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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
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ADVANCED ENVIRONMENTAL SYSTEMS, INC.
(Name of Subject Company)
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ADVANCED ENVIRONMENTAL SYSTEMS, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, $0.0001 PAR VALUE
(Title of Class of Securities)
007949100
(CUSIP Number of Class of Securities)
DOUGLAS B. KOFF, WALDBAUM, CORN, KOFF, BERGER & COHEN, P.C.,
303 E. 17TH AVENUE,
SUITE 940,
DENVER, COLORADO
80203-1262;
(303) 861-1166.
(Name, address and telephone number of person authorized to receive notice
and communications on behalf of the person(s) filing statement)
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is ADVANCED ENVIRONMENTAL SYSTEMS, INC., a
New York corporation (the "Company"), and the address of the principal executive
offices of the Company is 730 17th Street, Suite 712, Denver, Colorado 80202.
The title of the class of equity securities to which this Statement relates is
common stock, $0.0001 par value (sometimes collectively referred to as the
"Shares" or individually as a "Share").
ITEM 2. TENDER OFFER OF THE BIDDER
This Statement relates to an offer by AES Acquisition Corp. a New York
corporation (the "Purchaser"), an indirect, wholly owned subsidiary of Philip
Services Corp. ("Parent") to purchase all Shares of the Company at a purchase
price of $0.0059 per Share, net to the Seller in cash, without interest, upon
the terms and subject to the conditions set forth in the Offer to Purchase dated
December 24, 1997 (the "Offer"). Purchaser has advised that the address of the
Purchaser's and Parent's principal executive offices is 100 King Street West, P.
O. Box 2440, LCD1, Hamilton, Ontario, Canada L8N 4J6. A tender offer on Schedule
14D-1 with respect to the Offer has been filed by the Purchaser.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and business address of the Company, which is the person
filing this Statement, are set forth in Item 1 above.
(b) The largest shareholder of the Company is Industrial Services
Technologies, Inc. ("IST"), which is a privately-held company and owner of
approximately 61.7% of the outstanding common stock of the Company as well as
100% of the outstanding convertible preferred stock of the Company. Gary
Schmitt, a Board member and Vice President of the Company, is also a Board
member, President and Chief Financial Officer of IST. George "Buster" Austin, a
director of the Company, as well as the Executive Vice President of Operations
for International Catalyst, Inc. ("INCAT") (an indirect, wholly owned subsidiary
of the Company), is also an executive officer of Piping Companies, Inc., a
significant operating company and a subsidiary of IST. Mr. Austin, Mr. Schmitt
and Alfred Brehmer (the third member of the Board of the Company) each owns less
than 1% of the outstanding shares of IST, and neither Mr. Schmitt nor Mr. Austin
owns shares of the Company. Carylyn K. Bell, the spouse of J. Daniel Bell, the
former president and former director of the Company, is also one of the largest
shareholders of IST common stock.
Mr. Austin has been offered a two-year employment agreement to remain with
INCAT, with total base compensation comparable to that which he is presently
receiving. Mr. Schmitt may be retained by Parent for three months to assist with
the integration of Parent, certain of its subsidiaries, AES and IST. If
retained, Mr. Schmitt will receive from IST salary and benefits generally
consistent with those which he presently receives from IST. Mr. Schmitt does not
receive a salary from and is not an employee of AES or its subsidiaries. Mr.
Schmitt's present positions with IST (President and Chief Financial Officer)
will be eliminated due to the changes effected by the consummation of the
transactions described in this Schedule. In consideration for Mr. Schmitt
agreeing to remain with IST pending the consummation of the transactions
involving IST and to recognize his contributions, the IST Board of Directors has
approved a severance payment equivalent to approximately one year's base salary
payable from IST's working capital and has approved an additional payment of
$550,000 in settlement of certain pre-existing IST equity rights held by Mr.
Schmitt, to be paid out of the IST merger proceeds. Payment of the severance and
equity rights settlement amount will occur on the condition that the IST merger
closes by the end of 1997, regardless of if and when the AES merger closes. No
documents have been executed by either Mr. Schmitt or Mr. Austin concerning the
foregoing payments or compensation.
In addition to the foregoing, certain contracts, agreements, arrangements
or understandings relating to the Company and/or the Company's directors,
executive officers or affiliates are contained in agreements described below in
this Item 3(b).
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The following is a summary of certain provisions of the Agreement and Plan
of Merger (the "Merger Agreement"), the Stockholder Agreements and the Short
Form Merger Option Agreement. The following summary is not a complete
description of the terms and conditions of those documents and is qualified in
its entirety by reference to the full text thereof, which is incorporated herein
by reference and a copy of each of which has been filed with the Securities and
Exchange Commission ("Commission") as an exhibit to this Schedule 14D-9. This
Schedule and other information concerning the Company should be available for
inspection at the public reference facilities of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
should also be available for inspection and copying at prescribed rates at the
following regional offices of the Commission: Seven World Trade Center, 13th
Floor, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of this material may also be obtained by mail,
upon payment of the Commission's customary fees, from the Commission's principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports and certain other information regarding registrants that file
electronically with the Commission, including the Company.
THE MERGER AGREEMENT
The Offer. The Merger Agreement provides that the Purchaser will commence
the Offer and that, upon the terms and subject to prior satisfaction or waiver
of the conditions of the Offer, the Purchaser will purchase all Shares validly
tendered and not properly withdrawn pursuant to the Offer. The Merger Agreement
provides that, without the written consent of the Company, the Purchaser will
not decrease the Offer Price, decrease the number of Shares sought in the Offer
or amend any condition of the Offer in a manner adverse to the holders of
Shares. In the event that all of the conditions of the Offer have not been
satisfied or waived by the Initial Expiration Date, January 23, 1998, the
Purchaser shall have the right from time to time to extend the expiration date.
The Purchaser will, on the terms and subject to the prior satisfaction or waiver
of the conditions of the Offer, accept for payment and pay for Shares validly
tendered and not properly withdrawn as soon as it is legally permitted to do so
under applicable law.
The Merger. Following the consummation of the Offer, the Merger Agreement
provides that, subject to the terms and conditions thereof, and in accordance
with New York law, as soon as practicable following the Effective Time, the
Purchaser will be merged with and into the Company. As a result of the Merger,
the separate corporate existence of the Purchaser will cease and the Company
will continue as the Surviving Corporation.
The respective obligations of Parent and the Purchaser, on the one hand,
and the Company, on the other hand, to effect the Merger are subject to the
satisfaction on or prior to the Closing Date (as defined in the Merger
Agreement) of each of the following conditions, any and all of which may be
waived in whole or in part, to the extent permitted by applicable law: (i) the
Merger Agreement shall have been approved and adopted by the requisite vote of
the holders of Shares, if required by applicable law, in order to consummate the
Merger; (ii) no law, statute, rule, order, decree or regulation shall have been
enacted or promulgated by any government or any governmental entity of competent
jurisdiction which declares the Merger Agreement invalid or unenforceable in any
material respect or which prohibits the completion of the Offer or the
consummation of the Merger, and all governmental consents, orders and approvals
required for completion of the Offer or consummation of the merger shall have
been obtained and be in effect at the Effective Time; (iii) there shall be no
order or injunction of a court or other governmental entity of competent
jurisdiction in effect precluding consummation of the Offer or the Merger; and
(iv) Parent, the Purchaser or their affiliates shall have purchased Shares
pursuant to the Offer.
