<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1997.
REGISTRATION NO. 333-34439
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRECISION AUTO CARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
VIRGINIA 7539 54-1847851
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
748 MILLER DRIVE, S.E.
LEESBURG, VIRGINIA 20175
(703) 777-9095
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
PETER KENDRICK
748 MILLER DRIVE, S.E.
LEESBURG, VIRGINIA 20175
(703) 777-9095
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN B. FRISCH, ESQUIRE JOEL J. HUGHEY, ESQUIRE
MILES & STOCKBRIDGE, ALSTON & BIRD LLP
A PROFESSIONAL CORPORATION 1201 W. PEACHTREE STREET
10 LIGHT STREET ATLANTA, GEORGIA 30309-3424
BALTIMORE, MARYLAND 21202 (404) 881-7490
(410) 385-3507
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
Registration Statement for the same
offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective Registration Statement
for the same offering: [ ]
If delivery of the prospectuses is expected to be made pursuant to Rule
434, check the following box: [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
======================================================================================================================
PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share...................... $30,866,000 $384.23
======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) of the rules and regulations under the
Securities Act of 1933.
(2) Represents the difference between the total registration fee and the amount
already paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION DATED OCTOBER 20, 1997.
PROSPECTUS
2,440,000 SHARES
[Precision Auto Care Logo appears here]
COMMON STOCK
------------------------
Of the 2,440,000 shares of Common Stock being offered hereby, 2,300,000
shares of Common Stock are being offered by Precision Auto Care, Inc.
("Precision Auto Care" or the "Company") and 140,000 shares of Common Stock are
being offered by certain selling shareholders (the "Selling Shareholders"). The
Company will not receive any proceeds from the sale of shares of Common Stock
offered by the Selling Shareholders. Prior to this offering (the "Offering"),
there has been no public market for the Common Stock of the Company. The initial
public offering price of the Common Stock is estimated to be between $10.00 and
$12.00 per share. See "Underwriting" for information relating to the factors to
be considered in determining the initial public offering price. Application has
been made to have the Company's shares of Common Stock included for quotation on
the Nasdaq National Market under the symbol "PACI" following the consummation of
the Offering.
The shares being offered by the Selling Shareholders will be acquired by
the Selling Shareholders from the Company upon the consummation of the
Combination (as defined herein). Certain Selling Shareholders may be deemed to
be statutory underwriters as that term is defined in the Securities Act of 1933,
as amended (the "Securities Act"), and commissions or discounts or any profits
realized on the sale of such shares received by such Selling Stockholders may be
deemed to be underwriting commissions or discounts within the meaning of the
Securities Act. Approximately $18.5 million of the net proceeds the Company will
realize from the Offering will be used to discharge certain indebtedness, a
portion of which is guaranteed by directors and executive officers of the
Company.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2) SHAREHOLDERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total(3)............... $ $ $ $
=========================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated to be $ payable by the Company.
(3) The Company has granted the Underwriters a 30-day option from the date of
this Prospectus to purchase up to 366,000 additional shares of Common Stock
on the same terms and conditions as set forth above solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $ , $ , $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the Underwriters' right to withdraw, cancel or modify such offer and to reject
orders in whole or in part. It is expected that delivery of the shares of Common
Stock offered hereby will be made on or about , 1997.
------------------------
A.G. EDWARDS & SONS, INC. FERRIS, BAKER WATTS
Incorporated
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
INSIDE FRONT COVER: A map of all existing retail and manufacturing
operations for Precision Tune Auto Care, Precision Auto Wash and Precision Lube
Express.
GATEFOLD: Photos of the auto care, car wash and lube facilities as well as
artist renderings of future prototype centers.
INSIDE BACK COVER: Product photos from the facilities -- i.e. technician
interacting with engine analyzer, receptionist providing maintenance log at
check out, etc.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent certified public
accountants and quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Simultaneously with, and as a condition to, the closing of the Offering, the
Company will acquire, in a series of separate merger and exchange offer
transactions, businesses engaged in (i) franchising and operating automobile
repair and maintenance service centers ("Precision Tune Auto Care"), (ii)
operating self-service and automated car wash centers ("Precision Auto Wash"),
and (iii) franchising and operating fast oil change and lubrication service
centers ("Precision Lube Express"), in exchange for shares of Common Stock (the
"Combination"). Unless the context otherwise requires, all references herein to
the "Company" or "Precision Auto Care" shall mean Precision Auto Care, Inc., a
Virginia corporation, and the Constituent Companies (as defined herein), taken
as a whole, and assume that the Combination has been consummated. See "The
Combination." Unless otherwise indicated, the information in this Prospectus
does not give effect to the Underwriters' over-allotment option. References to
system wide retail sales for Precision Tune Auto Care and Precision Lube Express
and information derived therefrom have been based upon information obtained from
the Company's franchisees.
THE COMPANY
Precision Auto Care is an international provider of automotive maintenance
services which are offered principally as franchise operations and will be
marketed under the "Precision" brand. The Company's operations include: (i)
Precision Tune Auto Care, an international franchisor of automotive service
centers; (ii) Precision Auto Wash, an operator and franchisor of self-service
and touchless automatic car wash centers; and (iii) Precision Lube Express, an
operator and franchisor of modular fast oil change and lube centers. The
Company's management team has developed a strategic plan to capitalize on the
market opportunities currently presented to the Company. These opportunities
include leveraging Precision Tune Auto Care's existing brand name recognition
and current market position into a broader "Precision" brand which symbolizes a
high-quality, convenient and high-value auto services provider. Other
opportunities involve the cross-selling of each service offering to existing and
potential franchisees in order to provide multiple services and one-stop
shopping to its customers and consolidating the automotive maintenance service
industry through strategic acquisitions. Prior to the consummation of the
Offering and the Combination the Company has not conducted any operations, and
none of the Constituent Companies have operated under the Precision Auto Wash or
Precision Lube Express names.
Precision Tune Auto Care is a leading franchisor of automotive service
centers with 556 centers owned and operated by franchisees as of June 30, 1997.
Total system wide retail sales were approximately $207 million for the fiscal
year ended June 30, 1997. Precision Auto Wash operates 34 company-owned
touchless automatic and self-service car wash centers and has developed a
proprietary marketing and operating system which provides computerized central
control of its car wash system. Precision Lube Express owns and franchises
express automobile oil and lubrication centers predicated upon a modular,
above-ground building configuration designed to minimize the up-front cost of
construction and provide flexibility in site selection and relocation. As of
June 30, 1997, there were 21 fast oil change and lubrication centers in
operation. In support of its franchisees and retail services, the Company
manufactures and sells car wash equipment, modular fast oil change and lube
buildings and car wash chemicals. The Company also distributes automotive parts,
equipment and supplies. After giving effect to the Offering and the acquisition
of Worldwide Drying Systems, Inc. described herein, pro forma revenue, operating
income and net income were $43.1 million, $4.6 million and $2.0 million for the
year ended June 30, 1997, respectively.
The domestic automotive service, car wash and fast oil change and lube
sectors totaled approximately $100 billion in 1996, up from $95 billion in 1995
and there are approximately 200 million cars and light trucks in the United
States. The Company expects that the market for the services it provides will
continue to grow as more consumers seek to have services performed for them
("do-it-for-me") rather than performing those services themselves
("do-it-yourself"). The do-it-for-me segment of the total automotive service
market increased from 67% to 72% from 1985 to 1995 while the do-it-yourself
segment showed a corresponding decrease. In addition, the automotive service and
car wash industries are highly fragmented. The Company believes that it will be
uniquely positioned to consolidate these industries and grow its market share on
a regional and national basis. The Company further believes that its vertically
integrated manufacturing and distribution capabilities will allow the Company to
consolidate these industries more quickly and cost effectively.
The Company intends to maximize the profitability of individual centers
through superior operating systems and procedures and the advantages associated
with cross-promoting the three Precision-branded services. In addition, the
Company intends to offer the Precision Auto Wash and Precision Lube Express
franchise products to existing Precision Tune Auto Care franchisees and to other
potential franchisees through Precision Tune Auto Care's franchise marketing
organization. To facilitate franchise sales and increase Company revenue growth
and profitability, the Company intends to develop a division of
3
<PAGE>
Company-owned centers, which individually may then be sold as a franchised
operation through a "turnkey program." The Company also intends to continue to
leverage its manufacturing and distribution capabilities, particularly as it
strives to aggressively consolidate, directly or through franchising, the
competing service providers in the automotive service industry.
THE COMBINATION
The Company was formed in April 1997 and will have conducted no business
operations prior to the Combination. Prior to the Combination, the Company will
not have operated under the Precision Auto Wash or Precision Lube Express names.
Simultaneously with, and as a condition to, the closing of the Offering, the
Company will consummate the Combination. The consideration to be paid by the
Company in the Combination will consist of shares of Common Stock as set forth
in the Plan of Reorganization and Agreement for Share Exchange Offers dated
August 27, 1997 (the "Combination Agreement"), that the Company has entered into
with WE JAC Corporation ("WE JAC"), Miracle Industries, Inc. ("Miracle
Industries"), Lube Ventures, Inc. ("Lube Ventures"), Rocky Mountain Ventures,
Inc. ("Rocky Mountain I"), Rocky Mountain Ventures II, Inc. ("Rocky Mountain
II"), Prema Properties, Ltd. ("Prema Properties"), Miracle Partners, Inc.
("Miracle Partners"), Ralston Car Wash Ltd. ("Ralston Car Wash"), and KBG, LLC
("KBG").
WE JAC is a holding company that conducts its operations through Precision
Tune Auto Care, Inc., a wholly-owned subsidiary. For purposes of this
Prospectus, WE JAC, Miracle Industries, Lube Ventures, Rocky Mountain I, Rocky
Mountain II, Prema Properties, Miracle Partners, Ralston Car Wash and KBG are
hereinafter referred to individually as a "Constituent Company" and collectively
as the "Constituent Companies." In addition, the financial statements of Miracle
Industries, Lube Ventures and Prema Properties have been combined and are
referred to as the "Ohio Group" for purposes of presenting the Selected
Financial Data and the Management's Discussion and Analysis of Financial
Condition and Results of Operations portions of this Prospectus. The Ohio Group
has been presented in this format because Miracle Industries, Lube Ventures and
Prema Properties are under common ownership, control and management. The
financial statements of Rocky Mountain I, Rocky Mountain II, Ralston Car Wash
and Miracle Partners have been combined and presented as "All Other Constituent
Companies" for purposes of presenting the Selected Financial Data and
Management's Discussion and Analysis of Financial Condition and Results of
Operations because prior to the Combination each of these Constituent Companies
has been operating independently from WE JAC and the Company believes that an
independent presentation of information for the entities within that group would
not be material to an investor's understanding of the Combination. The results
of operations of KBG are not included in the Summary Financial Data, the Pro
Forma Combined Financial Statements, Selected Financial Data, or Management's
Discussion and Analysis of Financial Condition and Results of Operations
portions of the Prospectus because that Constituent Company was formed for the
purpose of conveying certain proprietary software and intellectual property and
has never conducted any operations.
The Combination Agreement provides for the allocation of the shares of
Common Stock among the Constituent Companies and their owners. The aggregate
consideration to be paid by the Company in the Combination will consist of
approximately 2,780,695 shares of Common Stock (valued at $30.6 million, based
upon an assumed initial Offering price of $11.00 per share). Approximately
1,061,806 shares of Common Stock (valued at $11.7 million, based upon an assumed
initial Offering price of $11.00 per share) will be paid to persons who are
owners of certain Constituent Companies, and who will be executive officers or
directors of the Company immediately following the Combination. As a result of
this payment of shares of Common Stock and shares such persons will be able to
obtain upon the exercise of options which will be exercisable within 60 days of
the Combination, such persons will beneficially own approximately 24.6% of the
outstanding Common Stock immediately following the Offering after deducting the
shares of Common Stock offered by the Selling Shareholders. The Combination
Agreement also calls for the Company to use approximately $18.5 million of the
net proceeds it realizes from the Offering to repay certain indebtedness of the
Constituent Companies, a portion of which is guaranteed by certain officers and
directors of the Company. See "Risk Factors -- Control by Management and
Principal Shareholders," " -- Benefits to Management and Principal
Shareholders," "The Combination," "Certain Transactions" and "Shares Eligible
for Future Sale."
The consummation of the Combination is contingent on the satisfaction of
certain customary closing conditions. See "The Combination" for a more complete
description of the Combination Agreement and related transactions.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................... 2,300,000 shares
Common Stock offered by Selling Shareholders.................. 140,000 shares
Common Stock to be outstanding after the Offering............. 5,135,895 shares(1)
Use of Proceeds............................................... To repay certain outstanding indebtedness of the Constituent
Companies assumed in connection with the Combination, to
provide a point of sale management information system for each
center, to assist franchisees in converting to current image
requirements and to fund an acquisition. See "Use of
Proceeds."
Proposed Nasdaq Symbol........................................ "PACI"
</TABLE>
- ---------------
(1) Includes 2,780,695 shares of Common Stock to be issued in the Combination
and 55,200 shares to be issued upon exercise of common stock warrants
simultaneously with the Offering. Does not include 642,100 shares of Common
Stock issuable upon the exercise of stock options granted under the
Company's stock option plans (177,000 of which are expected to be granted
effective at the closing of the Offering) or 366,000 shares of Common Stock
that may be issued pursuant to the Underwriters' over-allotment option. See
"Management -- Compensation Pursuant to Plans" and "Underwriting."
The Company was incorporated in the Commonwealth of Virginia on April 14,
1997. The Company's principal address is 748 Miller Drive, S.E., Leesburg,
Virginia 20175.
SUMMARY FINANCIAL DATA
The following table presents unaudited combined pro forma financial data of
the Constituent Companies. The data should be read in conjunction with the
historical audited and unaudited financial statements and notes thereto of the
individual Constituent Companies and the unaudited Pro Forma Combined Financial
Statements appearing elsewhere in this Prospectus. The presentation of financial
information of the Company in the future will reflect WE JAC as the acquiror of
the other Constituent Companies reflecting the ownership interest in the Company
WE JAC shareholders will receive and the composition of the Company's board of
directors and management immediately following the Combination. Accordingly, WE
JAC will continue to be accounted for using the historical cost basis while
other Constituent Companies will be accounted for at fair value as determined in
accordance with Accounting Principles Board Opinion No. 16. See "Unaudited Pro
Forma Combined Financial Statements."
5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
--------------------------------------------
PRO FORMA
PRO FORMA COMBINED
COMBINED AS ADJUSTED
AS ADJUSTED FOR OFFERING
PRO FORMA FOR AND
COMBINED(1) OFFERING(2) ACQUISITION(3)
----------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Revenue............................................................................ $41,198 $41,198 $ 43,107
Operating income................................................................... 4,205 4,205 4,644
Net income......................................................................... 670 1,859 2,044
Earnings per share(4).............................................................. $ 0.23 $ 0.36 $ 0.39
EBITDA(5).......................................................................... 7,006 7,006 7,505
EBITDA per share(4)(5)............................................................. 2.37 1.33 1.43
Weighted average shares(4)......................................................... 2,952 5,252 5,252
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
--------------------------------------------
PRO FORMA
PRO FORMA COMBINED
COMBINED AS ADJUSTED
AS ADJUSTED FOR OFFERING
PRO FORMA FOR AND
COMBINED(1) OFFERING(2) ACQUISITION(3)
----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET:
Working capital (deficit).......................................................... $(7,913)(6) $ 5,034 $ 3,223
Total assets....................................................................... 58,676 61,706 62,906
Total debt......................................................................... 22,325 3,825 5,025
Total shareholders' equity......................................................... 26,737 48,267 48,267
</TABLE>
- ---------------
(1) Pro Forma Combined financial data reflects the Combination of all
Constituent Companies, adjusted to reflect goodwill resulting from the
Combination and amortization thereon; the provision for income taxes for
those Constituent Companies not previously taxed at the corporate level; and
the elimination of management fee income. See "Unaudited Pro Forma Combined
Financial Statements."
(2) As adjusted to reflect the sale of 2,300,000 shares of common stock offered
by the Company at an assumed public offering price of $11.00 per share after
deducting underwriting discounts and estimated offering expenses payable by
the Company, the repayment of $18.5 million of outstanding debt with the
proceeds from the Offering and a $2.5 million upgrade to existing Precision
Tune Auto Care centers, $1.5 million of which will be funded from proceeds
of the Offering and the balance of which will be funded from borrowings
under a revolving credit facility.
(3) As adjusted to reflect the $2.8 million purchase of the capital stock and
the inclusion of the revenues of Worldwide Drying Systems, Inc.
("Worldwide") as if such transaction had occurred on July 1, 1996. The
purchase will be substantially funded by $1.5 million in proceeds from the
Offering, and $1.2 million in seller financing ($261,000 of which will be
classified as current), as described in "Use of Proceeds."
(4) The weighted average shares outstanding used to calculate pro forma combined
earnings per share and EBITDA per share is based on the number of shares of
common stock and common stock equivalents of the Company issued in the
Combination, as if such shares had been outstanding for all periods
presented, and is comprised of the 2,780,695 shares to be issued in
connection with the Combination, 55,200 shares to be issued upon the
exercise of common stock warrants and 115,832 shares outstanding using the
treasury stock method with respect to options and warrants. The weighted
average shares outstanding used to calculate pro forma combined as adjusted
for offering and acquisition earnings and EBITDA per share also includes
2,300,000 shares to be issued by the Company in the Offering.
(5) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. Interest, taxes, depreciation and amortization are significant
components in understanding and assessing the financial performance of the
Company. Management believes that EBITDA is an important measure of the
Company's results of operations because EBITDA represents earnings before
consideration of the Company's capital structure and non-cash charges.
EBITDA should not be considered as an alternative to operating income, net
income, or cash flow from operations as an indicator of the Company's
operating performance. EBITDA measures presented may not be comparable to
similarly titled measures presented by other companies. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for a more complete
discussion of these matters.
(6) WE JAC's line of credit and $8.6 million term loan mature during its fiscal
year ended June 30, 1998 and, accordingly, are included as current
liabilities. All of this debt will be discharged with proceeds from this
Offering.
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby. This discussion also
identifies important cautionary factors that could cause the Company's actual
results to differ materially from those projected in forward looking statements
of the Company made by, or on behalf of, the Company. In particular, the
Company's forward looking statements, including those regarding the successful
integration of the businesses of the Constituent Companies, the effective
implementation of the Company's operating strategy, including the consolidation
of the Company's services under the "Precision" brand and the cross-marketing of
such services, the availability of additional businesses or centers for
acquisition or conversion, the adequacy of the Company's capital resources and
other statements regarding trends relating to various revenue and expense items,
could be affected by a number of risks and uncertainties including those
described below.
ABSENCE OF COMBINED OPERATING HISTORY; OPERATIONS UNDER NEW NAMES
The Company was founded in April 1997, and it will not conduct any
operations of the Constituent Companies as a combined entity until the
Combination is consummated. The Constituent Companies have never operated the
auto wash and lube express businesses under the "Precision Auto Wash" or
"Precision Lube Express" names. Accordingly, there can be no assurance that the
Company will be able to operate profitably or to integrate successfully the
businesses of the Constituent Companies, including their franchising activities,
manufacturing and distributing activities, and Company-owned center operations.
The Company may experience delays, complications and expenses in implementing
and integrating such operations, which delays could have a material adverse
effect on the Company's operations, net revenue and earnings. In addition, there
can be no assurance that operating under the "Precision" brand will be
successful or will not lead to confusion in the market for consumers, existing
franchisees or for potential franchisees.
Several of the Constituent Companies (Miracle Industries, Prema Properties
and Lube Ventures) did not operate profitably in the most recently presented
periods. The combination of profitable businesses with businesses which have not
been profitable may require additional management time and financial resources
than would otherwise be required to integrate profitable businesses. There can
be no assurance that the Company's management group will be able to manage
effectively the combined entity and to implement effectively the Company's
operating and expansion strategies. Failure to integrate successfully the
Constituent Companies or to implement the Company's operating and expansion
strategies could have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Strategy" and "The
Combination."
RISKS ASSOCIATED WITH EXPANSION
The success of the Company's expansion strategy will depend on a number of
factors, including (i) the Company's ability to locate existing businesses or
centers for acquisition, (ii) the availability of adequate financing to develop
or acquire additional businesses and centers, (iii) the Company's ability to
integrate successfully the operations of businesses or centers acquired in the
future into the Company's operations and (iv) the acceptance of the Precision
Auto Wash and Precision Lube Express brand among consumers, current Precision
Tune Auto Care franchisees and potential franchisees. There can be no assurance
that the Company's expansion strategy will be successful, that modifications to
the Company's strategy will not be required, or that the Company will be able to
obtain adequate financing on reasonable terms to develop or acquire additional
businesses or centers. There can be no assurance that future acquisitions will
not have an adverse effect on the Company's financial condition and results of
operations, particularly in the fiscal quarters immediately following the
completion of such acquisitions while the operations of the acquired business
are being integrated into the Company's operations. Once integrated, acquired
operations may not achieve levels of revenues, profitability or productivity
comparable with those achieved by the Company's existing operations, or achieve
standards otherwise expected in the Company's operations. In addition, the
Company will be competing for acquisition and expansion opportunities with
companies that have substantially greater resources. The Company also plans to
expand through direct franchising, franchising through area developers and by
developing Company-owned and operated centers. The success of all of these
expansion activities will depend on a number of factors including the ability of
the Company to establish and maintain support services for new franchisees and
Company-owned centers, to distribute parts and equipment in a timely fashion,
and to provide administrative resources necessary to maintain oversight of
center operations to promote compliance with the Company's concepts and
operating standards. The Company's success will also be dependent upon the
acceptance of the Precision Auto Wash and Precision Lube Express brand among
consumers, current Precision Tune Auto Care franchisees and potential
franchisees. See " -- Use of Proceeds; Availability of Capital" and
"Business -- Strategy."
7
<PAGE>
COMPETITION
The Company encounters competition in all aspects of its business,
including the sale by Precision Tune Auto Care, Precision Auto Wash and
Precision Lube Express centers of automotive maintenance and repair services,
self-service and automatic car wash services and fast oil and lubrication
services, respectively. The Company believes that automobile dealerships,
including recently emerging national and regional new and used auto dealerships,
represent Precision Tune Auto Care's principal competitors; however, the Company
also competes with national and regional tire companies, major oil
manufacturers, local service stations, and local and regional automobile repair
specialists. The Company believes the principal competitive factors in its
market are location, name recognition and reputation, quality of service and
price.
The Company also competes with these and other parties in the sale of
franchises, based on startup costs, royalty rates and Company support for the
franchisee, and in the sale of supplies and equipment, based on availability,
price and ability to provide prompt delivery. As the Company grows and expands
into new markets, it will be necessary to establish and maintain local and
regional support services for new franchisees and also parts and equipment
distribution, and the failure to do so in a timely manner could have a material
adverse effect on the Company's financial condition and results of operations.
The Company's manufacturing and distribution divisions compete with a
number of manufacturers and distributors of automotive and car wash supplies and
equipment. Many of these competitors are large and have a substantially longer
operating history than the Company. In addition, although the Company does not
intend to sell its complete proprietary HydroSpray system to unaffiliated car
wash centers, the Company's car wash manufacturing operations will sell certain
car wash equipment to car wash centers unaffiliated with the Company. The sale
of car wash equipment to unaffiliated car wash centers could increase the level
of competition in the Company's car wash business, allow the Company's
competitors to compete more effectively with the Company or reduce the Company's
ability to distinguish itself from its competitors. See
"Business -- Manufacturing and Distribution."
