acquisition and included in the Company’s electronic and industrial coatings product line.
The Construction Materials segment is principally composed of project-oriented product offerings that are primarily sold and used as “Chase” branded products. Construction Materials products include protective coatings for pipeline applications, coating and lining systems for use in liquid storage and containment applications, adhesives and sealants used in architectural and building envelope waterproofing applications, high-performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets. The following tables summarize information about the Company’s reportable segments:
|
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|||||
|
|
|
2016 |
|
|
2015 |
|
|
|
||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
|
$ |
|
|
|
$ |
|
|
|
|
|
Construction Materials |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
|
$ |
|
(a) |
|
$ |
|
(c) |
|
|
|
Construction Materials |
|
|
|
|
|
|
|
|
|
|
|
Total for reportable segments |
|
|
|
|
|
|
|
|
|
|
|
Corporate and common costs |
|
|
|
(b) |
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Includes the following costs by segment: |
|
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Materials |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $190 of expenses related to inventory step-up in fair value attributable to the September 2016 acquisition of certain assets of Resin Designs, LLC |
|
|
(b) |
|
Includes $584 in acquisition-related expenses attributable to the September 2016 acquisition of certain assets of Resin Designs, LLC, facility exit and demolition costs of $27 incurred during the quarter, relating to the Company’s Randolph, MA location and a $792 gain related to the November 2016 sale of the Company’s Paterson, NJ location |
|
|
(c) |
|
Includes both a $1,031 gain on sale of our RodPack wind energy business contained within our structural composites product line and a $365 write-down on certain other structural composites assets based on usage constraints following the sale, both recognized in November 2015 |
13
Total assets for the Company’s reportable segments as of November 30, 2016 and August 31, 2016 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, |
|
August 31, |
|
|
||
|
|
|
2016 |
|
2016 |
|
|
||
|
Total assets |
|
|
|
|
|
|
|
|
|
Industrial Materials |
|
$ |
|
|
$ |
|
|
|
|
Construction Materials |
|
|
|
|
|
|
|
|
|
Total for reportable segments |
|
|
|
|
|
|
|
|
|
Corporate and common assets |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
|
The Company’s products are sold worldwide. Revenue for the three-month periods ended November 30, 2016 and 2015 are attributed to operations located in in the following countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|||||
|
|
|
2016 |
|
|
2015 |
|
|
|
||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
|
|
|
United Kingdom |
|
|
|
|
|
|
|
|
|
|
|
All other foreign (1) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
(1) |
|
Inclusive of sales originated from our Paris, France location, royalty revenue attributable to our licensed manufacturer in Asia, and Chase foreign manufacturing operations. |
14
As of November 30, 2016 and August 31, 2016, the Company had long-lived assets ( defined as tangible assets providing the Company with a future economic benefit beyond the current year or operating period, including buildings, equipment and leasehold improvements) and goodwill and intangible assets, less accumulated amortization, in the following countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, |
|
August 31, |
|
|
||
|
|
|
2016 |
|
2016 |
|
|
||
|
Long-lived Assets |
|
|
|
|
|
|
|
|
|
United States |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
|
|
|
Goodwill and Intangible assets, less accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
|
Goodwill and Intangible assets, less accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other foreign |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
|
Goodwill and Intangible assets, less accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
|
|
|
Goodwill and Intangible assets, less accumulated amortization |
|
$ |
|
|
$ |
|
|
|
Note 7 — Goodwill and Other Intangibles
The changes in the carrying value of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
Construction Materials |
|
Consolidated |
|
|||
|
Balance at August 31, 2016 |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Acquisition of Resin Designs, LLC |
|
|
|
|
|
— |
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2016 |
|
$ |
|
|
$ |
|
|
$ |
|
|
The Company’s goodwill is allocated to each reporting unit based on the nature of the products manufactured by the respective business combinations that originally created the goodwill. The Company has identified eleven reporting units within its two operating segments that are used to evaluate the possible impairment of goodwill. Goodwill impairment exists when the carrying value of goodwill exceeds its fair value. Assessments of possible impairment of goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and certain intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes; operating, raw material and energy costs; and various other projected operating and economic factors. When testing, fair values of the reporting units and the related implied fair values of their respective goodwill are established using discounted cash flows. The Company evaluates the possible impairment of goodwill annually during the fourth quarter and, whenever events or circumstances indicate the carrying value of goodwill may not be recoverable.
15
Intangible assets subject to amortization consist of the following as of November 30, 2016 and August 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
|||
|
|
|
Amortization Period |
|
Value |
|
Amortization |
|
Value |
|
|||
|
November 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and agreements |
|
|
years |
$ |
|
|
$ |
|
|
$ |
|
|
|
Formulas and technology |
|
|
years |
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
years |
|
|
|
|
|
|
|
|
|
|
Customer lists and relationships |
|
|
years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and agreements |
|
|
years |
$ |
|
|
$ |
|
|
$ |
|
|
|
Formulas and technology |
|
|
years |
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
years |
|
|
|
|
|
|
|
|
|
|
Customer lists and relationships |
|
|
years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Aggregate amortization expense related to intangible assets for the three months ended November 30, 2016 and 2015 was $2,176 and $1,916, respectively. Estimated amortization expense for the remainder of fiscal year 2017 and for the next five years is as follows:
|
|
|
|
|
|
|
Years ending August 31, |
|
|
|
|
|
2017 (remaining 9 months) |
|
$ |
|
|
|
2018 |
|
|
|
|
|
2019 |
|
|
|
|
|
2020 |
|
|
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
Note 8 — Sale of RodPack Business
In November 2015, the Company sold its RodPack wind energy business, contained within its structural composites product line, to an otherwise unrelated party (“Buyer”) for proceeds of $2,186. The Company’s structural composites product line is a part of the Company’s Industrial Materials segment. The Company is not restricted in its use of the net proceeds from the sale.
The sale resulted in a pre-tax book gain of $1,031, which was recorded within the condensed consolidated statement of operations as gain on sale of business in the quarter ended November 30, 2015. The Company received $1,500 of the proceeds in the first quarter of fiscal 2016, and has received two additional payments each for $229 during the quarters ended May 31, 2016 and November 30, 2016. It will receive the remaining instalment payment in the third quarter of fiscal 2017, and has recorded the balance as a current asset (Due from sale of business) as of November 30, 2016. The payment of these owed amounts is not subject to any further contingency or deliverable. Further, the Company will provide ongoing development support to the Buyer for which it will receive additional consideration upon the completion of services.
16
The sale of this business prompted the Company to perform a review of other long-lived assets within the structural composites product line, as the sale of the related intangible assets resulted in a limitation of the Company’s capacity to sell certain other goods produced by the product line. This review resulted in the identification of construction in progress assets with a net book value of $365, which the Company fully wrote down. This charge was recorded within the condensed consolidated statement of operations as write-down of certain assets under construction during the first quarter of fiscal 2016.
Note 9 — Sale of Paterson, NJ Location
In November 2016, the Company finalized the sale of its Paterson, NJ property for proceeds of $1,382. This transaction resulted in a gain of $792 which was recorded in the Company’s condensed consolidated statement of operations as a gain on sale of location during the fiscal quarter ended November 30, 2016. The Company had previously reclassified the related long-lived assets to assets held for sale after committing to a plan in the second quarter of fiscal 2016 to actively market the property. The assets held for sale had been reported within Corporate and Common assets as of August 31, 2016.
Note 10 — Commitments and Contingencies
The Company is involved from time to time in litigation incidental to the conduct of its business. Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements agreed to, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best forecast of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.
Note 11 — Pensions and Other Post-Retirement Benefits
The components of net periodic benefit cost for the three months ended November 30, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
||||
|
|
|
2016 |
|
2015 |
|
|
|
||
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
$ |
|
|
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
Amortization of accumulated loss |
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
|
|
$ |
|
|
|
|
When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes. As of November 30, 2016, the Company has made contributions of $21 in the current fiscal year to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 2017 to ensure the qualified plan continues to be adequately funded given the current market conditions. The Company made contributions of $77 in the first three months of the prior year.
17
Note 12 — Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company utilizes the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The financial assets classified as Level 1 and Level 2 as of November 30, 2016 and August 31, 2016 represent investments that are restricted for use in a nonqualified retirement savings plan for certain key employees and directors.
The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of November 30, 2016 and August 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement category |
|
|||||
|
|
|
|
|
|
|
|
Quoted prices |
|
Significant other |
|
Significant |
|
|
|
|
|
Fair value |
|
|
|
|
in active markets |
|
observable inputs |
|
unobservable inputs |
|
|
|
|
|
measurement date |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments |
|
November 30, 2016 |
|
$ |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments |
|
August 31, 2016 |
|
$ |
|
|
$ |
|
|
|
|
— |
|
The following table presents the fair value of the Company’s long-term debt (including current portion of long-term debt) as of November 30, 2016 and August 31, 2016, which is recorded at its carrying value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement category |
|
|||||
|
|
|
|
|
|
|
|
Quoted prices |
|
Significant other |
|
Significant |
|
|
|
|
|
Fair value |
|
|
|
|
in active markets |
|
observable inputs |
|
unobservable inputs |
|
|
|
|
|
measurement date |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
||
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
November 30, 2016 |
|
$ |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
August 31, 2016 |
|
$ |
|
|
$ |
— |
|
|
|
— |
|
The carrying value of the long-term debt approximates its fair value, as the monthly interest rate is set based on the movement of the underlying market rates. In December 2016, subsequent to the first quarter of fiscal 2017, Chase refinanced its term debt, with a new credit agreement. See Note 18 to the condensed consolidated financial statements for additional information on the refinancing of debt in the second quarter of fiscal 2017.
18
Note 13 — Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss), net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Funded |
|
Foreign Currency |
|
|
|
|
||
|
|
|
Restricted |
|
Status of |
|
Translation |
|
|
|
|
|||
|
|
|
Investments |
|
Pension Plan |
|
Adjustment |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2016 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gains (losses) before reclassifications (1) |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
Reclassifications to net income of previously deferred (gains) losses (2) |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2016 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
(1) |
|
Net of tax expense of $8, $0, $0, respectively. |
|
|
(2) |
|
Net of tax expense of $1, tax benefit of $78, $0, respectively. |
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) to the unaudited condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from |
|
|
|
|
||||
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
|
|
|
||||
|
|
|
|
|
(Loss) into Income |
|
|
|
|
||||
|
|
|
|
|
Three Months Ended November 30, |
|
|
Location of Gain (Loss) Reclassified from Accumulated |
|
||||
|
|
|
|
|
2016 |
|
2015 |
|
|
Other Comprehensive Income (Loss) into Income |
|
||
|
Gains on Restricted Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on sale of restricted investments |
|
|
|
$ |
|
|
$ |
|
|
|
Selling, general and administrative expenses |
|
|
Tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain net of tax |
|
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Funded Pension Plan adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior pension service costs and unrecognized losses |
|
|
|
$ |
|
|
$ |
|
|
|
Cost of products and services sold |
|
|
Amortization of prior pension service costs and unrecognized losses |
|
|
|
$ |
|
|
$ |
|
|
|
Selling, general and administrative expenses |
|
|
Tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss net of tax |
|
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss reclassified for the period |
|
|
|
$ |
|
|
$ |
|
|
|
|
|
19
Note 14 — Acquisitions
Acquisition of Resin Designs, LLC
On September 30, 2016, the Company acquired certain assets of Resin Designs, LLC (“Resin Designs”), an advanced adhesives and sealants manufacturer, with locations in Woburn, MA and Newark, CA. This business was acquired for a purchase price of $30,435, pending any final working capital adjustment and excluding acquisition-related costs. As part of this transaction, Chase acquired all working capital and fixed assets of the business, and entered into multi-year leases at both locations. Resin Designs is a formulator of customized adhesive and sealant systems used in high-reliability electronic applications. The acquisition broadens the Company’s adhesives and sealants product offering and manufacturing capabilities, and expands its market reach. The purchase was funded entirely with available cash on hand.
Since the effective date for this acquisition, September 30, 2016, the financial results of the acquired business have been included in the Company’s financial statements within the Industrial Materials operating segment, within the electronic and industrial coatings product line. The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations.” In accordance with this accounting standard, the Company expensed $584 of acquisition-related costs during the three-month period ended November 30, 2016 to acquisition-related costs.
The Company is currently in the process of finalizing purchase accounting, with regard to a final working capital adjustment and a final allocation of the purchase price to tangible and identifiable intangible assets assumed, and anticipates completion within the first half of fiscal 2017. The purchase price has been initially allocated to the acquired tangible and identifiable intangible assets assumed, based on their fair values as of the date of the acquisition:
|
|
|
|
|
|
|
Assets & Liabilities |
|
Amount |
|
|
|
Accounts receivable |
|
$ |
|
|
|
Inventory |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
Property, plant & equipment |
|
|
|
|
|
Goodwill |
|
|
|
|
|
Intangible assets |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
Total purchase price |
|
$ |
|
|
The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $7,592 that is largely attributable to the synergies and economies of scale from combining the operations, technologies and research and development capabilities of Resin Designs and Chase, particularly as it pertains to the expansion of the Company's product and service offerings, the established workforce and marketing efforts. This goodwill is deductible for income tax purposes.
All assets, including goodwill, acquired as part of the Resin Designs acquisition are included in the Industrial Materials operating segment. Identifiable intangible assets purchased with this transaction are as follows:
|
|
|
|
|
|
|
|
|
Intangible Asset |
|
Amount |
|
Useful life |
||
|
Customer relationships |
|
$ |
|
|
|
years |
|
Technology |
|
|
|
|
|
years |
|
Trade names |
|
|
|
|
|
years |
|
Total intangible assets |
|
$ |
|
|
|
|
20
Supplemental Pro Forma Data
The following table presents the pro forma results of the Company for the three-month periods ended November 30, 2016 and 2015 as though the Resin Designs acquisition described above occurred on September 1, 2015 (the first day of fiscal 2016). The actual revenue and expenses for the acquired business are included in the Company’s fiscal 2017 consolidated results beginning on September 30, 2016. From the date of acquisition (September 30, 2016) through November 30, 2016, revenue and net income (loss) for the Resin Designs operations included in the condensed consolidated statement of operations were $2,619 and ($237), respectively, inclusive of the effects of $584 in acquisition-related costs, $190 in sale of inventory step-up cost, and additional amortization expense recognized related to intangible assets recorded as part of the transaction. The pro forma results include adjustments for the estimated amortization of intangibles, acquisition-related costs, sale of inventory step-up cost and the income tax impact of the pro forma adjustments at the statutory rate of 35%. The following pro forma information is not necessarily indicative of the results that would have been achieved if the acquisition had been effective on September 1, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
||||
|
|
|
2016 |
|
2015 |
|
||
|
Revenue |
|
$ |
|
|
$ |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, per common and common equivalent share |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
|
|
$ |
|
|
|
Diluted earnings per share |
|
$ |
|
|
$ |
|
|
Acquisition of Spray Products (India) Private Limited
On June 23, 2016, the Company acquired all the capital stock of Spray Products (India) Private Limited for $1,161, net of cash acquired. This acquired business works closely with our HumiSeal manufacturing operation in Winnersh, Wokingham, England. The acquisition in India enhances the Company’s ability to provide technical, sales, manufacturing, chemical handling, and packaging services in the region. Since the effective date for this acquisition, the financial results of the business have been included in the Company's financial statements within the Company’s Industrial Materials operating segment in the electronic and industrial coatings product line. Purchase accounting was completed in the quarter ended August 31, 2016.
Note 15 — Exit Costs Related to Idle Facility
In the quarterly period ended November 30, 2016, the Company recognized $27 in expenses to raze its Randolph, MA facility, which has been idle with regard to production for several years. The Company began marketing the site for sale and reclassified the net book value of the facility to assets held for sale during the second quarter of fiscal 2016. These actions were taken as part of the Company’s on-going facility consolidation and rationalization initiative. The Company has updated its initial estimates, and currently anticipates no more than an additional $100 in expenses associated with completing the project, and expects work to be completed during fiscal 2017, with the sale of the property to follow. The Company recognized $935 in expenses in fiscal 2016 (during the second, third and fourth quarters) bringing the project to near completion. See Note 16 to the condensed consolidated financial statements for additional information on assets held for sale.
21
Note 16 — Assets Held for Sale
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of these assets. If the Company decides to dispose of an asset and commits to a plan to actively market and sell the asset, it will be moved to assets held for sale. The Company analyzes market conditions each reporting period and, if applicable, records additional impairments due to declines in market values of like assets. The fair value of the asset is determined by observable inputs such as appraisals and prices of comparable assets in active markets for assets like the Company's. Gains are not recognized until the assets are sold.
In October 2016, Chase entered into an agreement to sell its former corporate headquarters and executive offices in Bridgewater, MA. This transaction was conditioned upon the execution of a definitive asset purchase and sale agreement. In December 2016, subsequent to the first fiscal quarter, all conditions were met, and the sale was finalized for proceeds of $740, resulting in a gain on sale of $68, which will be recognized in the second quarter of fiscal 2017. The Company has determined that the related assets qualified for held for sale disclosure under ASC Topic 360, “Property, Plant and Equipment” at the end of the first fiscal quarter of 2017. See Note 17 to the condensed consolidated financial statements for additional information on the sale of the Bridgewater, MA location.
Assets held for sale as of November 30, 2016 and August 31, 2016 were:
|
|
|
|
|
|
|
|
|
|
November 30, 2016 |
|
August 31, 2016 |
|
||
|
Bridgewater, MA - Building and land |
$ |
|
|
$ |
— |
|
|
Randolph, MA - Property, plant and equipment (a) |
|
|
|
|
|
|
|
Paterson, NJ - Building and leasehold improvements (b) |
|
— |
|
|
|
|
|
Total |
$ |
|
|
$ |
|
|
|
|
(a) |
|
See Note 15 to the condensed consolidated financial statements for additional information on Randolph, MA location assets held for sale as of November 30, 2016 and August 31, 2016. |
|
|
(b) |
|
See Note 9 to the condensed consolidated financial statements for additional information on the sale of the Paterson, NJ location in the quarter ended November 30, 2016. |
Note 17 — Related Party Agreements
Reimbursements Related to Life Insurance Policies
During the fourth quarter of fiscal 2016 and the first quarter of fiscal 2017, the Edward L. Chase Trust (the “Trust”), owners of two insurance policies on the life of Claire E. Chase, reimbursed the Company for premiums paid on the policies in exchange for the Company’s release of any claims on the policies. In August 2016 (the fourth quarter of fiscal 2016), the Company received $1,238 related to the John Hancock (formerly Manufacturers’ Life Insurance Company) policy, the full value of premiums paid to date by the Company. In September 2016 (the first quarter of fiscal 2017), the Company received $1,504 related to the Metropolitan Life Insurance policy, its then cash surrender value, plus an additional prepaid related to the policy. Claire E. Chase is the spouse of a former executive of the Company, Edward L. Chase (deceased), and who in each case are the parents of Peter R. Chase (the Executive Chairman of the Company) and Mary Claire Chase (Director) and the grandparents of Adam P. Chase (the President and CEO of the Company). The Trust is the beneficial owner of more than 5% of the Company’s common stock. Terms and conditions of these transactions were reviewed and approved by the independent members of the Company's Board of Directors in advance.
22
Sale of Bridgewater, MA Location
In October 2016, Chase entered into an agreement to sell its former corporate headquarters and executive offices in Bridgewater, MA. At that time the transaction was conditioned upon the execution of a definitive asset purchase and sale agreement. In December 2016, subsequent to the first fiscal quarter, all conditions were met, and the sale was finalized for proceeds of $740, resulting in a gain on sale of $68, which will be recognized in the second quarter of fiscal 2017. The buyer, Bridgewater State University Foundation, Inc., was deemed a related party because of preexisting professional connections between it and two members of the Company’s Board of Directors, including Peter R. Chase (the Executive Chairman of the Company) and Dana Mohler-Faria (Director). The terms and conditions of the proposed transaction were reviewed and approved by all members of the Company's Board of Directors who were not parties related to the potential buyer, prior to entering into the then conditional agreement in October 2016. They concluded that the sale price was appropriate, after considering a recent market appraisal of the land and building performed by an independent third party valuation firm.