At the Effective Time of the Merger (i) each issued and outstanding Share
(other than Shares that are owned by the Company or any wholly owned subsidiary
of the Company, any Shares owned by Parent or any wholly owned subsidiary of
Parent, or any Shares which are held by stockholders exercising dissenters'
rights, if any, under New York law) will be converted into the right to receive
the price per Share paid pursuant to the Offer (the "Merger Consideration"), and
(ii) each issued and outstanding share of capital stock of the Purchaser will be
converted into one share of common stock of the Surviving Corporation.
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The Company Board. The directors of the Purchaser at the Effective Time
shall be the initial directors of the Surviving Corporation until their
successors have been duly elected or appointed or qualified or until their
earlier death, resignation or removal in accordance with the Certificate of
Incorporation and the By-laws.
Stockholders' Meeting. Pursuant to the Merger Agreement, the Company will,
if required by applicable law in order to consummate the Merger: (i) duly call,
give notice of, convene and hold a special meeting of its stockholders (the
"Special Meeting") as promptly as practicable following the acceptance for
payment and purchase of Shares by the Purchaser pursuant to the Offer for the
purpose of considering and taking action upon the approval of the Merger and the
adoption of the Merger Agreement; (ii) prepare and file with the Commission a
preliminary proxy or information statement relating to the Merger and the Merger
Agreement and use its best efforts (a) to obtain and furnish the information
required to be included by the Commission in the Proxy Statement (as hereafter
defined) and, after consultation with Parent, to respond promptly to any
comments made by the Commission with respect to the preliminary proxy or
information statement and cause a definitive proxy or information statement,
including any amendment or supplement thereto (the "Proxy Statement") to be
mailed to its stockholders, provided that no amendment or supplement to the
Proxy Statement will be made by the Company without consultation with Parent and
its counsel and (b) to obtain the necessary approvals of the Merger and the
Merger Agreement by its stockholders; and (iii) provide the recommendation of
the Company Board that stockholders of the Company vote in favor of the approval
of the Merger and the adoption of the Merger Agreement, subject to the fiduciary
obligations of the Company Board under applicable law as advised by independent
counsel. Parent has agreed that it will vote, or cause to be voted, all of the
Shares then owned by it, the Purchaser or any of its other subsidiaries and
affiliates in favor of the approval of the Merger and the adoption of the Merger
Agreement. IF THE PURCHASER ACQUIRES 66 2/3% OF THE OUTSTANDING SHARES, THE
PURCHASER WILL HAVE SUFFICIENT VOTING POWER TO APPROVE THE MERGER, EVEN IF NO
OTHER STOCKHOLDERS VOTE IN FAVOR OF THE MERGER.
The Merger Agreement provides that in the event that Parent, the Purchaser
and any other subsidiaries of Parent acquire, in the aggregate, at least 90% of
the outstanding Shares pursuant to the Offer or otherwise, Parent, the Purchaser
and the Company will, at the request of Parent and subject to the terms of the
Merger Agreement, take all necessary and appropriate action to cause the Merger
to become effective as soon as practicable after such acquisition, without a
meeting of stockholders of the Company, in accordance with Section 905 of the
New York Business Corporation Law ("NYBCL"). Pursuant to the Option Agreement,
the Purchaser may exercise the Short Form Merger Option (described below) at any
time within six business days after the acceptance by the Purchaser of Shares
pursuant to the Offer in accordance with the terms of the Merger Agreement;
provided, however, that the Purchaser may only exercise the Short Form Merger
Option in respect of at least that number of Short Form Shares which, when added
to the number of Shares purchased pursuant to the Offer or otherwise, represents
at least 90% of the outstanding Shares, after giving effect to the issuance of
the Short Form Shares.
Interim Operations. Pursuant to the Merger Agreement, the Company has
agreed that, except as expressly contemplated by the Merger Agreement or agreed
to in writing by Parent, prior to the Effective Time, (a) the business of the
Company and its subsidiaries will be conducted only in the ordinary and usual
course and, to the extent consistent therewith, each of the Company and its
subsidiaries will use its best efforts to preserve its business organization
intact and maintain its existing relations with customers, suppliers, employees,
creditors and business partners; (b) the Company will not, directly or
indirectly, amend or propose to amend its charter or by-laws or similar
organizational documents; (c) the Company will not, and will not permit its
subsidiaries to, (i) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property with respect to its capital
stock or that of its subsidiaries, other than current or accrued dividends on
the Preferred Stock; (ii) redeem, purchase or otherwise acquire directly or
indirectly any shares of the capital stock of the Company or its subsidiaries or
any other securities thereof or any rights, warrants or options to acquire any
such shares or other securities; (iii) authorize for issuance, issue, sell,
pledge, deliver or agree to commit to issue, sell, pledge or deliver (whether
through the issuance or granting of any options, warrants, calls, subscriptions,
stock appreciation rights or other rights or other agreements) or otherwise
encumber any shares of capital stock of any class of the Company or of its
subsidiaries or any securities convertible into or exchangeable for shares of
capital stock of any class of the Company or of its subsidiaries or
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(iv) split, combine or reclassify the outstanding capital stock of the Company
or of any of its subsidiaries or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares in the capital stock of
the Company or of any of its subsidiaries; (d) the Company will not, and it will
not permit any of its subsidiaries to, acquire or agree to acquire (i) by
merging or consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
limited liability company, joint venture, association or other business
organization or division thereof or (ii) any assets, outside of the ordinary
course of business, that individually is in excess of $25,000 or that in the
aggregate are in excess of $50,000; (e) the Company will not, and it will not
permit any of its subsidiaries to, sell, lease, license, mortgage or otherwise
encumber or subject to any lien or otherwise dispose of any assets of the
Company or of its subsidiaries other than (i) sales and dispositions of
interests or rights with respect to property having an aggregate fair market
value on the date of the Merger Agreement of less than $50,000, in each case
only if in the ordinary course of business and consistent with past practice, or
(ii) encumbrances and liens that are incurred in the ordinary course of business
and consistent with past practice; (f) neither the Company nor any of its
subsidiaries will: (i) grant any increase in the compensation payable or to
become payable by the Company or any of its subsidiaries to any of its executive
officers or key employees, (ii) adopt any new, or amend or otherwise increase,
or accelerate the payment or vesting of the amounts payable or to become payable
under any existing, bonus, incentive compensation, deferred compensation,
severance, profit sharing, stock option, stock purchase, insurance, pension,
retirement or other employee benefit plan agreement or arrangement or (iii)
enter into any employment or severance agreement with or, except in accordance
with the existing written policies of the Company, grant any severance or
termination pay to any officer, director or employee of the Company or any its
subsidiaries; (g) neither the Company nor any of its subsidiaries will: (i)
modify, amend or terminate any of its or its subsidiaries' material contracts or
waive, release or assign any material rights or claims, except in the ordinary
course of business and consistent with past practice, (ii) enter into any other
agreements, commitments or contracts that are material to the Company and its
subsidiaries taken as a whole, other than in the ordinary course of business and
consistent with past practice, or (iii) otherwise make any material change that
is adverse to the Company (including by way of termination) in (A) any existing
agreement, commitment or arrangement that is material to the Company and its
subsidiaries taken as a whole or (B) the conduct of the business or operations
of the Company and its subsidiaries; (h) neither the Company nor any of its
subsidiaries will: (i) incur or assume any long-term debt or, except in the
ordinary course of business in amounts consistent with past practice, incur or
assume any short-term indebtedness; (ii) incur or modify any material
indebtedness or other liability; (iii) issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Company or of any
of its subsidiaries; (iv) enter into any "keep well" or other arrangement to
maintain any financial condition of another person; (v) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person, except in
the ordinary course of business and consistent with past practice; (vi) make any
loans, advances or capital contributions to, or investments in, any other person
(other than to wholly owned subsidiaries of the Company) or (vii) enter into any
material commitment or transaction (including, but not limited to, any material
capital expenditure or purchase or lease of assets or real estate other than the