Certain competitors in each of the areas discussed above may have greater
financial resources than the Company, and there is no assurance that the Company
or individual Precision Auto Care centers will be able to compete effectively.
See "Business -- Competition."
RELIANCE ON FRANCHISEES; FRANCHISING
Franchise royalties are a significant component of the Company's revenue
base. Pro forma revenues attributable to franchise royalties were $13.8 million
for the year ended June 30, 1997. Therefore, the Company depends upon the
ability of its franchisees to promote and capitalize upon the Precision Tune
Auto Care, Precision Auto Wash and Precision Lube Express concepts and the
Company's reputation for quality and value. There can be no assurance that the
Company or its area developers will recruit franchisees with the business
abilities or financial resources necessary to open Precision Tune Auto Care,
Precision Auto Wash and Precision Lube Express centers on schedule or that the
franchisees will conduct operations profitably and in a manner consistent with
the Company's concepts and standards. In addition, the Company's growth strategy
is dependent in part upon the acceptance of the Precision Auto Wash and
Precision Lube Express brands among its existing Precision Tune Auto Care
franchisees. None of the existing Precision Tune Auto Care franchisees have been
offered the Precision Auto Wash or Precision Lube Express franchises. In
addition most of the existing Precision Tune Auto Care centers do not have the
required space to add a Precision Auto Wash or Precision Lube Express to their
existing center site. Accordingly, there can be no assurance that Precision Tune
Auto Care franchisees will become Precision Auto Wash or Precision Lube Express
franchisees. See "Business."
The Company is subject to various state, federal and international laws
relating to the franchisor-franchisee relationship. The failure by the Company
to comply with these laws could subject the Company to liability to franchisees
and to fines or other penalties imposed by governmental authorities. In
addition, the Company may become subject to litigation with, or other claims
filed with state, federal or international authorities by, franchisees or area
developers based on alleged unfair trade practices, implied covenants of good
faith and fair dealing or express violations of agreements. The Company believes
it is in material compliance with state, federal and international laws and with
its other obligations with regard to its franchising activities, to such a
degree that any failures to comply are unlikely to have a material adverse
effect on the Company. See "Business -- Government Regulation."
RELIANCE ON AREA DEVELOPERS
As of June 30, 1997, 505 of the 556 Precision Tune Auto Care centers, and
six of the 21 fast-oil change and lube centers were in territories covered by
area development and international master license agreements. The Company
relies, in part, on the assistance of area developers to identify and recruit
franchisees, to assist in the development of a center, and to support
8
<PAGE>
franchisees' continuing operations. Most area development agreements specify a
schedule for opening Precision Auto Care centers in the territory covered by the
agreement. In the past, the Company has agreed to extend or waive the
development schedules for certain of its area developers and there can be no
assurance that area developers will be able to meet their contractual
development schedules. Although the Company also expects to emphasize direct
franchising in open areas in its future growth, the development schedules of the
Company's area developers will remain a substantial part of the basis of the
Company's expectations regarding the number and timing of new center openings.
Specifically, the Company will be depending on its area developers to
promote the Precision Tune Auto Care, Precision Auto Wash and Precision Lube
Express franchises in their territories. Reluctance on their part to participate
in the development of these franchises and delays in Precision Auto Care center
openings could adversely effect the financial condition and results of
operations of the Company. The Company may encounter resistance to introducing
the Precision Lube Express brand and offering Precision Lube Express franchises
or opening Company-owned centers in areas covered by Precision Tune Auto Care
area subfranchisor agreements. While the Company believes that it may be
entitled to operate Company-owned centers and offer and sell Precision Lube
Express franchises directly or through others in such areas, there can be no
assurance that the Company will not become subject to legal proceedings or
otherwise expend Company resources in connection with disputes concerning the
Company's ability to offer and sell Precision Lube Express franchises or open
Company-owned centers in such areas. It also may be difficult for the Company to
enforce its area development agreements or to terminate the rights of area
developers who fail to meet development schedules or other standards and
requirements imposed by the Company, limiting the ability of the Company to
develop the territories of such developers.
Following a series of presentations to and meetings with Precision Tune Auto
Care subfranchisors, on October 12, 1997 the Company entered into a Statement of
Understanding (the "Statement of Understanding") with the Association of
Precision Tune Area Subfranchisors ("APTASF"), which represents substantially
all of the Company's subfranchisors. Pursuant to the Statement of Understanding,
the Company agreed to: (i) use its reasonable efforts to eliminate any
territorial conflicts between existing Precision Tune Auto Care subfranchisors
and existing Lube Depot area developers; and (ii) provide each APTASF member
with an option for 14 months after the completion of the Offering to elect to
execute a Precision Lube Area Subfranchisor Agreement and/or a Precision Auto
Wash Area Subfranchisor Agreement on substantially the same terms as existing
subfranchise agreements. The Statement of Understanding further provides that,
prior to the execution of a Precision Lube Express or Precision Auto Wash Area
Subfranchisor Agreement the Company shall have the right to establish
Precision Lube Express or Precision Auto Wash centers within such Precision
Tune Auto Care subfranchisor's territory if the area subfranchisor fails to
exercise a right of first refusal to open such center. In the event that an area
subfranchisor fails to execute an Area Subfranchisor Agreement within the
aforementioned option period, the Company shall have the right to establish
Precision Lube Express or Precision Auto Wash centers within such Precision Tune
Auto Care area subfranchisor's territory subject to the Company's obligations
to establish such a center no closer to an existing Precision Tune Auto Care
center than a distance to be agreed upon and to indemnify such area
subfranchisor from any claim made by Precision Tune Auto Care franchisees
alleging that a Precision Lube Express or Precision Auto Wash franchise
established by the Company in the area subfranchisor's area encroaches upon
the franchisee's Precision Tune Auto Care center. In addition to the foregoing,
the Company and APTASF agreed to jointly develop a structural relationship
between the Company, APTASF and the franchise owners association for the purpose
of enhancing communication within the system and jointly addressing certain
systemwide issues, such as avoiding encroachment, management of advertising
funds, development of new products and franchisee servicing. The Company and the
APTASF also agreed to jointly develop procedures and criteria for the purchase
and acquisition of buildings, fixtures, equipment and supplies from approved
suppliers or in accordance with specifications (including which items
franchisees must purchase from the Company). The APTASF membership agreed to
voluntarily purchase all such items from the Company for the next 24 months at
competitive prices. The Company believes that APTASF members and the Company
will finally resolve the matters contemplated by the Statement of Understanding
on terms that are favorable to the Company and the APTASF members. There can be
no assurance, however, that the Company, APTASF and the Company's subfranchisors
will be able to reach agreement on satisfactory terms or that the relationships
the Company develops with the APTASF members will not increase the costs of the
Company's operations or otherwise adversely affect the Company's financial
condition and results of operations. See "Business--Operations."
AUTOMOTIVE TECHNOLOGY ADVANCES
The demand for the services offered by the Company's Precision Tune Auto
Care and Precision Lube Express centers could be adversely affected as
automotive technology improves and automobiles are designed to have longer
overall lifetimes
9
<PAGE>
and to require regularly scheduled service and maintenance at less frequent
intervals. For example, some automobile manufacturers now recommend that
consumers change oil at 10,000 mile intervals, an increase from the mileage
intervals currently recommended by most manufacturers. The demand for the
Company's services also could be adversely affected by longer and more
comprehensive warranty programs offered by automobile manufacturers.
LABOR AVAILABILITY
The provision of high quality maintenance services by Precision Tune Auto
Care centers requires an adequate supply of skilled labor. In addition, the
operating costs of such centers may be adversely affected by high turnover in
skilled technicians. Accordingly, a center's ability to increase productivity
and revenues could be affected by its inability to maintain the continued
employment of skilled technicians necessary to provide the center's required and
optional services. There can be no assurance that Precision Tune Auto Care or
its franchisees will be able to maintain an adequate skilled labor force
necessary to efficiently operate these centers or that labor expenses will not
increase as a result of a shortage in the supply of skilled technicians.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL
The Company's success depends to a significant extent on the performance
and continued services of senior management and certain key personnel with
experience in developing, financing and operating the various types of Precision
Auto Care centers and the Company's related franchising and manufacturing and
distribution activities. The Company has employment agreements with John F.
Ripley, President and Chief Executive Officer of the Company, James A. Hay,
Senior Vice President-Retail Operations, Arnold Janofsky, Senior Vice President
and General Counsel, Peter Kendrick, Senior Vice President -- Finance, Grant G.
Nicolai, Senior Vice President Franchise Development, and William R. Klumb, Vice
President-Car Wash Operations. The loss of the services of one or more of these
key employees could have a material adverse impact on the Company's financial
condition and results of operations. Each of the employment agreements contains
certain noncompetition provisions that survive the termination of employment in
certain circumstances. The Company also has obtained certain noncompetition
agreements from several other members of management and key personnel who are
not subject to employment agreements. However, there can be no assurance such
noncompetition agreements will be enforceable. See "Management" and "The
Combination -- The Combination Agreement."
SEASONAL NATURE OF PORTIONS OF THE BUSINESS
Seasonal changes may impact various sectors of the Company's business
differently and, accordingly, the Company's operations may be affected by
seasonal trends in certain periods. In particular, severe weather in winter
months can adversely affect the Company because such weather makes it difficult
for consumers in affected parts of the country to travel to Precision Tune Auto
Care, Precision Lube Express and Precision Auto Wash centers and obtain
services. Severe winter weather and rainy conditions also adversely impact the
Company's sale and installation of car wash equipment. Conversely, the Precision
Auto Wash business is favorably impacted by the normal winter weather conditions
as demand for the Company's car wash service increases substantially in winter
months.
CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Following completion of the Offering, directors and executive officers of
the Company will beneficially own approximately 24.6% of the outstanding Common
Stock. Accordingly, these persons will have substantial influence over the
affairs of the Company, including the ability to influence the election of
directors, the outcome of votes by the Company's shareholders on major corporate
transactions, including mergers, sales of substantial assets, acquisitions and
going-private transactions, and other matters requiring shareholder approval.
See "Principal and Selling Shareholders."
BENEFITS TO MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Former owners of the Constituent Companies who are executive officers or
directors of the Company will receive an aggregate of approximately 1,061,806
shares of Common Stock as consideration in the Combination. In addition,
approximately $18.5 million of the net proceeds of the Offering will be used to
repay certain indebtedness of the Constituent Companies which is guaranteed by
executive officers or directors of the Company, or indebtedness for which such
persons are contingently liable. Certain former owners, including certain
directors and officers of the Company, are also entitled to purchase certain
Precision Lube Express buildings and Precision Auto Wash equipment at prices
which are at a discount of 10% from the normal price at which the equipment and
buildings are sold by the Company to its high volume distributors.
10
<PAGE>
This will result in a discount of approximately $250,000 in the aggregate from
sales prices the Company charges to such third parties. See "Use of Proceeds"
and "Certain Transactions."
In addition to the consideration to be paid in the Combination, certain of
the owners of the Constituent Companies and executive officers and directors of
the Company have received options to purchase shares of Common Stock. See
"Management" and "Certain Transactions."
USE OF PROCEEDS; AVAILABILITY OF CAPITAL
The Company intends to use approximately $18.5 million of the $21.5 million
($25.3 million if the Underwriters' over-allotment option is exercised in full)
in net proceeds from the Offering to repay certain existing indebtedness of the
Constituent Companies. Accordingly, most of the net proceeds from the Offering
will not be available for execution of the Company's expansion strategy.
Although the Company believes it will have access to sufficient additional
capital to pursue its expansion strategy, there can be no assurance that such
capital will be available or that, if available, the cost of such capital will
not restrict the Company's expansion or otherwise adversely affect the Company's
financial condition and results of operations. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
TRADEMARKS
The Company believes that its trademarks and other proprietary rights are
important to the success of its growth strategy. Accordingly, the Company
expects to continue to devote resources to the establishment and protection of
its trademarks in areas in which it conducts, or expects to conduct, business.
There can be no assurance that the actions taken by the Company to establish and
protect its trademarks and other proprietary rights will be adequate to prevent
imitation of its trademarks or to prevent others from seeking to block the
Company's use of its trademarks and proprietary rights as a violation of the
trademarks and proprietary rights of others. Moreover, no assurance can be given
that others will not assert rights in, or ownership of, trademarks and other
proprietary rights of the Company or that the Company will be able to
successfully resolve such conflicts.
In markets outside of the United States, the Company's rights to some or
all of its trademarks may not clearly be established. In addition, the laws of
certain foreign countries may not protect proprietary rights to the same extent
as do the laws of the United States. Although the Company has not in the past
suffered any material inhibition from doing business in desirable markets, there
can be no assurance that significant impediments will not arise in the future as
it expands product offerings and additional trademarks to new markets.
GOVERNMENT REGULATION
The Company is subject to federal, international and state laws and
regulations, including the regulations of the Federal Trade Commission as well
as similar authorities in individual states, in connection with the offer, sale
and termination of franchises, the operation of Precision Auto Care centers and
the regulation of the franchisor/franchisee relationship. The failure of the
Company to obtain or maintain approvals to sell franchises, or otherwise comply
with applicable franchise laws and regulations could have a material adverse
effect on the Company's financial condition and results of operations. Precision
Tune Auto Care and Precision Lube Express centers store new oil and handle large
quantities of used automotive oils and fluids. Precision Auto Wash centers
utilize chemicals in the washing process which are then discharged in the waste
water along with oils, fluids and other chemicals washed off of the vehicle. As
a result of these activities, the Company, its area developers and its
franchisees are subject to various environmental laws and regulations dealing
with the transportation, storage, presence, use, disposal and handling of
hazardous materials and hazardous wastes, discharge of stormwater, and
underground fuel storage tanks. The Company is not aware of any spills or
hazardous substance contamination on its properties or the properties of any
franchisees and believes that its operations are in material compliance with
existing environmental laws and regulations. However, if any such substances
were found on the Company's property or the property of any franchisee,
including leased properties, or if the Company were found to be in violation of
applicable laws and regulations, the Company could be responsible for clean-up
costs, property damage and fines or other penalties, any one of which could have
a material adverse effect on the Company's financial condition and results of
operations. See "Business -- Government Regulation."
11
<PAGE>
ASSUMPTION OF LIABILITIES OF CONSTITUENT COMPANIES
The Constituent Companies are businesses with prior operating histories.
Although the Company has instituted certain policies and procedures designed to
conform the operations of such Constituent Companies to its operating standards,
there can be no assurance that the Company will not become liable for past
operations of such Constituent Companies. In addition, although the Company has
performed certain due diligence investigations with respect to certain
liabilities of such Constituent Companies and has obtained indemnification with
respect to certain liabilities from the owners of such Constituent Companies,
there can be no assurance that any liabilities for which the Company becomes
responsible will not be material or will not exceed the limitations of the
applicable indemnification provisions.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws
and Virginia law may make a change in the control of the Company more difficult
to effect, even if a change in control were in the shareholders' interests. The
Virginia Stock Corporation Act prevents an "interested shareholder" (defined
generally as a person owning 10% or more of the Company's outstanding voting
stock) from engaging in an "affiliated transaction" with the Company for three
years following the date such person became an interested shareholder unless
certain conditions, including approval by the Company's Board of Directors, are
met. The Company's Articles of Incorporation allow the Board to determine the
terms of the preferred stock which may be issued by the Company without approval
of the holders of the Common Stock. The ability of the Company to issue
preferred stock in such manner could enable the Board to prevent changes in
management and control of the Company. The Board of the Company is divided into
three classes of directors, with directors being elected for staggered
three-year terms. Such staggered terms may affect the ability of the holders of
the Common Stock to change control of the Company. See "Description of Capital
Stock -- Anti-Takeover Provisions."
ABSENCE OF PRIOR PUBLIC MARKET; RELATIONSHIP OF OFFERING PRICE TO MARKET PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although the Company has applied for listing of the Common Stock on the
Nasdaq National Market, there can be no assurance that an active trading market
will develop or continue after the Offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined by
negotiations among the Company and representatives of the Underwriters, and may
not be indicative of the market price for shares of Common Stock after the
Offering. Prices for the shares of Common Stock after the Offering will be
determined in the market and may be influenced by many factors, including the
depth and liquidity of the market for the Common Stock, investor perception of
the Company, the automotive aftercare industry as a whole and general economic
and market conditions. See "Underwriting."
VOLATILITY OF MARKET PRICE FOR COMMON STOCK
From time to time after the Offering, there may be significant volatility
in the market price of the Common Stock. Quarterly operating results of the
Company or of other companies in the automotive aftercare market, changes in
earnings estimated by analysts, changes in general conditions in the economy or
the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance.
POTENTIAL STATUTORY UNDERWRITER STATUS OF SELLING SHAREHOLDERS
Due to questions regarding the investment intent of the Selling
Shareholders, the Selling Shareholders may be deemed to be statutory
"underwriters" as that term is defined in Section 2(11) of the Securities Act.
As statutory "underwriters", the Selling Shareholders may be subject to the
civil liability provisions of Section 11 of the Securities Act which may impose
a higher degree of due diligence upon the Selling Shareholders with respect to
the information contained in this Prospectus than may otherwise exist in the
absence of such underwriter status. Pursuant to Section 11 of the Securities
Act, any purchaser of securities offered hereby may sue the Company, statutory
underwriters (which includes the Underwriters and may include the Selling
Shareholders) and certain other parties to recover any losses sustained by such
party in connection with the purchase of the securities if, at the time the
registration statement became effective, the registration statement contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading.
The Company's liability under Section 11 is absolute whereas statutory
underwriters and other parties may assert reasonable care and due diligence
defenses as noted above.
12
<PAGE>
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and substantial dilution of $8.25 per share, the amount by which the purchase
price of the Common Stock offered hereby exceeds the pro forma net tangible book
value of the Common Stock immediately following the Offering. In the event the
Company issues additional Common Stock in the future, including shares which may
be issued in connection with future acquisitions or the exercise of outstanding
stock options, purchasers of Common Stock in this Offering may experience
further dilution in net tangible book value per share of the Common Stock. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 5,135,895 shares of Common
Stock outstanding. Of these shares, the 2,440,000 shares sold in the Offering
(together with any shares sold upon exercise of the over-allotment option) will
be freely tradeable without restriction, except for any shares purchased by an
"affiliate" of the Company within the meaning of the Securities Act. The
remaining 2,695,895 shares of Common Stock were issued in the Combination and
2,513,555 of such shares were registered under the Securities Act. Shareholders
of the Constituent Companies who will own in excess of 3,000 shares of the
Company's Common Stock following the consummation of the Combination have agreed
pursuant to the Combination Agreement not to sell or dispose of their shares for
a period of 180 days following closing without the Company's prior consent. The
Company has agreed it will not permit such shareholders to sell their shares
without the prior consent of the representatives of the underwriters. Otherwise,
the shares issued in the Combination which were registered under the Securities
Act will be freely tradable without restriction except for shares acquired by
"affiliates" of the Constituent Companies which will be subject to the
restrictions on transfer provided in Rule 145 of the Securities Act. In
addition, the Company and each of its directors and officers have agreed, for a
period of 180 days from the date of this Prospectus, not to sell or otherwise
dispose, directly or indirectly, of any shares of Common Stock in the public
market, without the prior written consent of the Underwriters. 182,340 of the
shares issued in the Combination were issued in transactions which the Company
believes were exempt from registration under the Securities Act. All of those
shares are held by affiliates of the Constituent Companies. Such shares may
generally only be sold in compliance with Rule 144 after a one-year holding
period has expired unless they are registered under the Securities Act. The
Company has agreed to register such shares under the Securities Act on behalf of
the affiliates upon their request following the expiration of the 180-day
lock-up period referenced above. Commencing 180 days after the completion of the
Offering, all of the issued and outstanding shares of Common Stock except
1,574,052 shares held by affiliates of the Constituent Companies will be
eligible for sale in the public market, and an additional 642,100 shares will be
available for issuance upon the exercise of outstanding stock options. The
market price of the Common Stock could be materially and adversely affected by
the sale or availability for sale of shares now held by the existing
shareholders of the Company or of shares which may be issued under the Company's
stock incentive plan.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,300,000 shares of
Common Stock offered by the Company, at an assumed public offering price of
$11.00 per share, are estimated to be approximately $21.5 million ($25.3 million
if the Underwriters' over-allotment option is exercised in full), after
deducting underwriting discounts and commissions and estimated offering expenses
and estimated offering expenses of the Selling Shareholders payable by the
Company.
In connection with the Combination, the Company plans to use approximately
$18.5 million of the net proceeds of the Offering to repay certain indebtedness
of the Constituent Companies assumed pursuant to the Combination. At June 30,
1997, such indebtedness had interest rates ranging between 7.5% and 12.5% and
had a weighted average interest rate of 9.3%. Such indebtedness, if not prepaid,
would otherwise mature at various dates through February 2026. See "Risk
Factors -- Use of Proceeds; Availability of Capital", "The Combination" and
"Certain Transactions."
The Company intends to spend approximately $2.5 million to upgrade and
equip each center in the Precision Tune Auto Care system with current signage
and a "point of sale" computer system, which will communicate sales results and
other data to the Company's corporate office. Following the Combination, the
Company will make an investment to ensure that each existing center is equipped
with the Company's proprietary point of sale system. For those centers which do
not currently have the system, the Company will provide the system (which costs
approximately $2,500) directly to the franchisee. For those centers which
already have the system, the Company will reimburse the franchisee for up to
$2,500 of costs the franchisee incurred in installing the system. In addition,
the Company will invest up to $2,500 to upgrade each center's signage to current
image standards. $1.5 million of the net proceeds from the Offering will be used
for this purpose and the balance will be financed through borrowings under a
revolving credit facility.
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The Company recently entered into a letter of understanding to purchase all
of the outstanding capital shares of Worldwide Drying Systems, Inc.
("Worldwide") for $2.8 million. Worldwide manufactures and distributes drying
systems for installation in automatic car washes. The terms of the agreement
call for a cash payment at closing of $1.6 million and seller financing of $1.2
million. The promissory note will bear interest at a rate of 9% per annum and
require monthly payments of principal and interest over a four-year term. The
Company expects to close the transaction immediately following the consummation
of the Offering and the Combination. The Company intends to use $1.5 million of
the net proceeds of the Offering to substantially fund the cash portion of the
purchase price.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, investment grade or
government, interest-bearing securities. The Company will not receive any
proceeds from the sale of shares of Common Stock offered by the Selling
Shareholders. See "Principal and Selling Shareholders."