Note 18 — Subsequent Events
Refinancing of Long-Term Debt
On December 15, 2016, the Company entered into an Amended and Restated Credit Agreement (the “New Credit Agreement”). The New Credit Agreement is an all revolving credit facility with a borrowing capacity of $150,000 which can be increased by an additional $50,000 at the request of the Company and the individual or collective option of any of the Lenders (defined below). The New Credit Agreement with Bank of America, acting as administrative agent, and with participation from Citizens Bank and JPMorgan Chase Bank (collectively with Bank of America, the “Lenders”), contains customary affirmative and negative covenants that, among other things, restricts our ability to incur additional indebtedness and requires certain lender approval for acquisitions by the Company and its subsidiaries over a certain size. It also requires us to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio (as defined in the facility) of no more than 3.25 to 1.00, and a consolidated fixed charge coverage ratio (as defined in the facility) of at least 1.25 to 1.00. The New Credit Agreement was entered into both to refinance our previously existing term loan and revolving line of credit and to provide for additional liquidity to finance potential acquisitions, working capital, capital expenditures, and for other general corporate purposes.
The applicable interest rate for the revolver portion of the New Credit Agreement (the “New Revolving Facility”) and any New Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus an additional amount in the range of 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. The New Credit Agreement has a five-year term with interest payments due at the end of the applicable LIBOR period (but in no event less frequently than the three-month anniversary of the commencement of such LIBOR period) and principal payment due at the expiration of the agreement, December 15, 2021. In addition, the Company may elect a base rate option for all or a portion of the New Revolving Facility, in which case, interest payments shall be due with respect to such portion of the New Revolving Facility on the last business day of each quarter.
Subject to certain conditions set forth in the New Credit Agreement (entered by and among the Company, NEPTCO Incorporated (“NEPTCO”), certain Subsidiaries of the Company and NEPTCO party thereto as Guarantors, and the financial institutions party thereto as Lenders), the Company may elect to convert all or a portion of the outstanding New Revolving Facility into a term loan (each, a “New Term Loan”, and collectively with the New Revolving Facility, the “New Credit Facility”), which shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such New Term Loan on a seven-year amortization schedule. Prepayment is allowed by the New Credit Agreement at any time during the term of the agreement, subject to customary notice requirements.
23
In connection with entry into the New Credit Agreement, Chase applied proceeds to pay off in full the outstanding principal balance of its preexisting term debt held under a previously existing credit agreement, which was entered in conjunction with the Company’s June 27, 2012 acquisition of NEPTCO Holdings, simultaneously terminating both our previously existing term loan agreement and the previously existing revolving line of credit, which was fully available as of December 15, 2016. As the preexisting term loan was refinanced with the New Revolving Facility, for which principal payment is due at the expiration of the agreement, December 15, 2021, we reclassified our preexisting term debt obligation to noncurrent on the condensed consolidated balance sheet as of November 30, 2016.
Sale of Bridgewater, MA Location
In October 2016, Chase entered into an agreement to sell its former corporate headquarters and executive offices in Bridgewater, MA. At that time the transaction was conditioned upon the execution of a definitive asset purchase and sale agreement. In December 2016, subsequent to the first fiscal quarter, all conditions were met, and the sale was finalized for proceeds of $740, resulting in a gain on sale of $68, which will be recognized in the second quarter of fiscal 2017. See Note 17 to the condensed consolidated financial statements for additional information on the sale of the Bridgewater, MA location.
24
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides an analysis of the Company’s financial condition and results of operations and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 2016.
Overview
Revenue, operating income and net income for the first quarter of fiscal 2017 all exceeded prior year results, as the current period benefited from both legacy product sales growth and revenue generated by the acquired operations of Resin Designs, LLC (“Resin Designs”). Our electronic and industrial coatings, specialty products, cable materials, electronic materials, building envelope and specialty chemical intermediates product lines all saw comparative revenue growth in the first quarter. Overall revenue growth was tempered by a comparative reduction in sales of our bridge and highway, pipeline coatings, coating and lining systems and fiber optic cable components products. The Company’s operating income and net income further benefited from a favorable sales mix and continued trends in commodities markets, with net income also receiving the benefit of the first quarter gain on sale of our Paterson, NJ location.
First quarter Industrial Materials segment revenue drove our company-wide quarter-over-quarter sales increase through both organic and inorganic growth. With revenue growth in its electronic and industrial coatings (which now includes Resin Designs), specialty products, cable materials, electronic materials and specialty chemical intermediates product lines, Chase again demonstrated its ability to grow profits through both existing and newly acquired product offerings. However, overall segment revenue growth was negatively affected by fiber optic cable components results during the quarter.
Revenue from our Construction Materials segment decreased for the first fiscal quarter, as compared to the same period in the prior year. Our pipeline coatings product line had a decrease from the prior year, with Middle East water infrastructure project demand for our Rye, UK facility-produced pipeline coatings products decreasing slightly over the prior year, and our domestically-produced pipeline coatings products falling short of sales volumes obtained in the prior year. Decreases in bridge and highway products sales, resulting from delayed project work, and coating and lining systems product line sales also both contributed to the overall decrease for the segment. Partially offsetting this decrease was our building envelope product line, which saw sales volume growth quarter-over-quarter.
Given the seasonality of certain product lines, the upcoming second fiscal quarter has historically generated lower quarterly sales; this is especially true within the Construction Materials segment which is principally composed of project-oriented product offerings. During the remainder of fiscal 2017, the Company will remain focused on its core drivers for sustainable growth: organic growth through market-driven development, mergers and acquisitions, and operational consolidation.
Our balance sheet remains strong, with cash on hand of $49,324,000 and a current ratio of 4.2 at November 30, 2016. At the end of our first fiscal quarter, our $15,000,000 line of credit was fully available, while the outstanding principal balance of our term debt was $41,300,000. In December 2016, subsequent to the first quarter, Chase entered into an Amended and Restated Credit Agreement (the “New Credit Agreement”) and applied proceeds from the New Credit Agreement to pay off in full the outstanding principal balance of its preexisting term debt.
25
We have two reportable segments as summarized below:
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Segment |
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Product Lines |
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Manufacturing Focus and Products |
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Industrial Materials |
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Cable Materials Electronic and Industrial Coatings Specialty Products Pulling and Detection Electronic Materials Structural Composites Fiber Optic Cable Components Specialty Chemical Intermediates |
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Protective coatings and tape products, including insulating and conducting materials for wire and cable manufacturers; moisture protective coatings and customized sealant and adhesive systems for electronics; laminated durable papers, packaging and industrial laminate products; pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines; cover tapes essential to delivering semiconductor components via tape and reel packaging; composite materials elements; glass-based strength elements designed to allow fiber optic cables to withstand mechanical and environmental strain and stress; Dualite brand microspheres; and polyurethane dispersions. |
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Construction Materials |
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Coating and Lining Systems Pipeline Coatings Building Envelope Bridge and Highway |
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Protective coatings and tape products, including coating and lining systems for use in liquid storage and containment applications; protective coatings for pipeline and general construction applications; adhesives and sealants used in architectural and building envelope waterproofing applications; high-performance polymeric asphalt additives; and expansion and control joint systems for use in the transportation and architectural markets. |
26
Results of Operations
Revenue and Operating Profit by Segment are as follows (dollars in thousands):
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% of |
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% of |
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Three Months Ended |
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Total |
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Three Months Ended |
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Total |
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November 30, 2016 |
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Revenue |
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November 30, 2015 |
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Revenue |
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Revenue |
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Industrial Materials |
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$ |
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% |
$ |
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% |
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Construction Materials |
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% |
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% |
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Total |
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$ |
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$ |
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% of |
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% of |
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Three Months Ended |
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Segment |
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Three Months Ended |
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Segment |
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November 30, 2016 |
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Revenue |
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November 30, 2015 |
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Revenue |
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Income before income taxes |
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Industrial Materials |
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$ |
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(a) |
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% |
$ |
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(c) |
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% |
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Construction Materials |
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% |
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% |
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Total for reportable segments |
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% |
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% |
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Corporate and Common Costs |
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(b) |
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Total |
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$ |
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% |
$ |
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% |
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(a) |
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Includes $190 of expenses related to inventory step-up in fair value attributable to the September 2016 acquisition of certain assets of Resin Designs, LLC |
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(b) |
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Includes $584 in acquisition-related expenses attributable to the September 2016 acquisition of certain assets of Resin Designs, LLC, facility exit and demolition costs of $27 incurred during the quarter, relating to the Company’s Randolph, MA location and $792 gain related to the November 2016 sale of the Company’s Paterson, NJ location |
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(c) |
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Includes both a $1,031 gain on sale of our RodPack ® wind energy business contained within our structural composites product line and a $365 write-down on certain other structural composites assets based on usage constraints following the sale, both recognized in November 2015 |
Total Revenue
Total revenue increased $3,879,000 or 7% to $61,357,000 for the quarter ended November 30, 2016, compared to $57,478,000 in the same quarter of the prior year.
Revenue in our Industrial Materials segment increased $5,725,000 or 13% for the current fiscal quarter. The changes in this segment compared to the prior year period were primarily due to the following: (a) our electronic and industrial coatings products, which included $2,619,000 or two months of sales related to the acquired Resin Designs operations, had a total increase in sales volume of $3,759,000; (b) our specialty products, made up of both laminated durable papers and industrial laminate products, had increased sales volume of $1,223,000 over the prior year period; (c) our cable materials, attained $735,000 in sales volume growth over the first quarter of the prior year, driven by increased sales of communication wire and cable components; (d) our electronic materials products, achieved year-over-year sales volume growth of $296,000; and (e) our specialty chemical intermediates product line, which continued to experience high demand, had a quarter-over-quarter sales volume increase of $196,000. These increases were negatively affected for the quarter by a quarter-over-quarter reduction of $669,000 in our fiber optic cable component products.
Revenue from our Construction Materials segment decreased $1,846,000 or 13% in the current quarter. The decrease in our Construction Materials segment compared to the prior year period was primarily due to the following: (a) our bridge and highway products sales volume decreased $855,000 in the current period compare to the first quarter of the prior
27
year, resulting from delayed project work in the current year, contrasted against a weather-lengthened construction season experienced in the prior year; (b) the anticipated decrease in our pipeline coatings product line sales, which totaled $778,000 for the quarter-over-quarter period, with decreases seen in sales volume both for our Rye, UK facility-produced products, sold into the Middle East for water infrastructure projects, and for our domestically-produced products, predominantly sold for use in the oil and gas industries; and (c) our coating and lining systems products, which experienced a period-over-period sales volume reduction of $481,000, resulting from delays in project work during the current quarter. These reductions in revenue were partially offset by a sales volume increase of $268,000 for our building envelope products.
Cost of Products and Services Sold
Cost of products and services sold increased $572,000 or 2% to $35,289,000 for the quarter ended November 30, 2016, compared to $34,717,000 in the same period of the prior year.
The following table summarizes our cost of products and services sold as a percentage of revenue for each of our reporting segments:
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Three Months Ended November 30, |
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Cost of products and services sold |
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2016 |
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2015 |
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Industrial Materials |
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% |
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% |
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|
Construction Materials |
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% |
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% |
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Total |
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% |
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% |
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Cost of products and services sold in our Industrial Materials segment was $28,492,000 in the first fiscal quarter compared to $26,831,000 in the comparable period in the prior year. Cost of products and services sold in our Construction Materials segment was $6,797,000 for the quarter ended November 30, 2016, compared to $7,886,000 in the same period of the prior year. As a percentage of revenue, cost of products and services sold decreased for both Industrial Materials and Construction Materials for the quarter-over-quarter period. These decreases were primarily due to product mix, as we had more-than-proportionately decreased sales from our lower margin products. Given the composition of our finished goods and the markets we serve, the pricing of certain commodities (including petroleum-based solvents, films, yarns, and nonwovens, aluminum and copper foils, specialty papers, and various resins, adhesives and inks) can both directly and indirectly affect the purchase price of our raw materials and the demand for our product offerings. Chase diligently monitors raw material and commodities pricing across all its product lines to preserve margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $242,000 or 2% to $11,752,000 for the quarter ended November 30, 2016 compared to $11,510,000 in the prior year quarter. As a percentage of revenue, selling, general and administrative expenses decreased to 19% in the first fiscal quarter compared to 20% in the prior year period. The nominal increase for the current fiscal quarter period compared to the prior year period was primarily attributable to: (a) increased amortization expense of $260,000, predominantly related to intangible assets acquired in our September 30, 2016 acquisition of certain assets of Resin Designs; (b) increase of $210,000 in stock-based compensation expenses; and (c) increased research and development expense of $192,000, principally related to the addition of the established research and development department of Resin Designs. The Company continues to closely monitor and control expenses, and these increases were partially offset for the quarter by a combined $369,000 reduction in direct selling and commission expenses.
Acquisition-Related Costs
In the three months ended November 30, 2016, the Company incurred $584,000 of costs related to our acquisition of certain assets of Resin Designs, LLC. This acquisition was accounted for as a business combination in accordance with applicable accounting standards, and as such all related professional service fees (i.e., banking, legal, accounting, actuarial, etc.) were expensed as incurred within the three-month period ended November 30, 2016.
28
Exit Costs Related to Idle Facility
In the quarter ended November 30, 2016, the Company recognized $27,000 in demolition costs associated with its site in Randolph, MA, which has been idle with regard to production for several years. The Company began marketing the site for sale during the second fiscal quarter of 2016. The decision to raze the site and market the property comes as part of the Company’s facility consolidation and rationalization initiative, and was done in part to make the property more attractive to a potential buyer. Production previously housed in Randolph, MA had been relocated to the Company’s Oxford, MA and Blawnox, PA locations prior to the commencement of demolition work. The Company has updated its initial estimate and currently anticipates no more than an additional $100,000 in expenses associated with completing the project, and expects work to be completed during fiscal 2017, with the sale of the property to follow.
Write-down of Certain Assets Under Construction
In the first quarter of fiscal 2016, the Company recorded a $365,000 charge related to the full write-down of certain structural composites tangible assets (construction in progress) located in its Granite Falls, NC facility. The first quarter of 2016 sale of our RodPack wind energy business (and related intangible assets), contained within the structural composites product line, placed a limitation on the Company’s ability to sell certain other goods produced for the same product line, resulting in our determination to fully write-down certain assets under construction during the quarter.
Interest Expense
Interest expense decreased $4,000 or 2% to $246,000 for the quarter ended November 30, 2016 compared to $250,000 in the prior year first quarter. The decrease in interest expense from the prior period is a result of a reduction in our overall average debt balance through principal payments made from operating cash flow over the past year.
Gain on Sale of Location
In November 2016, the Company finalized the sale of its Paterson, NJ property for proceeds of $1,382,000. This transaction resulted in a gain of $792,000 which was recorded in the Company’s condensed consolidated statement of operations as a gain on sale of location during the fiscal quarter ended November 30, 2016. The Company had previously reclassified the related long-lived assets to assets held for sale after committing to a plan in February 2016 to actively market the property. The assets held for sale had previously been reported within Corporate and Common assets.
Gain on Sale of Business
In the first quarter of fiscal 2016, the Company sold the RodPack wind energy business formerly contained within its structural composites product line. This transaction resulted in a pre-tax book gain of $1,031,000, which was recorded in the three-month period ended November 30, 2015.
Other Income (Expense)
Other income (expense) was an income of $399,000 in the quarter ended November 30, 2016 compared to an expense of $31,000 in the same period in the prior year, an increase of $430,000. Other income (expense) primarily includes interest income, rental income and foreign exchange gains (losses) caused by changes in exchange rates on transactions or balances denominated in currencies other than the functional currency of our subsidiaries. Income in the current period was primarily the result of sales made from our UK-based operations but denominated in US dollars.
29
Income Taxes
The effective tax rates for the quarters ended November 30, 2016 and 2015 were 29.3%, and 36.0%, respectively. The current year effective tax rate was affected by the Company’s adoption of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”, during the first fiscal quarter. The adoption of ASU No. 2016-09 resulted in recognition of excess tax benefit from stock-based compensation of $794,000 within income tax expense on the condensed consolidated statement of operations for the first fiscal quarter of fiscal 2017. The Company anticipates the potential for increased periodic volatility in future effective tax rates based on the continued application of the ASU No. 2016-09.
Net Income
Net income attributable to Chase Corporation increased $2,914,000 or 39% to $10,363,000 in the quarter ended November 30, 2016 compared to $7,449,000 in the prior year first quarter. The increase in net income in the first fiscal quarter is primarily due to increased sales, a more favorable sales mix during the quarter, the gain on sale of our Paterson, NJ location and the recognition of excess tax benefit related to our early adoption of ASU No. 2016-09. These gains were partially offset by the acquisition-related costs and increased amortization expense recognized in the first fiscal quarter, both of which related to our September 30, 2016 acquisition of certain assets of Resin Designs.
30
Other Important Performance Measures
We believe that EBITDA, Adjusted EBITDA and Free Cash Flow are useful performance measures. They are used by our executive management team to measure operating performance, to allocate resources, to evaluate the effectiveness of our business strategies and to communicate with our Board of Directors and investors concerning our financial performance. The Company believes EBITDA, Adjusted EBITDA and Free Cash Flow are commonly used by financial analysts and others in the industries in which the Company operates and thus provide useful information to investors. EBITDA, Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures.
We define EBITDA as net income before interest expense from borrowings, income tax expense, depreciation expense from fixed assets, and amortization expense from intangible assets. We define Adjusted EBITDA as EBITDA excluding costs and (gains)/losses related to our acquisitions and divestitures, costs of products sold related to inventory step-up to fair value, settlement (gains)/losses resulting from lump sum distributions to participants from our defined benefit plans, and other significant items. We define Free Cash Flow as Net cash provided by operating activities less purchases of property, plant and equipment.
The use of EBITDA, Adjusted EBITDA and Free Cash Flow has limitations and these performance measures should not be considered in isolation from, or as an alternative to, US GAAP measures such as net income and net cash provided by operating activities. None of these measures should be interpreted as representing the residual cash flow of the Company available for discretionary expenditures or to invest in the growth of our business, since we have certain non-discretionary expenditures that are not deducted from these measures, including scheduled principal and (in the case of Free Cash Flow) interest payments on outstanding debt. Our measurement of EBITDA, Adjusted EBITDA and Free Cash Flow may not be comparable to similarly-titled measures used by other companies.
The following table provides a reconciliation of net income, the most directly comparable financial measure presented in accordance with US GAAP, to EBITDA and Adjusted EBITDA for the periods presented (dollars in thousands):
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Three Months Ended November 30, |
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2016 |
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2015 |
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Net income |
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$ |
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$ |
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Interest expense |
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Income taxes |
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Depreciation expense |
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Amortization expense |
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EBITDA |
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$ |
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|
$ |
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Acquisition-related costs (a) |
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|
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— |
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Cost of sale of inventory step-up (b) |
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|
|
— |
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Gain on sale of location (c) |
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|
|
— |
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Exit costs related to idle facility (d) |
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— |
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Gain on sale of business (e) |
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— |
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Write-down of certain assets under construction (f) |
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— |
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|
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Adjusted EBITDA |
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$ |
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|
$ |
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(a) |
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Represents costs related to the September 2016 acquisition of certain assets of Resin Designs, LLC |
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(b) |
|
Represents expenses related to inventory step-up in fair value related to the September 2016 acquisition of certain assets of Resin Designs, LLC |
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|
(c) |
|
Represents gain on November 2016 sale of the Company’s Paterson, NJ location |
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(d) |
|
Represents Randolph, MA facility exit and demolition costs incurred |
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(e) |
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Represents gain on sale of the RodPack wind energy business contained within the structural composites product line that was completed in November 2015 |
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(f) |
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Represents a write-down of certain structural composites assets under construction based on usage constraints recognized following the sale of the RodPack wind energy business in November 2015 |
31
The following table provides a reconciliation of net cash provided by operating activities, the most directly comparable financial measure presented in accordance with US GAAP, to Free Cash Flow for the periods presented:
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Three Months Ended November 30, |
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2016 |
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2015 |
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Net cash provided by operating activities |
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$ |
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$ |
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Purchases of property, plant and equipment |
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Free Cash Flow |
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$ |
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$ |
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Liquidity and Sources of Capital
Our overall cash and cash equivalents balance decreased $24,087,000 to $49,324,000 at November 30, 2016, from $73,411,000 at August 31, 2016. The decreased cash balance is primarily attributable to $30,435,000 in cash paid for the September 2016 acquisition of certain assets of Resin Designs, LLC. The overall decrease was positively impacted by: (a) cash from operations; (b) cash proceeds from the sale of Paterson, NJ location; and (c) cash reimbursement related to a life insurance policy. Of the above noted amounts, $26,379,000 and $27,550,000 were held outside the US by Chase Corporation and our foreign subsidiaries as of November 30, 2016 and August 31, 2016, respectively. Given our cash position and borrowing capability in the US and the potential for increased investment and acquisitions in foreign jurisdictions, we do not have a history of repatriating a significant portion of our foreign cash. However, we do not currently take the position that undistributed foreign subsidiaries’ earnings are considered to be permanently reinvested. Accordingly, we recognize a deferred tax liability for the estimated future tax effects attributable to temporary differences due to these unremitted earnings. In the event that circumstances should change in the future and we decide to repatriate these foreign amounts to fund US operations, we would pay the applicable US taxes on these repatriated foreign amounts, less any tax credit offsets, to satisfy all previously recorded tax liabilities.