purchase of products for inventory and supplies in the ordinary course of
business); (i) neither the Company nor any of its subsidiaries will change any
of the accounting methods used by it unless required by GAAP; (j) neither the
Company nor any of its subsidiaries will, without the prior written consent of
Parent, pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of any such claims, liabilities or
obligations, in the ordinary course of business and consistent with past
practice, of claims, liabilities or obligations reflected or reserved against
in, or contemplated by, the consolidated financial statements (or the notes
thereto) of the Company and its consolidated subsidiaries; (k) neither the
Company nor any of its subsidiaries will take, or agree to commit to take, any
action that would or is reasonably likely to result in any of the conditions to
the Offer set forth in Annex A of the Merger Agreement or any of the conditions
to the Merger set forth in Article VI of the Merger Agreement not being
satisfied, or would make any representation or warranty of the Company contained
in the Merger Agreement inaccurate in any respect at, or as of any time prior
to, the Effective Time, or that would materially impair the ability of the
Company to consummate the Offer or the Merger in accordance with the terms of
the Merger Agreement or materially delay such consummation; (l) neither the
Company nor any of its subsidiaries will make any Tax
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election or settle or compromise any Tax liability or refund, except to the
extent already provided in the Company's filings with the Commission; (m)
neither the Company nor any of its subsidiaries will permit any material
insurance policy naming it as a beneficiary or a loss payable payee to be
cancelled or terminated without notice to Parent, except in the ordinary course
of business and consistent with past practice; (n) neither the Company nor any
of its subsidiaries will adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its subsidiaries (other than the Merger)
and (o) neither the Company nor any of its subsidiaries will enter into an
agreement, contract, commitment or arrangement to do any of the foregoing, or to
authorize, recommend, propose or announce an intention to do any of the
foregoing.
No Solicitation. Pursuant to the Merger Agreement, the Company has agreed
that neither the Company nor any of its subsidiaries or affiliates will (and the
Company will use its best efforts to cause its officers, directors, employees,
representatives and agents, including, but not limited to, investment bankers,
attorneys and accountants, not to), directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than Parent, any of its affiliates or representatives) concerning any
proposal or offer to acquire all or a substantial part of the business and
properties of the Company or any of its subsidiaries or any capital stock of the
Company or any of its subsidiaries, whether by merger, tender offer, exchange
offer, sale of assets or similar transactions involving the Company or any
subsidiary, division or operating or principal business unit of the Company (an
"Acquisition Proposal"), except that the Company and the Company Board may
furnish information concerning the Company and its subsidiaries to any
corporation, partnership, person or other entity or group pursuant to
appropriate confidentiality agreements, and may negotiate and participate in
discussions and negotiations with such entity or group concerning an Acquisition
Proposal if (i) such entity or group has, on an unsolicited basis, submitted a
bona fide written proposal to the Company Board relating to any such transaction
which the Company Board determines in good faith represents a superior
transaction to the Offer and the Merger and which is not conditioned upon
obtaining additional financing and (ii) in the opinion of the Company Board,
only after receipt of advice from independent legal counsel, the failure to
provide such information or access or to engage in such discussions or
negotiations would cause the Company Board to violate its fiduciary duties to
the Company's stockholders under applicable law (an Acquisition Proposal which
satisfies the immediately foregoing clauses (i) and (ii) is referred to in the
Merger Agreement as a "Superior Proposal"). The Company has agreed to
immediately communicate to Parent the terms of any proposal, discussion,
negotiation or inquiry (and will disclose any written materials received by the
Company in connection with such proposal, discussion negotiation or inquiry) and
the identity of the party making such proposal or inquiry which it may receive
in respect of any such transaction.
The Company has agreed that neither the Company Board nor any committee
thereof will (i) withdraw or modify, or propose to withdraw or modify, in a
manner adverse to Parent or the Purchaser, the approval or recommendation by the
Company Board or any such committee of the Offer, the Merger Agreement or the
Merger, (ii) approve or recommend, or propose to approve or recommend, any
Acquisition Proposal or (iii) enter into any agreement with respect to any
Acquisition Proposal, except that prior to the time of acceptance for payment of
Shares in the Offer, the Company Board may do any of the foregoing at any time
after (A) the Company Board determines, after receipt of advice from outside
legal counsel to the Company, that the failure to take such action would cause
the Company Board to violate its fiduciary duties to the Company's stockholders
under applicable law and (B) two business days following Parent's receipt of
written notice advising Parent that the Company Board has received a Superior
Proposal, specifying the material terms and conditions of such Superior Proposal
and identifying the person making such Superior Proposal. Furthermore, the
Company may not enter into an agreement with respect to a Superior Proposal
unless the Company furnishes Parent with written notice not later than noon (New
York time) one day in advance of any date that it intends to enter into such
agreement and shall have caused its financial and legal advisors to negotiate
with Parent to make such adjustments in the terms and conditions of the Merger
Agreement as would enable the Company to proceed with the transactions
contemplated in the Merger Agreement on such adjusted terms.
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Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether before or after
approval of the stockholders of the Company, (a) by mutual written consent of
Parent and the Company; (b) by either the Company or Parent (i) if the Offer
shall have expired without any Shares being purchased therein, provided, that
such right to terminate will not be available to any party whose failure to
fulfill any obligation under the Merger Agreement was the cause of, or resulted
in, the failure of Parent or the Purchaser to purchase the Shares prior to the
expiration of the Offer; (ii) if any governmental entity shall have issued an
order, decree or ruling or taken any other action (which order, decree, ruling
or other action the parties will use their best efforts to lift), in each case
permanently restraining, enjoining or otherwise prohibiting any of the
transactions contemplated by the Merger Agreement and such order, decree, ruling
or other action shall have become final and non-appealable; (c) by the Company
(i) if, prior to the purchase of the Shares pursuant to the Offer, Parent or the
Purchaser breaches or fails in any material respect to perform or comply with
any of its material covenants and agreements contained in the Merger Agreement
or breaches its representations and warranties in any material respect, (ii) in
connection with entering into a definitive agreement with respect to an
Acquisition Proposal if the Company has complied with all of the provisions
described above under "-- No Solicitation," including the notice provisions, and
the Company pays the Termination Fee described hereinafter, (iii) if Parent or
the Purchaser shall have terminated the Offer without Parent or the Purchaser,
as the case may be, purchasing any Shares pursuant thereto or (iv) if Parent,
the Purchaser or any of their affiliates fail to commence the Offer on or prior
to five business days following the date of the initial public announcement of
the Offer; provided, that the Company may not terminate the Merger Agreement
pursuant to clause (iii) or (iv) if the Company is in material breach of the
Merger Agreement; (d) by Parent or the Purchaser (i) if prior to the purchase of
the Shares pursuant to the Offer, the Company Board (A) withdraws, or modifies
or changes in a manner adverse to Parent or the Purchaser, its approval or
recommendation of the Offer, the Merger Agreement or the Merger, (B) approves or
recommends an Acquisition Proposal, (C) executes an agreement in principle (or
similar agreement) or definitive agreement providing for a tender offer or
exchange offer for any shares of capital stock of the Company, or a merger,
consolidation or other business combination with a person or entity other than
Parent, the Purchaser or their affiliates or (D) resolves to do any of the
foregoing, (ii) if Parent or the Purchaser terminates the Offer without Parent
or the Purchaser purchasing any Shares thereunder, provided that Parent or the
Purchaser may not terminate the Merger Agreement pursuant to this clause (ii) if
Parent or the Purchaser has failed to purchase the Shares in the Offer in
violation of the material terms thereof or (iii) if, due to an occurrence that
if occurring after the commencement of the Offer would result in a failure to
satisfy any of the conditions set forth in Annex A to the Merger Agreement,
Parent, the Purchaser or any of their affiliates fail to commence the Offer on
or prior to the fifth business day following the date of the initial public
announcement of the Offer.