DIVIDEND POLICY
As a newly formed corporation, the Company has never declared or paid
dividends on its Common Stock. The Company expects that future earnings, if any,
will be retained to finance the growth and development of the Company's business
and, accordingly, does not intend to declare or pay any dividends on the Common
Stock for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of the Company's Board of
Directors and will depend upon the future earnings, results of operations,
financial condition and capital requirements of the Company, among other
factors. The Company expects that the terms of its revolving credit facility
will prohibit the Company from paying dividends while amounts are outstanding
under the revolving credit facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of June 30, 1997 on a pro forma basis to reflect the Combination and on a pro
forma as adjusted to give effect to the Combination and the sale of the
2,300,000 shares of Common Stock offered by the Company in the Offering and the
application of the net proceeds therefrom, which are estimated to be
approximately $21.5 million based on an assumed initial offering price of $11.00
per share. The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Unaudited Pro Forma Combined Financial Statements of the Company included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------
PRO FORMA
COMBINED
AS ADJUSTED(1)
PRO FORMA FOR THE
COMBINED OFFERING
--------- ----------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Short-term debt, including current portion of long-term debt and notes payable to
related parties....................................................................... $11,417 $ 261
--------- ----------------
--------- ----------------
Long-term debt less current portion..................................................... $10,908 $ 4,764
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized, no shares
outstanding........................................................................ -- --
Common Stock, $.01 par value; 19,000,000 shares authorized; 2,835,895 shares issued
and outstanding, pro forma combined; 5,135,895 shares issued and outstanding, pro
forma as adjusted (2).............................................................. 28 51
Additional paid-in capital............................................................ 26,709 48,216
--------- ----------------
Total shareholders' equity......................................................... 26,737 48,267
--------- ----------------
Total capitalization............................................................... $37,645 $ 53,031
--------- ----------------
--------- ----------------
</TABLE>
- ---------------
(1) Does not include 642,100 shares of Common Stock issuable upon the exercise
of stock options granted under the Company's stock option plans (177,000 of
which are expected to be granted effective at the closing of the Offering)
or 366,000 shares of Common Stock that may be issued pursuant to the
Underwriters' over-allotment option. See "Management -- Compensation
Pursuant to Plans" and "Underwriting."
(2) Share data includes 55,200 shares issued upon exercise of common stock
warrants simultaneously with the Offering.
DILUTION
At June 30, 1997, after giving effect to the Combination, the unaudited pro
forma combined net tangible book deficit of the Company was $(5.6 million), or
$(1.97) per share. Pro forma combined net tangible book deficit is the tangible
net worth (tangible assets less total liabilities) of the Combined Constituent
Companies immediately following the Combination and prior to the Offering. After
giving effect to the Combination and the sale by the Company of the 2,300,000
shares of Common Stock offered by the Company at an assumed initial offering
price of $11.00 per share, the pro forma combined net tangible book value of the
Company would have been $14.1 million or $2.75 per share. This represents an
immediate increase in pro forma net tangible book value of $4.72 per share to
existing shareholders and an immediate dilution in pro forma net tangible book
value of $8.25 per share to new investors purchasing the shares of Common Stock
in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................................................... $ 11.00
Pro forma net tangible book deficit prior to the Offering(1)............................. $(1.97)
Increase attributable to new investors................................................... 4.72
------
Pro forma net tangible book value after the Offering....................................... 2.75
-------
Pro forma dilution in net tangible book value to New Investors............................. $ 8.25
-------
-------
</TABLE>
15
<PAGE>
The following table sets forth at June 30, 1997, the number of shares of
Common Stock purchased from the Company, the total consideration to the Company
and the average price per share paid to the Company by existing shareholders
after giving effect to the Combination and by the new investors purchasing
shares of Common Stock in the Offering:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
-------------------- ------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)(2)......................................... 2,835,895 55.2% $ 11,688 31.6% $ 4.12
New investors....................................................... 2,300,000 44.8% 25,300 68.4% $ 11.00
---------- ------- -------- -------
Total.......................................................... 5,135,895 100.0% $ 36,988 100.0%
---------- ------- -------- -------
---------- ------- -------- -------
</TABLE>
- ---------------
(1) This calculation is based on the 2,780,695 shares of Common Stock to be
issued in the Combination, and 55,200 shares issued upon exercise of common
stock warrants simultaneously with the Offering.
(2) Total consideration for the existing shareholders represents the net cash
investment made by the owners of the Constituent Companies prior to the
Combination plus the warrant exercise price of warrants exercised
simultaneously with the Offering.
The foregoing table assumes no exercise of the Underwriters' over-allotment
option or any of the Company's other outstanding options or warrants. Upon the
closing of the Combination, there will be outstanding options and warrants to
purchase 642,100 shares of Common Stock at a weighted average exercise price of
$9.43 per share (177,000 of which are expected to be issued at the closing of
the Offering with an exercise price equal to the initial offering price). To the
extent that any of the outstanding options are exercised, there will be further
dilution to new investors. See "Shares Eligible for Future Sale."
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
combination of Precision Auto Care and the Constituent Companies as more fully
described herein. See "The Combination." The unaudited pro forma financial
statements have been prepared by the Company based on the historical financial
statements of WE JAC, which is deemed the acquirer of the remaining Constituent
Companies in this Prospectus for financial statement purposes, adjusted to
reflect the purchase (as defined by Accounting Principle Board Opinion No. 16)
of the remaining Constituent Companies. The unaudited pro forma combined
financial statements reflect purchase adjustments based upon certain preliminary
estimates and assumptions deemed appropriate by management of the Company, but
do not include any expected benefits or cost reductions, if any, anticipated by
the Constituent Companies following consummation of the Combination. The
unaudited pro forma combined balance sheets at June 30, 1997, give effect to (i)
the consummation of the Combination, (ii) the consummation of the Combination
and this Offering and (iii) the consummation of the Combination, this Offering
and the acquisition of the assets of Worldwide Drying Systems, Inc., as if such
transactions had occurred on such date. The unaudited pro forma statements of
operations for the year ended June 30, 1997 give effect to (i) the Combination,
(ii) the Combination and the Offering and (iii) the Combination, the Offering
and the acquisition of Worldwide Drying Systems, Inc. as if such transactions
were completed on July 1, 1996. All companies have historically reported
earnings on a December 31 year end, except for WE JAC, which has historically
reported earnings on a June 30 year end. In order to provide for a consistent
presentation, the pro forma financial results for all Constituent Companies have
been presented using results of operations for the twelve month period ended
June 30, 1997.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of WE JAC and the individual
Constituent Companies comprising the Ohio Group, including the notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Prospectus.
16
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
OTHER PURCHASE COMBINED
WE JAC CONSTITUENT ACCOUNTING AS ADJUSTED
HISTORICAL COMPANIES AND COMBINING PRO FORMA FOR
(AUDITED) HISTORICAL(1) ADJUSTMENTS COMBINED(2) OFFERING(3)
---------- ------------- ------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets....................... $ 7,811 $ 4,036 $ (188)(5) $11,659 $13,189
Property plant and equipment......... 854 12,325 (586)(6) 12,593 14,093
Goodwill and other intangibles....... 16,579 1,554 14,202(7)(8) 32,335(7) 32,335(7)
Other................................ 1,450 639 2,089 2,089
---------- ------------- ------------- ----------- -----------
Total assets......................... $ 26,694 $18,554 $13,428 $58,676 $61,706
---------- ------------- ------------- ----------- -----------
---------- ------------- ------------- ----------- -----------
Current liabilities.................. $ 15,053 $ 4,519 $ -- $19,572 $ 8,155
Long term debt....................... 622 10,286 -- 10,908 3,825
Other................................ 725 259 475(8) 1,459(9) 1,459(9)
---------- ------------- ------------- ----------- -----------
Total liabilities.................... 16,400 15,064 475 31,939 13,439
Stockholders' equity................. 10,294 3,490 12,953(7)(8)(10) 26,737(7)(8)(10) 48,267(7)(8)(10)
---------- ------------- ------------- ----------- -----------
Total liabilities and stockholders'
equity............................. $ 26,694 $18,554 $13,428 $58,676 $61,706
---------- ------------- ------------- ----------- -----------
---------- ------------- ------------- ----------- -----------
<CAPTION>
PRO FORMA
COMBINED
AS ADJUSTED
FOR OFFERING
AND
ACQUISITION(4)
--------------
<S> <C>
Current assets....................... $ 11,639
Property plant and equipment......... 15,043
Goodwill and other intangibles....... 34,135(7)
Other................................ 2,089
--------------
Total assets......................... $ 62,906
--------------
--------------
Current liabilities.................. $ 8,416
Long term debt....................... 4,764
Other................................ 1,459(9)
--------------
Total liabilities.................... 14,639
Stockholders' equity................. 48,267(7)(8)(10)
--------------
Total liabilities and stockholders'
equity............................. $ 62,906
--------------
--------------
</TABLE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997(11)
<TABLE>
<CAPTION>
PRO FORMA
OTHER PURCHASE COMBINED
WE JAC CONSTITUENT ACCOUNTING AS ADJUSTED
HISTORICAL COMPANIES AND COMBINING PRO FORMA FOR
(AUDITED) HISTORICAL(1) ADJUSTMENTS COMBINED(2) OFFERING(3)
---------- ------------- ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue.............................. $ 27,457 $13,956 $ (215)(12) $41,198 $41,198
Direct cost.......................... 20,291 10,850 (207)(12) 30,934 30,934
---------- ------------- ------------- ----------- -----------
Contribution......................... 7,166 3,106 (8) 10,264 10,264
General and administrative
expenses............................. (2,522) (2,041) (41) (4,604) (4,604)
Amortization expense................. (968) -- (516)(13) (1,484)(13) (1,484)(13)
Company owned stores held for
resale............................... 29 -- -- 29 29
---------- ------------- ------------- ----------- -----------
Operating income (loss).............. 3,705 1,065 (565) 4,205 4,205
Other income (expense)............... (1,179) (1,103) (26)(12) (2,308) (359)(15)
---------- ------------- ------------- ----------- -----------
Income (loss) before income taxes.... 2,526 (38) (591) 1,897 3,846
Provision for income taxes........... 1,271 (18) (26) 1,227(17) 1,987(17)
---------- ------------- ------------- ----------- -----------
Net income (loss).................... $ 1,255 $ (20) $ (565) $ 670 $ 1,859
---------- ------------- ------------- ----------- -----------
---------- ------------- ------------- ----------- -----------
Earnings per share................... $ 0.23(18) $ 0.36(18)
----------- -----------
----------- -----------
<CAPTION>
PRO FORMA
COMBINED
AS ADJUSTED
FOR OFFERING
AND
ACQUISITION(4)
--------------
<S> <C>
Revenue.............................. $ 43,107
Direct cost.......................... 32,021
--------------
Contribution......................... 11,086
General and administrative
expenses............................. (4,927)
Amortization expense................. (1,544)(14)
Company owned stores held for
resale............................... 29
--------------
Operating income (loss).............. 4,644
Other income (expense)............... (456)(16)
--------------
Income (loss) before income taxes.... 4,188
Provision for income taxes........... 2,144(17)
--------------
Net income (loss).................... $ 2,044
--------------
--------------
Earnings per share................... $ 0.39(18)
--------------
--------------
</TABLE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT ADJUSTMENTS
(1) Reflects the historical financial data for the Ohio Group and All Other
Constituent Companies as of and for the twelve months ended June 30, 1997.
See note (19) for individual Constituent Company detail.
(2) As adjusted to reflect 2,780,695 shares issued in the Combination.
17
<PAGE>
(3) As adjusted to reflect the sale of 2,300,000 shares by the Company to the
public at an assumed initial offering price of $11.00 per share; payments
of $18.5 million of outstanding debt, and a $1.5 million upgrade to
existing Precision Tune Auto Care company centers with proceeds from the
Offering as described in "Use of Proceeds."
(4) As adjusted to reflect the proceeds and use of proceeds from the Offering
as described in footnote (3), and the $2.8 million purchase of the capital
stock of Worldwide as if such transactions had occurred on June 30, 1997.
The purchase will be substantially financed by $1.5 million in proceeds
from the Offering, and $1.2 million of seller financing, ($261,000 of which
is classified as current) as described in "Use of Proceeds."
(5) Reflects the elimination of $188,000 in intercompany receivables.
(6) Reflects the distribution of certain fixed assets with a net book value of
$586,000 in the Combination.
(7) The accounting for the Combination and the acquisition of Worldwide is
summarized as follows. Management believes that the final allocation of the
purchase price will not materially differ from the preliminary estimated
amounts.
<TABLE>
<CAPTION>
COMBINATION ACQUISITION
----------- -----------
Issuance of common stock (IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
WE JAC shares................................................ 1,333,625
Other Constituent Companies shares........................... 1,447,070 at $11 per share $15,918
----------
Total shares issued.......................................... 2,780,695
----------
----------
Cash consideration................................................................................ $ 1,500
Seller financing.................................................................................. 1,200
Transactions costs................................................................................ 525
----------- -----------
Total purchase price.............................................................................. $16,443 $ 2,700
----------- -----------
----------- -----------
<CAPTION>
COMBINATION ACQUISITION
----------- -----------
<S> <C> <C>
Fair value of net tangible assets acquired........................................................ $ 2,716 $ 950
Amounts allocated to franchise rights and goodwill................................................ 14,002 1,750
Amounts allocated to other intangibles............................................................ 200
Other accrued costs............................................................................... (475)
----------- -----------
Total purchase price.............................................................................. $16,443 $ 2,700
----------- -----------
----------- -----------
</TABLE>
(8) The Company has allocated $525,000 of the total transaction expenses to be
paid out of the proceeds of the Offering, to costs of the Combination. An
additional $475,000 has been accrued for estimated costs expected to be
incurred in connection with the Offering.
(9) Reflects the resulting deferred tax liability of the Constituent Companies
which, other than WE JAC, were previously organized as Subchapter S
corporations, partnerships or limited liability companies.
(10) Reflects the elimination of retained earnings or accumulated deficit.
(11) Reflects results of operations for the twelve months ended June 30, 1997,
although historical year end is December 31.
(12) Reflects the elimination of intercompany transactions between Rocky
Mountain I, Rocky Mountain II and Ralston Car Wash, and between Miracle
Industries, Lube Ventures and Prema Properties including the elimination of
$127,000 in management fees.
(13) Reflects additional straight line amortization of goodwill over 30 years
and other intangibles over 4 years ($516,000 for the year ended June 30,
1997).
(14) Reflects additional straight line amortization of goodwill over 30 years
including $1.8 million related to the purchase of the capital stock of
Worldwide and other intangibles over 4 years ($576,000 for the year ended
June 30, 1997).
(15) Reflects the reduction in interest expense ($2.0 million for the year ended
June 30, 1997) on debt to be repaid with proceeds of the Offering.
(16) Reflects the net effect of the reduction in interest expense ($1.9 million
for the year ended June 30, 1997) on debt to be repaid with the proceeds of
the Offering and the increase in interest expense on seller financing to be
incurred to purchase Worldwide.
(17) Reflects a provision for income taxes on the combined pro forma earnings at
the effective rate of 39%, after considering non-deductible goodwill
amortization.
(18) The weighted average shares outstanding used to calculate pro forma
combined earnings per share is based on the number of shares of common
stock and common stock equivalents of the Company issued in the
Combination, as if such shares had been outstanding for all periods
presented, and is comprised of the following: 2,780,695 shares to be issued
in connection with the Combination, 55,200 shares issued upon exercise of
common stock warrants simultaneously with the Offering, and 115,832 shares
outstanding using the treasury stock method on options and warrants. The
weighted average shares outstanding used to calculate pro forma combined as
adjusted for offering and acquisition earnings per share also include
2,300,000 shares to be issued by the Company in the Offering.
(19) Details of the historical Ohio Group and All Other Constituent Companies
follow.
18
<PAGE>
THE OHIO GROUP AND ALL OTHER CONSTITUENT COMPANIES
UNAUDITED PRO FORMA BALANCE SHEETS
JUNE 30, 1997
<TABLE>
<CAPTION>
THE OHIO GROUP ALL OTHER CONSTITUENT COMPANIES
-------------------------------- -------------------------------------------
MIRACLE LUBE PREMA ROCKY ROCKY RALSTON MIRACLE
INDUSTRIES VENTURES PROPERTIES MOUNTAIN I MOUNTAIN II CAR WASH PARTNERS
---------- -------- ---------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets............................... $2,572 $ 944 $ 44 $225 $ 187 $ 9 $ 55
Property, plant and equipment................ 3,746 860 3,032 467 2,282 201 1,737
Goodwill and other intangibles............... 1,495 59 -- -- -- -- --
Other........................................ 545 6 68 10 10 -- --
---------- -------- ---------- ---------- ----------- -------- --------
Total assets................................. $8,358 $1,869 $3,144 $702 $ 2,479 $210 $1,792
---------- -------- ---------- ---------- ----------- -------- --------
---------- -------- ---------- ---------- ----------- -------- --------
Current liabilities.......................... $2,426 $ 604 $ 872 $ 34 $ 325 $ 81 $ 177
Long term debt............................... 3,809 946 2,079 461 1,545 218 1,228
Other........................................ 154 -- 105 -- -- -- --
---------- -------- ---------- ---------- ----------- -------- --------
Total liabilities............................ 6,389 1,550 3,056 495 1,870 299 1,405
Stockholders' equity (deficit)............... 1,969 319 88 207 609 (89) 387
---------- -------- ---------- ---------- ----------- -------- --------
Total liabilities and stockholders' equity... $8,358 $1,869 $3,144 $702 $ 2,479 $210 $1,792
---------- -------- ---------- ---------- ----------- -------- --------
---------- -------- ---------- ---------- ----------- -------- --------
<CAPTION>
HISTORICAL
COMBINED
--------
<S> <C>
Current assets............................... $ 4,036
Property, plant and equipment................ 12,325
Goodwill and other intangibles............... 1,554
Other........................................ 639
--------
Total assets................................. $18,554
--------
--------
Current liabilities.......................... $ 4,519
Long term debt............................... 10,286
Other........................................ 259
--------
Total liabilities............................ 15,064
Stockholders' equity (deficit)............... 3,490
--------
Total liabilities and stockholders' equity... $18,554
--------
--------
</TABLE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
THE OHIO GROUP ALL OTHER CONSTITUENT COMPANIES
-------------------------------- -------------------------------------------
MIRACLE LUBE PREMA ROCKY ROCKY RALSTON MIRACLE HISTORICAL
INDUSTRIES VENTURES PROPERTIES MOUNTAIN I MOUNTAIN II CAR WASH PARTNERS COMBINED
---------- -------- ---------- ---------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................ $8,800 $2,201 $ 750 $216 $ 1,404 $169 $416 $ 13,956
Direct cost............................ 7,486 1,622 558 110 855 96 123 10,850
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Contribution......................... 1,314 579 192 106 549 73 293 3,106
General and administrative expenses.... 1,119 265 45 36 307 38 231 2,041
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Operating income....................... 195 314 147 70 242 35 62 1,065
Other (expense)........................ (426) (93) (273) (29) (178) (37) (67) (1,103)
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Income (loss) before income taxes...... (231) 221 (126) 41 64 (2) (5) (38)
Provision for income taxes............. (90) 86 (49) 15 23 (1) (2) (18)
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Net income (loss)...................... $ (141) $ 135 $ (77) $ 26 $ 41 $ (1) $ (3) $ (20)
---------- -------- ---------- ---------- ----------- -------- -------- ------------
---------- -------- ---------- ---------- ----------- -------- -------- ------------
</TABLE>
19
<PAGE>
SELECTED FINANCIAL DATA
Simultaneous with, and as a condition to, the closing of the Offering the
Company will acquire all of the Constituent Companies in a series of mergers and
share exchanges. The presentation of the financial information of the Company in
the future will reflect WE JAC as the acquiror of the other Constituent
Companies due to the ownership interest in the Company WE JAC shareholders will
receive and the composition of the Company's board of directors and managers
immediately following the Combination. The Combination will be accounted for
using the historical cost basis of WE JAC, and the fair value of the other
Constituent Companies, as determined in accordance with Accounting Principles
Board Opinion No. 16. Miracle Industries, Lube Ventures and Prema Properties
have been combined and are referred to as the "Ohio Group" for purposes of
presenting the Selected Financial Data below and the Management's Discussion and
Analysis of Financial Condition and Results of Operations portion of this
Prospectus. The Ohio Group has been presented in this format because Miracle
Industries, Lube Ventures and Prema Properties are under common ownership,
control and management. Rocky Mountain I, Rocky Mountain II, Ralston Car Wash
and Miracle Partners have been combined and presented as "All Other Constituent
Companies" for purposes of presenting the Selected Financial Data below and
Management's Discussion and Analysis of Financial Condition and Results of
Operations because prior to the Combination each of these Constituent Companies
has been operating independently from WE JAC and the Company believes that the
combination of related entities within that group would not be material to an
investor's understanding of the Combination.
WE JAC
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein. The consolidated statement of operations data set
forth below with respect to the years ended June 30, 1995, 1996 and 1997 and the
balance sheet data as of June 30, 1996 and 1997, is derived from the audited
consolidated financial statements of WE JAC included elsewhere in this
Prospectus. The statement of operations data set forth below with respect to the
years ended April 30, 1993 and June 30, 1994 and the balance sheet data as of
April 30, 1993 and June 30, 1994 are derived from audited consolidated financial
statements not included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEARS ENDED JUNE 30,
APRIL 30, -----------------------------------------------
1993(1) 1994(1) 1995 1996 1997
---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................................................... $ 24,323 $ 24,814 $ 26,579 $ 26,734 $ 27,457
Direct cost................................................... 17,688 18,686 20,042 19,708 20,291
---------- -------- -------- -------- --------
Contribution.................................................. 6,635 6,128 6,537 7,026 7,166
General and administrative expenses........................... 2,640 2,388 2,888 2,276 2,522
Amortization expense.......................................... 1,056 975 1,015 964 968
Company owned stores held for resale (loss)................... (173) 171 (351) (455) 29
---------- -------- -------- -------- --------
Operating income.............................................. 2,766 2,936 2,283 3,331 3,705
Other expense................................................. (1,361) (1,311) (2,435) (1,083) (1,179)
---------- -------- -------- -------- --------
Income (loss) before taxes.................................... 1,405 1,625 (152) 2,248 2,526
Provision for income taxes.................................... 23 868 72 1,178 1,271
Extraordinary gain............................................ -- -- 157 -- --
---------- -------- -------- -------- --------
Net income (loss)............................................. $ 1,382 $ 757 $ (67) $ 1,070 $ 1,255
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
<CAPTION>
SYSTEM STATISTICS: (IN THOUSANDS, EXCEPT NUMBER OF CENTERS)
<S> <C> <C> <C> <C> <C>
System wide retail sales(2)................................... $160,434 $172,028 $189,568 $196,549 $207,777
Number of centers opened during period........................ 43 45 51 76 62
Number of centers closed during period........................ 28 120 16 46 39
Number of centers in operation at end of period............... 556 481 516 546 569(4)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
APRIL 30, ----------------------------------------
1993 1994 1995 1996 1997
--------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................................. $ 1,994 $ 1,599 $ (940) $ 180 $(7,242)(3)
Total assets........................................................... 24,725 25,325 24,810 25,654 26,694
Total debt(3).......................................................... 10,433 9,011 8,633 8,462 9,379
Stockholders' equity................................................... 9,837 9,260 9,193 11,406 10,294
</TABLE>
- ---------------
(1) In February 1996, WE JAC's Board of Directors approved a change in the
Company's fiscal year end from April 30 to June 30. Results of operations
for May 1993 and June 1993 were not materially different from annualized
results.
(2) System wide retail sales are not included in the financial statements of WE
JAC. They are, however, the basis for royalty payments to WE JAC and are
based on reports provided to WE JAC by franchisees. The Company intends to
use a portion of the net cash proceeds from the Offering to upgrade its
existing point of sale system to provide more timely data from franchisees.