Cash flow provided by operations was $8,337,000 in the first quarter of fiscal year 2017 compared to $9,081,000 in the same period in the prior year. Cash provided by operations during the current period was primarily related to operating income. Negatively impacting our cash flow from operations were both an increase in inventories (in part related to certain delayed project work) and a decrease in accrued compensation and other expenses (related primarily to the payment of the Company’s annual employee incentive plan in November 2016).
The ratio of current assets to current liabilities was 4.2 as of November 30, 2016 compared to 2.0 as of August 31, 2016. The increase in our current ratio at November 30, 2016 was primarily attributable to the reclassification of our preexisting term debt to noncurrent at the end of the first quarter, given our entry into the New Credit Agreement (defined below) in December 2016. This was partially offset by a decrease in cash and cash equivalents for the acquisition of certain assets of Resin Designs, LLC during the first quarter of fiscal 2017.
Cash flow used in investing activities of $28,033,000 was primarily due to our acquisition of certain assets of Resin Designs, LLC in September 2016, in addition to cash paid for purchases of machinery and equipment at our manufacturing locations during fiscal 2017. These uses were partially offset by cash received in the quarter from both the sale of our Paterson, NJ location and in relation to a life insurance policy.
Cash flow used in financing activities of $3,060,000 was primarily due to scheduled payments made on the bank loans used to finance our June 2012 acquisition of NEPTCO, described in more detail below, as well as cash payments of taxes on stock options and restricted stock.
On November 1, 2016, we announced a cash dividend of $0.70 per share (totaling $6,532,000). The dividend was paid on December 7, 2016 to shareholders of record on November 11, 2016.
In June 2012, in connection with our acquisition of NEPTCO, we borrowed $70,000,000 under a five-year term debt financing arrangement led and arranged by Bank of America, with participation from RBS Citizens (the “Existing Credit Facility”). The applicable interest rate was based on the effective LIBOR plus an additional amount in the range of 1.75% to 2.25%, depending on our consolidated leverage ratio. At November 30, 2016, the applicable interest rate was
32
2.29% per annum and the outstanding principal amount was $41,300,000. The Existing Credit Facility required repayment of the principal amount of the term loan in quarterly installments. Installment payments of $1,400,000 began in September 2012 and continued through June 2014, increased to $1,750,000 per quarter thereafter through June 2015, and increased to $2,100,000 per quarter thereafter, and were scheduled to continue at this amount through March 2017. The Existing Credit Facility had a scheduled maturity date of June 27, 2017, prior to our refinancing via entry into an Amended and Restated Credit Agreement (the “New Credit Agreement”) in December 2016.
Under the Existing Credit Facility, Chase had a revolving line of credit with Bank of America (the “Existing Revolver”) totaling $15,000,000, which bore interest at LIBOR plus an additional amount in the range of 1.75% to 2.25%, depending on our consolidated leverage ratio, or, at our option, at the bank’s base lending rate. As of both November 30, 2016, and December 15, 2016 (the date on which the New Credit Agreement was entered into), the entire amount of $15,000,000 was available for use. The Existing Revolver had a scheduled maturity date of June 27, 2017 prior to our refinancing via the New Credit Agreement.
The Existing Credit Facility with Bank of America contained customary affirmative and negative covenants that, among other things, restricted our ability to incur additional indebtedness. It also required us to maintain a ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the facility) of no more than 3.00 to 1.00, and to maintain a consolidated fixed charge coverage ratio (as calculated in the facility) of at least 1.25 to 1.00. We were in compliance with our debt covenants as of November 30, 2016.
The New Credit Agreement is an all revolving credit facility with a borrowing capacity of $150,000,000, which can be increased by an additional $50,000,000 at the request of the Company and the individual or collective option of any of the Lenders (defined below). The New Credit Agreement with Bank of America, and with participation from Citizens Bank and JPMorgan Chase Bank (collectively with Bank of America, the “Lenders”), contains customary affirmative and negative covenants that, among other things, restricts our ability to incur additional indebtedness and requires certain lender approval for acquisitions by the Company and its subsidiaries over a certain size. It also requires us to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio (as defined in the facility) of no more than 3.25 to 1.00, and a consolidated fixed charge coverage ratio (as defined in the facility) of at least 1.25 to 1.00. The New Credit Agreement was entered into both to refinance our previously existing term loan and revolving line of credit and to provide for additional liquidity to finance potential acquisitions, working capital, capital expenditures, and for other general corporate purposes.
Currently, we have several on-going capital projects, as well as our facility consolidation and rationalization initiative, which are important to our long-term strategic goals. Machinery and equipment may be added as needed to increase capacity or enhance operating efficiencies in our production facilities.
During the first quarter of fiscal 2017, we finalized the sale of our Paterson, NJ location, entered into a conditional sales agreement for our former corporate offices in Bridgewater, MA (which subsequently closed in the second fiscal quarter), and entered the final stages of razing our location in Randolph, MA, in preparation for its eventual sale. All these actions were done as part of our continued facility rationalization and consolidation plan.
We may acquire companies or other assets in future periods which are complementary to our business. We believe that our existing resources, including cash on hand and the New Credit Agreement, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing, if needed, will be available on favorable terms, if at all.
To the extent that interest rates increase in future periods, we will assess the impact of these higher interest rates on the financial and cash flow projections of our potential acquisitions.
We have no significant off-balance sheet arrangements.
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Contractual Obligations
Please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016 for a complete discussion of our contractual obligations.
Recent Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which will replace most of the existing revenue recognition guidance under US Generally Accepted Accounting Principles (“GAAP”). The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. In March, April and May 2016, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” all of which provide further clarification to be considered when implementing ASU 2014-09. The ASU will be effective for the Company beginning September 1, 2018 (fiscal 2019), including interim periods in its fiscal year 2019, and allows for either retrospective or modified retrospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on the Company’s consolidated financial position, results of operations and cash flows.
In August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements: Going Concern (Subtopic 205-40),” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter (fiscal year 2017 for the Company). The adoption of ASU 2014-15, which occurred in the first quarter of fiscal 2017, did not have a material effect on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires that debt issue costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the amount of the debt liability, consistent with debt discounts and premiums. Amortization of such costs is still reported as interest expense. ASU 2015-03 is effective for fiscal years, and interim periods therein, beginning after December 15, 2015 (fiscal year 2017 for the Company). In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issue Costs Associated with Line-of-Credit Arrangements." ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issue costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. The adoption of ASU 2015-03 and ASU 2015-15, which occurred in the first quarter of fiscal 2017, did not have a material effect on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Changes were made to align lessor accounting with the lessee accounting model and ASU No. 2014-09, “Revenue from Contracts with Customers.” The ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020). Early application is permitted for all public business entities upon issuance. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. We are currently evaluating the impact of the application of this ASU on our consolidated financial statements and disclosures thereto.
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In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies the accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The required effective date for adoption of this guidance would be our fiscal year beginning September 1, 2017 (fiscal 2018), with early adoption allowed. The updated standard no longer requires cash flows related to excess tax benefits to be presented as a financing activity separate from other income tax cash flows. The update also allows entities to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments to taxing authorities made on an employee's behalf for withheld shares should be presented as a financing activity on the statement of cash flows, and provides for an accounting policy election to account for forfeitures as they occur. The Company early adopted this standard as of September 1, 2016 and during the first quarter of fiscal 2016 recognized an excess tax benefit from stock-based compensation of $794,000 within income tax expense on the condensed consolidated statement of operations (adopted prospectively). The adoption did not impact the existing classification of the awards. Excess tax benefits from stock based compensation is now classified in net income in the statement of cash flows instead of being separately stated in financing activities for the three months ended November 30, 2016 (adopted prospectively). Given the Company’s historical practice of including employee withholding taxes paid within financing activities in the statement of cash flows, no prior period reclassifications are required by the clarifications on classification provided by ASU No. 2016-09. Due predominately to the inclusion of the excess tax benefit, the effective tax rate for the first quarter of fiscal 2017 decreased to 29.3%, compared to effective tax rates of 36.0% and 34.5% recognized for the first quarter and whole year periods of fiscal 2016, respectively; further, the Company anticipates the potential for increased periodic volatility in future effective tax rates based on the continued application of the ASU No. 2016-09. Following the adoption of the new standard, the Company has elected to account for forfeitures as they occur.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” This ASU provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. The effective date for adoption of this guidance would be our fiscal year beginning September 1, 2018 (fiscal 2019), with early adoption permitted. The Company is currently evaluating the effect that ASU No. 2016-15 will have on its financial statements and related disclosures.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. To apply these principles, we must make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. In many instances, we reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable at the time and under the circumstances, and we evaluate these estimates and judgments on an ongoing basis. We refer to accounting estimates and judgments of this type as critical accounting policies, judgments, and estimates. Management believes there have been no material changes during the three months ended November 30, 2016 to the critical accounting policies reported in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016.
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Forward Looking Information
The part of this Quarterly Report on Form 10-Q captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain forward-looking statements, which involve risks and uncertainties. Forward-looking statements include, without limitation, statements as to our future operating results, seasonality expectations, plans for manufacturing facilities, future economic conditions and expectations or plans relating to the implementation or realization of our strategic goals and future growth. These statements are based on current expectations, estimates and projections about the industries in which we operate, and the beliefs and assumptions made by management. Readers should refer to the discussions under “Forward Looking Information” and “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. These discussions and Risk Factors are hereby incorporated by reference into this Quarterly Report.
Item 3 — Quantitative and Qualitative Disclosures about Market Ris k
We limit the amount of credit exposure to any one issuer. At November 30, 2016, other than our restricted investments (which are restricted for use in a non-qualified retirement savings plan for certain key employees and members of the Board of Directors), all of our funds were either in demand deposit accounts or investment instruments that meet high credit quality standards such as money market funds, government securities, or commercial paper.
Our domestic operations have limited currency exposure since substantially all transactions are denominated in US dollars. However, our European and Asian operations are subject to currency exchange fluctuations. We continue to review our policies and procedures to control this exposure while maintaining the benefit from these operations and sales not denominated in US dollars. The effect of an immediate hypothetical 10% change in the exchange rate between the British pound and the US dollar would not have a material effect on the Company’s overall liquidity. As of November 30, 2016, the Company had cash balances in the following foreign currencies (with USD equivalents):
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Currency Code |
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Currency Name |
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USD Equivalent at November 30, 2016 |
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GBP |
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British Pound |
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$ |
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EUR |
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Euro |
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$ |
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CAD |
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Canadian Dollar |
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$ |
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CNY |
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Chinese Yuan |
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$ |
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INR |
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Indian Rupee |
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$ |
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We will continue to review our current cash balances denominated in foreign currency in light of current tax guidelines, working capital requirements, infrastructure improvements and potential acquisitions.
We recognized a foreign currency translation loss for the three months ended November 30, 2016 in the amount of $2,098,000 related to our European and Indian operations, which is recorded in other comprehensive income (loss) within our Statement of Equity and Statement of Comprehensive Income. We do not have or utilize any derivative financial instruments.
We pay interest on our outstanding long-term debt at interest rates that fluctuate based upon changes in various base interest rates. The carrying value of our long-term debt, including current portion, was $41,300,000 at November 30, 2016. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Sources of Capital”, together with Note 12 — “Fair Value Measurements” and Note 18 – “Subsequent Events” to the Condensed Consolidated Financial Statements for additional information regarding our outstanding long-term debt. An immediate hypothetical 10% change in variable interest rates would not have a material effect on our Consolidated Financial Statements.
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Item 4 — Controls and Procedure s
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We carry out a variety of ongoing procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in internal control over financial reporting
During the quarter ended November 30, 2016, the Company began the process of implementing its world-wide ERP computer system, and other applicable shared services, to operations associated with the newly acquired Resin Designs, LLC assets. Otherwise, there have not been any changes in the Company’s internal control over financial reporting during the first quarter of fiscal 2017 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
We are involved from time to time in litigation incidental to the conduct of our business. Although we do not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on our financial condition, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements agreed to, that could adversely affect our operating results or cash flows in a particular period. We routinely assess all of our litigation and threatened litigation as to the probability of ultimately incurring a liability, and record our best estimate of the ultimate loss in situations where we assess the likelihood of loss as probable.
Please refer to Item 1A in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016 for a complete discussion of the risk factors which could materially affect our business, financial condition or future results.
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Exhibit
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Description |
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10.1 |
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Asset Purchase Agreement, dated September 30, 2016, between Chase Corporation and Resin Designs, LLC |
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10.10.1 |
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Restricted Stock Agreement (equity retention agreement) between Chase Corporation and Adam P. Chase dated September 1, 2016 |
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10.10.2 |
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Stock Option Agreement (equity retention agreement) between Chase Corporation and Adam P. Chase dated September 1, 2016 |
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10.10.3 |
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Restricted Stock Agreement (equity retention agreement) between Chase Corporation and Kenneth J. Feroldi dated September 1, 2016 |
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31.1 |
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Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
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32.2 |
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Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
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101.INS |
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XBRL Instance Document |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
* Furnished, not filed
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Chase Corporation |
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Dated: January 6, 2017 |
By: |
/s/ Adam P. Chase |
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Adam P. Chase |
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President and Chief Executive Officer |
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Dated: January 6, 2017 |
By: |
/s/ Kenneth J. Feroldi |
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Kenneth J. Feroldi |
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Treasurer and Chief Financial Officer |
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Exhibit 10.1
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the “ Agreement ”) is made and entered into effective as of September 30, 2016 by and among (i) Resin Designs, LLC, a Massachusetts limited liability company (the “ Company ”); (ii) Donald G. Giroux (“ Giroux ”), Timothy F. Desmond (“ Desmond ”), and Paul Ellsworth (“ Ellsworth ”); and (iii) Chase Corporation, a Massachusetts corporation (the “ Purchaser ”). Giroux, Desmond, and Ellsworth shall each hereinafter be referred to singly as a “ Seller ” and, collectively, as the “ Sellers ”.
Introduction
The Purchaser wishes to purchase from the Company, and the Company desires to sell to the Purchaser, substantially all of the assets of the Company. The purchase and sale of the assets and the other transactions contemplated hereby are sometimes collectively referred to herein as the “ Transactions ”. The Sellers are the owners of the Company and will benefit substantially from the Transactions.
NOW THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
THE TRANSACTIONS; CLOSING
1.1. Purchase and Sale of Purchased Assets . Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties contained herein, at the Closing (as hereinafter defined) the Purchaser shall purchase from the Company, and the Company shall sell, convey, transfer, assign and deliver to the Purchaser, free and clear of all liens, security interests, mortgages, encumbrances and restrictions of every kind (collectively, “ Liens ”), all of the Company’s assets and properties of every kind (collectively, the “ Purchased Assets ”), including without limitation the following:
(a) all accounts receivable;
(b) all tangible assets, including without limitation all equipment, machinery, computers and servers, information technology and telecommunications equipment, furniture and office equipment, and vehicles;
(c) all inventories, including without limitation all finished goods, work in process, raw materials, processing materials, purchased parts and supplies;
(d) all Company Intellectual Property;
(e) all rights under all contracts, agreements, leases, licenses and other arrangements listed on Schedule 1.3(a) ;
(f) all permits, authorizations, franchises and certifications;
(g) all sale orders, customer orders, open bids, warranties, prepaid expenses, deposits, retentions and refunds;
(h) originals or duplicate copies of all Company data and information (whether in paper or electronic format or any other medium) including without limitation all books and records (copies only), technical data, financial, accounting and operating data, payroll and personnel records, marketing, sales and promotional data, advertising materials, credit information, cost and pricing information, customer, supplier and service provider lists, business plans, projections, reference catalogs, and other similar property, rights and information;
(i) all claims, causes of action and rights of the Company against any Person, whether matured or unmatured, direct or indirect, known or unknown, or absolute or contingent; and
(j) all goodwill associated with the Company, the Business and/or the Purchased Assets.
Nothing in this Agreement nor the consummation of the Transactions shall be construed as an attempt or agreement to assign any Purchased Asset which by its terms or by any Legal Requirement is non-assignable without the consent of a third party or a Governmental Authority or is cancelable by a third party or a Governmental Authority in the event of an assignment or purported assignment (“ Non-Assignable Assets ”) unless and until such consent shall have been obtained. To the extent permitted by applicable Legal Requirements, in the event consents to the assignment of a Purchased Asset cannot be obtained, such Non-Assignable Assets shall not be assigned and transferred by the Company to the Purchaser at the Closing and instead shall be held, as of and from the Closing Date, by the Company in trust for the Purchaser. As of and from the Closing Date, the covenants and obligations thereunder shall be performed by the Purchaser in the Company’s name and all benefits and obligations existing thereunder shall be for Purchaser’s account. The Company shall take or cause to be taken at the Purchaser’s expense such actions in the Company’s name or otherwise as the Purchaser may reasonably request so as to provide the Purchaser with the benefits of the Non-Assignable Assets ( provided , that the Company shall not be required to incur any material costs or agree to any material undertakings therewith) and to effect collection of money or other consideration that becomes due and payable under the Non- Assignable Assets. The Company shall promptly pay over to the Purchaser all money or other consideration received by the Company after the Closing Date in respect of all Non-Assignable Assets. As of and from the Closing Date, the Company authorizes the Purchaser, to the extent permitted by applicable Legal Requirements and the terms of the Non-Assignable Assets, at the Purchaser’s expense, to perform all the obligations and receive all the benefits of the Company under the Non-Assignable Assets.
1.2. Excluded Assets . The Purchased Assets shall not include, however, the following assets of the Company (collectively, the “ Excluded Assets ”):
(a) the Company’s cash and cash equivalents;
(b) the Company’s rights under this Agreement or any other agreement, document or instrument entered into by the Company pursuant to this Agreement;
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(c) the 100% membership interest of Resin Designs Properties, LLC, a Massachusetts limited liability company (“ RDP LLC ”), which is a wholly owned subsidiary of the Company that holds title to the real estate and improvements located at 11 State Street, Woburn, Massachusetts (the “ Woburn Real Property ”); provided , that the Purchaser and the Company shall enter into the Woburn Lease pursuant to which the Purchaser shall acquire a leasehold interest in the Woburn Real Property on the terms and subject to the conditions set forth in the Woburn Lease;
(d) any Benefit Plans; or
(e) those assets of the Company expressly set forth on Schedule 1.2(e) attached hereto.
1.3. Assumed Liabilities . Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties contained herein, at the Closing the Purchaser shall assume from the Company and agree to pay when due, perform and discharge in accordance with the terms thereof only the following liabilities and obligations of the Company (collectively, the “ Assumed Liabilities ”):
(a) obligations for future performance after the Closing Date under all of the contracts, agreements, leases, licenses and other arrangements listed on Schedule 1.3(a) , it being understood that the Purchaser is not assuming and shall not be liable for any liabilities or obligations under such contracts to the extent the same should have been paid, performed or otherwise discharged on or prior to the Closing Date or to the extent the same arise out of any breach or default by the Company or any of its Affiliates prior to or as of the Closing Date); and Capital.