Indemnification. Pursuant to the Merger Agreement, for six years after the
Effective Time, the Surviving Corporation (or any successor to the Surviving
Corporation) will indemnify, defend and hold harmless the present officers and
directors of the Company and its subsidiaries with respect to matters occurring
at or prior to the Effective Time to the full extent permitted under New York
law, the terms of the Certificate of Incorporation, By-laws and the Company's
indemnification agreements, each as in effect as of the date of the Merger
Agreement.
Representations and Warranties. Pursuant to the Merger Agreement, the
Company has made customary representations and warranties to Parent and the
Purchaser with respect to, among other things, its organization, capitalization,
authority, financial statements, need for consents or approvals, public filings,
conduct of business, employee benefit plans, intellectual property, employment
matters, excess parachute payments, compliance with laws, tax matters,
insurance, litigation, title to properties, environmental matters, undisclosed
liabilities, information to be contained in the Proxy Statement, finders fees,
the opinion of its financial advisor, and the absence of any material adverse
change since September 30, 1997.
Pursuant to the Merger Agreement, Parent and the Purchaser have made
substantially similar representations and warranties as to their organization,
authority, need for consents or approvals and information to be contained in the
Proxy Statement.
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Certain Conditions of the Offer. Notwithstanding any other provisions of
the Offer, and in addition to (and not in limitation of) the Purchaser's rights
to extend and amend the Offer at any time in its sole discretion (subject to the
provisions of the Merger Agreement), the Purchaser shall not be required to
accept for payment or, subject to any applicable rules and regulations of the
Commission, including Rule 14e-1(c) under the Exchange Act (relating to the
Purchaser's obligation to pay for or return tendered Shares promptly after
termination or withdrawal of the Offer), pay for, and may delay the acceptance
for payment of or, subject to the restriction referred to above, the payment
for, any tendered Shares, and may terminate or amend the Offer as to any Shares
not then paid for, if (A) the Company, Parent and the Purchaser, as required,
have not obtained all necessary material consents, approvals, orders,
authorizations, registrations, declarations, permits or filings required to be
obtained by it in connection with the Merger Agreement and the transactions
contemplated thereby or (B) at any time on or after the date of the Merger
Agreement and before the time of payment for any such Shares, any of the
following events shall occur or shall be determined by the Purchaser to have
occurred:
(i) there shall be threatened or pending any suit, action or
proceeding by any Governmental Entity (as defined in the Merger Agreement)
against the Purchaser, Parent, the Company or any subsidiary of the Company
(a) seeking to prohibit or impose any material limitations on Parent's or
the Purchaser's ownership or operation (or that of any of their respective
subsidiaries or affiliates) of all or a material portion of their or the
Company's businesses or assets, or to compel Parent or the Purchaser or
their respective subsidiaries and affiliates to dispose of or hold separate
any material portion of the business or assets of the Company or Parent and
their respective subsidiaries, in each case taken as a whole, (b)
challenging the acquisition by Parent or the Purchaser of any Shares under
the Offer, the Merger or pursuant to the Stockholder Agreements, seeking to
restrain or prohibit the making or consummation of the Offer or the Merger
or the performance of any of the other transactions contemplated by the
Merger Agreement (including the voting provisions thereunder), or seeking
to obtain from the Company, Parent or the Purchaser any damages that are
material in relation to the Company and its subsidiaries taken as a whole,
(c) seeking to impose material limitations on the ability of the Purchaser,
or render the Purchaser unable, to accept for payment, pay for or purchase
some or all of the Shares pursuant to the Offer and the Merger, (d) seeking
to impose material limitations on the ability of the Purchaser or Parent
effectively to exercise full rights of ownership of the Shares, including,
without limitation, the right to vote the Shares purchased by it on all
matters properly presented to the Company's stockholders or (e) which
otherwise is reasonably likely to have a material adverse affect on the
Company and its subsidiaries, taken as a whole;
(ii) there shall be any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated, or deemed applicable,
pursuant to an authoritative interpretation by or on behalf of a Government
Entity, to the Offer or the Merger, or any other action shall be taken by
any Governmental Entity that is reasonably likely to result, directly or
indirectly, in any of the consequences referred to in clauses (a) through
(d) of paragraph (i) above;
(iii) there shall have occurred (a) any general suspension of trading
in, or limitation on prices for, securities on the New York Stock Exchange,
The Toronto Stock Exchange, the Montreal Exchange or in The Nasdaq Stock
Market, for a period in excess of 24 hours (excluding suspensions or
limitations resulting solely from physical damage or interference with such
exchanges not related to market conditions), (b) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States or Canada (whether or not mandatory), (c) a commencement of a war
directly or indirectly involving the United States or Canada, (d) any
limitation (whether or not mandatory) by any United States or Canadian
governmental authority on the extension of credit generally by banks or
other financial institutions, (e) any decline in either the Dow Jones
Industrial Average or the Standard & Poor's Index of 500 Industrial
Companies by an amount in excess of 20% measured from the close of business
on the date of the Merger Agreement, (f) a change in general financial bank
or capital market conditions which materially or adversely affects the
ability of financial institutions in the United States or Canada to extend
credit or syndicate loans or (g) in the case of any of the foregoing
existing at the time of the commencement of the Offer, a material
acceleration or worsening thereof;
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(iv) (a) the representations and warranties of the Company set forth
in the Merger Agreement shall not be true and correct in any material
respect as of the date of the Merger Agreement and as of consummation of
the Offer as though made on or as of such date, (b) the Company shall have
failed to comply with its covenants and agreements under the Merger
Agreement in all material respects or (c) there shall have occurred any
events or changes which have had or will have a material adverse effect on
the Company and its subsidiaries taken as a whole;
(v) (a) the Company Board shall have withdrawn, or modified or changed
in a manner adverse to Parent or the Purchaser (including by amendment of
the Schedule 14D-9) its approval or recommendation of the Offer, the Merger
Agreement or the Merger, or approved or recommended any Acquisition
Proposal, (b) the Company shall have entered into any agreement with
respect to any Superior Proposal in accordance with Section 5.5(b) of the
Merger Agreement or (c) the Company Board, upon request of the Purchaser,
shall fail to reaffirm its recommendation of the Offer, the Merger
Agreement or the Merger;
(vi) Parent shall not have acquired all of the outstanding capital
stock, on a fully diluted basis of Industrial Services Technologies, Inc.