Currently, sales data is manually calculated and reported and as such there
is often a lag time before that data is received in the Company's offices
for reporting purposes. Accordingly, the information presented for the
fiscal year ended June 30, 1997 contains sales estimates for franchisees who
have not yet reported sales to the Company for portions of that period.
(3) The line of credit and term loan of $8.6 million for WE JAC mature in its
fiscal year ended June 30, 1998 and, accordingly, are included as current
liabilities. It is anticipated that all of this debt will be paid off with
proceeds from this Offering.
(4) Includes 13 centers temporarily closed for relocation.
THE OHIO GROUP
The following selected combined financial data should be read in
conjunction with the financial statements and the notes thereto of the entities
comprising the Ohio Group included elsewhere herein. The combined statement of
operations data set forth below with respect to the year ended December 31, 1996
and the balance sheet data as of December 31, 1996 is derived from the
individual audited financial statements of the entities comprising the Ohio
Group included elsewhere in this Prospectus. The combined statement of
operations data set forth below with respect to the year ended December 31, 1995
and the combined balance sheet data as of December 31, 1995 is derived from the
individual audited financial statements of Miracle Industries and the individual
unaudited financial statements of Lube Ventures and Prema Properties included
elsewhere in this Prospectus. The combined statement of operations data set
forth below with respect to the six month periods ended June 30, 1996 and 1997
and the balance sheet data as of June 30, 1997 are derived from the individual
unaudited financial statements of the entities comprising the Ohio Group
included elsewhere in this Prospectus. The combined statement of operations set
forth below with respect to the year ended December 31, 1994 and the balance
sheet data as of December 31, 1994 are derived from unaudited individual
financial statements of the entities comprising the Ohio Group not included in
this Prospectus. The unaudited combined financial statements include all normal
recurring adjustments that the entities comprising the Ohio Group consider
necessary for a fair presentation of their financial position and results of
operations. The results of operations for the six month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
full year ended December 31, 1997, or any other future period.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1994 1995 1996 1996(2) 1997
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................................... $3,148 $4,888 $ 11,793 $ 4,492 $ 4,450
Direct cost...................................... 2,134 4,120 9,552 3,723 3,883
------------ ------------ ------------ ------------ ------------
Contribution..................................... 1,014 768 2,241 769 567
General and administrative expenses.............. 780 782 1,505 744 722
------------ ------------ ------------ ------------ ------------
Operating income (loss).......................... 234 (14) 736 25 (155)
Other expense.................................... (172) (338) (650) (310) (413)
------------ ------------ ------------ ------------ ------------
Net income (loss)(1)............................. $ 62 $ (352) $ 86 $ (285) $ (568)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ ------------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C>
Working capital (deficit)........................ $ 229 $ 110 $ (515)(3) $ (417)(3)
Total assets..................................... 6,591 7,262 13,405 13,359
Total debt....................................... 3,548 3,969 8,362 9,321
Shareholder's equity............................. 2,690 2,763 2,854 2,420
</TABLE>
- ---------------
(1) The Ohio Group consists of legal entities that are taxed as partnerships and
therefore no income tax expense is included.
(2) Results for the six months ended June 30, 1996 reflect the acquisition of a
90% interest in HydroSpray by Miracle Industries effective March 1, 1996.
The amounts presented do not include results of operations for January and
February 1996. HydroSpray has historically generated negative contribution
and losses from operations during those months due to seasonal factors. If
these months had been included, combined income for the Ohio Group would
have been reduced by $95,000, for the year ended December 31, 1996.
(3) In November 1996, Miracle Industries acquired a 50% investment in Indy
Ventures with proceeds from a short term credit facility.
ALL OTHER CONSTITUENT COMPANIES
The combined statement of operations data set forth below with respect to
the year ended December 31, 1996 and the balance sheet data as of December 31,
1996 are derived from the individual audited financial statements of the
entities comprising All Other Constituent Companies not included in this
Prospectus. The combined statement of operations data set forth below with
respect to the year ended December 31, 1995 and for the six months ended June
30, 1996 and 1997 and the combined balance sheet data as of June 30, 1997 are
derived from the individual unaudited financial statements the entities
comprising All Other Constituent Companies not included in this Prospectus. The
combined statement of operations data set forth below with respect to the year
ended December 31, 1995 and the combined balance sheet data as of December 31,
1994 are derived from the individual unaudited financial of the entities
comprising All Other Constituent Companies not included in this Prospectus. Such
unaudited financial statements include all normal recurring adjustments that the
Other Constituent Companies consider necessary for a fair presentation of their
financial position and results of operations. The results of operations for the
six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the full year ended December 31, 1997, or any other
future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- ----------------
1994 1995 1996 1996 1997
------ ------ ------------ ------ ------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue.............................................................. $2,017 $2,070 $2,175 $1,185 $1,190
Direct cost.......................................................... 893 1,131 1,158 580 605
------ ------ ------------ ------ ------
Contribution......................................................... 1,124 939 1,017 605 585
General and administrative expenses.................................. 764 600 611 360 362
------ ------ ------------ ------ ------
Operating income..................................................... 360 339 406 245 223
Other expense........................................................ (348) (256) (218) (146) (104)
------ ------ ------------ ------ ------
Net income(1)........................................................ $ 12 $ 83 $ 188 $ 99 $ 119
------ ------ ------------ ------ ------
------ ------ ------------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------- --------
1994 1995 1996 1997
------- ------ ------------ --------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C>
Working deficit...................................................... $(2,687) $ (380) $ (679) $ (140)
Total assets......................................................... 5,027 5,256 5,130 5,183
Total debt........................................................... 3,875 3,998 3,855 3,781
Shareholder's equity................................................. 946 822 996 1,115
</TABLE>
- ---------------
(1) Each of the All Other Constituent Companies are legal entities that are
taxed as partnerships and therefore no income tax expense is included.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Prospectus contain, in addition to historical
information, forward-looking statements which involve risks and uncertainties.
The Company's actual results could differ significantly from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors."
OVERVIEW
Contemporaneously with the closing of the Offering, the Company will
acquire the Constituent Companies in a series of mergers and share exchanges.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented in four components. The first component is the Pro Forma
Combined Financial Results for the year ended June 30, 1997, which include the
accounts of the Constituent Companies as if the Combination had occurred on July
1, 1996. The next three components of Management's Discussion and Analysis of
Financial Condition and Results of Operations are the financial results for WE
JAC, the Ohio Group, and All Other Constituent Companies. The Ohio Group
consists of Miracle Industries, Lube Ventures and Prema Properties. Financial
results for these entities are combined because the companies are under common
ownership and control. All Other Constituent Companies consist of Miracle
Partners, Rocky Mountain I, Rocky Mountain II and Ralston Car Wash. Prior to the
Combination, each of these companies has been operating separately and
independently from WE JAC and the Ohio Group. The results of KBG, LLC are not
included because that Constituent Company was formed for the purpose of
conveying certain proprietary software and intellectual property and has never
conducted any operations.
Although all but the largest Constituent Company report financial results
on a calendar year basis, the resulting combined Company will report on a June
30 fiscal year end and, as a result, historical information appearing in this
Prospectus relating to all but the largest Constituent Company may not be
comparable to future results of the combined entity.
PRO FORMA COMBINED COMPANY
GENERAL
Company revenues are derived from four primary areas: franchising,
company-operated center retail operations, manufacturing, and the distribution
of parts and supplies. Franchise revenue is derived from royalties paid by
individual franchisees to the Company, as well as the sale of individual
franchises and franchise development rights. Retail operations revenue is
derived from the operation of company-owned automotive centers and car wash
facilities. Manufacturing revenues are composed of the sale and installation of
car wash equipment and fast oil change and lubrication buildings. Parts and
supply revenue is derived from the sale of automotive parts and equipment and
car wash parts, supplies and chemicals. Direct costs consist of the cost of
parts and equipment, fees paid to area developers for the sale of new franchises
and for supporting franchisees, corporate costs associated with directly
supporting the franchise system, and the cost of operating Company-owned car
washes and fast oil change and lube centers. General and administrative expenses
include all legal, accounting, general overhead, information technology and
corporate staff expenses. Other income and expense items consist of
amortization, interest income and expense and the operating results of centers
held for resale by the Company.
The Company believes that on an individual basis, the Constituent Companies
have not had the resources required to more fully penetrate the automotive
aftermarket. The resulting combined Company strategy is to leverage name
recognition and existing market position by providing multiple complementary
lines of business with additional manufacturing and distribution capabilities.
As a result of the Combination, the Company believes there are several
areas where economies of scale can be achieved. Such areas include employee
benefits, advertising, insurance and parts and supplies purchasing arrangements.
The Company believes that its combined infrastructure will more efficiently
support the Company's operations. The Company cannot presently predict the
effect, if any, on its financial performance from any of these or other similar
opportunities to improve the operations of the Constituent Companies. The
Constituent Companies have been managed throughout the periods presented as
independent, privately owned companies and, as such, their results of operations
reflect different tax structures which have influenced, among other things,
their historical levels of owners' compensation.
Miracle Industries, Lube Ventures, Miracle Partners, Rocky Mountain I, and
Rocky Mountain II are corporations which historically have elected to be subject
to subchapter S of the Internal Revenue Code of 1986, as amended. Prema
Properties and Ralston Car Wash are limited liability companies and are taxed as
partnerships. Upon consummation of the Combination,
23
<PAGE>
the Company will file as a consolidated group for federal income tax purposes.
For purposes of the Pro Forma Combined Financial Statements presented in this
Prospectus, federal and state income taxes have been provided for these
companies, as if they had been taxable as C corporations during the periods.
The historical results of operations of the Constituent Companies have also
been adjusted to reflect certain purchase accounting adjustments, including (i)
the amortization of goodwill arising from the Combination, (ii) the elimination
of management fees charged between certain Constituent Companies and (iii) the
elimination of intercompany receivables. Accordingly, the Combination results in
additional goodwill of $14.2 million for a total of $32.3 million of goodwill on
the combined Company's balance sheet. As a result, the Company will incur a
non-cash and non-tax deductible expense of approximately $1.1 million per year
for the amortization of goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the operations and growth of the Constituent Companies have
been financed through private equity capital, internally generated working
capital, and borrowings from commercial banks or other lenders. Management
expects that approximately $18.5 million of the net proceeds of the Offering
will be used to repay substantially all of the outstanding indebtedness of the
Constituent Companies. These borrowings are generally secured by substantially
all of the assets of the respective Constituent Company as well as the personal
guarantees of the respective owners.
The Company intends to enter into an agreement with a commercial bank to
establish a credit facility upon the completion of the Offering and anticipates
receiving a commitment from Signet Bank for such credit facility in the
principal amount of $20 million, of which $5 million will be available to
finance working capital requirements and $15 million will be available to
finance future acquisitions. Borrowings under the credit facility will be
secured by first priority liens on certain assets of the Company and its
subsidiaries, and will bear interest at a LIBOR or prime-based rate at the
Company's election. The definitive loan documents are expected to contain
standard representations, covenants, conditions, events of defaults and
indemnities. The Company expects it will be required to pay a facility fee at
closing of approximately $40,000 and customary annual commitment fees. Interest
will be payable monthly. The principal amount of the working capital facility
will be payable at its maturity, which will be the third anniversary of its
extension unless the maturity is extended. The principal amount of each
acquisition loan will be amortized on the basis of an agreed amortization term
not to exceed 60 months with all outstanding principal due at maturity.
The Company intends to spend approximately $1.5 million over a period of 18
months to upgrade substantially all of the Company-owned car wash facilities
with the full complement of HydroSpray car wash equipment and the proprietary
operating and marketing features of the Precision Auto Wash System described
herein. This will include building and facility improvements and the
installation and replacement of car wash equipment. The Company also intends to
invest approximately $500,000 in the Company's management information and
accounting systems at the retail and corporate level. The Company intends to
fund these expenditures through internally generated funds and, if necessary,
borrowings under the revolving credit facility.
Under the terms of the Combination Agreement, each of the Constituent
Companies (other than WE JAC) is entitled to distribute amounts of cash to its
owners necessary to enable the owners to pay the 1997 tax liabilities they are
expected to incur with respect to the operation of the applicable Constituent
Company through the Closing Date. Each of the Constituent Companies (including
WE JAC) also is entitled to distribute cash to their owners in amounts equal to
the amount of professional fees associated with the Combination and actually
paid by the Constituent Company prior to the closing of the Combination.
Management believes that the proceeds of the Offering, together with
internally generated working capital and any additional borrowings, will be
adequate to fund operations of the Company for the foreseeable future. The
Company may incur, from time to time, additional bank indebtedness and may
issue, in public or private transactions, equity or debt securities. Although
the Company expects to obtain a revolving credit facility, as discussed above,
there can be no assurance that sufficient additional financing will be available
on terms acceptable to the Company. Failure to obtain additional financing on
reasonable terms could have a negative effect on the Company.
Management intends to increase the Company's market share in part through
the acquisition and development of additional centers. Acquisitions may vary in
size and the Company may consider larger acquisition opportunities which could
be material to the Company. The Company expects it will use cash, stock, debt,
seller financing or a combination thereof to effect such transactions. There can
be no assurance that the Company will be able to acquire additional centers or
that additional centers that might be acquired would be successfully integrated
into the Company's operations.
24
<PAGE>
WE JAC
WE JAC revenues principally are derived from royalties paid by individual
franchisees to WE JAC, the sale of automotive parts and equipment to franchisees
and other automotive parts resellers, and the sale of individual franchises and
the sale of franchise development rights for specific geographic areas. Direct
costs consist of the portion of royalty payments made by franchisees that WE JAC
pays to area developers, the cost of parts and equipment, fees paid to area
developers for the sale of new franchises and corporate costs directly
associated with servicing and supporting the franchisee system. General and
administrative expenses include all legal, accounting, general overhead,
information technology and corporate staff expenses. Other income and expense
items consist of amortization, interest income and expense and other
miscellaneous costs. From time to time, WE JAC assumes the operation of
individual franchisee centers to maintain market position and system stability.
WE JAC incurs additional expenses when this occurs. The centers typically are
renovated, operations brought up to WE JAC standards, and remarketed to a new
franchisee.
SYSTEM OVERVIEW
The Precision Tune Auto Care system has been undergoing strategic change
since the early 1990's. At that time, company management began to expand the
retail menu of services offered at its centers in response to the advancing
technology of automotive engines and the diminished need for a traditional
tune-up. Menu additions included brake service, oil change and lubrication
services, and scheduled factory maintenance, among other things. A number of the
Company's underperforming franchised centers that were unable or unwilling to
transition their service offerings to keep pace with changes in automotive
technology were closed during the last four years.
WE JAC's current management team has continued this strategic repositioning
effort by preparing a definitive operations policy and procedures manual, adding
experienced field supervisory personnel, attempting to reposition the Company's
service menu in the eyes of the consumer by adding "Auto Care" to the name, and
redesigning the company's marketing and advertising materials to clearly
articulate the one-stop-shopping capabilities of a Precision Tune Auto Care
center. Once fully implemented, the Company believes that these efforts will
enable Precision Tune Auto Care franchisees to increase their sales per center.
RESULTS OF OPERATIONS
The following table sets forth certain income statement items as a
percentage of net revenue for the fiscal years ended June 30, 1995, 1996 and
1997 for WE JAC.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1995 1996 1997
---- ---- ----
(PERCENTAGE OF REVENUE)
<S> <C> <C> <C>
Net revenue....................................................................................... 100% 100% 100%
Direct cost....................................................................................... 75 74 74
---- ---- ----
Contribution...................................................................................... 25 26 26
General and administrative expenses............................................................... 11 8 9
Amortization expense.............................................................................. 4 4 4
Company owned stores held for resale.............................................................. 2 2 0
---- ---- ----
Operating income.................................................................................. 8 12 13
Other expense..................................................................................... (9) (4) (4)
---- ---- ----
Income (loss) before taxes........................................................................ (1) 8 9
Provision for income taxes........................................................................ 0 4 5
---- ---- ----
Net income (loss)................................................................................. (1)% 4% 4%
---- ---- ----
---- ---- ----
</TABLE>
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Revenue. Revenue increased $723,000 or 3% to $27.4 million for the year
ended June 30, 1997 from $26.7 million for the year ended June 30, 1996. This
reflects increases of $757,000 in royalty revenue, $235,000 in franchise revenue
and $82,000 in other revenues which were offset by a $351,000 decrease in sales
of equipment and parts. The increase in royalty revenue resulted from an
increase in system-wide sales reflecting the Company's emphasis on a wider range
of vehicle maintenance services instead of specialty tune ups. While this has
resulted in a lower average price per service visit, the
25
<PAGE>
volume of service visits increased during the period. The Company's emphasis on
providing a wider range of vehicle maintenance services has resulted in a lower
average cost per service and a corresponding decrease in average parts sales per
visit. The increase in franchise revenue reflects the sale of international
master licenses, consistent with the Company's strategy to expand into
international markets. Including master license fees, franchise fees and
royalties, total revenues derived from international operations were $937,000
for the year ended June 30, 1997 compared to $636,000 for the year ended June
30, 1996.
Direct Cost. Direct cost increased $583,000, or 3%, to $20.3 million for
the year ended June 30, 1997 from $19.7 million for the year ended June 30,
1996. Direct cost as a percentage of revenue remained constant at 74% for 1997
and 1996, notwithstanding a $400,000 increase in expenses associated with
franchisee field operations and training support, marketing and communication
costs focused on the strategic repositioning of the business, and international
and domestic sales development costs. Equipment and parts costs decreased
$196,000 which was consistent with the decline in related sales.
Contribution. Contribution increased $140,000, or 2%, to $7.2 million for
the year ended June 30, 1997 from $7.0 million for the year ended June 30, 1996.
Contribution margin as a percentage of revenue remained constant at 26% for 1997
and 1996.
General and Administrative Expenses. General and administrative expenses
increased $246,000, or 11%, to $2.5 million for the year ended June 30, 1997
from $2.2 million for the year ended June 30, 1996. General and administrative
expenses as a percentage of revenue increased to 9% for the year ended June 30,
1997 from 8% for the year ended June 30, 1996. This increase was primarily due
to the hiring of additional personnel and improvements made to the Company's
management information system.
Operating Income. Operating income increased $374,000, or 11%, to $3.7
million for the year ended June 30, 1997 from $3.3 million for the year ended
June 30, 1996. Operating income as a percentage of revenues increased to 13% for
the year ended June 30, 1997 from 12% for the year ended June 30, 1996. This
increase reflects the divestiture of Company-owned stores which were operated by
the Company in 1996 and negatively impacted the Company during that fiscal year.
Other Expense. Other expense increased $96,000, or 9%, to $1.2 million for
the year ended June 30, 1997 from $1.1 million for the year ended June 30, 1996.
Other expense increased by $176,000 which was offset by net interest income of
$80,000.
Income (Loss) Before Taxes. Income before taxes increased $278,000, or 12%
to $2.5 million for the year ended June 30, 1997 from $2.2 million for the year
ended June 30, 1996. Income before taxes as a percentage of revenue increased to
9% for the year ended June 30, 1997 from 8% for the year ended June 30, 1996.
Provision for Income Taxes. Provision for income taxes increased $93,000,
or 8%, to $1.3 million for the year ended June 30, 1997 from $1.2 million for
the year ended June 30, 1996 due to the increase in income before taxes.
Net Income. Net income increased $185,000, or 17%, to $1.3 million for the
year ended June 30, 1997 from $1.1 million for the year ended June 30, 1996. Net
income as a percentage of revenue remained constant at 4% for 1997 and 1996.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
Revenue. Revenue increased $155,000, or 1%, to $26.7 million for the year
ended June 30, 1996 from $26.6 million for the year ended June 30, 1995. The
higher revenues are attributable to increases in royalty revenue of $153,000,
equipment and parts sales of $25,000, and franchise fees of $69,000. The
increases were offset by a decrease of $92,000 in other income. WE JAC revenues
remained stable for the year as the Company continued to refocus the services
offered from engine tune-ups to vehicle maintenance.
Direct Cost. Direct cost decreased $334,000, or 2%, to $19.7 million for
the year ended June 30, 1996 from $20.0 million for the year ended June 30,
1995. Direct cost as a percentage of revenues decreased from 75% for the year
ended June 30, 1995 to 74% for the year ended June 30, 1996. Direct cost
decreased as a result of a reduction in the allocation of corporate expense
associated with open area and center operations in the amount of $257,000.
Additionally, there was a $100,000 reduction in the cost of parts and equipment
due to improved purchasing procedures. Costs associated with franchise fees and
royalty revenue decreased $47,000 while revenues increased. This is attributed
to acquisitions of areas previously held by area subfranchisors.
26
<PAGE>
Contribution. Contribution increased $489,000, or 7%, to $7.0 million for
the year ended June 30, 1996 from $6.5 million for the year ended June 30, 1995.
Contribution as a percentage of revenues increased to 26% for the year ended
June 30, 1996 from 25% for the year ended June 30, 1995.
General and Administrative Expenses. General and administrative expenses
decreased $612,000, or 21%, to $2.3 million for the year ended June 30, 1996
from $2.9 million for the year ended June 30, 1995. As a percentage of revenue,
general and administrative expenses decreased to 8% for the year ended June 30,
1996 from 11% for the year ended June 30, 1995. General and administrative
expenses were lower for the year as a result of a reduction in legal expenses.
This factor combined with a focus on cost containment had a significant effect
on general and administrative expenses.
Operating Income. Operating income increased $1 million, or 46%, to $3.3
million for the year ended June 30, 1996 from $2.3 million for the year ended
June 30, 1995. As a percentage of revenue, operating income increased to 12% for
the year ended June 30, 1996 from 8% for the year ended June 30, 1995. This
reflects decreased direct costs and general and administrative expenses.
Other Expense. Other expense decreased $1.4 million, or 56%, to $1 million
for the year ended June 30, 1996 from $2.4 million for the year ended June 30,
1995. Other expense decreased primarily because the 1995 results of operations
included the settlement of and legal fees associated with disputes involving an
area subfranchisor and franchisee in the amount of $1.2 million.
Income (Loss) Before Taxes. Income before taxes increased $2.4 million to
$2.2 million for the year ended June 30, 1996 from a loss before taxes of
$152,000 for the year ended June 30, 1995. Income before taxes as a percentage
of revenue increased to 8% for the year ended June 30, 1996 from a loss before
taxes for the year ended June 30, 1995. This increase can be attributed to the
one time charge in 1995 related to legal fees and settlement costs of franchisee
litigation recorded in fiscal 1995.
Provision for Income Taxes. Provision for income taxes increased $1.1
million to $1.2 million for the year ended June 30, 1996 from $72,000 for the
year ended June 30, 1995 due to the increase in income before taxes.
Net Income (Loss). Net income increased $1.2 million to $1.1 million for
the year ended June 30, 1996 from a loss of $67,000 for the year ended June 30,
1995. Net income as a percentage of revenue increased to 4% for the year ended
June 30, 1996 from a loss for the year ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of WE JAC:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities..................................................... $ 1,949 $ 462 $ 2,207
Net cash used in investing activities......................................................... (504) (1,176) (891)
Net cash provided by (used in) financing
activities.................................................................................. (1,852) 933 (1,491)
------- ------- -------
Change in cash and cash equivalents........................................................... $ (407) $ 219 $ (175)
------- ------- -------
------- ------- -------
</TABLE>
From July 1, 1996 through June 30, 1997, WE JAC generated $2.2 million in
net cash from operating activities. This amount was higher than the net cash
provided by operating activities for the year ended June 30, 1996 principally
because of changes in working capital, most notably, accounts payable and
accrued expenses, and income taxes. Accounts receivable increased by $1.5
million during this period. This change is comprised of an increase in royalty
receivables of $470,000, primarily as a result of an increase in retail sales
during the month of June 1997, and an increase in master license fee receivables
of $270,000 from the sale of international development rights in the same month.