(b) all liabilities included in the final calculation of the Closing Working
1.4. Excluded Liabilities . Except for the Assumed Liabilities, the Purchaser shall not assume or in any way be responsible for any other obligations or liabilities of the Company (whether or not disclosed) of any kind. Without limiting the generality of the foregoing, the Assumed Liabilities will not include:
(a) any Taxes;
(b) any liability relating to any Benefit Plans;
(c) any obligation of the Company under this Agreement or any other agreement, document or instrument entered into by the Company pursuant to this Agreement;
(d) the Sellers’ Expenses;
(e) any Sale Bonuses;
(f) any Indebtedness outstanding as of the date of Closing;
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(g) any liability arising out of any action, arbitration, claim, proceeding or litigation of any nature (whether or not disclosed) against the Company, or relating to the pre- Closing operation of the Business;
(h) any liability arising out of the Company’s violation of any Legal Requirement;
(i) any environmental liabilities arising or related to the pre-Closing operations of the Company;
(j) any liability arising out of any contract, agreement, lease, license or other arrangement that is not listed on Schedule 1.3(a) ;
(k) any liability arising out of the failure of the Company to comply with any contract, agreement, lease, license or other arrangement (whether or not such contract, agreement, lease, license or other arrangement is listed on Schedule 1.3(a) ); and
(l) any liability to any Seller or to any Affiliate of the Company or any Seller.
Liabilities of the Company which are not Assumed Liabilities are herein referred to collectively as the “ Excluded Liabilities ”. The Company will discharge when due all of the Excluded Liabilities; provided , that the Company may refuse to discharge any Excluded Liability that the Company is contesting in good faith.
1.5. General .
(a) Certain Definitions . For purposes of this Agreement, the following terms shall have the meanings indicated below:
“ Base Purchase Price ” means $30,000,000.
“ Closing Purchase Price ” means the sum of the Base Purchase Price, plus the amount, if any, by which Closing Working Capital exceeds $2,145,000, or minus the amount, if any, by which Closing Working Capital is less than $2,095,000. The Closing Purchase Price shall be finally determined in accordance with Section 1.7.
“ Closing Working Capital ” means (i) the inventory, accounts receivable, prepaid expenses and other current assets (excluding for this purpose the Excluded Assets) of the Company as of immediately prior to the Closing (net of all applicable reserves), minus (ii) the accounts payable, accrued expenses, accrued compensation and all other current liabilities of the Company as of immediately prior to the Closing (excluding for this purpose all liabilities paid by or behalf of the Company at the Closing and the Indebtedness, Sale Bonuses and Sellers’ Expenses). The Closing Working Capital shall be determined in accordance with United States generally accepted accounting principles and, to the extent consistent with United States generally accepted accounting principles, the Company’s historical accounting practices as reflected in the most recent audited financial statements described in Section 3.7 (but excluding any unusual items or reclassifications but including, and with inventory valued in the manner set forth in the balance sheet of the Company as of August 31, 2016).
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“ Escrow ” means $3,000,000, which will be deposited at the Closing with the Escrow Agent (as hereinafter defined) pursuant to the Escrow Agreement (as hereinafter defined).
“ Estimated Closing Purchase Price ” means the Base Purchase Price, with any increase or decrease thereto shown on the Estimated Closing Purchase Price Certificate (as hereinafter defined) and approved by the Purchaser.
“ Indebtedness ” means all principal, interest, fees, expenses, premiums, payments and other obligations in respect of borrowed money, notes, bonds, debentures and other debt securities, guarantees, interest rate, currency or other hedging arrangements, outstanding checks, any amounts due to the Sellers or any of their Affiliates, letters of credit, deferred purchase price for services or assets (other than current liabilities in the ordinary course of business included within Closing Working Capital) and/or installment purchases incurred by the Company prior to the Closing, or required to be paid in order to discharge fully all such amounts as of the Closing.
“ Person ” means any natural person, corporation, limited liability company, partnership, trust or other entity.
“ Sale Bonuses ” means the aggregate amount (if any) of (i) all transaction, sale and change of control bonuses and similar payments, (ii) all payments in respect of stock appreciation, phantom stock or similar rights and (iii) all employment and withholding Taxes in respect of the foregoing.
“ Sellers’ Expenses ” means the aggregate amount of fees, costs, expenses and obligations incurred by the Company, any of the Sellers or any of their respective Affiliates in connection with the Transactions or the sale of the Company generally including, without limitation, all amounts in respect of legal, accounting, investment banking and other similar fees, costs, expenses and obligations.
(b) Pre-Closing Deliveries . Prior to the Closing, the Company will furnish to the Purchaser (i) a certificate signed by the Company setting forth the Company’s (A) good faith estimated Closing Working Capital, including an itemization of the components of Closing Working Capital, (B) the amount of the Indebtedness existing as of the Closing, and (C) good faith estimated calculation of the Closing Purchase Price based thereon (the “ Estimated Closing Purchase Price Certificate ”), (ii) a payoff letter, in form and substance satisfactory to the Purchaser, from each holder of Indebtedness indicating the amount required to discharge in full such Indebtedness at Closing and, if such Indebtedness is secured, an undertaking by such holder to discharge at Closing any Liens securing such Indebtedness, and (iii) a final bill and wire transfer instructions from each payee of any portion of the Sellers’ Expenses, provided, however, that if any such payee delivers to the Purchaser and the Company a written correspondence (which shall include electronic mail) stating that it will seek payment solely from the Sellers, such portion shall not be deemed to be part of the Sellers’ Expenses for purposes of Section 1.5(c).
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(c) Payments at Closing . At the Closing, the Purchaser will make or cause to be made the following payments of the Estimated Closing Purchase Price by wire transfer as follows:
(i) first , to the respective holders of the Indebtedness, the amounts specified in the pay-off letters delivered pursuant to Section 1.5(b);
(ii) second , to the respective payees of the Sellers’ Expenses, the amounts set forth in the final bills delivered pursuant to Section 1.5(b);
(iii) third , to the Escrow Agent, an amount equal to the Escrow; and
(iv) fourth , the balance to the Company.
Promptly upon receipt by the Company of the amount contemplated by clause (iv), the Company shall pay the Sale Bonuses (less applicable Tax withholdings) to the recipients.
1.6. Closing . The Transactions contemplated hereby shall take place at a closing (the “ Closing ”) to be held by electronic exchange of funds and signature pages on the date hereof (the “ Closing Date ”).
1.7. Determination of Closing Purchase Price .
(a) Within 90 days after the Closing Date, the Purchaser will deliver to the Company a certificate (the “ Closing Purchase Price Certificate ”), executed by the Purchaser, setting forth an itemized statement of the Closing Working Capital, and a calculation of the Closing Purchase Price based thereon.
(b) If the Company delivers written notice (the “ Disputed Items Notice ”) to the Purchaser within 30 days after the date of delivery of the Closing Purchase Price Certificate, stating that the Company objects to any items on the Closing Purchase Price Certificate, specifying the basis for such objection in reasonable detail and setting forth the Company’s proposed modifications to the Closing Purchase Price Certificate, the Company and the Purchaser will attempt to resolve and finally determine and agree upon the Closing Purchase Price as promptly as practicable.
(c) If the Company and the Purchaser are unable to agree upon the Closing Purchase Price within 30 days after delivery of the Disputed Items Notice, the Company and the Purchaser will select an independent, nationally recognized accounting firm to resolve the disputed items specified in the Disputed Items Notice. If the Purchaser and the Company are unable to agree on the selection of an accounting firm, the accounting firm will be chosen by the American Arbitration Association, with the expenses of the American Arbitration Association to be shared equally by the Purchaser and the Company. The accounting firm shall address only the disputed items set forth in the Disputed Items Notice and may not assign a value greater than the greatest value claimed for such item by either party or smaller than the smallest value claimed for such item by either party. The accounting firm will (i) resolve the disputed items specified in the Disputed Items Notice and (ii) determine the Closing Purchase Price, as modified only by the resolution of such items. The determination of the selected accounting firm will be made within
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60 days after being selected and will be final and binding upon the parties. The fees, costs and expenses of the accounting firm so selected will be borne by the party whose positions generally did not prevail in such determination, or if the accounting firm determines that neither party could be fairly found to be the prevailing party, then such fees, costs and expenses will be borne 50% by the Company and the Sellers, on the one hand, and 50% by the Purchaser, on the other.
(d) If the Company does not deliver the Disputed Items Notice to the Purchaser within 30 days after the date of delivery of the Closing Purchase Price Certificate, the calculation of the Closing Purchase Price specified in the Closing Purchase Price Certificate will be conclusively presumed to be true and correct in all respects and will be final and binding upon the parties.
(e) At such time as the Closing Purchase Price is finally determined, either (i) the Purchaser shall pay or cause to be paid to the Company an aggregate amount equal to the excess of the Closing Purchase Price over the Estimated Closing Purchase Price, or (ii) the Company and the Sellers shall pay to the Purchaser an aggregate amount equal to the excess of the Estimated Closing Purchase Price over the Closing Purchase Price.
(f) The final determination of the Closing Purchase Price under this Section 1.7 shall not impair any other rights of a party under this Agreement including, without limitation, any rights to indemnification.
1.8. A llocation . The total amount of the Closing Purchase Price and the Assumed Liabilities (to the extent the Assumed Liabilities are properly treated as liabilities for U.S. federal income tax purposes) shall be allocated among the assets of the Company for tax purposes in a manner consistent with the allocations set forth on Schedule 1.8 . It is agreed by the parties that such allocation was arrived at by arm’s length negotiation and in the judgment of the parties properly reflects the fair market value of such assets. It is agreed that the allocations under this Section 1.8 will be binding on all parties for federal, state, local and other tax purposes and will be consistently reflected by each party on such party’s Tax Returns.
1.9. Further Assurances . Following the Closing, the Sellers and the Company will execute and deliver such documents and take such other actions as may be reasonably requested from time to time by the Purchaser in order to more effectively convey and transfer the Purchased Assets from the Company to the Purchaser, put the Purchaser in operational control of the Business or otherwise fully consummate the Transactions. The Sellers shall cause the Company to comply with its covenants hereunder in all respects.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
CONCERNING THE SELLERS
Each Seller severally, but not jointly, represents and warrants to the Purchaser (as each such representation and warranty below relates solely to such Seller individually only and not to the other Sellers) that the information contained in this ARTICLE II is true and correct and will be true and correct as of the Closing Date:
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2.1. Capacity . The Seller has legal capacity to execute and deliver and carry out the terms of this Agreement and each of the other agreements, instruments and documents contemplated hereby to which such Seller is a party.
2.2. No Conflict . No consent, order, authorization, approval, declaration or filing is required on the part of the Seller for or in connection with the execution, delivery or performance of this Agreement and the other agreements, documents and instruments of the Seller contemplated hereby. The execution, delivery and performance of this Agreement and the other agreements, documents and instruments contemplated hereby by the Seller will not result in any violation of, be in conflict with, constitute a default under, or cause the acceleration of any obligation or loss of any rights under any Legal Requirement, agreement, contract, instrument, charter, by-laws, operating agreement, partnership agreement, organizational document, license, permit, authorization, franchise or certification to which the Seller is a party or by which the Seller is bound.
2.3. Validity and Enforceability . This Agreement has been validly executed and delivered by the Seller. This Agreement is, and each of the other agreements, documents and instruments contemplated hereby to which the Seller is a party shall be when executed and delivered by the Seller, the valid and binding obligations of the Seller enforceable in accordance with its terms except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and by laws related to the availability of specific performance, injunctive relief or other equitable remedies.
2.4. Litigation . No action, arbitration, suit, proceeding or investigation is pending or, to the knowledge of the Seller, threatened against the Seller in relation to the affairs of the Company or the Business, and the Seller does not know of any basis therefor. The Seller is not currently planning to initiate any action, suit, or proceeding before any court, arbitrator or Governmental Authority in relation to the affairs of the Company or the Business.
2.5. No Other Agreements . Except for the agreements expressly contemplated hereby, none of the Sellers or any of its Affiliates has any other agreements, arrangements or understandings with any director, officer, member, manager, employee, consultant, stockholder or Affiliate of the Company in respect of the Transactions.
2.6. Sellers’ Broker . No finder, broker, agent, financial advisor or other intermediary has acted on behalf of the Sellers, the Company or any of their respective Affiliates in connection with the negotiation or consummation of this Agreement, the other agreements, instruments or documents contemplated hereby or the Transactions and no such Person is entitled to any fee, payment, commission or other consideration in connection therewith as a result of any arrangement made by any of them.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
Except as set forth in the corresponding sections or subsections of the disclosure schedules delivered to the Purchaser on the date hereof, each of the Sellers and the Company severally, but not jointly, represents and warrants to the Purchaser (as each such representation and warranty below relates solely to the Company and such Seller individually only and not to the other Sellers) that each of the statements contained in this ARTICLE III is true and correct and will be true and correct as of the Closing Date:
3.1. Organization, Power and Standing . The Company is a limited liability company duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts, and has all requisite power and authority to own, lease and operate its properties and to carry on its business as currently conducted and as currently proposed by the Company to be conducted after the Closing (the “ Business ”).
3.2. No Subsidiaries . The Company has no subsidiaries except for RDP LLC, which is not a party to this Agreement nor are the assets of RDP LLC included in the Transactions. The Company does not directly or indirectly own or have the right to acquire any equity interest in any other corporation, partnership, limited liability company, joint venture, trust or other business organization.
3.3. Foreign Qualifications . The Company is duly qualified and authorized to do business and is in good standing in each of the jurisdictions listed on Schedule 3.3 . The Company is not required to qualify to do business as a foreign entity in any other jurisdiction, except where the failure to do so would not have a material adverse effect on the Business, the Purchased Assets or the affairs, condition (financial or otherwise), prospects or results of operations of the Business, whether or not such effect is foreseeable.
3.4. Due Authorization; No-Conflict . The Company has full power and authority and has taken all required action on its part (including manager and member approval) necessary to permit it to execute and deliver and to carry out the terms of this Agreement and the other agreements, instruments and documents of the Company contemplated hereby. Except as specified on Schedule 3.4 , no consent, order, authorization, approval, declaration or filing, including, without limitation, any consent, approval or authorization of or declaration or filing with any Governmental Authority or non-Governmental Authority or any party to a contract, is required on the part of the Company for or in connection with its execution, delivery or performance of this Agreement or any of the other agreements, documents and instruments contemplated hereby, or the conduct of the Business by the Purchaser after the Closing (the “ Required Consents ”). Subject to obtaining the Required Consents specified on Schedule 3.4 , the execution, delivery and performance of this Agreement and the other agreements, documents and instruments contemplated hereby by the Company will not result in any violation of, be in conflict with, constitute a default under, or cause the acceleration of any obligation or loss of any rights under, any Legal Requirement, agreement, contract, instrument, charter, by-laws, operating agreement, partnership agreement, organizational document, license, permit, authorization, franchise or certification to which the Company is a party or by which the Company is bound. As used in this Agreement, “ Governmental Authority ” means any court, agency, commission or other governmental or regulatory entity, body, authority or instrumentality.
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3.5. Validity and Enforceability . This Agreement has been validly executed and delivered by the Company. This Agreement is, and each of the other agreements, documents and instruments contemplated hereby to which the Company is a party shall be when executed and delivered by the Company, the valid and binding obligations of the Company enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and by laws related to the availability of specific performance, injunctive relief or other equitable remedies.
3.6. Capitalization .
(a) The Company’s authorized and outstanding equity securities are as set forth on Schedule 3.6(a) hereto. The Sellers are the only members of the Company and are the owners of all of the outstanding equity securities of the Company, free and clear of all Liens. The Company’s outstanding equity and other securities are owned beneficially and as of record by the Persons and in the amounts set forth on Schedule 3.6(a) and are duly authorized and validly issued. There are no outstanding options, warrants, convertible or exchangeable securities or other rights that could, directly or indirectly, obligate the Company to issue equity or other securities. The offer, issuance and sale of such equity and other securities were made in compliance with all applicable securities laws and all applicable preemptive and similar rights. The Company has made available to the Purchaser true, complete and correct copies of the organizational documents of the Company.
(b) There are no outstanding or authorized equity appreciation, phantom equity or similar rights with respect to the Company.
(c) Except as described on Schedule 3.6(c) , there are no agreements, written or oral, relating to the securities of the Company including, without limitation, the acquisition, disposition, repurchase, voting or registration thereof.
3.7. Financial Information .
(a) The Company has delivered to the Purchaser the audited balance sheet of the Company as at December 31, 2013, December 31, 2014 and December 31, 2015 (the December 31, 2015 balance sheet is sometimes referred to herein as the “ Balance Sheet ” and the date thereof is sometimes referred to as the “ Balance Sheet Date ”), and the audited statements of cash flows, income and stockholders’ equity for the fiscal years then ended. The Company has also furnished to the Purchaser the unaudited balance sheet of the Company as of August 31, 2016 and the unaudited statements of cash flows, income and stockholders’ equity of the Company for the calendar year to date as of August 31, 2016.
(b) As used herein, “Financial Statements” means the financial statements referenced in clause (a) above. The Financial Statements and the notes thereto, if any, (i) are complete and accurate in all material respects and fairly present the financial condition of the Company at the respective dates thereof and the cash flows and results of operations for the periods then ended, and (ii) were prepared in accordance with the books and records of the Company in conformity with United States generally accepted accounting principles consistently
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applied during the periods covered thereby, except, in the case of unaudited Financial Statements, for the omission of footnotes and normal year-end adjustments that are not and will not be, individually and in the aggregate, material. None of the Financial Statements contains any material, extraordinary items of income or gain, except as expressly set forth therein.
(c) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions of the Company are executed in accordance with management’s general or specific authorizations; (ii) transactions of the Company are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain asset accountability; and (iii) access to assets of the Company is permitted only in accordance with management’s general or specific authorization. The Company is in material compliance with its system of internal accounting controls.
3.8. No Material Adverse Changes . Since December 31, 2015, other than as shown on Schedule 3.8 , (a) the Company has operated only in the usual and ordinary course of business, (b) there has been no event or condition which individually, or together with any other events or conditions, has had or could reasonably be expected to have a material adverse effect on the Business, the Purchased Assets or the affairs, condition (financial or otherwise), prospects or results of operations of the Business or any material division of the Business, whether or not such effect is foreseeable, and (c) the Company has not taken any of the following actions:
(i) permitted any Lien upon any of the Purchased Assets, other than Permitted Liens;
(ii) declared or paid any dividend or distribution or redeemed any of its equity securities;
(iii) acquired, disposed of, leased or licensed any material assets, except in the ordinary course of business;
(iv) permitted any damage, destruction or casualty loss (other than those covered by insurance) with respect to any of the Purchased Assets;
(v) made any change in the compensation paid or payable or increase the benefits payable to any director, officer, manager or senior management employee, other than any change in the ordinary course of business;
(vi) cancelled or waived any claims with a potential value in excess of $10,000;
(vii) delayed or postponed any payment of accounts payable or other liabilities outside of the ordinary course of business;
(viii) incurred any damage, destruction or loss not covered by insurance affecting any assets or property of the Company resulting in liability or loss in excess of $25,000;
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(ix) other than in the ordinary course of business, made any capital expenditure (or series of related capital expenditures) in excess of $25,000;
(x) entered into, adopted, terminated, modified, renewed or amended in any material respect (including by accelerating material rights or benefits under) any Material Contract;
(xi) changed any method of financial or Tax accounting or financial or Tax accounting practice used by the Company other than such changes required by United States generally acceptable accounting principles or Legal Requirements, as applicable; or
(xii) entered into any agreement, commitment or other arrangement to do (or any action or omission that would result in) any of the foregoing actions referred to in this Section 3.8 (except as expressly required by this Agreement).
3.9. Material Contracts . Schedule 3.9 sets forth a complete and accurate list, in each case whether written or unwritten, of all of the following contracts, agreements and arrangements with respect to the Company:
(a) contracts with respect to which the Company has any liability or obligation involving more than $25,000, contingent or otherwise;
(b) contracts which may extend for a term of more than one year after the Closing;
(c) contracts under which the amount payable by the Company is dependent on the revenue, income or other similar measure of the Company or any other Person;
(d) licenses, leases, contracts, agreements and other arrangements with respect to any material property of the Company, including without limitation, distribution, sales and supply contracts;
(e) contracts, instruments and arrangements relating to any Indebtedness or the guarantee thereof;
(f) contracts and other arrangements of the Company with any officer, director, manager, stockholder, member or Affiliate of the Company or any of their respective relatives or Affiliates;
(g) contracts or other arrangements which place any limitation on the method of conducting or scope of the Business including, without limitation, any agreement that contains any exclusivity, non-competition, non-solicitation or no-hire provisions;
(h) employment, severance, consulting, deferred compensation, collective bargaining, benefits and similar plans, agreements, contracts or other arrangements involving the Company;
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(i) contracts relating to or involving any franchise, partnership, joint venture or other similar arrangement;
(j) contracts with respect to mergers or acquisitions, sales of securities or material assets, or investments by the Company;
(k) contracts with any Governmental Authority;
(l) strategic alliance, co-marketing, co-promotion, co-packaging, joint development or similar agreements;
(m) agreements, contracts, instruments, commitments, plans or other arrangements of the Company outside of the ordinary course of business; and
(n) other agreements, contracts, instruments, commitments, plans or other arrangements of the Company which are material to the Business or which a reasonable purchaser would consider important in deciding whether or not to acquire the Company.