(vii) the Merger Agreement shall have terminated in accordance with
its terms;
which in the sole judgment of Parent or the Purchaser, in any such case, and
regardless of the circumstances (including any action or inaction by Parent or
the Purchaser) giving rise to such condition makes it inadvisable to proceed
with the Offer and/or with such acceptance for payment of or payment for Shares.
The foregoing conditions are for the sole benefit of Parent and the
Purchaser and may be waived by Parent or the Purchaser, in whole or in part at
any time and from time to time in the sole discretion of Parent or the
Purchaser. The failure by Parent or the Purchaser at any time to exercise any of
the foregoing rights shall not be deemed a waiver of any such right and each
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time. Any determination by the Purchaser or Parent concerning
the events described in this section, "Certain Conditions of the Offer", will be
final and binding upon all parties.
THE STOCKHOLDER AGREEMENT
Tender of Shares. In connection with the execution of the Merger
Agreement, Parent and the Purchaser entered into Stockholder Agreements with the
Selling Stockholders. Upon the terms and subject to the conditions of such
agreements, each of the Selling Stockholders has agreed to validly tender (and
not withdraw) pursuant to and in accordance with the terms of the Offer, not
later than the fifth business day after commencement of the Offer, the number of
Shares owned beneficially by such Selling Stockholder (or a total of 28,808,953
Shares, representing approximately 5.4% of the outstanding Shares).
Provisions Concerning the Shares. The Selling Stockholders have agreed
that during the period commencing on the date of the Stockholder Agreement and
continuing until the first to occur of the Effective Time or the termination of
the Merger Agreement in accordance with its terms, at any meeting of the
Company's stockholders or in connection with any written consent of the
Company's stockholders, the Selling Stockholders will vote (or cause to be
voted) the Shares held of record or beneficially owned by each of such Selling
Stockholders: (i) in favor of the Merger, the execution and delivery by the
Company of the Merger Agreement and the approval of the terms thereof and each
of the other actions contemplated by the Merger Agreement and the Stockholder
Agreement and any actions required in furtherance thereof; and (ii) against any
Acquisition Proposal and against any action or agreement that would impede,
frustrate, prevent or nullify the Stockholder Agreement or result in a breach in
any respect of any covenant, representation or warranty or any other obligation
or agreement of the Company under the Merger Agreement or which would result in
any of the conditions to the Offer or the Merger not being fulfilled. Each of
the Selling Stockholders has also agreed not to transfer such Selling
Stockholder's Shares and not to, directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation,
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partnership, person or other entity or group (other than Parent, any of its
affiliates or representatives) concerning any Acquisition Proposal.
Other Covenants, Representations, Warranties. In connection with the
Stockholder Agreements, the Selling Stockholders made certain customary
representations and warranties, including with respect to (i) ownership of the
Shares, (ii) the Selling Stockholder's authority to enter into and perform its
or his \obligations under the Stockholder Agreement, (iii) the absence of
conflicts and requisite governmental consents and approvals, and (iv) the
absence of encumbrances on and in respect of the Selling Stockholder's Shares.
Parent and the Purchaser have made certain representations and warranties with
respect to Parent and the Purchaser's authority to enter into the Stockholder
Agreement and the absence of conflicts and requisite governmental consents and
approvals.
SHORT FORM MERGER OPTION AGREEMENT
The NYBCL requires, among other things, that the adoption of any plan of
merger or consolidation of the Company must be approved by the Company Board and
generally by the holders of the Company's outstanding voting securities. The
Company Board has approved the Offer and the Merger; consequently, the only
additional action of the Company that may be necessary to effect the Merger is
approval by such stockholders if the "short-form" merger procedure described
below is not available. Under the NYBCL, the affirmative vote of holders of
66 2/3% of the outstanding Shares (including any Shares owned by the Purchaser)
is generally required to approve the Merger. If the Purchaser acquires, through
the Offer or otherwise, voting power with respect to at least 66 2/3% of the
outstanding Shares (which would be the case if the Purchaser were to accept for
payment Shares tendered pursuant to the Offer, including the Shares subject to
the Stockholder Agreements sold pursuant to the Stockholder Agreements or
tendered by the Selling Stockholders pursuant to the Offer), it would have
sufficient voting power to effect the Merger without the vote of any other
stockholder of the Company. However, the NYBCL also provides that if a parent
company owns at least 90% of each class of stock of a subsidiary, the parent
company can effect a short-form merger with that subsidiary without the action
of the other stockholders of the subsidiary. Accordingly, if, as a result of the
Offer or otherwise, the Purchaser acquires or controls the voting power of at
least 90% of the outstanding Shares, the Purchaser could, and intends to, effect
the Merger without prior notice to, or any action by, any other stockholder of
the Company. Pursuant to an agreement dated December 15, 1997, among Parent, the
Purchaser and the Company (the "Option Agreement"), the Company has granted to
the Purchaser an option (the "Short Form Merger Option") to purchase up to
1,300,000,000 newly issued Shares ("Short Form Shares"). The Short Form Merger
Option may be exercised by the Purchaser at any time within six business days
after the acceptance by the Purchaser of Shares pursuant to the Offer in
accordance with the terms of the Merger Agreement; provided, however, that the
Purchaser may only exercise the Short Form Merger Option in respect of at least
that number of Short Form Shares which, when added to the number of Shares
purchased pursuant to the Offer or otherwise, represents at least 90% of the
outstanding Shares, after giving effect to the issuance of the Short Form
Shares.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) RECOMMENDATION OF THE BOARD OF DIRECTORS. The Company's Board of
Directors unanimously determined on December 15, 1997 that the Offer is fair to,
and in the best interests of, the Company and the shareholders of the Company,
and recommends that the shareholders of the Company accept the Offer and tender
their shares pursuant to the Offer.
(b) BACKGROUND OF THE OFFER
In 1996, CIBC Oppenheimer Corp., on behalf of IST and its subsidiaries,
acted as an advisor to analyze whether there existed opportunities for these
companies by means of a merger, acquisition or other reorganization. In
connection with those activities, IST's majority ownership of the Company was
examined. In February 1997, representatives of IST and the Company made a
presentation to representatives of Parent with respect to IST's and AES's
business activities. On August 29, 1997, Parent submitted a non-binding letter
of intent which was accepted by IST on September 4, 1997 for the purchase of IST
by a subsidiary of
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Parent in which the Purchaser would be merged with and into IST. The letter of
intent required, as a condition of the closing of the merger with IST, that the
Board of AES would approve, on terms satisfactory to it, a transaction by which
a subsidiary of Parent would acquire the remaining issued shares of AES not
owned by IST. Shortly thereafter, the Company was advised that, especially in
light of the various interests of the Company's Board members described in Item
3(b) above, the amount of consideration to be received by the Company's
shareholders in any such transaction should be determined by the Company as part
of its own negotiations and that such consideration would not be negotiated by
IST.