In addition, rent receivables increased $160,000 from the sale of company owned
stores held for resale during the year resulting in accounts receivable from the
franchisees which have sub-leased the centers. The allowance for bad debts
decreased by approximately $233,000 primarily because the Company wrote off
approximately $450,000 of receivables against the reserve during the year. These
changes did not have a material impact on the Company's liquidity and cash flow.
27
<PAGE>
Inventory decreased $365,000 for the year ended June 30, 1997 from June 30,
1996. The decrease is attributable to the sale of Company centers and their
associated inventory and the change in the mix of inventory from higher cost
electronic parts to lower cost vehicle and engine maintenance parts. This change
had a corresponding positive impact on liquidity.
During the year ended June 30, 1997, cash used in investing activities
consisted of $296,000 used to purchase property and equipment, $546,000 used to
purchase franchise agreements and rights. Cash used in financing activities was
primarily attributable to $2.8 million received from a term loan offset against
the purchase of treasury stock from a former officer for $2.4 million and the
repayment of long-term debt and notes payable of $2 million.
From July 1, 1995 through June 30, 1996, WE JAC generated $462,000 in net
cash from operating activities. This amount was substantially lower than the net
cash provided by operating activities for the year ended June 30, 1995 in spite
of higher net income because of changes in working capital, principally accounts
payable and accrued expenses, and income taxes. Cash used in investing
activities consisted of $358,000 used to purchase property and equipment, and
$754,000 to purchase franchise rights. Cash provided from financing activities
was attributable to $1.1 million received from the sale of stock less $170,000
in net decreases in debt.
From July 1, 1994 through June 30, 1995, WE JAC generated $1.9 million in
net cash from operating activities. During this period, $67,000 resulted from a
net loss, and the remainder was generated from reductions in working capital.
Cash used in investing activities consisted of $504,000 used to purchase
property and equipment. Cash used in financing activities was attributable to
$1.1 million in net payments on debt, and a repurchase of stock warrants of
$750,000.
THE OHIO GROUP
Ohio Group revenue is derived primarily from the operation of car wash
centers, the sale of car wash equipment and fast-oil change buildings and to a
lesser extent the sale of parts and supplies and franchise and royalties fees.
For the period ended June 30, 1997, the Company derived $1.6 million from the
operation of car wash centers, $7.1 million from the sale of car wash equipment,
$1.8 million from the sale of fast oil change buildings, $820,000 from the sale
of parts and supplies, and $354,000 from franchise and royalty fees. Direct
costs are those related to the manufacture and installation of car wash
equipment and automobile lubrication facilities, as well as direct costs
associated with the operation of Company-owned car wash and fast oil change and
lube centers. General and administrative expenses include all accounting,
general overhead, information technology and corporate staff. Other
income/expense consists of other expenses associated with Company-owned store
operations, amortization, depreciation and interest expense.
The Ohio Group acquired a 90% interest in HydroSpray in February 1996 in a
transaction in which the Ohio Group assumed $1.0 million of current liabilities
and refinanced $1.3 million of long term debt through a new bank loan. In
connection with the purchase, the Ohio Group converted $500,000 of debt it had
extended to HydroSpray previously into equity. Because the HydroSpray division
sells both equipment and parts and supplies, the Ohio Group has shifted the
sales of its parts and supplies to HydroSpray after it was acquired.
Sales by the Ohio Group are impacted by seasonal factors. Low sales by the
HydroSpray division for quarters ended March 31 reflect the difficulty in
delivering and installing car wash equipment in winter months. Severe winter
weather and rainy conditions can also negatively impact car wash operations
while normal winter conditions increase the demand for car wash services.
28
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenue for the years ended December 31, 1994, 1995 and 1996 and
for the six months ended June 30, 1996 and 1997 for the Ohio Group:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C> <C>
Revenue..................................................................... 100 % 100 % 100 % 100 % 100 %
Direct cost................................................................. 68 84 81 83 87
---- ---- ---- ---- ----
Contribution................................................................ 32 16 19 17 13
General and administrative expenses......................................... 25 16 13 17 16
---- ---- ---- ---- ----
Operating income (loss)..................................................... 7 0 6 0 (3)
Other expense............................................................... (5) (7) (5) (7) (10)
---- ---- ---- ---- ----
Net income (loss)........................................................... 2% (7)% 1% (7)% (13)%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Revenue decreased $42,000, or 1%, to $4.4 million for the six
months ended June 30, 1997 from $4.5 million for the six months ended June 30,
1996. The decrease was attributable to a decrease in service revenues resulting
from severe rains and poor weather in the spring of 1997 which adversely
impacted car wash equipment installation and car wash sales. The decrease in
revenue was offset by increased sales of $95,000 in Lube Ventures equipment and
$52,000 in Lube Depot franchise fees and royalties. Car wash product and
equipment sales decreased $162,000 and car wash retail sales decreased $27,000.
Direct Cost. Direct cost increased $160,000, or 4%, to $3.9 million for the
six months ended June 30, 1997 from $3.7 million for the six months ended June
30, 1996. Direct cost as a percentage of revenue increased to 87% for the six
months ended June 30, 1997 from 83% for the six months ended June 30, 1996. Car
wash product and equipment costs increased $68,000. A significant factor in the
increase was that the period included two more months of fixed costs associated
with the HydroSpray operation than during the previous year.
Contribution. Contribution decreased $202,000, or 26%, to $567,000 for the
six months ended June 30, 1997 from $769,000 for the six months ended June 30,
1996. The decrease is primarily attributable to increased marketing expenses and
the adverse impact of the poor spring weather.
General and Administrative Expenses. General and administrative expenses
decreased $22,000, or 3%, to $722,000 for the six months ended June 30, 1997
from $744,000 for the six months ended June 30, 1996. General and administrative
expenses as a percentage of revenues decreased to 16% in 1997 from 17% in 1996.
Operating Income (Loss). Operating loss increased $180,000 to $(155,000)
for the six months ended June 30, 1997 from operating income of $25,000 for the
six months ended June 30, 1996. Operating loss as a percentage of revenue
decreased to 3% in 1997 from 0% in 1996. The 1996 operating loss would have been
increased by $95,000 had the acquisition of HydroSpray occured prior to February
29, 1996, as the quarter ending March 31 is generally the least profitable
quarter.
Other Expense. Other expense increased $103,000, or 33%, to $413,000 for
the six months ended June 30, 1997 from $310,000 for the six months ended June
30, 1996. The change was a result of the increase in interest expense associated
with the assumption of the debt obligations of HydroSpray and indebtedness
incurred in connection with the acquisition of new car wash facilities.
Net Income (Loss). Net loss increased $283,000, or 99%, to $568,000 for the
six months ended June 30, 1997 from $285,000 for the six months ended June 30,
1996. Net loss as a percentage of revenue increased to 13% for the six months
ended June 30, 1997 from a loss of 7% for the six months ended June 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $6.9 million, or 141%, to $11.8 million for the
year ended December 31, 1996 from $4.9 million for the year ended December 31,
1995. This change was due to the acquisition of a 90% interest in HydroSpray
representing approximately $6.0 million in sales, increased sales in Lube
Ventures of $753,000, the fast oil change and
29
<PAGE>
lubrication operation, and the purchase of five additional car washes operated
as company-owned centers which contributed $320,000 in additional revenues.
These increases were partially offset by a $245,000 anticipated decrease in
parts sales from discontinued lines.
Direct Cost. Direct cost increased $5.4 million, or 132%, to $9.6 million
for the year ended December 31, 1996 from $4.1 million for the year ended
December 31, 1995. Direct cost as a percentage of revenue decreased to 81% for
the year ended December 31, 1996 from 84% for the year ended December 31, 1995.
The acquisition of HydroSpray accounted for an increase of $5.3 million. Direct
costs for car wash operations increased $440,000 due to higher fixed costs as a
result of newly acquired car washes which was offset by a decrease of $177,000
in car wash equipment and product sales.
Contribution. Contribution increased $1.5 million, or 192%, to $2.2 million
for the year ended December 31, 1996 from $768,000 for the year ended December
31, 1995. The increase is primarily a result of an increase in revenues relating
to the acquisition of HydroSpray.
General and Administrative Expenses. General and administrative expenses
increased $723,000, or 92%, to $1.5 million for the year ended December 31, 1996
from $782,000 for the year ended December 31, 1995. General and administrative
expenses as a percentage of revenue decreased to 13% in 1996 from 16% in 1995 as
expenses were spread across a larger revenue base.
Operating income (Loss). Operating income increased $750,000 to $736,000
for the year ended December 31, 1996 from a loss for the year ended December 31,
1995. Operating income as a percentage of revenue increased to 6% for the year
ended December 31, 1996 from a loss for the year ended December 31, 1995.
Other Expense. Other expense increased $312,000, or 92%, to $650,000 for
the year ended December 31, 1996 from $338,000 for the year ended December 31,
1995. The increase primarily consisted of a $160,000 increase in interest
expense relating to HydroSpray and $137,000 in interest expense related to new
indebtedness incurred in connection with building new car wash operations.
Net Income (Loss). Net income increased $438,000 to $86,000 for the year
ended December 31, 1996 from a loss of $352,000 for the year ended December 31,
1995. Net income as a percentage of revenue increased to 1% for the year ended
December 31, 1996 from a loss for the year ended December 31, 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue increased $1.7 million, or 55%, to $4.8 million for the
year ended December 31, 1995 from $3.1 million for the year ended December 31,
1994. Revenue increased from the purchase of the Lube Venture operation which
represented $1.3 million of the $1.7 million increase. Revenue from car washes
increased $484,000 as a result of several acquisitions.
Direct Cost. Direct cost increased $2.0 million, or 93%, to $4.1 million
for the year ended December 31, 1995 from $2.1 million for the year ended
December 31, 1994. Direct cost as a percentage of revenue increased to 84% for
the year ended December 31, 1995 from 68% for the year ended December 31, 1994.
Direct costs increased from the initial costs associated with developing the
franchising operation for Lube Ventures. Lube Ventures incurred direct costs
totalling $1.4 million. Direct cost for car wash operations increased $262,000.
Product and equipment distribution costs increased $120,000.
Contribution. Contribution decreased $246,000, or 24%, to $768,000 for the
year ended December 31, 1995 from $1.0 million for the year ended December 31,
1994. Contribution as a percentage of revenue decreased to 16% for the year
ended December 31, 1995 from 32% for the year ended December 31, 1994.
Contribution decreased as a result of the increase in direct costs and revenues.
General and Administrative Expenses. General and administrative expenses
remained flat at approximately $780,000 in both 1994 and 1995. General and
administrative expenses as a percentage of revenues decreased to 16% for the
year ended December 31, 1995 from 25% for the year ended December 31, 1994. The
percentage decrease was due to the larger revenue base that general and
administrative cost were applied against. An increase in the actual dollar cost
of general and administrative costs was associated with adding the franchising
capability of the Lube Venture operation and the increased costs of a larger
operation.
Operating Income (Loss). Operating loss increased $248,000 to $(14,000) for
the year ended December 31, 1995 from operating income of $234,000 for the year
ended December 31, 1994. Operating loss as a percentage of revenue decreased to
30
<PAGE>
0% for the year ended December 31, 1995 from 7% for the year ended December 31,
1994. Loss from operations increased as a result of the Lube Ventures purchase.
Other Expense. Other expense increased $166,000, or 96%, to $338,000 for
the year ended December 31, 1995 from $172,000 for the year ended December 31,
1994. Additional interest costs from the acquisition increased other expenses.
Net Income (Loss). Net income decreased $414,000 to $(352,000) for the year
ended December 31, 1995 from $62,000 for the year ended December 31, 1994. Net
loss as a percentage of revenue increased to (7)% for the year ended December
31, 1995 from net income as a percentage of revenue of 2% for the year ended
December 31, 1994. Net income decreased from the additional initial costs of
acquisition and franchising.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of the Ohio Group:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
1995 1996 1996 1997
-------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities........................................ $ 176 $ 745 $ (745) $ (857)
Net cash used in investing activities............... (971) (3,609) (3,610) (207)
Net cash provided by financing activities........... 1,124 2,670 4,146 1,096
-------------- -------------- -------------- --------------
Change in cash and cash equivalents................. $ 329 $ (194) $ (209) $ 32
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
During the six months ended June 30, 1997, the Ohio Group used cash of
$857,000 in operating activities. During this period, $168,000 related to net
loss before non-cash charges, and $689,000 from reductions in working capital
accounts. In the first six months ended June 30, 1996, the Ohio Group used $3.6
million in investing activities largely for the acquisition of a 90% interest in
HydroSpray Equipment Co., Ltd. and additional car wash facilities. During the
six months ended June 30, 1997, the Ohio Group generated cash from financing
activities of $1.1 million consisting of $136,000 from the sale of common stock
and $1.0 million in net proceeds from debt.
From January 1, 1995 through December 31, 1996, the Ohio Group generated
$921,000 in net cash from operating activities. During this period, $881,000 was
generated from net income before non-cash charges, and $40,000 from reductions
in working capital. Cash used in investing activities was attributable to $4.3
million in purchases of property and equipment (primarily related to the
HydroSpray acquisition), $150,000 from a net increase in outstanding notes
receivable, $62,000 for investments, and $50,000 in other purchases. Cash used
in financing activities was attributable to $330,000 for the purchase of
treasury stock, and $33,000 in payment of dividends. Financing sources consisted
of $995,000 received upon the sale of common stock and $3.1 million in net
proceeds from debt.
ALL OTHER CONSTITUENT COMPANIES
Revenues for All Other Constituent Companies are derived primarily from car
wash operation sales. Contribution margin consists of direct costs related to
car wash operations including facilities, personnel, utilities, maintenance and
supplies. General and administrative expenses include all accounting, general
overhead, information technology and executive expenses. Other income/expense
consists of other expenses associated with company-owned store operations,
amortization and depreciation expense and interest expense.
Sales by all other Constituent Companies are impacted by several factors.
Severe winter weather and rainy conditions can negatively impact car wash
operations while normal winter conditions generally increase the demand for car
wash services.
RESULTS OF OPERATIONS
The following table sets forth certain income statement items as a
percentage of revenue for the years ended December 31, 1994, 1995 and 1996 and
for the six months ended June 30, 1996 and 1997 for All Other Constituent
Companies.
31
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C> <C>
Revenue..................................................................... 100 % 100 % 100 % 100 % 100 %
Direct cost................................................................. 44 55 53 49 51
---- ---- ---- ---- ----
Contribution................................................................ 56 45 47 51 49
General and administrative expenses......................................... 38 29 28 30 30
---- ---- ---- ---- ----
Operating income............................................................ 18 16 19 21 19
Other expense............................................................... (17) (12) (10) (12) (9)
---- ---- ---- ---- ----
Net income.................................................................. 1 % 4 % 9 % 9 % 10 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Revenue remained essentially constant at $1.2 million for the six
months ended June 30, 1997 and for the six months ended June 30, 1996. The
relatively constant sales were attributed to severe rain conditions that reduced
sales from the Ohio operations by 11% or $27,000 which offset a $40,000 or 4%
increase in sales from the Denver operations.
Direct Cost. Direct cost increased $25,000 or 4%, to $605,000 for the six
months ended June 30, 1997 from $580,000 for the six months ended June 30, 1996.
Direct cost as a percentage of revenue increased to 51% for the six months ended
June 30, 1997 from 49% for the six months ended June 30, 1996. Direct cost, as a
percentage of revenue increased principally as a result of relatively fixed
direct costs associated with the Ohio operation coupled with reduced sales
during the period.
Contribution. Contribution decreased $20,000, or 3%, to $585,000 for the
six months ended June 30, 1997 from $605,000 for the six months ended June 30,
1996. Contribution was adversely affected by the reduction in sales from the
Ohio operation, combined with no offsetting decrease in fixed direct costs.
General and Administrative Expenses. The level of general and
administrative expenses remained relatively constant during the period and have
remained essentially constant as a percentage of revenue.
Operating Income. Operating income decreased $22,000 or 9%, to $223,000 for
the six months ended June 30, 1997 from $245,000 for the six months ended June
30, 1996. Operating income as a percentage of revenue decreased to 19% for the
six months ended June 30, 1997 from 21% for the six months ended June 30, 1996.
Other Expense. Other expense decreased $42,000 or 29%, to $104,000 for the
six months ended June 30, 1997 from $146,000 for the six months ended June 30,
1996. Other expense as a percentage of revenue decreased to 9% for the six
months ended June 30, 1997 from 12% for the six months ended June 30, 1996. The
decrease consists primarily of a reduction in interest expense.
Net Income. Net income increased $20,000 or 20%, to $119,000 for the six
months ended June 30, 1997 from $99,000 for the six months ended June 30, 1996.
Net income as a percentage of revenue increased to 10% for the six months ended
June 30, 1997 from 9% for the six months ended June 30, 1996. The change in net
income is principally attributed to the decrease in other expense.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $105,000, or 5%, to $2.2 million for the year
ended December 31, 1996 from $2.1 million for the year ended December 31, 1995.
This change was primarily due to sales increases at each of the facilities,
particularly at the Company's prototype operation located in Denver, Colorado.
Direct Cost. Direct cost increased $27,000, or 2%, to $1.2 million for the
year ended December 31, 1996 from $1.1 million for the year ended December 31,
1995. Direct cost as a percentage of revenue decreased to 53% for the year ended
December 31, 1996 from 55% for the year ended December 31, 1995. Direct costs,
as a percentage of revenue, decreased by holding fixed costs relatively constant
as revenues increased.
Contribution. Contribution increased $78,000, or 8%, to $1.0 million for
the year ended December 31, 1996 from $939,000 for the year ended December 31,
1995. This change is attributable to the revenue increase and stability of
direct costs.
32
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased $11,000 or 2%, to $611,000 for the year ended December 31, 1996 from
$600,000 for the year ended December 31, 1995. This increase was due primarily
to increased professional fees and personnel costs required to support continued
growth. General and administrative expenses remained constant as a percentage of
revenue.
Operating Income. Operating income increased $67,000, or 120%, to $406,000
for the year ended December 31, 1996 from $339,000 for the year ended December
31, 1995. Operating income as a percentage of revenue increased to 19% for the
year ended December 31, 1996 from 16% for the year ended December 31, 1995. The
change in operating income improved through increased revenue and stable direct
costs.
Other Expense. Other expense decreased $38,000, or 15%, to $218,000 for the
year ended December 31, 1996 from $256,000 for the year ended December 31, 1995.
Other expense as a percentage of revenue decreased to 10% for the year ended
December 31, 1996 from 12% for the year ended December 31, 1995. The decrease
consists of a reduction in interest and rent expense.
Net Income. Net income increased $105,000, or 126%, to $188,000 for the
year ended December 31, 1996 from $83,000 for the year ended December 31, 1995.
Net income as a percentage of revenue increased to 9% for the year ended
December 31, 1996 from 4% for the year ended December 31, 1995. The change in
net income is attributed to the increase in revenues while holding or reducing
direct and other costs.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue increased $53,000, or 3%, to $2.1 million for the year
ended December 31, 1995 from $2.0 million for the year ended December 31, 1994.
Revenues increased from the increased use of repeat customer promotions and
targeted advertising.
Direct Cost. Direct cost increased $238,000, or 27%, to $1.1 million for
the year ended December 31, 1995 from $893,000 for the year ended December 31,
1994. Direct cost as a percentage of revenue increased to 55% for the year ended
December 31, 1995 from 44% for the year ended December 31, 1994. Direct costs
increased from an additional investment in control systems and new facilities
and a re-allocation of certain general and administrative expenses to direct
costs.
Contribution. Contribution decreased $185,000, or 16%, to $939,000 for the
year ended December 31, 1995 from $1.1 million for the year ended December 31,
1994. Contribution as a percentage of revenue decreased to 45% for the year
ended December 31, 1995 from 56% for the year ended December 31, 1994.
Contribution decreased primarily as a result of the increase in direct costs.
General and Administrative Expenses. General and administrative expenses
decreased $164,000, or 21%, to $600,000 for the year ended December 31, 1995
from $764,000 for the year ended December 31, 1994. General and administrative
expenses as a percentage of revenues decreased to 29% for the year ended
December 31, 1995 from 38% for the year ended December 31, 1994. To more
accurately reflect the nature of the costs of the business, a re-allocation of
costs from general and administrative to direct was made. This accounts for the
majority of the increase in direct costs and decrease in general and
administrative costs.
Operating Income. Operating income decreased $21,000, or 6%, to $339,000
for the year ended December 31, 1995 from $360,000 for the year ended December
31, 1994. Operating income as a percentage of revenue decreased to 16% for the
year ended December 31, 1995 from 18% for the year ended December 31, 1994.
Operating income decreased as a result of the increase in direct costs
associated with new systems development.
Other Expense. Other expenses decreased $92,000, or 26%, to $256,000 for
the year ended December 31, 1995 from $348,000 for the year ended December 31,
1994. Other expenses as a percentage of revenue decreased to 12% for the year
ended December 31, 1995 from 17% for the year ended December 31, 1994. Other
expenses decreased from debt refinancing and cost control.
Net Income. Net income increased $71,000, or 591%, to $83,000 for the year
ended December 31, 1995 from $12,000 for the year ended December 31, 1994. Net
income from operations as a percentage of revenue increased to 4% for the year
ended December 31, 1995 from 1% for the year ended December 31, 1994. Net income
benefited from the increase in revenues and the decrease in general and
administrative and other expenses offset by the increase in direct costs.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of all other Constituent Companies:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ----------------
1995 1996 1996 1997
----- ----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities...................................... $ 390 $ 481 $ 137 $ 270
Net cash used in investing activities.......................................... (464) (153) (57) (143)
Net cash provided by (used in) financing activities............................ 109 (331) (98) (125)
----- ----- ----- -----
Change in cash and cash equivalents............................................ $ 35 $ (3) $ (18) $ 2
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
During the six months ended June 30, 1997, the Other Constituent Companies
generated cash from operating activities of $270,000 as compared to $137,000 in
the same period in the prior year. The majority of the change relates to net
income before non cash charges of $230,000 and $300,000 and cash used in the
reduction of working capital of $93,000 and $30,000 in 1996 and 1997,
respectively. In the six months ended June 30, 1997, All Other Constituent
Companies used $143,000 in investing activities largely attributable to the
acquisition of property and equipment. During the six months ended June 30,
1997, All Other Constituent Companies used cash in financing activities of
$125,000 which was attributable to payments on long-term debt.
From January 1, 1995 through December 31, 1996, All Other Constituent
Companies generated $871,000 in net cash from operating activities. During this
period, $880,000 was generated from net income before non-cash charges, and
$9,000 was used in the reduction of working capital. Cash used in investing
activities was attributable to $635,000 in purchases of property and equipment
offset by payments on notes receivable of $18,000. Cash used in financing
activities was attributable to $109,000 in net payments on debt, $83,000 for the
purchase of treasury stock, and $31,000 in other financing activities.