All the foregoing (whether written or unwritten), including all amendments or modifications thereto, all Real Estate Leases (as hereinafter defined) and all IP Licenses (as hereinafter defined) are sometimes collectively referred to as “ Material Contracts ”. The Company has furnished to the Purchaser true and correct copies of all Material Contracts (or descriptions thereof, in the case of oral contracts). Each Material Contract (or description) sets forth the entire agreement and understanding between the Company and the other parties thereto. Each Material Contract is in full force and effect and is valid, binding and enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and by laws related to the availability of specific performance, injunctive relief or other equitable remedies. The Company is in compliance with each of the Material Contracts in all material respects. To the knowledge of the Company, each party to a Material Contract (other than the Company) is in compliance with such Material Contract in all material respects. There is no event or condition which has occurred or exists which constitutes or which, with or without notice, the happening of any event and/or the passage of time, could constitute a default or breach under any such Material Contract by the Company or, to the knowledge of the Company, any other party thereto, or could cause the acceleration of any obligation or loss of any rights of any party thereto or give rise to any right of termination, cancellation or material modification thereof. The Company has no reason to believe that the parties to any Material Contract will not fulfill their obligations thereunder in all material respects. Except as specifically set forth on Schedule 3.9 , all of the Material Contracts can be terminated by the Company upon at most ninety days’ notice without penalty, premium or other liability to the Company.
3.10. Real Property .
(a) Schedule 3.10(a) sets forth each interest in real property (including all land, buildings, easements, rights of way and other real property rights) owned by the Company (the “ Owned Real Estate ”). The Company has good and marketable title to the Owned Real Estate, free and clear of all Liens, except for Permitted Liens, and enjoys peaceful and quiet possession of
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the Owned Real Estate. The Owned Real Estate is legally subdivided and consists of separate tax lots so that each is assessed separate and apart from any other real property. There are no suits, actions or proceedings pending or, to the Company’s knowledge, threatened against or affecting any of the Owned Real Estate before any court or administrative agency or office. Each parcel of the Owned Real Estate is an independent unit which does not now rely on any facilities (other than the facilities of public utility and water companies) located on any other property (i) to fulfill any Legal Requirement or (ii) for structural support or the furnishing to the buildings or other improvements on the Owned Real Estate of any building systems. There are no material Taxes, levies, fees or similar costs or charges which must be paid with respect to existing water or sewer hook-ups or other similar services relating to the Owned Real Estate. As used herein, “ Permitted Liens ” means (i) prior to the Closing, the Liens designated as such on Schedule 3.10(a) , (ii) statutory Liens for current taxes or assessments not yet due and payable and (iii) with respect to Owned Real Estate only, such other Liens, imperfections in title and easements of record, if any, which do not detract, individually or in the aggregate, from the value of or interfere with the present or proposed use by the Company of the property subject thereto or affected thereby.
(b) Schedule 3.10(b) sets forth each interest in real property (including all land, buildings, easements, rights of way and other real property rights) leased by the Company, the lessor of such Leased Real Estate, the annual rent payable by the Company in respect of such Leased Real Estate, and each lease or any other arrangement under which such property is leased (the “ Leased Real Estate ” and together with the Owned Real Estate, the “ Real Property ”). The Company enjoys peaceful and quiet possession of its leased premises, and is not in default or breach under any such leasehold. The Company has not been informed that any lessor under any of the leases set forth on Schedule 3.10(b) (the “ Real Estate Leases ”) has taken actionin respect of any Real Estate Lease or threatened to terminate any Real Estate Lease before the expiration date specified in such lease.
(c) The Real Property includes all real property necessary for the conduct of the Business and is adequate to conduct the operations of the Company as currently conducted. The Company does not need to own or lease any other real property to conduct the Business. The Real Property is in compliance in all material respects with all applicable Legal Requirements.
(d) None of the buildings, plant or structures on any Real Property is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are, individually and in the aggregate, immaterial. All utility systems serving the Real Property are adequate for the Business as currently conducted. Each Real Property has adequate access for ingress from and egress to a public way. There is no pending or, to the knowledge of the Company, threatened condemnation, eminent domain or similar proceeding with respect to any Real Property.
3.11. Personal Property and Assets .
(a) All material tangible assets of the Company are in good operating condition and repair, normal wear and tear excepted, and are adequate to conduct the operations of the Company as currently conducted.
(b) The Company has good and marketable title to or a valid leasehold or license interest in the Purchased Assets, free and clear of all Liens, other than Permitted Liens.
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The Purchased Assets include all assets and properties necessary for or currently used in the conduct of the Business, and are adequate to conduct the Business as currently conducted. Except for the Woburn Real Property, no assets used or useful in the Business are owned by any Seller or any Affiliate of the Company or any Seller. At the Closing, the Purchaser will acquire from the Company good and marketable title to or a valid leasehold or license interest in the Purchased Assets, free and clear of all Liens, other than Permitted Liens.
3.12. Intellectual Property .
(a) As used herein “ Intellectual Property ” means all intellectual property rights of every kind including but not limited to all (i) patents, patent applications, patent disclosures and inventions, (ii) trademarks, service marks, trade dress, trade names, logos and entity names (in each case, whether registered or unregistered) and registrations and applications for registration thereof, (iii) copyrights (registered or unregistered) and registrations and applications for registration thereof, (iv) computer software, computer software licenses, data, data bases and documentation thereof, (v) trade secrets and other confidential or proprietary information (including, without limitation, ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial and marketing plans and customer and supplier lists and information), (vi) World Wide Web addresses and domain name registrations, (vii) works of authorship including, without limitation, computer programs, source code and executable code, whether embodied in software, firmware or otherwise, documentation, designs, files, records, data and mask works and any rights in semiconductor masks, layouts, architectures or topography, and (viii) goodwill associated with any of the foregoing. As used herein “ Company Intellectual Property ” means Intellectual Property owned or used by the Company or otherwise included in the Purchased Assets.
(b) Schedule 3.12(b) hereto contains a complete and accurate list of all Company Intellectual Property included in clauses (i), (ii), (iii) and (vi) of the definition of Intellectual Property. Schedule 3.12(b) contains a complete and accurate list of all licenses and other rights granted by the Company to any Person with respect to any Company Intellectual Property and all licenses and other rights granted by any Person to the Company with respect to any Company Intellectual Property (for this purpose, excluding so-called “off-the-shelf” products and “shrink wrap” software licensed to the Company in the ordinary course of business and easily obtainable without material expense) identifying the subject Company Intellectual Property and describing the material terms of such licenses or other rights (collectively, the “ IP Licenses ”). The Company is not required to pay any royalties or other compensation to any third parties in respect of its ownership or use of any Company Intellectual Property, other than payments in the ordinary course of business for so-called “off-the-shelf” products or “shrink wrap” software. The Company is in compliance with all of its obligations pursuant to any license or agreement relating to the distribution, modification, reproduction and any other use of any Intellectual Property owned by a third party. The Company is in compliance with all of its obligations pursuant to any license or agreement relating to the use of any Company Intellectual Property owned by a third party. Except as disclosed on Schedule 3.12(b) , the Company has not granted to any Person any ownership rights, exclusive rights or any rights to sublicense, transfer or redistribute the Company Intellectual Property.
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(c) The Company owns or possesses sufficient legal rights to use all Intellectual Property reasonably necessary for or used in the Business. The Company has not violated or infringed, is not violating or infringing and, by conducting the Business in the ordinary course, will not violate or infringe any Intellectual Property of any other Person, and the Company has no knowledge of any violation or infringement by any Person of any Company Intellectual Property. The Company has not received any notice from any Person claiming any violation or infringement of a Person’s Intellectual Property rights.
(d) Each item of Company Intellectual Property owned by the Company is valid and subsisting. There is no threatened or reasonably foreseeable loss or expiration of any Company Intellectual Property.
(e) The Company has taken steps that are reasonably required to protect its rights in, and the confidentiality of, the Company Intellectual Property, including but not limited to Company Intellectual Property belonging to the Company or provided by any other Person to the Company. Without limiting the foregoing, prior to the execution of this Agreement, at the Purchaser’s request, the Company has requested that certain of its employees who have participated or contributed to the development of Intellectual Property on behalf of the Company execute a proprietary information and confidentiality, and assignment agreement, the form of which is shown on Schedule 3.12(e) hereof. To the knowledge of the Company, no employee, consultant or contractor of the Company is obligated under any agreement or commitment, or subject to any judgment, decree or order of any court or administrative agency, that could interfere with such employee’s duties to the Company, or that could conflict with the Business.
(f) The Company has not used any free or open source software or other third party software in whole or in part in the development of any part of the Company Intellectual Property in a manner that requires, as a condition of the use, modification, and/or distribution of such third-party software, any or all of the Company Intellectual Property: (a) to be disclosed or distributed in source code form, (b) to be licensed for the purpose of making derivative works of the Company Intellectual Property or (c) to be redistributable at no or minimal charge.
(g) The Company’s rights in and to its Company Intellectual Property are free and clear of all Liens.
(h) The Company has secured and maintains all software licenses reasonably necessary to operate the Business and its equipment in all material respects, and has taken all reasonable precautions to preserve the availability, security and integrity of its computer systems and the software, data and information stored on its computer systems, and the Company has not experienced any breach of security or unauthorized access of its computer systems or the software, data or information stored on its computer systems. The Company has disaster recovery plans, procedures and facilities in place that are appropriate to minimize the disruption of its Business in the event of any material failure of its computer systems and has tested such plans, procedures and facilities.
3.13. Accounts Receivable . Except for a de minimis amount of accounts receivable in an amount not to exceed $5,000 in the aggregate, all of the accounts receivable of the Company are valid and enforceable claims, subject to no set off or counterclaim, and will be collected in
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the ordinary course of business within 90 days after becoming due and payable, subject to applicable reserves. All accounts receivable of the Company are determined in accordance with United States generally acceptable accounting principles and arose out of bona fide transactions in the ordinary course of business.
3.14. Inventories . The inventory of the Company consists of raw materials, manufactured and purchased parts and finished goods saleable in the ordinary course of business. Except for a de minimis amount of inventory in an amount not to exceed $20,000 in the aggregate, the inventory of the Company is fit and sufficient for the purposes for which it was provided or manufactured and is normal and reasonable in kind and amount in light of the normal needs of the Business.
3.15. Warranty Claims . Since December 31, 2013, there have been no material claims against the Company alleging any defects in the Company’s services or products, or alleging any failure of the products or services of the Company to meet applicable specifications, warranties or contractual commitments. The Company’s liability for breach of warranty is limited to repair or replacement of products or nonconforming parts. The Company’s liability for any breach of warranty for products manufactured or services provided prior to Closing shall not exceed the warranty reserve set forth in the most recent financial statements set forth in Section 3.7(a). The Company’s products are free from material defects and perform in all material respects in accordance with all applicable specifications, warranties and contractual commitments.
3.16. Business Relationships .
(a) Schedule 3.16(a) sets forth a list of the top twenty-five customers of the Company by net sales during the twelve calendar months ended as of December 31, 2015 and the six months ended June 30, 2016. To the knowledge of the Company, none of such customers has indicated to the Company that it will refrain from purchasing products and services from the Company (or, after the Closing, the Purchaser).
(b) Schedule 3.16(b) sets forth a list of all suppliers, vendors and service providers which are material to the Company. To the knowledge of the Company, all such suppliers, vendors and service providers will continue after the Closing to sell the products and provide the services to the Purchaser currently sold and provided by them to the Company.
(c) During the previous 18 months, no customer listed or required to be listed on Schedule 3.16(a) and no significant supplier, vendor or service provider has (i) terminated or, to the knowledge of the Company, threatened to terminate its relationship with the Company, (ii) decreased or limited materially or, to the knowledge of the Company, threatened to decrease or limit materially, the services, supplies or materials supplied to or purchased from the Company, or
(iii) materially changed its business relationship with the Company.
3.17. Regulatory and Legal Compliance .
(a) The Company has at all times complied in all material respects with all Legal Requirements.
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(b) During the five (5) years prior to the date of this Agreement, the Company has not received any notice, letter, finding, warning or communication from any Governmental Authority or other Person regarding any alleged material violation or noncompliance, and does not know of any basis therefor, with respect to any applicable Legal Requirement.
(c) The Company has timely and properly filed all material reports, data, documents and other information required under applicable Legal Requirements to be filed with Governmental Authorities.
(d) Neither the Company nor to the knowledge of the Company, any Person acting on behalf of the Company has, directly or indirectly, on behalf of or with respect to the Company: (i) made an unreported or unlawful political contribution, gift, donation, entertainment or payments, (ii) created or used any “off book” bank or cash account or “slush fund,” or (iii) engaged in any conduct constituting a violation of the Foreign Corrupt Practices Act of 1977, as amended, or any similar Legal Requirement.
As used herein, the term “ Legal Requirements ” means, with respect to any Person, all foreign, federal, state and local statutes, laws, ordinances, judgments, decrees, orders, rules, regulations, policies and guidelines applicable to such Person.
3.18. Licenses and Permits . Schedule 3.18 sets forth all licenses, permits, authorizations, franchises and certifications of Governmental Authorities and non-Governmental Authorities held by the Company. The Company is in compliance in all material respects with all such licenses, permits, authorizations, franchises and certifications, all of which are in full force and effect. To the knowledge of the Company, there are no other licenses, permits, authorizations, franchises or certifications which are material to the Company or the Business which the Company is required to obtain or which, in good industry practice, the Company should hold for the conduct of the Business. The Company has not received notice of any, and does not know of any, threatened suspension, revocation or invalidation of any such licenses, permits, authorizations, franchises or certifications, or any basis therefor.
3.19. Tax Matters .
(a) Definitions . For purposes of this Agreement, the following definitions shall apply:
(i) “ Tax ” or “ Taxes ” means all taxes, charges, fees, levies, penalties, additions or other assessments imposed by any foreign, federal, state or local taxing authority, including, but not limited to, income, excise, property, sales, use, transfer, franchise, payroll, withholding, value added, social security or other taxes, charges or assessments, including any interest, penalties or additions attributable thereto.
(ii) “ Tax Returns ” means all reports, estimates, declarations of estimated Tax, information statements and returns relating to, or required to be filed in connection with, any Taxes and any schedules attached to or amendments of (including refund claims with respect to) any of the foregoing.
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(b) Except as set forth on Schedule 3.19(b) hereto: (i) all Tax Returns required to be filed by or on behalf of the Company have been duly filed on a timely basis; (ii) such Tax Returns are true, complete and correct; (iii) all Taxes owed by the Company for or with respect to any taxable period or partial taxable period ending on or before the Closing Date, whether or not stated as due on such Tax Returns, have been paid or will be timely paid by the Company prior to the Closing; (iv) the Purchaser has been supplied with true and complete copies of each Tax Return of the Company, including each franchise or excise Tax Return based on income filed for the last three taxable years; (v) the Company (A) has never been audited or received notice of initiation thereof by any taxing authority for which the statute of limitations for assessment of Taxes remains open, (B) has never extended any applicable statute of limitations regarding Taxes for which the statute of limitations for assessment of Taxes remains open, (C) is not liable, contractually or otherwise, for the Taxes of any other Person (other than withholding Taxes arising in the ordinary course of business), (D) has not agreed to and is not required to make any adjustment under Code Section 481(a) or 263A, (E) has never made any payments, is not obligated to make any payments, and is not a party to any agreement or arrangement that under certain circumstances could obligate it to make any payments that may not be deductible under Section 280G of the Code, (F) is not a party to any allocation or sharing agreement with respect to Taxes, (G) has never participated in the filing of any consolidated, combined or unitary Tax Return, (H) is not currently the beneficiary of any extension of time within which to file any Tax Return, and (I) has not received notice of any claim by any authority in any jurisdiction where it does not file Tax Returns that it (or the Sellers) is or may be subject to any Taxes or future taxation in such jurisdiction; (vi) all Taxes which the Company is required to withhold or to collect for payment have been duly withheld and collected and paid to the proper Governmental Authority or third party; and (vii) the Company is not a “foreign person” as such term is used in Treas. Reg. §1.1445-2.
(c) The Purchaser has been supplied with the Tax Return workpapers of the Company and other Tax related information, which accurately set forth the tax basis of the Company’s assets and the amount of its liabilities, net operating loss and other carry forwards, and other tax attributes.
(d) The Company is not party to any joint venture, partnership or other arrangement or contract that could be treated as a partnership for federal income tax purposes.
(e) Each agreement or arrangement of the Company that is a “nonqualified deferred compensation plan” (within the meaning of Section 409A(d)(1) of the Code) complies with Section 409A of the Code. No amounts paid or payable under any such agreement or arrangement is or has been subject to the interest or additional Tax set forth under Section 409A of the Code. The Company does not have any obligation that would entitle a participant of any such agreement or arrangement to reimbursement for any such interest or additional Tax.
(f) Each employee and independent contractor of the Company has been properly classified for purposes of applicable Legal Requirements.
(g) The Company has not engaged in a transaction that is the same or substantially similar to one of the types of transactions that the Internal Revenue Service has identified by notice, regulation or other form of published guidance as a listed transaction, as set
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forth in Treasury Regulation Section 1.6011-4(b)(2), or otherwise identified as a tax avoidance transaction.
3.20. Litigation . Except as expressly set forth on Schedule 3.20 , no action, arbitration, suit, proceeding or investigation is pending or, to the knowledge of the Company, threatened against the Company or, to the knowledge of the Company, against any stockholder, member, officer, director, manager or employee of the Company in relation to the affairs of the Company or the Business, and the Company does not know of any basis therefor. Except as expressly set forth on Schedule 3.20 , the matters disclosed on such Schedule will be covered by the Company’s insurance policies. The Company is not currently planning to initiate any action, suit, or proceeding before any court, arbitrator or Governmental Authority.
3.21. Employees and Compensation .
(a) The Company complies in all material respects with all applicable Legal Requirements respecting employment and employment practices in the jurisdictions within which it operates including, without limitation, the Age Discrimination in Employment Act of 1967, as amended, the Americans with Disabilities Act of 1990, as amended, ERISA (as hereinafter defined), and state fair employment practices laws.
(b) The Company’s employees are not represented by a union, and there is no labor strike, dispute, arbitration, grievance, slowdown, stoppage, organizational effort, dispute or proceeding by or with any employee or former employee of the Company or any labor union pending or, to the knowledge of the Company, threatened against the Company.
(c) There are no employment or consulting contracts or arrangements (other than those terminable at will without liability to the Company) with any employees or consultants of the Company other than as described on Schedule 3.9 . Schedule 3.21 sets forth a complete list of all employees of and consultants to the Company, with annual compensation in excess of $75,000, showing date of hire, hourly rate or salary or other basis of compensation, other benefits accrued as of a recent date and job function. To the knowledge of the Company, no officer or key employee of the Company intends to terminate his or her employment with the Company.
3.22. ERISA; Compensation and Benefit Plans .
(a) Schedule 3.22(a) sets forth all employee compensation and benefit plans, agreements, commitments, practices or arrangements of any type (including, but not limited to, plans described in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”)) offered, maintained or contributed to by the Company for the benefit of current or former employees or directors of the Company, or with respect to which the Company has or may have any liability, whether direct or indirect, actual or contingent (including, but not limited to, liabilities arising from affiliation under Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended (the “ Code ”), or Section 4001 of ERISA) (collectively, the “ Benefit Plans ”), and includes a written description of all oral Benefit Plans. There are no material compensation or benefit plans, agreements, commitments, practices or arrangements of any type providing benefits to employees or directors of the Company or, or with respect to which the Company may have any liability, other than the Benefit Plans.