In response to this information, in October 1997 the Board of Directors of
the Company engaged Neidiger/Tucker/Bruner, Inc. (the "Financial Advisor") for
the purpose of rendering an opinion as to the fairness of a proposed
transaction, from a financial point of view, to the minority shareholders of the
Company. As no such transaction was then structured or agreed upon, the
Financial Advisor's initial task was to assist in determining a fair price to be
paid to the minority shareholders assuming a transaction by which there would be
a change in control of the Company.
On October 21, 1997, a meeting was held between representatives of Parent
and of IST, one of whom is also an executive officer of AES. At that meeting
there was a brief discussion of the alternative structures for the acquisition
by Parent of the interest of the minority shareholders of AES. No agreements as
to the terms for the AES transaction were reached at that time.
On November 7, 1997, a Board of Directors meeting of the Company was held
for the purpose of discussing with the Financial Advisor its progress to date.
During the meeting, Mr. Bell (the then President of the Company) submitted his
resignation. He stated that he was resigning as a result of conflicts of
interest pertaining to him and his family. Although as of the meeting date,
neither the value of consideration to be received by shareholders of the Company
nor the structure of any proposed transaction with Parent had been identified, a
substantial portion of that meeting was devoted to the Financial Advisor's
presentation regarding its preliminary financial analyses concerning the
Company's financial and business condition and the value of the holdings of the
shareholders of the Company who own of approximately 38% of the common stock of
the Company not owned by IST (the "Minority Interest"). After the presentation
and discussion with members of the Board, the Board decided to further consider
the matters presented by the Financial Advisor and to schedule a subsequent
meeting at which additional questioning and presentation of analyses could
occur.
After several days of informal discussions among members of the Board, the
Board again met on November 11, 1997 to continue discussions with and
questioning of the Financial Advisor, who again presented information to the
Board with respect to its financial analyses. At the end of that meeting, the
Board authorized Mr. Schmitt to discuss with representatives of Parent whether
Parent intended to propose a transaction which would cause a change in control
of the Company. Mr. Schmitt was authorized to receive such information and
communicate the terms of any proposal from Parent to the Board for its
consideration.
On November 19, 1997, Mr. Schmitt first received an oral proposal from
Parent with respect to its interest in submitting a tender offer on behalf of
Purchaser for shares of common stock of the Company. After discussion with the
Board of the Company and subsequent discussions between Mr. Schmitt and Parent,
and further negotiations between the parties, Parent indicated that it would
request its board of directors to consider making a tender offer to the Company
on the terms substantially similar to the Offer. After further informal
discussions among the members of the Board, the Board met on November 25, 1997
to consider the pending discussions and to engage in further discussions with
the Financial Advisor.
Mr. Schmitt explained at the meeting that the transaction then being
discussed was a two-step transaction in which the first step would be a tender
offer for shares of common stock of the Company and the second step would be the
merger of the Purchaser into the Company. The transaction would result in
shareholders of the Company receiving $0.0059 per share of common stock (a total
of approximately $1,200,000 to the holders of the Minority Interest).The Board
also discussed the proposed transaction by which Parent or a subsidiary would
acquire IST by merger, the closing of which would be a condition to the closing
of the transactions concerning the Company. In addition, the Board discussed the
requirement that other shareholders of the Company (owning at least 26,264,000
shares of the common stock of the Company) enter into Stockholder Agreements to
tender their shares in accordance with the provisions of the tender offer
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applicable to all other shareholders of the Company (the effect of the IST
merger agreement and Stockholder Agreements would be to make Parent the owner of
at least 66 2/3% of the shares of common stock of the Company). Also, the
Company would be asked to grant an option to permit Parent or the Purchaser to
purchase such amount of newly issued shares from the Company to cause Parent
and/or the Purchaser to own, together with shares tendered pursuant to the
tender offer and shares acquired by Parent's acquisition of IST through a
merger, at least ninety percent (90%) of the outstanding common stock of the
Company. At the time of this Board meeting, the Board understood that it would
be premature to vote on the particulars of any proposal, as the actual making of
any offer by or for the benefit of Parent could not occur until the proposed
transaction was considered by the Board of Directors of Parent, which had not
yet occurred.
After further discussions between the parties, and being advised by Parent
that its Board on December 15, 1997, had approved making the Offer, the Board of
the Company met on December 15, 1997 to consider the Offer. At that meeting, the
Board engaged in additional discussions and reviewed the documents proposed to
effectuate the Offer. In addition, the Financial Advisor made a presentation of
certain financial analyses it had performed in connection with its review of the
proposed Offer and gave its oral opinion that the price to the owners of the
Minority Interest would be fair, from a financial point of view, if the
transactions discussed at the meeting were consummated under the terms described
in the documents. At the conclusion of that meeting, the Board of Directors of
the Company authorized the officers of the Company to proceed with the
transaction on terms consistent with those presented and to execute such
documents as necessary to cause the transaction to be completed.
On December 16, 1997, Parent, IST Acquisition Corp., an indirect wholly
owned subsidiary of Parent, and IST entered into the IST Merger Agreement
pursuant to which IST Acquisition Corp. will be merged with and into IST, with
IST continuing as the surviving corporation and an indirect wholly owned
subsidiary of Parent.
A press release was issued by the Company after the closing of the United
States stock markets on December 18, 1997 announcing the transaction, and the
Company received the Financial Advisor's written opinion, dated as of December
15, 1997, which confirmed the oral opinion previously communicated.
OPINION OF FINANCIAL ADVISOR
The Company engaged the Financial Advisor to act as its financial advisor
in connection with the Offer and to render an opinion as to the fairness, from a
financial point of view, to the holders of the Minority Interest of the
consideration to be received in the Offer. The Financial Advisor rendered its
oral opinion, subsequently confirmed in writing effective as of December 15,
1997, to the Board that, as of such date, the consideration to be received by
the shareholders' of the Minority Interest of the Company was fair to such
holders from a financial point of view. A COPY OF THE FINANCIAL ADVISOR'S
OPINION DATED DECEMBER 15, 1997 IS ATTACHED AS EXHIBIT (c)(1) HERETO. THE
COMPANY'S SHAREHOLDERS ARE ADVISED TO READ THE OPINION. Shareholders should note
that the opinion was written for the information of the Board in connection with
their evaluation of the Offer. No limitations were placed on the Financial
Advisor by the Board with respect to the investigation made or the procedures
followed in preparing and rendering its opinion.
In its review of the Offer, and in arriving at its opinion, the Financial
Advisor, among other things: (i) reviewed the publicly available consolidated
financial statements of the Company for recent years and interim periods to date
and certain other relevant financial and operating data of the Company made
available to the Financial Advisor from published sources and from the internal
records of the Company; (ii) reviewed certain internal financial and operating
information, including projections, relating to the Company provided by the
management of the Company; (iii) discussed with certain members of the
management of the Company the business, financial condition and business
prospects of the Company; (iv) reviewed the recent reported prices and trading
activity for the Company's common stock; and (v) performed such other analyses
and examinations and considered such other information, financial studies,
analyses and investigations and financial, economic and market data the
Financial Advisor deemed relevant.