34
<PAGE>
BUSINESS
GENERAL
Upon completion of the Offering and the Combination, management believes
that Precision Auto Care will be a leading provider of comprehensive automotive
maintenance services. These services will be marketed under the "Precision"
brand and include three distinct operations: (i) Precision Tune Auto Care, an
existing international chain of automotive service franchises; (ii) Precision
Auto Wash, an operator and franchisor of a chain of self-service and touchless
automatic car wash centers; and (iii) Precision Lube Express, an operator and
franchisor of a chain of modular fast oil change and lube centers. The Company's
mission is to be the premier provider of quality car care services worldwide by
exceeding its customers' expectations.
The management team headed by John F. Ripley, the Company's president and
chief executive officer, joined Precision Tune Auto Care, the operating
subsidiary of WE JAC Corporation (the largest Constituent Company), in July of
1995 and developed a strategic plan to capitalize on the market opportunities
presented to Precision Tune Auto Care. The primary goal of the strategic plan is
to grow the Company into a multiple-solutions provider of automotive services by
effectively cross-marketing the depth and breadth of the Company's services.
The Company intends to employ the following strategies to accomplish its
objectives:
(Bullet) Leverage Precision Tune Auto Care's broad brand name recognition
and existing market position in the automotive services business
into the car wash and fast oil change and lube sectors of the
automotive aftermarket;
(Bullet) Provide existing Precision Tune Auto Care franchisees with
cross-selling opportunities to their customer base and local
market position by adding Precision Auto Wash and Precision Lube
Express operations at or in close proximity to their existing
centers;
(Bullet) Develop cross-marketing programs among franchisees throughout the
Precision Auto Care system that would enable franchisees to
maximize their returns on advertising spending;
(Bullet) Capitalize on the Company's vertically integrated manufacturing
and distributing capabilities to provide a broad array of products
to franchisees, including automotive parts and service equipment,
car wash equipment, chemicals and supplies, and modular fast oil
change and lube buildings; and
(Bullet) Consolidate the automotive maintenance service industry through
strategic acquisitions and the conversion of centers operated by
competitors into Precision Auto Care franchises or Company-owned
centers.
The market for automotive services is large, growing and highly fragmented.
The Company expects that the market for its services will continue to grow
primarily due to a continuing shift of consumer preference from the
"do-it-yourself" to the "do-it-for-me" sector. The Company believes that no
national brand leader currently markets the full range of automotive maintenance
services the Company provides and that the fragmented nature of the industry
presents a unique opportunity to amass market share. The Company's manufacturing
capabilities will provide an opportunity for the Company to make cost-effective
conversions of its competitors' car washes and fast oil change and lube centers
into Precision Auto Care franchises or Company-owned centers, enabling the
Company to consolidate these sectors of the industry more quickly.
At June 30, 1997, the Company had 556 franchise Precision Tune Auto Care
centers, 34 Company-owned car washes and 21 franchise and one Company-owned fast
oil change and lube express centers. For the year ended June 30, 1997, after
giving effect to the Offering and the acquisition of Worldwide, pro forma
Company revenue, operating income and net income were $43.1 million, $4.6
million and $2.0 million, respectively.
INDUSTRY OVERVIEW
The automotive maintenance service market is large, growing and highly
fragmented. Management believes these characteristics present a unique
opportunity for a quality national brand to achieve internal growth and to gain
market share through consolidation.
The domestic automotive service, car wash and quick lube sectors totaled
approximately $100 billion in 1996, up from $95 billion in 1995 according to the
Automotive Parts and Accessories Association and the International Car Wash
Association. According to the Automotive Parts and Accessories Association 1996
Aftermarket Factbook, there are approximately 200 million cars and light trucks
in the United States today. The Company estimates that its current market share
is less than 1% of this market.
35
<PAGE>
The Company expects that the market for the services it provides will
continue to grow as more consumers seek to have services performed for them
("do-it-for-me") rather than performing those services themselves
("do-it-yourself"). According to Lang Marketing Resources, Inc., the
do-it-for-me segment increased from 67% to 72% from 1985 to 1995 while the
do-it-yourself format showed a corresponding decrease. The Company believes the
principal factors causing this shift in consumer preference are as follows:
(Bullet) The consumer desire for one-stop shopping, convenience and value;
(Bullet) An aging and time sensitive population;
(Bullet) The increase in two wage-earning households;
(Bullet) Greater technical complexity in today's vehicles; and
(Bullet) Competitive pricing to many "do-it-yourself" services.
The FIND/SVP (March 1995) Report, Market for Aftermarket Services estimates that
this trend should continue and projects annual growth rates of 5.8%, 6.8% and
13.6% in oil change, tune-up, and brake services sectors, respectively, through
1999. Additional industry factors which the Company believes will increase the
demand for its services include (i) a continuing decline in the number of
service bays at automobile dealerships, (ii) the increasing cost of new cars and
the relative percentage of that cost to median family income and (iii) the
increasing age of the average vehicle (9.3 years in 1996 compared to 6.9 years
in 1981).
The Company's consumer research indicates that the fragmentation of the
industry is exemplified in the fact that automobile dealerships, which do not
currently have significant national or international name brand recognition,
represent Precision Tune Auto Care's primary competition. While automobile
dealerships do not have significant brand recognition, the fact that they are
authorized to provide services by the manufacturers of the automobiles they sell
provides them with credibility as a premium provider of automotive maintenance
service for such brands of automobiles. Other participants in the automotive
service sector include parts suppliers, tire companies, and regional service
specialists, none of which are deemed by management to be national service
providers with strong top-of-mind brand awareness. The International Car Wash
Association estimates that there are approximately 75,000 car wash facilities in
North America. The Company is not aware of any national or significant regional
competitors in this sector. Precision Lube Express competes in a fast lube
industry marked with national chains such as Jiffy Lube, Q Lube, Texaco's
Express Lube and Valvoline's Instant Oil Change, as well as a number of smaller,
regional chains and independent operators.
The Company believes that the size, growth and fragmentation of the markets
in which it operates present significant opportunities for a national brand with
a reputation for quality. For example, the car wash business and significant
portions of the fast oil change and lube business historically have been
populated with local operators who rarely upgrade or improve their facilities.
Moreover, recent technological improvements in car wash equipment and chemicals
now allow for more consistent and higher quality service. The Company believes
that a large national brand can attract a greater part of the market as
consumers become aware of these features and experience consistent quality,
appearance and service standards throughout the Precision Auto Care system.
COMPETITIVE STRENGTHS
Precision Auto Care believes that the following characteristics provide
competitive advantages:
Strong Brand Awareness. Although the Company has not conducted operations
under the Precision Auto Wash or Precision Lube Express name, Precision Tune
Auto Care has been in existence since 1977 and, with 468 domestic centers and 88
international centers as of June 30, 1997, has achieved significant awareness of
the Precision brand name. The Company's centers are located in 39 states and
five countries. The logos, signage, and building identity package for Precision
Lube Express and Precision Auto Wash have been designed to be complementary with
and to extend this brand awareness, which management believes will provide
significant opportunities for cross promotion of the three businesses. The
Company expects that this cross promotion will allow the Company to utilize
national broadcast advertising more effectively and earlier than would otherwise
be the case, creating top-of-the mind brand awareness among consumers.
One-Stop-Shop "Do-It-For-Me" Service Capability. In addition to providing a
full range of automotive maintenance services at Precision Tune Auto Care, the
Company believes its franchisees can successfully add Precision Lube Express
bays to Precision Auto Wash centers and Precision Auto Wash touchless wash bays
to Precision Tune Auto Care and Precision Lube Express centers, thereby
maximizing customer convenience and Company and franchisee revenues and
earnings. The
36
<PAGE>
Company believes that positioning the Company as a one-stop, multiple-solutions
provider of automotive maintenance services (many of which are essential to
vehicle maintenance) will be very attractive to today's drivers, many of whom
are faced with increasing time pressures.
Experienced and Proven Full Service Franchising Capability. Precision Tune
Auto Care has been engaged in franchising for 20 years and has been named as one
of the top franchises in the United States and the world by publications such as
Entrepreneur Magazine, Success Magazine, Money Magazine, and Franchise Buyer.
The Company supports its franchisees with a vertically integrated support
system, including operations, customer service, marketing and training support
and computerized systems at the retail level, site selection and service center
development assistance, parts and supplies distribution, auto wash equipment
manufacturing and installation, lube express building manufacturing and
installation, and if desired, monthly accounting and financial reporting
assistance. The Company utilizes a dual approach to sell franchises. There
currently are 31 Precision Tune Auto Care area developers who have existing
rights to develop certain territories. The Company's new management has recently
refocused the Company's infrastructure to market sales of franchises directly to
prospective franchisees in areas not covered by these subfranchisors.
Superior Technical Capabilities and Customer Service. Precision Tune Auto
Care's highly trained technicians specialize in high end "under-the-hood"
automotive maintenance services and engine diagnostics. Given the increasing
complexity of today's vehicles, management believes that the Company's highly
trained technicians give the Company a competitive advantage over many of its
competitors, whose technicians are not as well trained, and over
"do-it-yourself" consumers, who typically are unqualified to repair and maintain
modern engine systems. The Company supports its services with a comprehensive
warranty program. The Company's technical capabilities also are supported by a
series of quality-oriented programs, including the training of center personnel
in how to provide high quality customer service, centralized customer service
"800" numbers, extensive store evaluation and "mystery shopper" programs,
computerized in-store educational kiosks, use of quality parts, and a pricing
policy which aims to provide customers with Precision Value, which the Company
defines as quality, service and convenience at a fair price.
Attractive Unit Economics. When operated in accordance with Company
guidelines, each of the three types of retail centers can provide attractive
economic returns to the owner. The Company believes that these economic
opportunities will be enhanced by the ability to cross promote the Precision
brand through the three different types of retail centers. The Company also
believes that the levels of initial investment required of franchisees make the
Company's franchises economically attractive. Of particular note is the
relatively low cost of entry into the fast oil change and lube business
facilitated by the Company's modular fast lube building. Management believes the
modular fast oil change and lube building provides a significant competitive
advantage over its competitors which require more expensive build-to-suit
buildings with pits or a basement.
Motivated Owner-Operators. Although the Precision Tune Auto Care system has
several successful franchisees who own large numbers of centers, the average
franchisee owns between one and three centers. Management believes that a
substantial majority of these franchisees operate Precision Tune Auto Care
centers as their primary source of income and are therefore highly motivated to
maximize their retail center sales and profits.
Experienced Management. As a team, the Company's senior officers have
extensive experience in the automotive aftermarket sector, franchising
operations, and the management of publicly-held growth companies. This
management team has implemented a series of programs designed to give the
Company a common vision, shared goals and a culture of responsibility and
accountability.
GROWTH STRATEGY
The Company's growth strategy centers on the following elements:
Maximizing Service Center Profitability. The Company believes that
maximizing service center profitability is vital to the stability and growth of
the Precision Auto Care system. Accordingly, the Company continually seeks to
identify, develop and promote systems, products, and practices that enhance the
awareness of the Precision name, grow retail sales, and control service center
operating costs. The Company has identified a strategy to become a nationally
recognized leader in the automotive service industry by offering the services of
its three types of operating units under one brand name. In addition to
providing cross-promotional and other marketing opportunities, the Company
believes that the combination of up to the three types of individual services
offered by the Company at the same location or in close proximity will provide
added customer convenience and can generate superior economic returns to the
center operators. For example, if space is available Precision Lube Express bays
can quickly and economically be added to an existing Precision Auto Wash
facility. Such combinations
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increase the level of service to the customer, allowing the operator to provide
cross-promotions to encourage the frequent usage of the services offered by each
unit.
Service Center Growth. Precision Tune Auto Care intends to utilize its
franchising capability and experience and its existing center base to cross-sell
Precision Auto Wash and Precision Lube Express franchises. The Company's
domestic franchising efforts seek to establish critical mass in regional
markets. Although it has relied heavily on area subfranchisors in the past, the
Company intends to utilize direct franchising versus franchising through area
developers in the future. The Company's international expansion efforts will
continue to utilize master franchise arrangements and will focus primarily in
areas of the world where Precision Tune Auto Care already has developed a
presence, namely Southeast Asia, the Americas, and the Caribbean.
Management believes that the availability of two new franchise products to
offer existing franchisees could result in significant franchise sales as those
franchisees seek to obtain incremental market penetration and revenue growth by
complementing existing centers with one or more of the other types of centers.
To simplify the process of starting a new franchise or adding an additional
franchise, the Company presently intends to initiate two new programs:
(Bullet) The Precision Asset Leasing Program will be intended to minimize
the up-front cash investment required by the franchisee. This
program will provide franchisees the opportunity to lease the
equipment required for operation of a Precision Tune Auto Care or
Precision Auto Wash center, as well as the building and equipment
required for a Precision Lube Express center.
(Bullet) The Precision Turnkey Program will be designed to allow a
franchisee to purchase an existing company-operated center and
will be offered at management's discretion in certain
predetermined areas. The franchisee will purchase a franchise
license and the center's assets, including goodwill, and, if
applicable, will rent the underlying real property from the
Company. The program is designed to enhance franchise sales by
providing readily available and immediately operational sites of
Company-selected locations.
Acquisition or Conversion of Competitor Centers. The Company aggressively
will seek to acquire or convert competitors, directly or through franchising, to
the Precision Auto Care system. Because the car wash industry is dominated by
one-to-three center operators, this business will be a particular focus for this
strategy. Management estimates that approximately 2,000 of the existing car wash
centers in the United States use equipment similar to the equipment that will be
used in Precision Auto Wash centers. The Company believes that significant sales
increases could be achieved upon the acquisition or conversion of such centers
once they are upgraded to Precision Auto Wash operating and marketing standards
and enjoy the competitive advantages of the comprehensive and proprietary
Precision Auto Wash system and Precision brand name awareness. A number of
competing auto care and fast lube chains will also be targeted for acquisition
or conversion.
Company Store Division. The Company plans to develop a division of Company
owned Precision Tune Auto Care, Precision Auto Wash, and Precision Lube Express
centers. This will enable the Company to capture revenue and profits at the
service center operating level, increase Precision brand market share and
potentially derive capital gains through the subsequent sale and franchising of
such units pursuant to the Precision Turnkey Program. At June 30, 1997 this
division included 31 auto wash centers owned directly by the Company, 4 auto
wash centers which the Company manages and in which it holds a 50% equity
interest and four fast oil change and lube centers. Future development efforts
will initially focus principally on Precision Auto Wash and Precision Lube
Express centers targeted in the Colorado and Ohio regions in order to take
advantage of the base of existing operations.
Manufacturing and Distribution. In addition to providing its franchisees
with superior service and support, manufacturing and distribution activities
also generate significant revenue and operating profits for the Company.
Furthermore, these activities are designed to allow the Company to promote
uniform quality across its franchised locations. Precision Tune Auto Care
distributes parts and equipment to Precision Tune Auto Care centers through its
warehouse distribution division. The Company manufactures and installs the
HydroSpray equipment and operating system required to operate a Precision Auto
Wash franchise and also offers chemicals, parts and supplies to franchisees. The
Company manufactures and installs the prefabricated buildings from which
Precision Lube Express operations are conducted. The Company believes that the
HydroSpray equipment and prefabricated building operations will provide the
Company with significant cost advantages in connection with its acquisition and
conversion of competitor operated centers by allowing the Company to more easily
and economically upgrade the acquired facilities.
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OPERATIONS
PRECISION TUNE AUTO CARE
Precision Tune Auto Care is an automotive service specialist engaged in the
business of providing quality automobile maintenance services. At June 30, 1997
these services were provided at 556 Precision Tune Auto Care centers owned and
operated by Precision Tune Auto Care franchisees. The automotive maintenance
services provided by Precision Tune Auto Care centers include the diagnosis,
maintenance and repair of ignition systems, fuel systems, computerized engine
control systems, cooling systems, starting/charging systems, emissions control
systems, engine drive train systems, electrical systems, air conditioning
systems, oil and other fluid systems, and brake systems. Precision Tune Auto
Care believes it is a leading provider of automotive maintenance services in the
United States, that it enjoys a reputation for providing quality service quickly
and conveniently for a fair price and that it has benefitted from the growth in
the "do-it-for-me" versus the "do-it-yourself" market. For the year ended June
30, 1997, Precision Tune Auto Care system-wide retail sales, and the Company's
franchising revenues derived from the Precision Tune Auto Care system were
$207.7 million and $15.6 million, respectively.
Prototype Center. The prototype Precision Tune Auto Care center typically
is free-standing and currently consists of six to eight service bays, two to
four of which are drive-through and include pits to facilitate fast oil change
and lubrication services. Approximately 33% of the Company's existing domestic
Precision Tune Auto Care centers have at least six bays. The center also
includes storage space for parts and inventory, a manager's office, a
fully-furnished customer service and reception area, and restrooms. An optional
children's play area can be added to make the center more family friendly. The
center is located on a 15,000 to 20,000 square foot lot, generally in a high
traffic, commercial area. Each center is identified with Precision Tune Auto
Care signage, including the Precision Tune Auto Care logo and trade dress, to
create a consistent image and heightened customer recognition. Precision Tune
Auto Care Centers are generally open six days a week from 8:00 a.m. until 6:00
p.m. Each center maintains an inventory of over 3,000 SKU's, including oil and
other automotive fluids, having an aggregate average value of approximately
$15,000. The design and operation of each center is intended to provide the
customer with a superior experience by offering the customer high quality
services quickly in clean, well-run facilities. Exclusive of real estate, the
estimated initial investment to open a prototype Precision Tune Auto Care center
ranges from $130,000 to $200,000.
Existing centers presently consist of between two and fourteen bays. All
centers are required to provide oil change and lubrication services (unless
otherwise restricted under the terms of a lease); however, a substantial number
of existing centers do not have drive through capabilities. For those existing
centers not currently able to offer fast oil change and lube services, the
Company believes that the modular system offered by Precision Lube Express will
present an excellent opportunity to penetrate this market segment and increase
revenue and earnings for franchisees who are able to locate a Precision Lube
Express center on their existing site or on a site in close proximity to their
Precision Tune Auto Care operation. Franchisees typically develop Precision Tune
Auto Care centers either by entering into a build to suit lease, under which the
landlord constructs the center and leases it to the franchisee, or by purchasing
land and building the facility.
Precision Tune Auto Care seeks half-acre sites in commercial areas which
have a minimum of 50,000 people within a five mile radius and 24-hour drive-by
traffic of at least 20,000 cars. In addition, the Company aims to cluster
existing markets before opening centers in markets where Precision Tune Auto
Care has no presence in order to create and take advantage of advertising
efficiencies. The Company actively assists franchisees with site selection and
evaluation of the proposed site, after which the Company has the right to reject
sites selected by franchisees.
Retail Marketing. Precision Tune Auto Care's marketing objectives at the
retail level are to increase sales penetration, enhance first time customers'
trial experience, and bolster customer retention efforts. To further these
objectives, Precision Tune Auto Care has developed and implemented a
comprehensive marketing plan containing numerous programs and materials for use
by Precision Tune Auto Care centers. The plan includes targeted marketing
programs designed to reach key market segments, in-store merchandising materials
designed to enhance retail sales and first time customer trials, and other local
marketing materials (e.g., second car discounts, service reminder cards, and ATM
receipt coupons) designed to generate first time customer trials and improve
customer retention. The Company's current data base includes approximately three
million names. The Company uses this data to analyze services provided by
Precision Tune Auto Care centers. Moreover, franchisees can access the data for
the purpose of issuing service reminder notices and other promotional purposes.
Precision Tune Auto Care, in conjunction with an advertising cooperative funded
by franchisees, provides a variety of marketing materials to franchisees,
including television and radio commercials, newspaper, direct mail material, and
instore promotional material. In addition, a number of sales promotion program
packages, including grand opening, anniversary and peak season promotional
packages, have been developed. Precision Tune Auto Care recently introduced a
marketing campaign designed
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to enhance awareness of the variety of Precision Tune Auto Care services and to
establish Precision Tune Auto Care as the convenient and cost-effective
alternative to the new car dealer for automotive maintenance. The Company has
also recently initiated a fleet service program pursuant to which the Company
services automotive fleets at volume discounts.
Training and Operational Support. A significant element of Precision Tune
Auto Care's commitment to quality service is its intensive training program for
franchisees. Franchisees are required to successfully complete 80 hours of
initial training prior to opening their centers. This training runs for two
weeks at the Company's national training center in Leesburg, Virginia. The
Company also offers a full line of technical training, including courses on
engine performance, fuel systems and emissions, automotive electronics, fuel
injection, and brake certification. These courses, which consist of between 40
and 80 hours of classroom and hands-on training, are designed to allow
franchisees and service center technicians to maintain and update their
technical capability to service today's more technically complex vehicles. In
addition to classes conducted at the Company's national training headquarters,
Precision Tune Auto Care offers a program through which trainers are available
to franchisees onsite. Generally, area subfranchisors also are required to
maintain a training facility and have one certified trainer on staff to provide
local technical training and certification. Upon opening a new center, training
crews are onsite for at least the first two business days.
The Company has designed a policies and procedures manual to simplify the
management and operational challenges faced by a franchisee, maximize the
franchisee's revenue and earnings, and provide a consistent customer experience
throughout the Precision Tune Auto Care system. Each center in the system
receives an evaluation utilizing a standard evaluation report on a quarterly
basis and shorter monthly visitation reports by an operations manager employed
by the Company or an area subfranchisor as appropriate. Recent management
initiatives have also included the retention of an independent service to
"mystery shop" approximately one-third of Precision Tune Auto Care centers each
year.
Management also has developed the Precision Information Network ("PIN"), a
proprietary point of sale computer system, and has made this system available to
franchisees. This Windows-based system employs touch-screen technology designed
to be user friendly. The PIN or a similar system is required to be used under
current franchise agreements. Reports provided by the PIN system include
productivity, cost of goods, labor, inventory and product class. In addition,
PIN contains a marketing database module that facilitates the tracking of
customer information for the development of direct mail marketing campaigns and
other marketing strategies. Remote-location polling of information and
electronic ordering from the Company's parts and equipment division are features
currently under development. Upon completion of the Offering each center will
receive up to $2,500 to upgrade its existing computer system to PIN or to
install a PIN system if the center does not already have a computer system.
Franchise Marketing. Precision Tune Auto Care has been engaged in
franchising Precision Tune Auto Care centers since 1977. The Company has a
comprehensive franchise sales process that starts with the placement of
advertising in appropriate franchise and business publications. The Company also
maintains a home page on the Internet through which interested parties may
submit a franchise inquiry. Prospective franchisees are asked to complete a
Confidential Qualifications Report which serves as the initial screen to
determine whether a prospect is qualified. The Company seeks individuals with
management experience who will commit full time to the operation of their
franchise and who have a minimum of $50,000 and $150,000 in liquid assets and
net worth, respectively. Franchise sales seminars are conducted on a regular
basis at the corporate office and provide qualified prospective franchisees with
the opportunity to investigate the franchise arrangements thoroughly in
connection with their decision to become a franchisee.
Precision Tune Auto Care's area development system has played a major role
in the Company's franchise development efforts. Under this system, Precision
Tune Auto Care has entered into area development agreements that grant area
developers the right and obligation to develop franchises on Precision Tune Auto
Care's behalf within specific geographic regions for stated periods of time.