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(b) With respect to each Benefit Plan, the Company has delivered to the Purchaser true and complete copies of: (i) any and all plan texts and agreements (including, but not limited to, trust agreements, insurance contracts and investment management agreements); (ii) any and all material employee communications (including all summary plan descriptions and material modifications thereto); (iii) the two most recent annual reports, if applicable; (iv) the most recent annual and periodic accounting of plan assets, if applicable; (v) the most recent determination letter received from the Internal Revenue Service (the “ Service ”), if applicable; and (vi) in the case of any unfunded or self-insured plan or arrangement, a current estimate of accrued and anticipated liabilities thereunder.
(c) With respect to each Benefit Plan: (i) if intended to qualify under Section 401(a) of the Code, such plan so qualifies, and its trust is exempt from taxation under Section 501(a) of the Code; (ii) such plan has been administered and enforced in accordance with its terms and all applicable Legal Requirements in all material respects; (iii) no breach of fiduciary duty has occurred with respect to which the Company or any Benefit Plan may be liable or otherwise damaged in any material respect; (iv) no material disputes nor any audits or investigations by any Governmental Authority are pending or, to the knowledge of the Company, threatened; (v) no “prohibited transaction” (within the meaning of either Section 4975(c) of the Code or Section 406 of ERISA) has occurred with respect to which the Company or any Benefit Plan may be liable or otherwise damaged in any material respect; (vi) all contributions, premiums, and other payment obligations have been accrued on the financial statements of the Company in accordance with United States generally accepted accounting principles, and, to the extent due, have been made on a timely basis, in all material respects; (vii) all contributions or benefit payments made or required to be made under such plan meet the requirements for deductibility under the Code; (viii) the Company has expressly reserved in itself the right to amend, modify or terminate such plan, or any portion of it, at any time without liability to itself; and (ix) no such plan requires the Company to continue to employ any employee or director.
(d) No Benefit Plan is, or has ever been, subject to Title IV of ERISA.
(e) With respect to each Benefit Plan which provides welfare benefits of the type described in Section 3(1) of ERISA: (i) no such plan provides medical or death benefits with respect to current or former employees or directors of the Company beyond their termination of employment, other than coverage mandated by Sections 601-608 of ERISA and 4980B(f) of the Code, (ii) each such plan has been administered in compliance with Sections 601-609 of ERISA and 4980B(f) of the Code; (iii) no such plan is or is provided through a “multiple employer welfare arrangement” within the meaning of Section 3(40) of ERISA; and (iv) no such plan has reserves, assets, surpluses or prepaid premiums.
(f) The consummation of the Transactions contemplated by this Agreement will not (i) entitle any individual to severance pay except as set forth in the Employment Agreements, (ii) accelerate the time of payment or vesting under any Benefit Plan, or (iii) increase the amount of compensation or benefits due to any individual that accrue to the liability of the Purchaser.
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3.23. Environmental Matters .
(a) The Company is and has for the past five (5) years been in compliance with all applicable Environmental Laws in all material respects. None of the Company or any of its officers has received during the past five (5) years any communication or complaint from a Governmental Authority or other Person alleging that the Company has any liability under any applicable Environmental Law or is not in compliance with any applicable Environmental Law.
(b) Except as set forth on Schedule 3.23(b) , there is and has been no presence or Release or threatened Release of Hazardous Substances for which the Company would have liability or responsibility pursuant to applicable Environmental Law in connection with the conduct or the Business or on or from any properties currently or formerly owned, leased or operated by or for the Company or any predecessor company, at any location to which the Company or any predecessor company has disposed of or arranged for the disposal of any Hazardous Substances or at any other location. No underground storage tank or water, gas, or oil well, is located on any Owned Real Estate, or, to the knowledge of the Company, is located on any Leased Real Estate. There are no past or present actions, activities, circumstances, conditions, events or incidents, including without limitation the presence or Release of Hazardous Substances, that could form the basis for assertion of liability under Environmental Laws against the Company, the Sellers, the Purchaser, the Business or any property used therein or the Purchased Assets. There is no pending or, to the knowledge of the Company, threatened investigation by any Governmental Authority, nor any pending or, to the knowledge of the Company, threatened action, arbitration, suit, proceeding or investigation with respect to the Company, the Business or any property used therein or the Purchased Assets or against any predecessor, relating to Hazardous Substances or otherwise under any Environmental Law.
(c) Schedule 3.23(c) sets forth a complete list of all Environmental Permits that are required with respect to the occupation of the properties and the operation of the Business of the Company. The Company holds all Environmental Permits that are required with respect to the occupation of the properties and the operation of the Business of the Company, and is and has for the past five (5) years been in material compliance therewith. All such Environmental Permits are in full force and effect, and to the knowledge of the Company, no action, arbitration, suit, proceeding or investigation, revocation proceeding, amendment procedure, writ, injunction or claim is pending or threatened concerning any such Environmental Permits.
(d) Except as set forth in Schedule 3.23(d) , the Company has not agreed to assume, undertake or provide indemnification for any liability of any other Person under Environmental Laws, including without limitation any obligation for any response action.
(e) Neither the execution, delivery or performance of this Agreement nor the consummation of the Transactions will (i) require any notice to or consent of any Governmental Authority or other Person pursuant to any applicable “transaction-triggered” Environmental Law or any Environmental Permit or (ii) subject any Environmental Permit to suspension, cancellation, modification, revocation or nonrenewal.
(f) No restrictions have been imposed on the operation or use of the current Owned Real Estate or, to the knowledge of the Company, on the Leased Real Estate in connection with any liability or potential liability arising from or related to Environmental Laws, and to the knowledge of the Company, there is no action, arbitration, suit, proceeding, investigation, writ,
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injunction or claim pending or threatened which would reasonably be expected to result in the imposition of any such restriction.
(g) The Company has provided to the Purchaser all “Phase I,” “Phase II” or other environmental assessment or compliance audit reports in its possession or to which they have reasonable access addressing locations ever owned, operated or leased by the Company or any predecessor company at which the Company or any predecessor actually, potentially or allegedly may have liability under any Environmental Law.
For purposes of this Agreement: (i) “ Environmental Laws ” means, as in effect on or prior to the Closing Date, any Laws of any Governmental Authority, and all common law relating to (A) the presence, release or threatened release of Hazardous Substances or materials containing Hazardous Substances; (B) the manufacture, handling, transport, use, treatment, storage or disposal of Hazardous Substances or materials containing Hazardous Substances; or (C) pollution or protection of the environment, or protection of health or safety or protection of natural resources; (ii) “ Environmental Permits ” means all Permits required to be maintained by the Company under any Environmental Law; (iii) “ Hazardous Substances ” means any pollutants, contaminants, hazardous substances, hazardous material or hazardous waste regulated pursuant to Environmental Laws including without limitation: (A) those substances defined in or regulated as hazardous materials under the Hazardous Materials Transportation Act, hazardous wastes under the Resource Conservation and Recovery Act, hazardous substances under the Comprehensive Environmental Response, Compensation and Liability Act (“ CERCLA ”), pollutants under the Clean Water Act, contaminants under the Safe Drinking Water Act, nuclear material under the Atomic Energy Act, pesticide under the Federal Insecticide, Fungicide, and Rodenticide Act, toxic substance under the Toxic Substances Control Act, and air pollutant under the Clean Air Act, and their state counterparts, as each may be amended from time to time, and all regulations thereunder; (B) petroleum and petroleum products, including crude oil and any fractions thereof; (C) natural gas, synthetic gas, and any mixtures thereof; and (D) polychlorinated biphenyls, asbestos, asbestos-containing materials and radon; and (iv) “ Release ” has the meaning set forth in Section 101(22) of CERCLA.
3.24. Insurance . Schedule 3.24 sets forth all insurance policies under which the Company is insured, the name of the insurer of each policy, the type of policy provided by such insurer, the amount, scope and period covered thereby and a description of any material claims made thereunder. Such insurance policies are valid and in full force and effect and are adequate to insure against all liabilities, claims and risks against which it is customary for companies similarly situated as the Company to insure. All premiums due to date under such policies have been paid, no default exists thereunder and, with respect to any material claims made under such policies, no insurer has made any “reservation of rights” or refused to cover all or any portion of such claims. The Company has not received any notice of any proposed material increase in the premiums payable for coverage, or proposed reduction in the scope (or discontinuation) of coverage, under any of such insurance policies.
3.25. Affiliate Transactions . Except as set forth on Schedule 3.25 , (a) the Company is not a party to any contract or arrangement with, or indebted, either directly or indirectly, to any of its officers, directors, managers, members or stockholders, or any of their respective relatives or Affiliates, and (b) none of such Persons is indebted to the Company or has any direct or
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indirect ownership interest in, or any contractual or business relationship with, any Person with which the Company is or was Affiliated or with which the Company has a business relationship, or any Person which, directly or indirectly, competes with the Company. As used herein, “ Affiliate ” has the meaning ascribed to it in Rule 405 promulgated under the Securities Act of 1933, as amended (the “ Securities Act ”).
3.26. Absence of Material Undisclosed Liabilities . Except for (a) accounts payable and accrued expenses reflected on the Balance Sheet and other similar amounts incurred in the ordinary course of business since the Balance Sheet Date, and (b) obligations of future performance under contracts set forth on a Schedule hereto and under other contracts entered into in the ordinary course in accordance with this Agreement which are not required to be listed on a Schedule hereto, as of the Closing Date, the Company will not have any material liabilities or obligations, whether absolute, accrued, contingent or otherwise, and whether due or to become due.
3.27. Brokers . No finder, broker, agent, financial advisor or other intermediary has acted on behalf of the Sellers, the Company or any of their respective Affiliates in connection with the negotiation or consummation of this Agreement, the other agreements, instruments or documents contemplated hereby or the Transactions and no such Person is entitled to any fee, payment, commission or other consideration in connection therewith as a result of any arrangement made by any of them.
3.28. Bank Accounts . Schedule 3.28 sets forth a true, correct and complete list showing the name and address of each banking institution, mutual fund or stock brokerage firm in which the Company has accounts or safe deposit boxes, the account numbers or box numbers relating thereto and the name of each Person authorized to draw thereon or to have access thereto.
3.29. No Other Agreements . Except for this Agreement and the other agreements, documents and instruments contemplated by this Agreement, the Company does not have any other agreements, arrangements or understandings with any manager, member, officer, director, employee, consultant, stockholder or Affiliate of the Company in respect of the transactions contemplated by this Agreement and the other agreements, documents and instruments contemplated by this Agreement.
3.30. Solvency . As of the Closing and after giving effect to receipt of the portion of the Purchase Price to be paid at Closing and the application or distribution of the proceeds thereof, the Company (a) will not have unreasonably small assets for the conduct of its remaining business, (b) will not have incurred debts beyond its ability to pay as they become due and (c) will not be insolvent (either because its financial condition is such that the sum of its debts is greater than the fair market value of its assets or because the fair saleable value of its assets is less than the amount required to pay its probable liability on its existing debts as they mature).
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASER
The Purchaser represents and warrants to the Company that each of the statements contained in this ARTICLE IV is true and correct and will be true and correct as of the Closing Date:
4.1. Authority . The Purchaser has full power and authority and has taken all required action on its part (including board and stockholder approval) necessary to permit it to execute and deliver and to carry out the terms of this Agreement and the other agreements, instruments and documents of the Purchaser contemplated hereby.
4.2. No Conflict . No consent, approval or authorization of or declaration or filing with any Governmental or non-Governmental Authority or any party to any contract with the Purchaser is required on the part of the Purchaser for or in connection with its execution, delivery or performance of this Agreement and the other agreements, documents and instruments contemplated hereby. The execution, delivery and performance of this Agreement and the other agreements, documents and instruments contemplated hereby by the Purchaser will not result in any violation of, be in conflict with, or constitute a default under any Legal Requirement, agreement, contract, instrument, charter, by-laws, operating agreement, partnership agreement, organizational document, license, permit, authorization, franchise or certification to which the Purchaser is a party or by which the Purchaser is bound.
4.3. Validity and Enforceability . This Agreement is, and each of the other agreements, documents and instruments contemplated hereby to which the Purchaser is a party shall be when executed and delivered by the Purchaser, the valid and binding obligations of the Purchaser enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and by laws related to the availability of specific performance, injunctive relief or other equitable remedies.
4.4. Brokers . Except as set forth on Schedule 4.4 , no finder, broker, agent, financial advisor or other intermediary has acted on behalf of the Purchaser or any of its Affiliates in connection with the negotiation or consummation of this Agreement or the Transactions and no such Person is entitled to any fee, payment, commission or other consideration in connection therewith as a result of any arrangement made by any of them. The obligations to any Person set forth on Schedule 4.4 will be paid by Purchaser at Closing, and Purchaser hereby indemnifies and agrees to hold harmless Sellers and the Company for any claims made against them by any such Person listed on Schedule 4.4 or any other Person in violation of this Section 4.4.
ARTICLE V
COVENANTS
5.1. Confidentiality . Following the Closing, none of the Company or the Sellers shall, directly or indirectly, disclose, divulge or make use of any trade secrets or other confidential information of a business, financial, marketing, technical or other nature pertaining to the Purchaser, the Company, the Business, the Purchased Assets or the Assumed Liabilities, including information of others that the Purchaser, the Company or any of the Sellers has agreed to keep confidential, except (a) to the extent that such information shall have become public knowledge other than by breach of this Agreement by the Company or any of the Sellers, (b) as required in
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connection with the performance of such Seller’s duties as an employee of the Purchaser and (c) to the extent that disclosure of such information is required by law or legal process (but only after the Company or the Seller has provided the Purchaser with reasonable notice and opportunity to take action against any legally required disclosure). Notwithstanding the foregoing, nothing herein shall limit the right and ability of the Company or the Sellers to disclose such information to their respective lawyer(s), accountant(s) and other personal professional consultants with a demonstrable need to know or have access to such information.
5.2. Wrong Pocket Assets . If the Company or any Seller owns or shall at any time hereafter acquire any rights in any Company Intellectual Property or other Purchased Asset, the Company or such Seller, as the case may be, shall, and hereby does, transfer all of its rights, title and interest in such Company Intellectual Property or other Purchased Asset to the Purchaser for no additional consideration. So long as the Company and each Seller shall not be required to incur any material cost or expense, the Company and each Seller shall execute and deliver such additional documents and instruments and take such other actions as the Purchaser shall reasonably request to give effect to the provisions of this Section.
5.3. Litigation Cooperation . The Company and each Seller shall reasonably cooperate with the Purchaser in connection with any pending or threatened governmental or third party investigation, action, arbitration, claim or proceeding or internal investigation that relates to events that transpired prior to the Closing related to the Business. The Company and the Sellers’ cooperation shall include, without implication of limitation, being available to meet with counsel to prepare for discovery or trial and to testify truthfully as a witness when requested by the Purchaser. This Section 5.3 shall not apply to litigation between any Purchaser Indemnified Party, on the one hand, and the Company or any Seller, on the other hand.
5.4. [Intentionally omitted].
5.5. Use of Name . The Company acknowledges and agrees that the names “Resin Designs” and any abbreviations or derivations thereof, constitute part of the Purchased Assets and shall refrain from using any such names, abbreviations or derivations after the Closing. Within ten
(10) business days after the Closing, the Company shall change its legal name to a name that is not confusingly similar to such name.
5.6. [Intentionally omitted.]
5.7. Solvency; Maintenance of Existence . From the Closing Date through the expiration or termination of all of the Company’s obligations under this Agreement, the Company
(a) shall remain solvent and shall not incur liabilities in excess of its ability to pay as they become due and (b) shall not dissolve, merge, or otherwise terminate the Company’s separate corporate existence.
5.8. Employees . The Purchaser shall offer employment to all employees of Company effective as of the Closing on substantially the same terms and conditions and with comparable or better benefits as such employees have been provided in their employment with the Company.
5.9. Termination of 401(k) Plan . The Company shall have approved such resolutions and adopted such amendments, each in a form satisfactory to the Company and the Purchaser, as
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are reasonably necessary to terminate any Benefit Plan intended to be “qualified” within the meaning of Section 401(a) of the Code, and the Company shall have delivered communications to each participant in such plan indicating the ability to “roll over” such participant's account in such plan to the benefit plan sponsored by the Purchaser.
ARTICLE VI
CONDITIONS TO CLOSING
6.1. Conditions to Obligations of the Purchaser . Unless waived in writing by the Purchaser, the obligation of the Purchaser hereunder to consummate the Transactions is subject to the satisfaction at or prior to the Closing of the following conditions:
(a) Ellsworth Required Consent Received . The Company shall have obtained and delivered to the Purchaser a copy of the Required Consent for that certain Distribution Agreement dated as of January 1, 2004 by and between the Company and Ellsworth Corporation, and such Required Consent shall not have been withdrawn, suspended or conditioned.
(b) No Injunction . The consummation of the Transactions contemplated hereby shall not violate any order, decree or judgment of any court or Governmental Authority having competent jurisdiction.
(c) Management Arrangements . Each of Giroux and Desmond and the Purchaser shall have entered into an Employment Agreement in the form attached hereto as Exhibit 6.1(c) (collectively, the “ Employment Agreements ”).
(d) Restrictive Covenants Agreements . Each of Giroux and Desmond and the Purchaser shall have entered into a Restrictive Covenants Agreement in the form attached hereto as Exhibit 6.1(d)(1) , and Ellsworth and the Purchaser shall have entered into a Restrictive Covenants Agreement in the form attached hereto as Exhibit 6.1(d)(2) (collectively, the “ Restrictive Covenants Agreements ”).
(e) Certificates; Documents . The Purchaser shall have received copies of each of the following for the Company certified to its satisfaction by an officer of the Company:
(i) the Company’s certificate of formation, as amended, certified by the Secretary of the Commonwealth of The Commonwealth of Massachusetts as of a recent date; (ii) a certificate of the Secretary of the Commonwealth of The Commonwealth of Massachusetts as of a recent date as to the legal existence and good standing of the Company; (iii) the Company’s limited liability company operating agreement, as amended; (iv) votes adopted by the members and resolutions adopted by the managers of the Company authorizing the execution, delivery and performance of this Agreement and the other agreements, documents and instruments contemplated hereby and the consummation of the Transactions; and (v) evidence as of a recent date of the qualification of the Company as a foreign corporation in the jurisdictions listed on Schedule 3.3 . The Purchaser shall also have received such other certificates, documents and materials as it shall reasonably request.
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(f) Lease . The Company and the Purchaser shall have entered into a lease pursuant to which the Purchaser shall acquire a leasehold interest in the Woburn Real Property in the form attached hereto as Exhibit 6.1(f) (the “ Woburn Lease ”).
(g) Pre-Closing Deliveries . The Sellers and the Company shall have delivered the items, certificates and documents required by Section 1.5.
(h) Licenses, Consents, Etc. Received by Purchaser . The Purchaser shall have obtained all consents, licenses, approvals, authorizations and permits required to be obtained by it as a result of the Transactions contemplated hereby, in each case in which the failure to obtain the same would materially interfere with the Purchaser’s ability to consummate the Transactions contemplated hereby or to operate the Business after the Closing, and no such consent, license, approval, authorization or permit shall have been withdrawn, conditioned or suspended.
(i) Instruments of Transfer . The Company shall have executed and delivered to the Purchaser: (i) a Bill of Sale in the form attached hereto as Exhibit 6.1(i)(1) (the “ Bill of Sale ”); (ii) an Assignment and Assumption Agreement in the form attached hereto as Exhibit 6.1(i)(2) (the “ Assignment and Assumption Agreement ”); (iii) an Assignment of Trademarks and Trademark Applications in the form attached hereto as Exhibit 6.1(i)(3) (the “ Trademark Assignment ”); (iv) an Assignment of Patents and Patent Applications in the form attached hereto as Exhibit 6.1(i)(4) (the “ Patent Assignment ”); and (v) such other instruments of transfer as the Purchaser may reasonable request in order to transfer the Purchased Assets to the Purchaser, free and clear of all Liens.
(j) Escrow Agreement . The Company and Citibank, N.A., as escrow agent (the “ Escrow Agent ”), shall have entered into the Escrow Agreement in substantially the form attached hereto as Exhibit 6.1(j) (the “ Escrow Agreement ”).
(k) Termination of 401(k) Plan . The Company shall have terminated its 401(k) Benefit Plan, and delivered communications to each participant in such plan indicating the ability to “roll over” such participant’s account in such plan to a benefit plan sponsored by the Buyer.