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The Financial Advisor did not independently verify any of the information
concerning the Company reviewed by it in connection with its evaluation of the
Minority Interest and the Offer. The Financial Advisor assumed and relied upon
the accuracy and completeness of all such information provided by the Company or
available from public sources. In connection with its opinion, the Financial
Advisor did not prepare or obtain any independent evaluation or appraisal of any
of the assets or liabilities of the Company, nor did it conduct a physical
inspection of the properties and facilities of the Company. With respect to the
financial forecasts and projections used in its analyses, the Financial Advisor
assumed that they reflect the best currently available estimates and judgments
of the expected future performance of the Company. The Financial Advisor also
assumed that the Company was not a party to any pending transactions, including
external financings, recapitalizations or material merger discussions, other
than the Offer and those in the ordinary course of conducting its business. The
Financial Advisor's opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the date
of its opinion and any change in such conditions would require a reevaluation of
its opinion. The Financial Advisor was not requested to, and did not, formally
solicit indications of interest from any other parties in connection with a
possible acquisition of, or business combination with, the Company or its common
stock.
The Financial Advisor was not involved in determining any terms of the
Offer. The Financial Advisor was selected by the Board after consideration of
other investment bankers and based upon its qualifications, experience and
reputation. The Financial Advisor is a member of the National Association of
Securities Dealers, Inc. and is regularly engaged in the valuation of businesses
and securities in connection with business combinations, tender offers, mergers
and acquisitions and for other purposes.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Financial Advisor analyses set forth below does not purport to be a
complete description of the presentation by the Financial Advisor to the Board.
In arriving at its opinion, the Financial Advisor did not attribute any
particular weight to any analyses or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, the Financial Advisor believes that its analyses and the
summary set forth below must be considered as a whole and that selecting
portions of its analyses, without considering the entire analysis could create
an incomplete view of the processes underlying the analyses set forth in the
Financial Advisor presentation to the Board and its opinion. In performing its
analyses, the Financial Advisor made numerous assumptions with respect to
general business and economic conditions and other matters, many of which are
beyond the control of the Company. The analyses performed by the Financial
Advisor (and summarized below) are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses.
The Financial Advisor utilized several analyses in rendering its fairness
opinion. They are briefly described below.
Review of Recent Reported Prices and Trading Activity. The Financial
Advisor reviewed the average price and trading activity for the Company's common
stock for the twelve months preceding December 15, 1997. The bid and ask prices
of the Company's common stock as of December 15, 1997 were $0.0030 and $0.0065
respectively. This compares with a price of $0.0059 per share pursuant to the
Offer. The Financial Advisor found that generally the volume of trading activity
was extremely small.
Discounted Cash Flow Analysis. The Financial Advisor performed a
discounted cash flow analysis pursuant to which the value of the Company (and
accordingly the value of the Minority Interest) was estimated by subtracting (i)
the Company's obligations, senior to its common stockholders, to its lenders and
in respect of its preferred stock, from (ii) the estimated net present value of
the Company obtained by determining the average "free" cash flow for the
four-year, three-year and one-year periods ending on the last day of 1997, based
on certain operating and financial assumptions, forecasts and other information
provided by management of the Company. This analysis included an adjustment for
the discontinuance of the flow bin operations which were sold in the second
quarter of 1997. The Financial Advisor included the four-year average in its
analysis because the performance of the Company in 1994 was considerably better
than the performance for 1995 and 1996. For purposes of such analysis, the
Financial Advisor utilized varying discount
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rates (with particular focus on the discount rate of 20%, representing both
interest and risk factors). From these analyses, the Financial Advisor
determined that the adjusted value of the Company (and the consequent value of
the Minority Interest) was negative for both the three-year average period and
the four-year average period. The analysis using only 1997 numbers was
determined to be of only limited relevance in that, as noted in the Company's
Form 10-Q for the quarter ended September 30, 1997, performance in 1997 was
significantly affected by the Company's work on an unplanned turnaround project
as well as timing which caused projects to be undertaken in first quarter 1997
rather than fourth quarter 1996. The Company does not expect this to be repeated
in fiscal year 1998.
The Financial Advisor also performed the discounted cash flow analysis
without adjustment for the revenues and earnings previously generated from the
Company's leasing of its flow bins (which, as noted, have been sold so that such
source of revenues and earnings is no longer a part of the business of the
Company). Applying the same assumptions and methodology as discussed in the
preceding paragraph, the value of the Company (and the value of the Minority
Interest) was accordingly higher for each period. The Financial Advisor
attributed minimal weight to this methodology, as the flow bins have been sold
by the Company and the Company does not have an available business activity to
substitute for the flow bin business. However, for purposes of performing a
comprehensive valuation analysis and for demonstrating the quantitative effect
upon the valuation of the Company by such loss of business, the Financial
Advisor performed a discounted cash flow analysis which does not take into
account the cessation of the flow bin business.
Common Equity Book Value Per Common Share. The common equity book value
per common share of the Company was estimated as of December 31, 1997.
Adjustments were made to eliminate earnings obtained by the Company in
connection with the leasing of flow bins, as those assets were sold during
fiscal year 1997. The estimated value resulting from these calculations was
$0.00250 per common share, substantially lower than the $0.0059 per common share
to be paid pursuant to the Offer. Although these calculations support the
Financial Advisor's opinion that the Offer is fair, from a financial point of
view, to the holders of the Minority Interest of the Company, the Financial
Advisor attributed minimal weight to this result since it is not an appropriate
basis for valuing a company such as the Company. However, for purposes of
performing a comprehensive valuation analysis, the Financial Advisor performed
an analysis of common equity book value per common share.
Twelve-Month Trailing Cash Flow Analysis. The Financial Advisor performed
a twelve-month trailing cash flow analysis for the period from October 31, 1996
through September 30, 1997. The cash flow was adjusted for the sale of the flow
bins as a one-time event, but no adjustment was made for the expected decrease
in revenues and earnings to the Company which had been received from the
Company's leasing of its flow bins. The Financial Advisor applied a multiple to
the twelve-month trailing earnings (before income taxes, depreciation and
amortization) to arrive at a value of the Company of $4,456,000. After deducting
the Company's obligations to its lender and preferred stockholders, the adjusted
value of the Company was determined to be $2,863,000, with the Minority Interest
having a value of $1,097,000 (lower than the approximate $1,200,000 value
attributed to the Minority Interest under the terms of the Offer). This analysis
was deemed of only limited relevance for the same reasons discussed in
"Discounted Cash Flow Analysis" above.
Analysis of Contribution to Enterprise Value. The Company was advised
that, and so informed the Financial Advisor, that the total price to be paid by
Parent and/or the Purchaser in connection with both the Offer as well as the
acquisition of IST is to be approximately $31,500,000, of which approximately
$1,200,000 will be offered for the Minority Interest of the Company. The
Financial Advisor used such "enterprise value" to calculate the amount that
would constitute the Company's contribution to the enterprise value based on
both a contribution to revenues basis as well as a contribution to earnings
basis (before taxes, depreciation and amortization), based upon both a three
year average and a four year average. Under these analyses, the value of the
Minority Interest of the Company based upon the Company's overall contribution
to the enterprise ranged from $156,000 to $268,000, significantly lower than the
approximate $1,200,000 attributed to the Minority Interest under the terms of
the Offer.