Franchise agreements within the area are between Precision Tune Auto Care and
the franchisee. The area developer typically receives up to one-half of the
initial franchise fee, one-half of the subsequent royalty revenues and one-half
of franchise renewal and transfer fees. After the creation of a franchise, the
area developer performs some or all of Precision Tune Auto Care's franchisor
obligations. The Company is free to establish and operate Company-owned centers
in areas in which it has granted development rights to area developers. In that
event the Company is required to pay the area developer amounts equal to the
royalty payments that the area developer would otherwise receive if the center
was being operated by a franchisee. As of June 30, 1997, 32 area developers had
an ownership interest in a total of 157 Precision Tune Auto Care centers and
provided support to another 254 centers.
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The map below reflects territories within the United States that are
covered by area development agreements as of June 30, 1997.
[U.S. map appears here]
Following a series of presentations to and meetings with Precision Tune
Auto Care subfranchisors, on October 12, 1997 the Company entered into a
Statement of Understanding (the "Statement of Understanding") with the
Association of Precision Tune Area Subfranchisors ("APTASF"), which represents
substantially all of the Company's subfranchisors. Pursuant to the Statement of
Understanding, the Company agreed to: (i) use its reasonable efforts to
eliminate any territorial conflicts between existing Precision Tune Auto Care
subfranchisors and existing Lube Depot area developers; and (ii) provide each
APTASF member with an option for 14 months after the completion of the Offering
to elect to execute a Precision Lube Area Subfranchisor Agreement and/or a
Precision Auto Wash Area Subfranchisor Agreement on substantially the same terms
as existing subfranchise agreements. The Statement of Understanding further
provides that, prior to the execution of a Precision Lube Express or Precision
Auto Wash Area Subfranchisor Agreement the Company shall have the right to
establish Precision Lube Express or Precision Auto Wash centers within such
Precision Tune Auto Care subfranchisor's territory if the area subfranchisor
fails to exercise a right of first refusal to open such center. In the event
that an area subfranchisor fails to execute an Area Subfranchisor Agreement
within the aforementioned option period, the Company shall have the right to
establish Precision Lube Express or Precision Auto Wash centers within such
Precision Tune Auto Care area subfranchisor's territory subject to the Company's
obligations to establish such a center no closer to an existing Precision Tune
Auto Care center than a distance to be agreed upon and to indemnify such area
subfranchisor from any claim made by Precision Tune Auto Care franchisees
alleging that a Precision Lube Express or Precision Auto Wash franchise
established by the Company in the area subfranchisor's area encroaches upon
the franchisee's Precision Tune Auto Care center. In addition to the foregoing,
the Company and APTASF agreed to jointly develop a structural relationship
between the Company, APTASF and the franchise owners association for the purpose
of enhancing communication within the system and jointly addressing certain
systemwide issues, such as avoiding encroachment, management of advertising
funds, development of new products and franchisee servicing. The Company and
the APTASF also agreed to jointly develop procedures and criteria for the
purchase and acquisition of buildings, fixtures, equipment and supplies from
approved suppliers or in accordance with specifications
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(including which items franchisees must purchase from the Company). The APTASF
membership agreed to voluntarily purchase all such items from the Company for
the next 24 months at competitive prices. The Company believes that APTASF
members and the Company will finally resolve the matters contemplated by the
Statement of Understanding on terms that are favorable to the Company and the
APTASF members. There can be no assurance, however, that the Company, APTASF and
the Company's area subfranchisors will be able to reach agreement on
satisfactory terms or that the relationships the Company develops with the
APTASF members will not increase the costs of the Company's operations or
otherwise adversely affect the Company's financial condition and results of
operations. See "Business--Operations."
Open Area Development. Precision Tune Auto Care's current strategy is to
pursue aggressively the direct development of open areas in which area
developers have not been granted rights. To facilitate this strategy, Precision
Tune Auto Care has implemented an open area development plan that is supported
by a devoted franchise development team on the corporate payroll. This plan
addresses such factors as market demographics, development resources (e.g.,
advertising and public relations vehicles, developers of commercial real
estate), criteria for initial center development, and criteria for additional
center development. Based on these factors, a specific expansion strategy for
each target area has been developed. The Company believes that significant
expansion potential exists in areas not controlled currently by area developers.
PRECISION AUTO WASH
Precision Auto Wash operates 34 Company-owned touchless automatic and
self-service car wash centers. The Company owns 30 of these centers and manages
and holds a 50% interest in the remaining four. The Company intends to commence
the sale of Precision Auto Wash franchises promptly following the Combination
and after the Company complies with applicable state franchise filing and other
regulations.
The Company believes that touchless automatic and self-service car washes
present the following significant competitive advantages relative to other
sectors of the car wash industry:
(Bullet) Price: According to studies commissioned in 1996 by the
Professional Carwashing and Detailing Magazine, the average cost
of a basic in-bay automatic wash was $3.40 as compared to $5.98
for an exterior-only cloth wash and $9.28 for a full-service
tunnel wash. The Company's price for a basic in-bay automatic car
wash is based on regional market conditions and currently ranges
from $3.50 to $4.00.
(Bullet) Convenience: Self-service and touchless automatic washes are open
24 hours per day, 365 days per year as opposed to exterior-only
cloth washes and full service tunnels which typically are open
8-10 hours per day and are closed on holidays.
(Bullet) Capital investment: The capital investment required to build a
self-service and touchless automatic wash is significantly lower
than that required for full service tunnel and exterior-only cloth
washes.
(Bullet) Labor: Self-service and touchless automatic washes do not require
the same level of labor required to operate other types of washes.
(Bullet) No-touch operation: Recent advances in chemical technology allow a
self-service or touchless automatic car wash to provide a
high-quality wash without friction, which lowers the risk of
vehicle damage.
These factors are the driving forces behind management's belief fact that
touchless automatic and self-service car wash systems are the fastest growing
segment of the car wash industry.
Precision Auto Wash has developed a system that management believes
represents the state-of-the-art in modern touchless automatic and self-service
car washing capabilities. Substantially all Precision Auto Wash centers will
feature HydroSpray equipment and the proprietary operating system developed by
the Precision Auto Wash Constituent Companies. The Company believes that both
the HydroSpray equipment and the proprietary operating system are superior to
the technologies utilized by its competitors and, therefore, provide the Company
with a significant competitive advantage.
This operating system includes the following features:
(Bullet) Total computerized control of the wash system which allows the
operator to change time cycles and equipment functions, and to
monitor the status of operations, quickly, easily and
cost-effectively, even from a remote location on a laptop personal
computer.
(Bullet) The ability for customers to quickly and easily contact a central
national customer help center on a dedicated toll-free number in
the event of an equipment malfunction, and for the help center to
immediately rectify such problem on-line.
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(Bullet) A frequent wash card system, utilizing bar-code technology,
rewards customers with free washes based upon wash frequency.
(Bullet) Through its exclusive integrated voice, LED display and video
instruction features, the system provides the customer with an
understanding of how to operate the system.
(Bullet) A grace period feature permits the customer to continue the wash
cycle by inserting one or more quarters after his or her initial
time has expired.
(Bullet) A bonus time feature allows customers more time per coin during
off-peak hours.
The system also includes several important mechanical features which
provide the motorist with a superior car wash. In the automatic bay, the
HydroSpray unit travels around the vehicle in a heated, galvanized track
enabling the car wash to be open 24 hours a day, even during the coldest times
of the year. Three rotating wands and 8 high pressure nozzles continuously sweep
dirt and grime from the vehicle. Each wash is finished with a spot-free rinse.
In the self-service bay, the customer controls the entire wash process by means
of a wash wand and foaming brush system. Many motorists prefer self-service car
washing because they maintain total control over the entire wash process and the
amount of money they spend. Utilized properly, the self-serve wash produces
results similar to those of the automatic wash. Because the system is operated
by a completely integrated computer control system, the foregoing features may
be modified and tailored to each specific location, depending on customer needs
and market conditions.
Centers will include powerful vacuums that deliver maximum cleaning power
and feature clear, graphic instructions. A timer offers a "Last Coin Alert,"
"Extra-Time" service, and a "Count-Down" display of time remaining. All
Precision Auto Wash centers will also offer a complete line of auxiliary vending
items such as towels, wet towels and Armor All(Register mark). Depending on
market conditions and requirements, other services may be offered as well such
as fragrance-dispensing machines and carpet shampooers.
The Company intends to use approximately $1.5 million in borrowings under a
credit facility and internally generated operating funds to outfit all of the 34
Company-operated centers with the full complement of HydroSpray equipment,
proprietary operating and marketing features of the Precision Auto Wash system,
and the Precision brand signage. The Company expects to complete this conversion
within 18 months of the consummation of the Offering.
Precision Auto Wash will aggressively pursue new market development. Its
strategies will focus on acquiring and upgrading existing car wash facilities in
selected markets, developing Company-owned centers, and marketing both existing
and new centers to franchisees. Targeted markets will be selected based on the
presence of suitable car wash facilities and existing centers controlled by
Precision Auto Wash. Development efforts initially will be focused on clustering
in Colorado and Ohio markets, where Precision Auto Wash facilities already
exist. Management believes that the highly-fragmented car wash market is ripe
for consolidation, and that the Company's ability to upgrade acquired washes to
Precision Auto Wash standards at wholesale prices through its HydroSpray
equipment division represents a significant competitive advantage.
Prototype Center. An auto wash center prototype was developed in 1995 in
Aurora, Colorado to demonstrate that a self-service car wash could gain
significant market share through sound marketing and operating practices. This
center contains 5 self-service and one automatic car wash bays. Exclusive of
real estate, the estimated initial investment to open a Precision Auto Wash
prototype center ranges from $210,000 to $235,000.
Precision Auto Wash centers are generally located on half-acre sites in
high-traffic, commercial areas.
Retail Marketing. The Company believes that Precision Auto Wash should
enjoy significant benefits from the Precision Tune Auto Care national marketing
program. In addition, retail sales should be stimulated by the name recognition
and cross marketing opportunities generated through Precision Auto Wash's
association with the Precision Tune Auto Care and Precision Lube Express
systems.
At present, marketing initiatives at the retail level include (i) a grand
opening ceremony to publicize the opening of each new center, (ii) frequent
usage/swipe card system to encourage repeat business, (iii) direct mail
marketing, (iv) quarterly newsletter publication and distribution to customers,
(v) advertising on the back of grocery store receipts, (vi) customer
appreciation days, and (vii) fleet account solicitation.
Training and Operational Support. A three-day formal pre-opening training
program is required for all Precision Auto Wash franchisees prior to the opening
of a center.
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Precision Auto Wash will provide its franchisees with an operations policy
and procedures manual, and perform a thorough center evaluation on a quarterly
basis. Precision Auto Wash centers will participate in "mystery shopper" and
customer service programs. Field operations, marketing and training support will
be provided by Company personnel.
Franchise Marketing. After the Offering, the Precision Auto Wash franchise
sales effort will be combined into and become part of the overall franchise
sales process for all three Precision-branded products. Therefore, prospective
Precision Auto Wash franchisees will be recruited and granted franchises in
accordance with the same processes and techniques that are used to recruit and
license prospective Precision Tune Auto Care franchisees. Precision Tune Auto
Care's area subfranchisors who agree to become a Precision Auto Wash area
subfranchisor in their territory will be paid a portion of the initial
franchisee fee and continuing royalty in consideration for assisting in the
development and ongoing support of a Precision Auto Wash center.
Precision Auto Wash franchisees will be required to purchase the HydroSpray
equipment and operational system package from the Company.
PRECISION LUBE EXPRESS
Precision Lube Express owns and franchises "Lube Depot" centers, which
provide fast automobile oil change, lubrication, filter replacement and related
basic services. In addition, Precision Lube Express manufactures modular Lube
Express buildings that it will sell to franchisees and independent entities.
Precision Lube Express will also be an approved supplier of oil filters, air
filters, additives and tools used in franchised operations. Immediately after
the Offering, the Lube Depot name will be changed to Precision Lube Express and
all of the existing Lube Depot centers will be offered the opportunity to
convert to Precision Lube Express centers. The Company will pay all of the costs
incident to the conversion and estimates that this would cost approximately
$150,000 if all 22 centers converted. The Company will fund these costs from
internally generated funds or its revolving credit facility. The Company intends
to commence the sale of Precision Lube Express franchises promptly following the
Combination and after the Company complies with applicable state franchise
filing and other regulations.
The "above-ground" configuration of the modular Lube Express building
manufactured and sold by the Company enables Precision Lube Express operators to
commence operations more quickly and with lower levels of initial investment
than many of its competitors. Unlike traditionally constructed fast oil change
and lube centers, the Company's modular centers can be relocated or expanded
quickly. In addition, the modular Lube Express building can be located on a
relatively small piece of property. Unlike certain of its competitors, Precision
Lube Express centers do not perform transmission and differential fluid changes,
radiator flushes or other automotive maintenance or repair work. Accordingly,
the Company believes that this enables Precision Lube Express operators to
provide services more inexpensively than their competitors because Precision
Lube Express operations require less skilled labor.
The Company also believes that the Precision Lube Express operations can be
combined with Precision Auto Wash and Precision Tune Auto Care centers to gain
competitive advantages associated with being a one-stop retail shop and the
benefits associated with operating under the "Precision" brand name. Because the
Precision Lube Express building is modular and relatively small, it can be
located on the same site as a Precision Auto Wash or Precision Tune Auto Care
center, or on other retail locations as well.
The Company has conducted discussions with the Precision Tune Auto Care
franchise owners association concerning the potential conflict between the oil
and lube services provided by existing Precision Tune Auto Care centers and
potential new Precision Lube Express centers. The Company has agreed to use its
best efforts to avoid such conflicts by only developing Precision Lube Express
centers after studying the existing trade areas of potentially impacted
Precision Tune Auto Care centers.
At June 30, 1997, there were 22 Lube Depot centers in operation. These
franchises are located in Ohio, Pennsylvania, Iowa, Delaware, Kentucky,
Illinois, Indiana, and West Virginia.
Prototype Center. The prototype Precision Lube Express Center consists of a
one or two bay unit which provides oil and filter replacement and chassis
lubrication services. Precision Lube Express centers also check and fill all
vital fluids, and conduct vehicle safety inspections, including inspection of
exhaust systems, tires and chassis parts. Precision Lube Express customers may
also purchase air filters, PCV valves, breather filters, wiper blades and
assorted engine additives. Precision Lube Express centers top off vital fluids
between customer's oil changes at no charge. Exclusive of land, the estimated
initial investment to open a Precision Lube Express prototype Center ranges from
$134,000 to $246,000.
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Retail Marketing. Precision Lube Express marketing emphasizes the basic
"hassle-free" fast oil change and lube services Precision Lube Express provides.
Precision Lube Express believes it can compete effectively with other fast lube
regional and national chains because the basic nature of its services minimizes
the amount of services and accessories that may be sold
and added to a customer's invoice. In addition, retail sales are expected to
benefit from the name recognition and cross marketing opportunities generated
through Precision Lube Express' association with other Precision Auto Care
brands.
Specific marketing initiatives at the retail level include (i) VIP cards,
granting customers special rates and other benefits, (ii) point-of-sale
marketing materials, including frequent usage cards that provide customers with
free oil changes to encourage repeat business, (iii) radio and print media
advertising, and (iv) direct mail marketing.
After the Offering, Precision Lube Express will expand its existing local
fleet marketing efforts by tapping into the Precision Tune Auto Care national
fleet marketing program.
Training and Operational Support. Precision Lube Express provides a
one-week training program that franchisees will be required to complete
successfully before opening a Precision Lube Express center. The program will
address the following areas: computer system operations, lubrication equipment
training, center operations, customer service, and advertising.
Each Precision Lube Express franchisee is provided with an operations
policy and procedures manual. In addition, each center will receive operational
visits similar to Precision Tune Auto Care centers and will be included in
mystery shopper and customer service programs. Field operations, marketing and
training support will be provided using the existing Precision Tune Auto Care
structure, with area subfranchisor personnel or corporate personnel, as
applicable.
Franchise Marketing. After the Offering, the Precision Lube Express
franchise sales effort will be combined into and become part of the overall
franchise sales process for all three Precision-branded products. Therefore,
prospective Precision Lube Express franchisees will be recruited and granted
franchises in accordance with the same processes and techniques that are used to
recruit and license prospective Precision Tune Auto Care franchisees. In areas
where Precision Tune Auto Care has an area developer, those area developers will
be offered the opportunity to enter into a Precision Lube Express development
schedule or the Company will develop Precision Lube Express centers in those
areas directly. Lube Depot currently has agreements in place covering the
development of areas including territories in the states of Arizona, California,
Delaware, Maryland, Nevada, New Jersey, Ohio, Oregon, Pennsylvania, Washington
and West Virginia. Upon consummation of the Combination, Lube Depot's prior
practice of selling territories to area developers will be discontinued.
MANUFACTURING AND DISTRIBUTION
The Company's manufacturing and distribution account for a significant
portion of the Company's revenues and are more fully described below. The
Company does not rely heavily on any single supplier for the supply of any
materials, such as oil, equipment or raw materials or components the Company
utilizes in its manufacturing operations.
Precision Tune Auto Care. Precision Automotive Components ("PAC"), a
distributor of automotive parts and equipment located in Winchester, Virginia,
has been an integral part of the Precision Tune Auto Care system since its
inception. PAC sells a complete line of quality ignition parts, oil and air
filters, brake parts, diagnostic equipment, signage, and other items necessary
and incidental to the outfitting and operation of Precision Tune Auto Care
centers. PAC carries an inventory of approximately 5,500 SKU's, many of which
are private labeled for the Precision brand. PAC provides two-day delivery to
centers anywhere in the United States. After the Combination, PAC will supply
oil and air filters, and other supplies, to Precision Lube Express centers and
will, over time, supply spare parts and other supplies to Precision Auto Wash
centers. PAC revenues totaled $11.8 million for the year ended June 30, 1997.
Precision Auto Wash. Hydro Spray Car Wash Equipment Co., Ltd.
("HydroSpray"), a Company subsidiary, manufactures, distributes and sells the
car wash equipment used in Precision Auto Wash centers. Management believes that
the HydroSpray equipment package is a leading car wash equipment package on the
market because it includes such unique features as an integrated computer system
that controls the auto wash system and allows remote dial-in access for system
status reports and the diagnosis of maintenance problems. HydroSpray will sell
equipment to Precision Auto Wash franchisees and to other third parties for
installation in car wash centers that are not franchised or otherwise affiliated
with Precision Auto Wash. HydroSpray revenues totaled $6.3 million for the year
ended June 30, 1997.
While the Company has a welding shop and fabricates some of its components
onsite, HydroSpray's operations principally include the assembly of parts that
have been manufactured by suppliers to HydroSpray specifications. This process
is conducted at HydroSpray's 40,000 square foot manufacturing facility located
in Cedar Falls, Iowa. The finished materials are generally constructed of
stainless steel and galvanized steel.
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Miracle Chemicals blends and distributes the chemical solutions used in
Precision Auto Wash centers including the "Mean Green" presoak and other
solutions of the type which are required in the Precision Auto Wash system.
Miracle Chemicals makes its chemicals and supplies available to Precision Auto
Wash franchisees and other third parties who are not
franchisees or otherwise affiliated with Precision Auto Wash. Miracle Chemical's
revenues for the year ended June 30, 1997 were $811,000.
Precision Lube Express. A modular building division manufactures and
installs the modular building and equipment system utilized by Precision Lube
Express centers. The Company also sells these buildings to others for various
commercial applications. The buildings are delivered, installed, field-tested,
and outfitted with all of the supplies and tools necessary to commence
operations immediately. Most installations are complete within three to five
business days from the date of shipment, thus providing competitive time and
cost advantages over traditional construction. This division produced $1.8
million in revenues for the year ended June 30, 1997.
The Company conducts these manufacturing operations at a 27,000 square foot
facility located in Mansfield, Ohio. The Company purchases parts from
third-party suppliers which are manufactured to the Company's specifications.
Following the assembly of a steel subframe, an aluminum skin is attached to the
frame to form the exterior. Doors and windows are then installed together with
insulation, wiring, piping and other components. The buildings are finally spray
painted and shipped to customers for installation. The Company is not dependent
upon any single supplier and the parts and materials the Company uses in
connection with its manufacturing process can be obtained from a variety of
suppliers.
FRANCHISE ARRANGEMENTS
Precision Tune Auto Care. Precision Tune Auto Care has been engaged in
franchising Precision Tune Auto Care centers since 1977. Precision Tune Auto
Care enters into franchise agreements pursuant to which a franchisee is granted
the right to establish and operate a Precision Tune Auto Care center. As of June
30, 1997, substantially all of the Company's Precision Tune Auto Care centers
were owned and managed by franchisees. Precision Tune Auto Care's franchises
have been sold during the preceding years under franchise agreements that vary
in detail as the Precision Tune Auto Care's franchise program has evolved.
Currently, the Precision Tune Auto Care's standard form of franchise agreement
requires payment to Precision Tune Auto Care of an initial franchise fee of
$25,000 and a continuing royalty of 7.5% of weekly gross receipts (but not less
than $100 per week). In addition, the franchisee is required to spend 9% of
weekly gross receipts on advertising, 1.5% of which is paid into the national
advertising fund and 7.5% of which is spent locally. The current franchise
agreement has an initial term of ten years and provides for a number of five
year renewal options.
Under the terms of a program implemented recently by the Company, qualified
franchisees are eligible to have their royalty rate reduced to 6% if they
satisfy certain criteria. Under the program, franchisees are also provided with
an incentive to purchase additional Precision Tune Auto Care franchises. Any
franchisee who has owned and operated a center for at least one year in
accordance with this program will be charged an initial franchise fee of $15,000
for a second franchise and $10,000 for each additional franchise purchased,
rather than the standard initial franchise fee of $25,000.
Under its current form of franchise agreement, the Company has a continuing
obligation to provide technical and administrative support, supervisory
services, centralized advertising, and training and related support to its
franchisees. In certain regions, the Company has delegated these duties on area
developers under its area developer system.
Upon non-renewal and transfer, the Company has the first right to purchase
the operating assets and obtain an assignment of leased facilities in certain
cases. The Company occasionally repurchases franchise rights. The decision to
repurchase is made solely at the Company's discretion and is not a contractual
obligation. The Company also periodically obtains possession of some
franchisees' franchise rights by exchanging for such rights notes payable or
other consideration, or by exercising rights outlined in the Franchise
Agreements.
Precision Tune Auto Care also enters into master franchise agreements to
develop international markets. Generally, the master franchisee pays a license
fee and is required to develop Precision Tune Auto Care centers in accordance
with an agreed upon schedule within the defined area. Franchise agreements
within the area are between the master franchisee and the unit franchisee. The
master franchisee is required to perform all of the obligations of the
franchisor, and Precision Tune Auto Care generally receives 20% of the initial
franchise fee and up to one-third of ongoing royalty fees.
Precision Auto Wash. The Company intends to establish relationships with
Precision Auto Wash franchisees pursuant to the terms of a standard franchise
agreement. The Company expects that the terms of its standard franchise
agreement will call for the payment of an initial franchise fee of $20,000. The
initial franchise fee includes a $5,000 credit that may be applied
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towards parts and supplies purchased from the Company. Franchisees will be
required to pay continuing royalties of 5% of weekly gross receipts (with a
minimum of $50 per week).