(l) Non-Foreign Affidavit . The Company shall have delivered to the Purchaser, in form and substance acceptable to the Purchaser, a statement satisfying the requirements of Treas. Reg. §1.1445-2(b)(2).
(m) Actions and Proceedings . Prior to the Closing, all actions, proceedings, instruments and documents required to carry out the Transactions contemplated hereby or incident hereto and all other legal matters required for such Transactions shall have been reasonably satisfactory to counsel for the Purchaser.
6.2. Conditions to Obligations of the Company and the Sellers . Unless waived in writing by the Sellers, the obligation of the Company and the Sellers hereunder to consummate the Transactions is subject to the satisfaction at or prior to the Closing of the following condition:
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(a) No Injunction . The consummation of the Transactions contemplated hereby shall not violate any order, decree or judgment of any court or Governmental Authority having competent jurisdiction.
(b) Payment of the Closing Purchase Price . The Purchaser shall have delivered to the Company the Closing Purchase Price in accordance with Section 1.2(c).
(c) Instruments of Transfer . The Purchaser shall have executed and delivered to the Company the Assignment and Assumption Agreement, the Trademark Assignment and the Patent Assignment.
(d) Management Arrangements . The Purchaser shall have executed and delivered to the Company the Employment Agreements.
(e) Lease . The Purchaser and the Company shall have entered into the Woburn Lease.
(f) Escrow Agreement . The Purchaser and the Escrow Agent shall have entered into the Escrow Agreement.
(g) Employment of Company Employees . The Purchaser shall have satisfied the covenant set forth in Section 5.8 hereof.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
7.1. Survival . The representations, warranties, covenants and agreements contained herein shall survive the Closing and any investigation or finding made by or on behalf of the Purchaser, the Sellers or the Company. No action for a breach of the representations and warranties contained herein shall be brought more than eighteen (18) months following the Closing Date, except for (a) claims arising out of the representations and warranties contained in ARTICLE II (‘ Representations and Warranties Concerning the Sellers ’) or Sections 3.4 (‘ Due Authorization; No Conflict ’), 3.5 (‘ Validity and Enforceability ’), 3.6 (‘ Capitalization ’), 3.11(b) (‘ Assets ’), 3.25 (‘ Affiliate Transactions ’) or 3.27 (‘ Brokers ’), which shall survive indefinitely after the Closing, (b) claims arising out of the representations and warranties contained in Sections
3.19 (‘ Tax Matters ’), 3.22 (‘ ERISA; Compensation and Benefit Plans ’) or 3.23 (‘ Environmental Matters ’), which shall survive until the expiration of the statute of limitations period (including all extensions thereof) applicable to the underlying subject matter being represented, and (c) claims based upon intentional misrepresentation, willful misconduct or fraud. The representations and warranties contained in Sections 3.4 (‘ Due Authorization; No Conflict ’), 3.5 (‘ Validity and Enforceability ’), 3.6 (‘ Capitalization ’), 3.11(b) (‘ Assets ’), 3.12 (‘Intellectual Property’), 3.19 (‘ Tax Matters ’), 3.22 (‘ ERISA; Compensation and Benefit Plans ’), 3.23 (‘ Environmental Matters ’), 3.25 (‘ Affiliate Transactions ’) and 3.27 (‘ Brokers ’) are sometimes collectively referred to herein the “ Fundamental Representations ”.
7.2. Indemnification Limits . The Purchaser Indemnified Parties (as hereinafter defined) shall not be entitled to recover any Losses (as hereinafter defined) for breach of the representations and warranties of the Sellers and/or the Company contained herein (a) unless and
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until the Purchaser Indemnified Parties’ aggregate claims therefor exceed $300,000, at which time the Purchaser Indemnified Parties shall be entitled to recover Losses for any claims arising hereunder, or (b) for an aggregate amount in excess of $3,000,000 and, in the case of indemnification against each Seller individually, for an aggregate amount in excess of $1,000,000 per Seller; provided, that claims for breach of any of the Fundamental Representations and claims based upon intentional misrepresentation, willful misconduct or fraud shall not be subject to the foregoing limits and shall not be included in the determination of whether the limit in clause (b) has been reached.
7.3. Indemnification by the Company and the Sellers .
(a) Subject to Section 7.2 above and Section 7.3(b) below, the Company and each Seller shall severally, but not jointly, indemnify and hold the Purchaser and its Affiliates (the “ Purchaser Indemnified Parties ”) harmless from and against all claims, liabilities, obligations, costs, damages, losses and expenses (including reasonable attorneys’ fees and costs of investigation) of any nature (collectively, “ Losses ”) arising out of or relating to (i) any breach or violation of the representations or warranties of the Sellers (other than those set forth in ARTICLE
II) or the Company set forth in this Agreement (including the schedules), (ii) any breach or violation of the covenants or agreements of the Company set forth in this Agreement, or (iii) the Excluded Liabilities.
(b) Each Seller shall severally, but not jointly, indemnify and hold the Purchaser Indemnified Parties harmless from and against all Losses arising out of or relating to (i) any breach or violation of the representations or warranties of such Seller in ARTICLE II of this Agreement, or (ii) any breach or violation by such Seller of any covenants of such Seller in this Agreement.
(c) No Purchaser Indemnified Party may initiate a claim for indemnification under this Agreement without the prior approval of the Purchaser.
7.4. Indemnification by the Purchaser . The Purchaser shall indemnify and hold the Company harmless from and against all Losses arising out of or relating to any breach or violation of the representations, warranties, covenants or agreements of the Purchaser set forth in this Agreement.
7.5. Procedures for Indemnification of Third Party Claims .
(a) A party or parties entitled to indemnification hereunder with respect to a third party claim (the “ Indemnified Party ”) will give the party or parties required to provide such indemnification (the “ Indemnifier ”) prompt written notice of any legal proceeding, claim or demand instituted by any third party (in each case, a “ Claim ”) in respect of which the Indemnified Party is entitled to indemnification hereunder.
(b) If the Indemnifier provides written notice to the Indemnified Party stating that the Indemnifier is responsible for the entire Claim within 30 days after the Indemnifier’s receipt of written notice from the Indemnified Party of such Claim, the Indemnifier shall have the right, at the Indemnifier’s expense, to defend against, negotiate, settle or otherwise deal with such Claim and to have the Indemnified Party represented by counsel, reasonably satisfactory to the
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Indemnified Party, selected by the Indemnifier; provided, that (i) the Indemnified Party may participate in any proceeding with counsel of its choice and at its expense, (ii) the Purchaser, at any time when it believes in good faith that any Claim is having or could reasonably be expected to have a material effect on the Business or assets, affairs, condition (financial or otherwise), business relationships or prospects of the Purchaser or any of its Affiliates, may assume the defense and otherwise deal with such Claim in good faith, with counsel of its choice, and be fully indemnified therefor, (iii) the Purchaser, at any time when it believes that a claim for indemnification relates to or arises in connection with Taxes or any criminal proceeding, indictment or investigation or seeks specific performance, an injunction or any other form of equitable relief, may assume the defense and otherwise deal with such Claim in good faith with counsel of its choice, and be fully indemnified therefor, (iv) the Indemnifier may not assume the defense of any Claim if an actual or potential conflict of interest exists between the Indemnifier and the Indemnified Party that, in the reasonable belief of the Indemnified Party, precludes effective joint representation, and (v) the Indemnified Party may take over the defense and prosecution of a Claim from the Indemnifier if the Indemnifier has failed or is failing to vigorously prosecute or defend such Claim; and provided further, that the Indemnifier may not enter into a settlement of any Claim without the written consent of the Indemnified Party unless such settlement provides the Indemnified Party with a full release from such Claim and requires no more than a monetary payment for which the Indemnified Party is fully indemnified.
(c) The parties will reasonably cooperate fully with each other in connection with the defense of any Claim.
7.6. Adjustment to Purchase Price . All indemnification payments paid pursuant to this ARTICLE VII shall be adjustments to the purchase price.
ARTICLE VIII
MISCELLANEOUS
8.1. Notices . All notices, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, by email or fax, by United States mail, certified or registered with return receipt requested, or by a nationally recognized overnight courier service, or otherwise actually delivered:
(a) if to the Sellers or the Company, to:
Resin Designs, LLC
c/o Timothy F. Desmond
E-mail: tdesmond@resindesigns.com
with a copy (which shall not constitute notice) to:
Seyfarth Shaw LLP
Two Seaport Lane, 3rd Floor
Boston, Massachusetts 02210
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Attention: Michael F. Dowley
Facsimile: 617.790.5327
Email: mdowley@seyfarth.com
(b) if to the Purchaser, to:
Chase Corporation
295 University Avenue
Westwood, MA 02090
Attn: Chief Executive Officer
Facsimile: 781.332.0701
Email: adamchase@chasecorp.com
with a copy (which shall not constitute notice) to:
Choate, Hall & Stewart LLP
Two International Place
Boston, Massachusetts 02110
Attention: Christian A. Atwood and Daniel P. Riley
Facsimile: 617.248.4000
Email: catwood@choate.com and driley@choate.com
or at such other address as may have been furnished by such person in writing to the other parties. Any such notice, demand or communication shall be deemed given on the date given, if delivered in person, emailed or faxed or otherwise actually delivered, on the date received, if given by registered or certified mail, return receipt requested or given by overnight delivery service, or three days after the date mailed, if otherwise given by first class mail, postage prepaid.
8.2. Governing Law; Forum . This Agreement shall be governed by and construed in accordance with the internal laws of The Commonwealth of Massachusetts applicable to agreements executed and to be performed solely within such Commonwealth. Any judicial proceeding arising out of or relating to this Agreement shall be brought in the courts of The Commonwealth of Massachusetts, and, by execution and delivery of this Agreement, each of the parties to this Agreement accepts the exclusive jurisdiction of such courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Each of the parties further agrees that a summons and complaint commencing an action or proceeding in any of such courts shall be properly served and shall confer personal jurisdiction if served to it at the address and in the manner set forth in Section 8.1 or as otherwise provided under the laws of The Commonwealth of Massachusetts. This provision may be filed with any court as written evidence of the knowing and voluntary irrevocable agreement between the parties to waive any objections to jurisdiction, to venue or to convenience of forum. The foregoing consents to jurisdiction and appointments of agents to receive service of process shall not be deemed to confer rights on any Person other than the respective parties to this Agreement.
8.3. Amendments, Waivers . This Agreement may be amended or modified only with the written consent of the Purchaser and the Company. No waiver of any term or provision hereof shall be effective unless in writing signed by the party waiving such term or provision. No failure
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to exercise or delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The rights provided hereunder are cumulative and not exclusive of any rights, powers or remedies provided by law.
8.4. Expenses . Except as otherwise expressly set forth herein, all legal and other costs and expenses incurred in connection with this Agreement and the Transactions contemplated hereby shall be paid by the party incurring such costs and expenses.
8.5. Successors and Assigns . This Agreement, and all provisions hereof, shall be binding upon and inure to the benefit of the respective successors and assigns of the parties hereto, provided that this Agreement may not be assigned by any party without the prior written consent of the other parties hereto except that (a) the indemnification and other rights hereunder of the Purchaser may be assigned to any bank or other financial institution which is or becomes a lender to the Purchaser or any of its subsidiaries, and (b) this Agreement may be assigned by the Purchaser to any of its Affiliates or to any Person acquiring a material portion of the assets, business or securities of the Purchaser, whether by merger, consolidation, sale of assets or securities or otherwise.
8.6. Entire Agreement . This Agreement, the attached Exhibits and Schedules, and the other agreements, documents and instruments contemplated hereby contain the entire understanding of the parties, and there are no further or other agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof unless expressly referred to herein.
8.7. Counterparts . This Agreement may be executed in one or more counterparts, and with counterpart facsimile signature pages, each of which shall be an original, but all of which when taken together shall constitute one and the same Agreement. Delivery of counterpart signature pages to this Agreement by facsimile transmission, by electronic mail in .pdf or .tiff format, or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing an original signature.
8.8. Headings . The headings of Articles and Sections herein are inserted for convenience of reference only and shall be ignored in the construction or interpretation hereof.
8.9. Third Party Beneficiaries . Except with respect to ARTICLE VII, which shall inure to the benefit of the Purchaser Indemnified Parties, nothing in the Agreement shall be construed to confer any right, benefit or remedy upon any Person that is not a party hereto or a permitted assignee of a party hereto.
8.10. No Strict Construction . The parties hereto have participated jointly in the negotiation and drafting of this Agreement and the other agreements and documents contemplated herein. In the event an ambiguity or question of intent or interpretation arises under any provision of this Agreement or any other agreement or documents contemplated herein, this Agreement and such other agreements or documents shall be construed as if drafted jointly by the parties thereto,
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and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of authoring any of the provisions of this Agreement or any other agreements or documents contemplated herein.
8.11. Publicity . None of the Company or the Sellers shall issue a press release or make any other public announcement concerning the Transactions contemplated by this Agreement without the prior written consent of the Purchaser, except to the extent required by law.
8.12. Schedules and Exhibits . All Schedules and Exhibits to this Agreement are an integral part of this Agreement and are incorporated herein by reference in this Agreement for all purposes of this Agreement. All Schedules delivered with this Agreement shall be arranged to correspond with the numbered and lettered Sections and Subsections contained in this Agreement, and the disclosures in such Schedules shall qualify only the corresponding Sections and Subsections contained in this Agreement.
8.13. WAIVER OF JURY TRIAL . EACH PARTY HERETO ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
8.14. Severability . This Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision hereof shall be prohibited or invalid under any such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating or nullifying the remainder of such provision or any other provisions of this Agreement.
8.15. Certain Taxes . All transfer, documentary, sales, use, real property gains, stamp, registration, and other such Taxes and fees incurred in connection with this Agreement and each of the other agreements, instruments and documents contemplated hereby shall be paid by the Company when due, and the Company will, at its expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, real property gains, stamp, registration, and other Taxes and fees, and, if required by applicable law, the Purchaser and the Sellers will join in the execution of any such Tax Returns and other documentation. For the avoidance of doubt, all such Taxes and fees shall be Excluded Liabilities.
8.16. Bulk Transfer Laws . The parties hereby waive compliance with the provisions of any so-called “bulk transfer law” of any jurisdiction in connection with the sale of the Purchased Assets to the Purchaser.
[ Signature pages follow. ]
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as a sealed instrument as of the date first above written.
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RESIN DESIGNS, LLC |
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By: |
/s/ Timothy F. Desmond |
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Name: Timothy F. Desmond |
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Title: Member |
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/s/ Donald J. Giroux |
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Donald J. Giroux, individually |
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/s/ Timothy F. Desmond |
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Timothy F. Desmond, individually |
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/s/ Paul Ellsworth |
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Paul Ellsworth, individually |
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CHASE CORPORATION |
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By: |
/s/ Adam P. Chase |
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Name: Adam P. Chase |
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Title: President & Chief Executive Officer |
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Exhibit 10.10.1
CHASE CORPORATION
R ESTRICTED S TOCK A GREEMENT UNDER THE 2013 I NCENTIVE P LAN
This Restricted Stock Agreement (the “Agreement” ) , dated as of September 1, 2016, is by and between Chase Corporation (the “Company”) and Adam P. Chase (the “Restricted Stockholder”).
1. Grant of Award . Pursuant to the terms of the Chase Corporation 2013 Incentive Plan (the “Plan”), effective as of September 1, 2016 (the “Grant Date”), the Company hereby grants to the Restricted Stockholder an award of 7,768 shares of the Company’s common stock, par value $0.10 per share, subject to the terms and conditions of this Agreement and the Plan. As more fully described below, the shares granted hereby are subject to forfeiture by the Restricted Stockholder if certain criteria are not satisfied.
2. Restrictions on Stock . Until the termination of restrictions as provided in Section 3 hereof, the Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered except as provided in this Agreement. No rights or interests of the Restricted Stockholder under this Agreement or under the Plan may be assigned, encumbered or transferred other than (i) to the extent permitted and in accordance with such procedures adopted by the Administrator from time to time and (ii) by will or the laws of descent and distribution. The naming of a designated beneficiary will not constitute a transfer.
3. Termination of Restrictions .
(a) Vesting . The Restricted Stock Award shall cliff vest over 3 years from the grant date and become nonforfeitable and all restrictions set forth in Section 3 hereof shall lapse, on August 31, 2019 (the “Vest Date”), provided the Restricted Stockholder’s service with the Company has not terminated or ceased on or prior to the Vest Date.
(b) Termination of Service . If the Restricted Stockholder’s status as an employee, consultant or director of the Company is terminated prior to the Vest Date by reason of the Restricted Stockholder’s retirement, death or disability (as determined by the Administrator) or the Company terminating his service without cause, the Restricted Stock Award shall vest, pro-rated on the date service is terminated, and the restrictions on the pro-rated vested shares shall lapse on the date of termination of service. If the Restricted Stockholder’s status as an employee, consultant or director of the Company is terminated by the Restricted Stockholder or by the Company for cause prior to the Vest Date, the Restricted Stock Award will immediately and irrevocably be forfeited and neither the Restricted Stockholder nor any successors, heirs, assigns, or legal representatives of the Restricted Stockholder shall thereafter have any further rights or interest in such forfeited Restricted Stock or the certificates thereof. For purposes of this subsection (b), service will be considered as continuing uninterrupted during any bona fide leave of absence approved in writing by the Company so long as the Restricted Stockholder’s right to reemployment or survival of his service arrangement with the Company is guaranteed either by statute or by contract.
(c) Acceleration of Vesting upon Change in Control . Unless otherwise provided for in the vote granting such restricted stock, upon the consummation of a transaction resulting in a
Change in Control of the Company prior to the Vest Date, all restrictions remaining on any Restricted Stock shall lapse.
4. Rights as Stockholder . Upon the issuance of a certificate or certificates representing the Restricted Stock, the Restricted Stockholder shall thereupon be a stockholder and, subject to the provisions of Section 2 hereof, have all the rights of a stockholder with respect to such Restricted Stock, including the right to vote and receive all dividends or other distributions made or paid with respect to such Restricted Stock; provided, however, that such Restricted Stock and any new, additional or different securities the Restricted Stockholder may become entitled to receive with respect to such Restricted Stock by virtue of a stock split, dividend or other change in the corporate or capital structure of the Company shall be subject to the vesting and forfeiture provisions, restrictions on transfer and other restrictions set forth in this Agreement and the Plan.
5. Stock Certificates; Legend . Certificates for Restricted Stock shall be issued in the Restricted Stockholder’s name and shall be held by the Company until the Restricted Stock shall become vested and all restrictions thereon have lapsed. The Company shall serve as attorney-in-fact for the Restricted Stockholder during the period during which the Restricted Stock are unvested with full power and authority in the Restricted Stockholder’s name to assign and convey to the Company any Restricted Stock held by the Company for the Restricted Stockholder if the Restricted Stockholder forfeits the shares under the terms of the this Agreement and the Plan. Certificates representing the Restricted Stock shall bear the following legend:
“The Shares represented by this Stock Certificate have been granted as restricted stock under the Chase Corporation 2013 Equity Incentive Plan. The Shares represented by this Stock Certificate may not be sold, exchanged, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of unless the restrictions set forth in the Restricted Share Agreement between the registered holder of these Shares and Chase Corporation shall have lapsed.
Upon the vesting of the Restricted Stock, the Company shall so notify the Secretary of the Company and the Secretary shall obtain from the Company certificates representing all such shares that have vested, which certificates shall not bear any restrictive endorsement making reference to this Agreement, and shall deliver such certificates to the Restricted Stockholder.
6. No Right to Continued Employment . This Agreement shall not confer upon the Restricted Stockholder any right with respect to continuance of employment by, or service with, the Company, nor shall it interfere in any way with the right of the Company to terminate the Restricted Stockholder’s service at any time and for any reason.
7. Adjustment to Common Stock . In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin‑off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, the Committee shall make approximate and equitable adjustments in the Restricted Stock corresponding to adjustments made by the Committee in the number and kind of shares which may be issued under the Plan. Any new, additional or different securities to which the Restricted Stockholder shall be entitled in respect of Restricted Stock by reason of such adjustment shall be deemed to be Restricted Stock and shall be subject to the same terms, conditions and restrictions as the Restricted Stock so adjusted.