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The foregoing summary does not purport to be a complete description of the
analyses performed by the Financial Advisor or of its presentations to the Board
of the Company. The Financial Advisor's analyses were prepared solely as part of
the Financial Advisor's analysis of the fairness of the consideration to be
received by the holders of the Minority Interest of the Company and were
provided to the Board of the Company in that connection.
The Company will pay the Financial Advisor a fee of $35,000 for rendering
its opinion. In addition, the Company agreed to reimburse the Financial Advisor
for reasonable out-of-pocket expenses and to indemnify the Financial Advisor and
its directors, officers and employees against any loss or claims arising out of
its engagement by the Company, subject to certain exceptions.
REASONS FOR THE BOARD'S POSITION.
In reaching its recommendation specified in Item 4(a), the Board of
Directors of the Company considered a number of factors, including without
limitation, the following:
(i) the financial and other terms and conditions of the Offer and
Merger, and the opinion of the Financial Advisor that the transaction is
fair, from a financial point of view, to the holders of the Minority
Interest, and the analyses of various factors considered by the Financial
Advisor in reaching its opinion, including those described above;
(ii) that a prior indication of interest had been received by the
Company for the purchase of the Company's assets, but that even though the
price proposed in that offer exceeded the price in the pending offer, the
net price receivable by the holders of the Minority Interest would have
been substantially less due to the two levels of taxation resulting from a
sale of assets;
(iii) that the historical performance of the Company has been
extremely erratic with respect to revenues, cash flow, expenses and income,
and that although the Company's year to date performance is relatively
good, it is not expected to be indicative of next year's results and there
is no reason to believe that future financial performance of the Company
will be any less erratic;
(iv) that the Company is no longer engaged in the business of leasing
flow bins to customers, which business previously resulted in positive
revenue and income, but which business was sold as a result of the
diminishing market for the Company's flow bins due to competition, the
costs of continued certification and maintenance of the flow bins, the need
for immediate additional working capital and the requirements of lenders;
(v) the historical market prices and volume of recent trading
activity, including that the Company's common stock is very thinly traded
and subject to significant volatility;
(vi) that it did not appear that the holders of the Minority Interest
would be able to participate in a business combination without the
contemporaneous sale by or of IST, and that the acquisition by Parent
and/or its affiliates of both companies would be appropriate for Parent
because the work being done by the Company and IST would complement work
being done by other companies owned by Parent;
(vii) that the Financial Advisor did not apply a specific
minority-ownership discount factor in arriving at the fair value of the
Minority Interest;
(viii) that the Company's inability to demonstrate to its employees
that there is growth potential has made it difficult to retain skilled
employees and to pay compensation to employees at a level necessary to
retain key employees, and that as a result the Company has experienced some
loss of business from customers whose relationships were with prior
employees of the Company;
(ix) that the Company's size makes it unlikely that larger buyers
would look at an acquisition of the Company by itself, while smaller buyers
might not find the Company to be attractive for acquisition as a result of
there not appearing to be advantages to the Company being a public entity;
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(x) the possible alternatives to consummating the Offer, including,
without limitation, continuing to operate the Company as an independent
entity and the risks associated therewith; and
(xi) that the price to be paid under the Offer was above the market
price for the shares on the date of the Company's receipt of the Offer, and
that the parties to the Stockholder Agreements are willing and desire to
tender their shares in connection with the Offer and at the price specified
in the Offer.
The members of the Board of the Company evaluated the various factors
listed above in light of their knowledge of the business, financial condition
and prospects of the Company and based upon the advice of financial and legal
advisors. In light of the number and variety of factors considered in connection
with the Board's evaluation of the Offer, the Board did not find it practicable
to assign relative weights to the foregoing factors and, accordingly, the Board
did not do so.
The Board of the Company recognizes that the Offer is not structured to
require the approval of the holders of the Minority Interest, and that it is
intended that if the Offer is consummated, Parent and/or the Purchaser will be
able to approve a merger without the affirmative vote of any other shareholder
of the Company. In considering the recommendation of the Board, shareholders of
the Company should be aware that certain members of the Board and executive
officers of the Company have interests in the transaction which present them
with conflicts of interest. In making its determinations and recommendations,
the Board of the Company was aware of the matters set forth above under Item
3(b) and considered them in making their recommendation and in approving the
Offer and related transactions.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
Neither the Company nor any person acting on its behalf has employed,
retained or compensated, or intends to employ, retain or compensate, any person
or class of persons to make solicitations or recommendations to security holders
concerning the Offer. However, the Company retained Neidiger/Tucker/Bruner, Inc.
to render its opinion to the Board as to the fairness to the Company's minority
shareholders, from a financial point of view, of the consideration to be
received by the Company's shareholders pursuant to the Offer. See Item 4 above.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) The Company has not effected any transactions in the Shares during
the 60 days preceding this Statement nor, to the best of the Company's
knowledge, have there been any such transactions during said period by any
executive officer, director, affiliate or subsidiary of the Company.
(b) To the best knowledge of the Company, to the extent permitted by
applicable securities laws, rules and regulations, all of the Company's
executive officers, directors and affiliates who own Shares intend to
tender such Shares to Purchaser pursuant to the Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as set forth in this Statement, the Company is not engaged
in any negotiation in response to the Offer which relates to or would
result in: (i) an extraordinary transaction, such as a merger or
reorganization, involving the Company or any subsidiary of the Company;
(ii) a purchase, sale or transfer of a material amount of assets by the
Company or any subsidiary of the Company; (iii) a tender offer for or other
acquisition of securities by or of the Company; or (iv) any material change
in the present capitalization or dividend policy of the Company.
(b) Except as set forth in this Statement, there are no transactions,
Board resolutions, agreements in principle or signed contracts in response
to the Offer, which relate to or would result in one or more of the matters
referred to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
None.
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ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
(a) None
(b) None
(c)(1) Opinion Letter from Neidiger/Tucker/Bruner, Inc. dated December
15, 1997.
*(c)(2) Text of Press Release, dated December 18, 1997, issued by the
Company.
*(c)(3) Agreement and Plan of Merger, dated as of December 15, 1997 among
the Company, Philip Services Corp. and AES Acquisition Corp.
*(c)(4) Form of Stockholder Agreement, dated as of December 15, 1997,
among Philip Services Corp., AES Acquisition Corp. and the
Selling Shareholders.
*(c)(5) Short Form Merger Option Agreement, dated as of December 15,
1997, among the Company, Philip Services Corp. and AES
Acquisition Corp.
* Not included in the mailing to the Company's shareholders.
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
/s/ GARY L. SCHMITT
--------------------------------------
Signature
Name: Gary L. Schmitt
Title: Vice President
Date: December 24, 1997
17
18
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- ----------------------------------------------------------------------------------
(a) None
(b) None
(c)(1) Opinion Letter from Neidiger/Tucker/Bruner, Inc. dated December 15, 1997
*(c)(2) Text of Press Release, dated December 18, 1997, issued by the Company
*(c)(3) Agreement and Plan of Merger, dated as of December 15, 1997 among the Company,
Philip Services Corp. and AES Acquisition Corp.
*(c)(4) Form of Stockholder Agreement, dated as of December 15, 1997, among Philip
Services Corp., AES Acquisition Corp. and the Selling Shareholders
*(c)(5) Short Form Merger Option Agreement, dated as of December 15, 1997, among the
Company, Philip Services Corp. and AES Acquisition Corp.
*Not included in the mailing to the Company's shareholders.