8. Withholding Taxes . The Restricted Stockholder acknowledges that the Company is not responsible for the tax consequences to the Restricted Stockholder of the granting or vesting of the Restricted Stock, and that it is the responsibility of the Restricted Stockholder to consult with the Restricted Stockholder’s personal tax advisor regarding all matters with respect to the tax consequences of the granting and vesting of the Restricted Stock. The Company shall have the right to deduct from the Restricted Stock or any payment to be made with respect to the Restricted Stock any amount that federal, state, local or foreign tax law required to be withheld with respect to the Restricted Stock or any such payment. Alternatively, the Company may require that the Restricted Stockholder, prior to or simultaneously with the Company incurring any obligation to withhold any such amount, pay such amount to the Company in cash or in shares of the Company’s Common Stock (including shares of Common Stock retained from the Restricted Share Award creating the tax obligation), which shall be valued at the Fair Market Value of such shares on the date of such payment. In any case where it is determined that taxes are required to be withheld in connection with the issuance, transfer or delivery of the shares, the Company may reduce the number of shares so issued, transferred or delivered by such number of shares as the Company may deem appropriate to comply with such withholding. The Company may also impose such conditions on the payment of any withholding obligations as may be required to satisfy applicable regulatory requirements under the Exchange Act.
9. Governing Law . This Agreement shall be construed and administered in accordance with and governed by the laws of the Commonwealth of Massachusetts (without giving effect to any conflict or choice of laws provisions thereof that would cause the application of the domestic substantive laws of any other jurisdiction).
10. Notice of Election Under Section 83(b) . If the Restricted Stockholder makes an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations and rulings promulgated thereunder, he will provide a copy thereof to the Company within thirty days of the filing of such election with the Internal Revenue Service.
11. Notices . Any notice hereunder to the Company shall be addressed to the Company at its principal business office, 295 University Ave., Westwood, Massachusetts 02090 and any notice hereunder to the Restricted Stockholder shall be sent to the address reflected on the records of the Company, subject to the right of either party to designate at any time hereafter in writing some other address.
12. Amendment of Agreement . The Company may amend, modify or terminate this Agreement, provided that the Restricted Stockholder’s consent to such action shall be required unless the Company determines that the action, taking into account any related action, would not materially and adversely affect the Restricted Stockholder.
13. Successors and Assigns; No Third Party Beneficiaries . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. There are no third party beneficiaries of this Agreement.
14. Entire Agreement . This Agreement and the Plan constitute the full and entire understanding and agreement of the parties with regard to the Restricted Stock and supersede in their entirety all other prior agreements, whether oral or written, with respect thereto.
15. Severability . In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and each provision of this Agreement shall be enforced to the fullest extent permitted by law.
16. Waivers . Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of such provision or any other provision hereof.
17. Defined Terms . Capitalized terms used but not defined in this Agreement will have the meanings specified in the Plan.
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument.
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RESTRICTED STOCKHOLDER |
CHASE CORPORATION |
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By: |
/s/ Adam P. Chase |
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By: |
/s/ Peter R. Chase |
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Signature |
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Signature |
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Name: |
Adam P. Chase |
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Name: |
Peter R. Chase |
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Title: |
Executive Chairman |
Exhibit 10.10.2
CHASE CORPORATION
2013 INCENTIVE PLAN
Stock Option Agreement
Chase Corporation (the “ Company ”) hereby grants to you (the “ Optionee ”) the following option (the “ Option ”) to purchase Common Stock of the Company:
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Name of Optionee: |
Adam P. Chase |
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Total Number of Shares Subject to this Option: |
23,563 |
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Type of Option: |
Non Qualified Option (NQO)-“retention” |
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Exercise Price per Share: |
$64.37 |
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Grant Date: |
September 1, 2016 |
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Vesting Schedule: |
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Vesting Commencement Date: |
August 31, 2019 |
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Number of Vested Shares on Grant Date: |
0
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Vesting Period: |
3 years |
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Expiration Date: |
August 31, 2026 |
By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms of the Chase Corporation 2013 Incentive Plan (the “ Plan ”) and this Stock Option Agreement (this “ Agreement ”), which includes the incorporated terms and conditions attached to and made a part of this Agreement. This Agreement is an Award Agreement issued under the Plan.
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OPTIONEE |
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CHASE CORPORATION |
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/s/ Adam P. Chase |
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By: /s/ Peter R. Chase |
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Print Name: Adam P. Chase |
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Print Name: Peter R. Chase |
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Title: Executive Chairman |
CHASE CORPORATION
Stock Option Agreement
under the 2013 Incentive Plan
Incorporated Terms and Conditions
1. Grant of Option . On the terms and conditions set forth in this Agreement, the Company grants to the Optionee on the Grant Date this Option to purchase at the exercise price per share set forth on the Signature Page of this Agreement the number of shares of the Company’s Common Stock set forth on said Signature Page. This Option is granted pursuant to and is governed by Plan, the terms of which are incorporated into this Agreement by this reference. To the extent there is any inconsistency between the terms of the Plan and this Agreement, the terms of the Plan shall control. Unless the context otherwise requires, capitalized terms used herein without definitions shall have the respective meanings assigned to them in the Plan. By signing this Agreement, the Optionee acknowledges receipt of a copy of the Plan.
2. Type of Option . This Option is intended to qualify either as an ISO or an NQO, as set forth on the Signature Page of this Agreement. If this Option is intended to qualify as an ISO, it is agreed that the Exercise Price is at least 100% of the Fair Market Value per Share on the Grant Date (110% of Fair Market Value if Section 7.2 of the Plan applies).
3. Exercisability Schedule . The Optionee may exercise this Option for such number of Shares as have become exercisable pursuant to the vesting schedule set forth on the Signature Page of this Agreement.
4. Exercise of Option . Prior to the Expiration Date (or such earlier date as set forth in Section 5 below), the Optionee may exercise this Option by delivering a Notice of Stock Option Exercise in the form attached hereto as Exhibit A (the “ Notice ”), signed by the Participant, and received by the Company at its principal office, accompanied by this Agreement and payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share or for fewer than ten (10) whole shares. The Optionee (or any other person entitled to exercise this Option) shall not be entitled to any rights as a shareholder of the Company with respect to any Shares issuable upon exercise of this Option until such Shares shall have been registered on the stock transfer books of the Company in the name of the Optionee (or such other person).
5. Exercise of Option After Termination of Employment.
(a) Termination of service . Except as otherwise determined by the Board, or as may otherwise be expressly provided in any employment agreement between the Company and the Optionee, upon the termination of the service of the Optionee to the Company (or to an affiliate), this Option shall expire on the earliest of the following occasions:
(i) the date that is three months after the voluntary termination of the Optionee’s service or the termination of the Optionee’s service by the Company (or by an affiliate) other than for cause;
(ii) the date that is three months after the termination of the Optionee’s service by the Company (or by an Affiliate) for cause;
(iii) the date six months after the termination of the Optionee’s service by reason of Disability or death;
(v) the specified expiration date of the Option, as set forth on the Signature Page.
Any portion of this Option that is not exercisable on the date of termination of the Optionee’s service with the Company, for any reason, shall terminate immediately and be null and void and of no further force and effect.
6. Notice of Premature Disposition . If this Option is intended to qualify as an ISO, as provided on the Signature Page of this Agreement, then if, within (2) two years from the Grant Date or within one (1) year after the issuance of Shares to the Optionee upon exercise of this Option, the Optionee makes a disposition (as defined in Section 424(c) of the Code) of any Shares, the Optionee shall notify the Treasurer of the Company within ten (10) days after such disposition.
7. Restrictions on Transfer . The Optionee shall not sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise except by will or the laws of descent and distribution, and during the lifetime of the Participant, this Option shall be exercisable only by the Participant.
8. Withholding . No Shares shall be issued pursuant to the exercise of this Option unless and until the Participant pays to the Company or makes provision satisfactory to the Company for payment of any federal, state or local withholding taxes required by law to be withheld in respect of this Option.
9. Amendment . The Board may at any time or times amend the Plan or this Agreement for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which at the time may be permitted by law. No termination, amendment of the Plan or amendment of this Agreement shall, without the Optionee’s consent, materially adversely affect the Optionee’s rights under this Agreement.
10. Notices . All notices, requests, consents and other communications shall be in writing and be deemed given when delivered personally, by telex or facsimile transmission or when received if mailed by first class registered or certified mail, postage prepaid. Notices to the Company or the Optionee shall be addressed as set forth underneath their signatures below, or to such other address or addresses as may have been furnished by such party in writing to the other.
11. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts without regard to conflict of law principles.
12. Counterparts . For the convenience of the parties and to facilitate execution, this Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document.
Exhibit A
NOTICE OF STOCK OPTION EXERCISE
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[DATE]
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[ ]
[INSERT ADDRESS]
Attention: Treasurer
Dear Sir or Madam
Pursuant to the terms of the stock option agreement between myself and Chase Corporation (the “Company”) dated (the “Agreement”), under the Company’s 2013 Incentive Plan, I, [Insert Name] , hereby [Circle One] partially/fully exercise such Option by including herein payment in the amount of $__________ representing the purchase price for [Fill in number of Underlying Shares] Shares. I have chosen the following form(s) of payment:
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Cash |
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Certified or bank check payable to [ ] |
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Other (as described in the Plan (please describe)) |
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In connection with my exercise of the Option as set forth above, I hereby represent and warrant to the Company as follows:
(i) I am purchasing the Shares for my own account for investment only, and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act, or any rule or regulation under the Securities Act.
(ii) I have had such an opportunity as I have deemed adequate to obtain from the Company such information as is necessary to permit me to evaluate the merits and risks of my investment in the Company and have consulted with my own advisers with respect to my investment in the Company.
(iii) I have sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Shares and to make an informed investment decision with respect to such purchase.
(iv) I can afford a complete loss of the value of the Shares and am able to bear the economic risk of holding such Option Shares for an indefinite period of time.
(v) I understand that the Shares have not be registered under the Securities Act (it being understood that the Shares are being issued and sold in reliance on the exemption provided in Rule 701 thereunder) or any applicable state securities or “blue sky” laws and may not be sold or otherwise transferred or disposed of in the absence of an effective registration statement under the Securities Act
of 1933 and under any applicable state securities or “blue sky” laws (or exemptions from the registration requirements thereof). I further acknowledge that certificates representing Shares will bear restrictive legends reflecting the foregoing.
(vi) I understand and agree that the Shares when issued will continue to be subject to the Plan.
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Sincerely yours, |
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Name |
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Address: |
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Exhibit 10.10.3
CHASE CORPORATION
Restricted Stock Agreement under the 2013 incentive plan
This Restricted Stock Agreement (the “Agreement” ) , dated as of September 1, 2016, is by and between Chase Corporation (the “Company”) and Kenneth J. Feroldi (the “Restricted Stockholder”).
1. Grant of Award . Pursuant to the terms of the Chase Corporation 2013 Incentive Plan (the “Plan”), effective as of September 1, 2016 (the “Grant Date”), the Company hereby grants to the Restricted Stockholder an award of 8,544 shares of the Company’s common stock, par value $0.10 per share, subject to the terms and conditions of this Agreement and the Plan. As more fully described below, the shares granted hereby are subject to forfeiture by the Restricted Stockholder if certain criteria are not satisfied.
2. Restrictions on Stock . Until the termination of restrictions as provided in Section 3 hereof, the Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered except as provided in this Agreement. No rights or interests of the Restricted Stockholder under this Agreement or under the Plan may be assigned, encumbered or transferred other than (i) to the extent permitted and in accordance with such procedures adopted by the Administrator from time to time and (ii) by will or the laws of descent and distribution. The naming of a designated beneficiary will not constitute a transfer.
3. Termination of Restrictions .
(a) Vesting . The Restricted Stock Award shall cliff vest over 5 years from the grant date and become nonforfeitable and all restrictions set forth in Section 3 hereof shall lapse, on August 31, 2021 (the “Vest Date”), provided the Restricted Stockholder’s service with the Company has not terminated or ceased on or prior to the Vest Date.
(b) Termination of Service . If the Restricted Stockholder’s status as an employee, consultant or director of the Company is terminated prior to the Vest Date by reason of the Restricted Stockholder’s retirement, death or disability (as determined by the Administrator) or the Company terminating his service without cause, the Restricted Stock Award shall vest, pro-rated on the date service is terminated, and the restrictions on the pro-rated vested shares shall lapse on the date of termination of service. If the Restricted Stockholder’s status as an employee, consultant or director of the Company is terminated by the Restricted Stockholder or by the Company for cause prior to the Vest Date, the Restricted Stock Award will immediately and irrevocably be forfeited and neither the Restricted Stockholder nor any successors, heirs, assigns, or legal representatives of the Restricted Stockholder shall thereafter have any further rights or interest in such forfeited Restricted Stock or the certificates thereof. For purposes of this subsection (b), service will be considered as continuing uninterrupted during any bona fide leave of absence approved in writing by the Company so long as the Restricted Stockholder’s right to reemployment or survival of his service arrangement with the Company is guaranteed either by statute or by contract.
(c) Acceleration of Vesting upon Change in Control . Unless otherwise provided for in the vote granting such restricted stock, upon the consummation of a transaction resulting in a Change in Control of the Company prior to the Vest Date, all restrictions remaining on any Restricted Stock shall lapse.
4. Rights as Stockholder . Upon the issuance of a certificate or certificates representing the Restricted Stock, the Restricted Stockholder shall thereupon be a stockholder and, subject to the provisions of Section 2 hereof, have all the rights of a stockholder with respect to such Restricted Stock, including the right to vote and receive all dividends or other distributions made or paid with respect to such Restricted Stock; provided, however, that such Restricted Stock and any new, additional or different securities the Restricted Stockholder may become entitled to receive with respect to such Restricted Stock by virtue of a stock split, dividend or other change in the corporate or capital structure of the Company shall be subject to the vesting and forfeiture provisions, restrictions on transfer and other restrictions set forth in this Agreement and the Plan.
5. Stock Certificates; Legend . Certificates for Restricted Stock shall be issued in the Restricted Stockholder’s name and shall be held by the Company until the Restricted Stock shall become vested and all restrictions thereon have lapsed. The Company shall serve as attorney-in-fact for the Restricted Stockholder during the period during which the Restricted Stock are unvested with full power and authority in the Restricted Stockholder’s name to assign and convey to the Company any Restricted Stock held by the Company for the Restricted Stockholder if the Restricted Stockholder forfeits the shares under the terms of the this Agreement and the Plan. Certificates representing the Restricted Stock shall bear the following legend:
“The Shares represented by this Stock Certificate have been granted as restricted stock under the Chase Corporation 2013 Equity Incentive Plan. The Shares represented by this Stock Certificate may not be sold, exchanged, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of unless the restrictions set forth in the Restricted Share Agreement between the registered holder of these Shares and Chase Corporation shall have lapsed.
Upon the vesting of the Restricted Stock, the Company shall so notify the Secretary of the Company and the Secretary shall obtain from the Company certificates representing all such shares that have vested, which certificates shall not bear any restrictive endorsement making reference to this Agreement, and shall deliver such certificates to the Restricted Stockholder.
6. No Right to Continued Employment . This Agreement shall not confer upon the Restricted Stockholder any right with respect to continuance of employment by, or service with, the Company, nor shall it interfere in any way with the right of the Company to terminate the Restricted Stockholder’s service at any time and for any reason.
7. Adjustment to Common Stock . In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin‑off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, the Committee shall make approximate and equitable adjustments in the Restricted Stock corresponding to adjustments made by the Committee in the number and kind of shares which may be issued under the Plan. Any new, additional or different securities to which the Restricted Stockholder shall be entitled in respect of Restricted Stock by reason of such adjustment shall be deemed to be Restricted Stock and shall be subject to the same terms, conditions and restrictions as the Restricted Stock so adjusted.
8. Withholding Taxes . The Restricted Stockholder acknowledges that the Company is not responsible for the tax consequences to the Restricted Stockholder of the granting or vesting of the Restricted Stock, and that it is the responsibility of the Restricted Stockholder to consult with the Restricted Stockholder’s personal tax advisor regarding all matters with respect to the tax
consequences of the granting and vesting of the Restricted Stock. The Company shall have the right to deduct from the Restricted Stock or any payment to be made with respect to the Restricted Stock any amount that federal, state, local or foreign tax law required to be withheld with respect to the Restricted Stock or any such payment. Alternatively, the Company may require that the Restricted Stockholder, prior to or simultaneously with the Company incurring any obligation to withhold any such amount, pay such amount to the Company in cash or in shares of the Company’s Common Stock (including shares of Common Stock retained from the Restricted Share Award creating the tax obligation), which shall be valued at the Fair Market Value of such shares on the date of such payment. In any case where it is determined that taxes are required to be withheld in connection with the issuance, transfer or delivery of the shares, the Company may reduce the number of shares so issued, transferred or delivered by such number of shares as the Company may deem appropriate to comply with such withholding. The Company may also impose such conditions on the payment of any withholding obligations as may be required to satisfy applicable regulatory requirements under the Exchange Act.
9. Governing Law . This Agreement shall be construed and administered in accordance with and governed by the laws of the Commonwealth of Massachusetts (without giving effect to any conflict or choice of laws provisions thereof that would cause the application of the domestic substantive laws of any other jurisdiction).
10. Notice of Election Under Section 83(b) . If the Restricted Stockholder makes an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations and rulings promulgated thereunder, he will provide a copy thereof to the Company within thirty days of the filing of such election with the Internal Revenue Service.
11. Notices . Any notice hereunder to the Company shall be addressed to the Company at its principal business office, 295 University Ave., Westwood, Massachusetts 02090 and any notice hereunder to the Restricted Stockholder shall be sent to the address reflected on the records of the Company, subject to the right of either party to designate at any time hereafter in writing some other address.
12. Amendment of Agreement . The Company may amend, modify or terminate this Agreement, provided that the Restricted Stockholder’s consent to such action shall be required unless the Company determines that the action, taking into account any related action, would not materially and adversely affect the Restricted Stockholder.
13. Successors and Assigns; No Third Party Beneficiaries . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. There are no third party beneficiaries of this Agreement.
14. Entire Agreement . This Agreement and the Plan constitute the full and entire understanding and agreement of the parties with regard to the Restricted Stock and supersede in their entirety all other prior agreements, whether oral or written, with respect thereto.
15. Severability . In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and each provision of this Agreement shall be enforced to the fullest extent permitted by law.
16. Waivers . Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of such provision or any other provision hereof.
17. Defined Terms . Capitalized terms used but not defined in this Agreement will have the meanings specified in the Plan.
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument.
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RESTRICTED STOCKHOLDER |
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CHASE CORPORATION |
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By: |
/s/ Kenneth J. Feroldi |
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By: |
/s/ Adam P. Chase |
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Signature |
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Signature |
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Name: |
Kenneth J. Feroldi |
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Adam P. Chase |
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Title: |
President & CEO |
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Exhibit 31.1
CERTIFICATION
I, Adam P. Chase, certify that:
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I have reviewed this Quarterly Report on Form 10-Q of Chase Corporation; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
Date: January 6, 2017
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/s/ Adam P. Chase |
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Adam P. Chase |
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President and Chief Executive Officer |
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(Principal executive officer) |
1
Exhibit 31.2
CERTIFICATION
I, Kenneth J. Feroldi, certify that:
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I have reviewed this Quarterly Report on Form 10-Q of Chase Corporation; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
Date: January 6, 2017
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/s/ Kenneth J. Feroldi |
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Kenneth J. Feroldi |
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Treasurer and Chief Financial Officer |
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(Principal financial officer) |
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Exhibit 32.1
CERTIFICATION
PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of Chase Corporation (the “Company”) hereby certifies that the Company’s Quarterly Report on Form 10-Q for the period ended November 30, 2016 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certificate is furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Date: January 6, 2017
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/s/ Adam P. Chase |
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Adam P. Chase |
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President and Chief Executive Officer |
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(Principal executive officer) |
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Exhibit 32.2
CERTIFICATION
PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of Chase Corporation (the “Company”) hereby certifies that the Company’s Quarterly Report on Form 10-Q for the period ended November 30, 2016 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certificate is furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Date: January 6, 2017
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/s/ Kenneth J. Feroldi |
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Kenneth J. Feroldi |
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Treasurer and Chief Financial Officer |
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(Principal financial officer) |
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1