Franchisees will also be required to contribute an amount equal to 2% of
their monthly gross receipts to a national advertising fund and an additional
amount of their gross receipts royalties to a local advertising cooperative. In
addition, a franchisee will receive franchise protection within a specified
area. The Company expects that the franchise agreements will have an initial
term of ten years and provide for five-year renewal options.
Precision Lube Express. The Lube Depot franchise agreements currently in
effect have an initial ten-year term and may be renewed at the end of the
initial term for up to two additional five-year terms. Under the agreements, the
franchisee agrees to pay a royalty rate of between 3% and 5% of retail sales
generated by the franchise. Some franchisees currently pay a flat fee of between
$400 and $600 per month in lieu of a percentage royalty. The current franchise
agreements also called for the franchisee to pay an initial franchisee fee of
$10,000. The Company expects that the standard franchise agreement Precision
Lube Express will employ after the Combination will call for the payment of an
initial franchise fee of $12,500. Franchisees will be required to pay continuing
royalties of 5% of weekly gross receipts (with a minimum of $25 per week).
Franchisees also will be required to contribute an amount equal to 2% of their
monthly gross receipts to a national advertising fund and an additional amount
of their gross receipts royalties to a local advertising cooperative. The
Company expects that the franchise agreements will have an initial term of ten
years and provide for five-year renewal options.
The Precision Lube Express Constituent Company has entered into area
representative agreements which provide for the licensing of individuals and
entities to serve as area representatives and to assist with promotion,
marketing and the sale of centers within a particular territory. Area
representatives have the right to construct, own and operate franchise centers
within their territories. Precision Lube Express has granted area rights in
Arizona, California, Delaware, Maryland, Nevada, New Jersey, Ohio, Oregon,
Pennsylvania, Washington and West Virginia.
COMPETITION
The Company encounters competition in all aspects of its business,
including the sale by Precision Tune Auto Care, Precision Auto Wash and
Precision Lube Express centers of automotive maintenance and repair services,
self-service and automatic car wash services and fast oil and lubrication
services, respectively. The Company believes that automobile dealerships,
including recently emerging national and regional new and used auto dealerships,
represent Precision Tune Auto Care's principal competitors. Other Precision Tune
Auto Care competitors include tire companies and regional under-the-hood service
specialists. National competitors within Precision Tune Auto Care's market
include Sears Auto Center and the automotive maintenance centers operated by
Goodyear, Firestone and Penske, among others. Its regional competitors include
All Tune and Lube, EconoLube and Tune, Tunex, Tune-Up Masters and Speedy Oil
Change and Tune-Up, among others. The Company believes that the greater
technical complexity of today's vehicles provides a substantial barrier to entry
for competitors in the "under-the-hood" segment of the automotive maintenance
services industry.
Precision Auto Wash will compete not only with other self-service
automobile car washes but with car wash services provided by full-service
tunnels, exterior only tunnels, hand washes, oil company washes, and
do-it-yourself car washing.
Precision Lube Express also competes in the service segment of the
automotive aftermarket industry. According to the American Oil Change
Association, an estimated 650 million oil changes are performed annually in cars
and light trucks. These oil changes are performed by individuals (the
"do-it-yourself" market segment) or are performed professionally (the
"do-it-for-me" market segment). Professional oil changes are performed in all
types of automotive aftermarket outlets including fast oil change and
lubrication facilities such as those operated by the Company, car dealerships,
and gasoline stations. On a national level, Precision Lube Express will compete
with a number of major oil manufacturers dominating the fast lube market. These
include Pennzoil Company (Jiffy Lube International, Inc.), Quaker State Corp.
(Q-Lube Inc.), Valvoline Company/Ashland Oil Inc. (Instant Oil Change) and
Texaco Inc. (Express Lube), among others. In addition, Precision Lube Express
will compete with regional fast oil and lubrication operations including All
Tune and Lube (East Coast), EconoTune and Lube (West Coast), Tunex International
Inc. (Rocky Mountain region) and Speedee Oil Change and Tune-Up (Southern
region), among others.
The Company believes that the Precision Tune Auto Care, Precision Auto Wash
and Precision Lube Express centers will compete on the basis of customer
awareness through advertising, service, convenience and location and, to a
lesser extent, on price. The Company believes that the potential ability to
offer all of the services provided by each of the operations at one center or in
centers in close proximity to one another will be a significant competitive
advantage.
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The Company's HydroSpray subsidiary competes with many other manufacturers
of self-service and touchless automatic car wash equipment manufacturers. Many
of these competitors are larger and well-established. The Company's competitors
include, but are not limited to, Mark VII Industries, Inc., Ryko, PDQ and many
smaller businesses. Some of these
companies are well capitalized and have long standing relationships with large
oil companies who frequently purchase their equipment for installation at car
washes located on or adjacent to gasoline stations.
TRADEMARKS
The Company has registered (subject to certain limited exceptions) a number
of trademarks and service marks with the United States Patent and Trademark
Office and has recently filed trademark and service mark applications with
respect to the names "Precision Tune Auto Care," "Precision Auto Wash" and
"Precision Lube Express." The Company's failure to obtain trademark and service
mark registration could have a material adverse effect on the Company's
operations. The Company has also registered and made application to register
trademarks in foreign countries where master franchise licenses have been
granted.
GOVERNMENT REGULATION
As a franchisor, the Company must comply with regulations adopted by the
Federal Trade Commission (the "FTC") and with several state laws that regulate
the offer and sale of franchises. The Company also must comply with a number of
state laws that regulate certain substantive portions of the
franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires that the Company furnish prospective
franchisees with a franchise offering circular containing information prescribed
by the FTC Rule. State laws that regulate the offer and sale of franchises
require the Company to register before the offer and sale of a franchise can be
made in that state.
State laws that regulate the franchisor-franchisee relationship presently
exist in a substantial number of states. Those laws regulate the franchise
relationship, for example, by requiring the franchisor to deal with its
franchisees in good faith, by prohibiting interference with the right to free
association among franchisees, and by regulating discrimination among
franchisees with respect to charges, royalties or fees. Those laws generally
also restrict a franchisor's rights with regard to the termination of a
franchise agreement by, first, requiring "good cause" to exist as a basis for
the termination; second, requiring the franchisor to give advance notice to the
franchisee of the termination; third, requiring the franchisor to provide the
franchisee with an opportunity to cure any default; and fourth, requiring the
franchisor to repurchase the franchisee's inventory or provide other
compensation. To date, those laws have not precluded the Company from seeking
franchisees in any given area and have not had a material adverse effect on the
Company's operations.
Precision Tune Auto Care centers and Precision Lube Express centers store
new oil and generate and handle large quantities of used automotive oils and
fluids. Precision Auto Wash centers utilize chemicals in the car wash process
which are then discharged in the waste water along with oils, fluids and other
chemicals washed off the vehicle. Accordingly, the Company and its franchisees
are subject to numerous federal, state and local environmental laws.
Non-compliance with such laws and regulations, especially with regard to leaks
in the Precision Tune Auto Care and Precision Lube Express centers' underground
storage tanks, could result in substantial costs. In its franchise agreements,
WE JAC requires its franchisees to comply with all applicable laws and
regulations. Certain states may also require the Precision Tune Auto Care,
Precision Auto Wash and Precision Lube Express centers to register or obtain a
license to perform certain services.
The Company believes it is presently in material compliance with applicable
federal, state and local environmental laws. The failure of the Company or its
franchisees to comply with any applicable laws, rules or regulations could have
a material adverse effect on the Company's business, financial condition and
operations.
PROPERTIES
The Company's corporate headquarters are located in approximately 24,000
square feet of leased office space in Leesburg, Virginia pursuant to a lease
that expires in 2002. The Company also leases 32,000 square feet in Winchester,
Virginia pursuant to a lease that expires in 2002. The Winchester facility
houses PAC, which warehouses the parts that are distributed to the Company's
Precision Tune Auto Care operation. The Company's annual rental obligations on
the headquarters and warehouse leases aggregate $311,500.
The Company conducts its HydroSpray car wash equipment manufacturing
operations from a 40,000 square foot Company-owned facility located in Cedar
Falls, Iowa. For information concerning the terms of this lease, see "The
Combination" and "Certain Transactions -- Real Estate Transactions."
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The Company conducts its car wash chemical blending and distribution
operations from an 8,000 square foot Company-owned facility located in Columbus,
Ohio and operates its modular building manufacturing facility from a 27,000
square foot Company-owned building located in Mansfield, Ohio.
The Company believes that the three manufacturing facilities described
above will provide the Company with sufficient manufacturing capacity for the
foreseeable future.
The Company owns 30 of its Company-owned car wash centers and leases four
of its Company-owned car wash centers from unaffiliated third parties. The
Company made rental payments aggregating $40,000 with respect to the three
Company-owned centers it leases from unaffiliated third parties during the year
ended June 30, 1997. All four of the other Company-operated centers are owned by
the entities in which the Company holds 50% equity interest. In connection with
the Combination, the Company granted options to certain owners of Constituent
Companies to purchase properties from the Company at fair market value. In the
event such owners exercise their options, the Company will lease the properties
from such owners at fair market rental rates. For information concerning these
option and lease arrangements, see "The Combination" and "Certain
Transactions -- Real Estate Transactions."
The Company also owns a small piece of property in Lake Charles, Louisiana
that previously had been the site of a Precision Tune Auto Care center.
EMPLOYEES
As of June 30, 1997, the Constituent Companies employed 165 full-time and
38 part-time employees in the aggregate. The Constituent Companies consider
their relations with their employees to be good. None of the Constituent
Companies' employees is covered by a collective bargaining agreement.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to routine litigation in the
ordinary course of business, including contract, franchisee and
employment-related litigation. In the course of enforcing its rights under
existing and former franchise agreements, the Company is subject to complaints
and letters threatening litigation concerning the interpretation and application
of these agreements, particularly in the case of defaults and terminations. None
of these routine matters, individually or in the aggregate, are believed by the
Company to be material to its business or financial condition or results of
operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- ---- ------------------------------------------------------------------------------
<S> <C> <C>
Lynn E. Caruthers(1)(3) 45 Chairperson of the Board, Chairperson of the Executive Committee, and Class
III Director
John F. Ripley(1) 40 President, Chief Executive Officer and Class I Director
James A. Hay 41 Senior Vice President -- Retail Operations
Arnold Janofsky 54 Senior Vice President, Secretary & General Counsel
Peter Kendrick 43 Senior Vice President -- Finance and Treasurer
Grant G. Nicolai 50 Senior Vice President -- Franchise Development
William R. Klumb 39 Vice President -- Precision Auto Wash Operations and Class III Director
Woodley A. Allen(2) 50 Class II Director, Chairman of the Audit Committee
George Bavelis(1) 60 Class III Director
Bernard H. Clineburg(1) 48 Class III Director
Clarence E. Deal 52 Class I Director
Effie Eliopulos 58 Class III Director
Bassam N. Ibrahim(3) 35 Class II Director
Richard O. Johnson(2) 69 Class I Director
Arthur Kellar(1)(3) 75 Class II Director, Chairman of the Organization and Compensation Committee
Harry G. Pappas, Jr.(2) 49 Class I Director
Gerald Zamensky 56 Class II Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Organization and Compensation Committee.
Precision Auto Care's officers are elected by and serve at the discretion
of the Board of Directors. Precision Auto Care's Board of Directors is divided
into three classes. Class I and Class II each consist of four members and Class
III consists of five members. At each annual shareholders meeting, directors of
one class are elected to three year terms. The terms of Messrs. Johnson, Deal,
Ripley and Pappas expire in 1998, Messrs. Zamensky, Kellar, Ibrahim and Allen in
1999 and Messrs. Bavelis, Klumb, Clineburg and Ms. Caruthers and Ms. Eliopulos
in 2000. See "Description of Capital Stock -- Anti-Takeover Provisions."
Lynn E. Caruthers was elected a member of the Board of Directors of WE JAC
in August 1991 and has served as Chairperson of the Board since September 1994.
She has been the general partner of Caruthers Properties, Ltd. of Arlington,
Virginia, a commercial real estate developer, for the past five years.
John F. Ripley has served as the President and Chief Executive Officer of
WE JAC and as a member of WE JAC's Board of Directors since July 1995. Mr.
Ripley was Chief Operating Officer of the Juvenile Justice Division of Youth
Services International, Inc. (YSI) from March 1994 to July 1995. He also served
as the Executive Vice President and Chief Financial Officer of YSI from January
1991 to September 1994. Mr. Ripley co-founded YSI and was instrumental in its
development and initial public offering. From March 1990 to January 1991, Mr.
Ripley was an independent financial planner with Chesapeake Financial Group,
Inc. in Ellicott City, Maryland. From August 1985 to March 1990, Mr. Ripley
served in various capacities at Jiffy Lube International, Inc., including Vice
President -- Eastern Division Retail Operations, Vice President and Corporate
Controller, and Director of Internal Audit. Mr. Ripley began his career with
Ernst & Young LLP in 1979.
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James A. Hay was named Senior Vice President of Retail Operations in April
1997. From 1993 until joining WE JAC, he was Chief Operating Officer with
Decorating Den Systems, Inc. Mr. Hay was Chief Executive Officer with Window
Works of Annapolis from 1987 to 1993. He also held positions with Window Works
International, Pepsi-Cola, Inc. and Procter and Gamble.
Arnold Janofsky joined WE JAC as Senior Vice President in October 1995.
From 1992 to September 1995, Mr. Janofsky was with The Structure Group,
specializing in franchise consulting. From 1981 to 1991, he was Vice President
and General Counsel of Jiffy Lube International, Inc.
Peter J. Kendrick was named Senior Vice President -- Finance in May 1997.
From 1995 until joining WE JAC, he was a principal with Corporate Finance of
Washington, a private investment banking firm serving companies in the
Washington metropolitan area. Mr. Kendrick was Vice President and Chief
Financial Officer with Capital Carousel, a closely-held wholesale distributor of
wall coverings and fabrics, from 1991 to 1995. Capital Carousel filed for
bankruptcy protection in 1995.
Grant G. Nicolai was named Senior Vice President-International Development
and Operations of WE JAC in October 1995. He previously served as Director of
International Development and Operations beginning in October 1994. Prior to his
employment with WE JAC, Mr. Nicolai was involved in international business
development for six years with LTV Aerospace and Defense, which later became
Vought Aircraft Company. In November 1988, he retired from the U.S. Air Force.
William R. Klumb has been President of Rocky Mountain I since its
incorporation in March 1987 and President of Rocky Mountain II since it was
incorporated in September 1988. In addition, Mr. Klumb has served as the
Managing Member of Ralston Car Wash since its formation in September 1991. From
March 1978 to April 1990, he was Vice President of W.H. Klumb Masonry, Inc., a
masonry contracting company he co-founded.
Woodley A. Allen became a member of WE JAC's Board of Directors in August
1991 and was elected Vice Chairman of the Board in April 1992. He has been
President of Allen Management Services, an Oakton, Virginia management
consulting firm, since May 1992. Mr. Allen was Chief Financial Officer of EZ
Communications, Inc. of Reston, Virginia from March 1973 to May 1992.
George Bavelis has served as the Chairman, President and Chief Executive
Officer of Pella Co., a corporation engaged in real estate development, since
1973. Mr. Bavelis has also served as the Chairman and President of Coin Op.
Vending Co., since 1983. Mr. Bavelis currently serves as a director of Heartland
Bancorp, First Family Bank and Sterling BancGroup. He has served as a director
of these financial institutions since 1988, 1992 and 1995, respectively.
Bernard H. Clineburg was elected a Director of WE JAC in October 1993.
Since October, 1990, he has been President, Chief Executive Officer and member
of the Boards of Directors of both The George Mason Bank of Fairfax, Virginia
and George Mason Bankshares, Inc. He also has served as Chairman of the Board of
George Mason Mortgage Corporation.
Clarence E. Deal has served as the President of Lube Ventures since
November 1994 and as President of Miracle Partners since 1988.
Effie Eliopulos has served as the Chairperson and Chief Executive Officer
of Miracle Industries, since 1991.
Bassam N. Ibrahim was elected a Director of WE JAC in October 1993. Mr.
Ibrahim has been an attorney with the Washington, D.C. law firm of Burns, Doane,
Sweeker & Mathis, LLP since August 1996. He was an attorney with the Washington,
D.C. law firm of Popham, Haik, Schnobrich & Kaufmann from June 1994 to August
1996. From June 1990 to June 1994, Mr. Ibrahim was an attorney with the
Washington, D.C. law firm of Mason, Fenwick & Lawrence.
Richard O. Johnson has been a director of Miracle Industries since 1991. He
also served as president of JJ-AGRO, Inc. a farming and farm services business
for the past 46 years. Mr. Johnson has been a director of First Nations Bank of
Zanesville since 1987. He has also served as a director of National Gas and Oil
Company since 1983 and Muskingum Livestock, Inc. since 1976.
Arthur Kellar has been a Director of WE JAC since August 1991 and served as
Chairman of the Board of Directors from April 1992 to September 1994. He also
has been Chairman of the Board of Directors of EZ Communications, Inc. of
Reston, Virginia for the past 25 years.
Harry G. Pappas, Jr. was elected a Director of WE JAC on February 28, 1996
and served as Chief Financial Officer from February 1997 to May 1997. From July
1992 to the present, Mr. Pappas has been the principal of Harry G. Pappas, Jr.
Consulting, specializing in financial consulting services to businesses and
business owners. Mr. Pappas acted as the Chief Financial Officer of Youth
Services International, Inc. from September 1994 to May 1995 and Chief Financial
Officer of
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Meridian Healthcare from July 1993 to May 1994. From February 1991 to July 1992,
he was Vice Chairman and Chief Financial Officer of MBNA Corporation, Newark,
Delaware. Prior to this, Mr. Pappas was Chief Financial Officer at both MNC
Financial, Inc. and Equitable Bancorporation, and was a partner with Ernst &
Young LLP.
Gerald Zamensky is currently a self-employed manufacturing consultant. From
1975 to 1995, Mr. Zamensky served as the President and Chief Executive Officer
of Southeastern Plastics, Inc., a company engaged in custom injection molding of
plastics.
The Board of Directors has standing Executive, Audit and Compensation
Committees. The Executive Committee has authority to take any action which could
be taken by the Board, except actions reserved for other committees or which may
be taken only by the full Board under law or Precision Auto Care's bylaws. The
Audit Committee will annually recommend to the Board the appointment of
independent certified public accountants as auditors for Precision Auto Care,
review the scope and fees of the annual audit and any special audit and review
the results with the auditors, review accounting practices and policies of
Precision Auto Care with the auditors, review the adequacy of the accounting and
financial controls of Precision Auto Care and submit recommendations to the
Board regarding oversight and compliance with accounting principles and legal
requirements. The Compensation Committee reviews and make recommendations to the
Board regarding salaries and benefits of executive officers and employees of
Precision Auto Care and administers Precision Auto Care's stock option and
employee stock purchase plans.
COMPENSATION OF DIRECTORS
Directors who attend Board of Directors' meetings in person will receive a
fee of $1,000 for each meeting attended. Directors attending telephonic board
meetings will receive a fee of $500 per meeting. Directors who attend committee
meetings will receive a fee of $200 per committee meeting attended.
In addition to the foregoing, the Board of Directors of WE JAC granted
options to purchase 10,000 shares of WE JAC Common Stock at an exercise price of
$10.00 per share to each of Lynn E. Caruthers, Woodley A. Allen, Bernard
Clineburg, Bassam N. Ibrahim, and Arthur Kellar on February 19, 1997. Options
with respect to 5,000 shares vested with respect to each such director at the
time of grant. The options with respect to the remaining 5,000 shares awarded to
each director are to vest upon the consummation of the Offering. In addition, WE
JAC granted Harry Pappas options to purchase 12,500 shares of WE JAC Common
Stock at an exercise price of $10.00 per share. Options with respect to 5,000
shares vested at the time of grant and options with respect to the remaining
7,500 shares awarded to Mr. Pappas are to vest upon the consummation of the
Offering. These options will be assumed by Precision Auto Care in connection
with the Combination.
The Company intends to grant each of Mr. Klumb and Ms. Eliopulos options to
purchase 12,500 shares of Common Stock effective at the closing of the
Combination. Such options will have an exercise price per share equal to the
initial offering price and one third of the options will vest on each of the
first three anniversary dates of the Combination.
EXECUTIVE COMPENSATION
General. Precision Auto Care was organized in April 1997, and its operation
since that time has related primarily to its formation and to the Combination.
The Company anticipates that during its fiscal year ending June 30, 1998 its
most highly compensated executive officers will be Messrs. Ripley, Hay,
Janofsky, Kendrick and Nicolai (the "Named Executive Officers"), each of whom
will be paid an annual salary of $200,000, $120,000, $120,000, $120,000 and
$120,000, respectively.
In addition to base salary, the Named Executive Officers will be eligible
to participate in bonus and incentive compensation plans as are from time to
time made available to senior executive officers of the Company. The Company
intends to grant options to purchase 20,000, 3,500, 20,000 and 12,500 shares of
the Company's Common Stock to Messrs. Hay, Janofsky, Kendrick and Nicolai,
respectively. These options, which shall be effective upon the closing of the
Combination and the Offering, will be granted pursuant to the Company's 1997
Stock Option Plan. Such options will have an exercise price per share equal to
the initial Offering price and one-third of the shares under each option will be
exercisable one year from the date of grant, another one-third will be
exercisable two years from the date of grant, and the final one-third will be
exercisable three years from the date of grant.
The table below sets forth the compensation earned and paid to each Named
Executive Officer who earned $100,000 or more during the periods presented. Each
such Named Executive Officer was employed by WE JAC during the periods.
52
<PAGE>
<TABLE>
<CAPTION>
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ---------------------------------------------------- ---- --------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John F. Ripley(1) 1997 $ 181,734 $34,000 100,000
President and 1996 169,131 93,100
Chief Executive Officer 1995
Arnold Janofsky(2) 1997 117,269 9,646 4,000
Senior Vice President 1996 80,385 17,500
and General Counsel 1995
Grant G. Nicolai(3) 1997 110,809 8,577
Senior Vice President -- 1996 85,769 8,625
Franchise Development 1995 48,462
</TABLE>
- ---------------
(1) Mr. Ripley's employment with WE JAC commenced on July 1, 1995.
(2) Mr. Janofsky's employment with WE JAC commenced on October 1, 1995.
(3) Mr. Nicolai's employment with WE JAC commenced on September 11, 1995.
Option/SAR Grants in Last Fiscal Year. WE JAC is the only Constituent
Company that has a stock option plan or that otherwise granted stock options to
its executive officers during its last fiscal year. No SARs were granted to any
executive officer of any Constituent Company during its last fiscal year. The
following table sets forth certain information with respect to grants made by WE
JAC of stock options to Named Executive Officers who will be continuing as
executive officers of the Company pursuant to WE JAC's stock option plans. No
SARs were granted to executive officers during fiscal year 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION ------------------------
NAME GRANTED (1) FISCAL YEAR BASE PRICE DATE 5% 10%
- -------------------- ----------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John F. Ripley 100,000 75.7% $ 10.00 1/1/07 $629,000 $1,594,000
Arnold Janofsky 4,000 3% 10.00 1/29/07 25,160 63,760
Grant G. Nicolai -- -- -- -- -- --
James A. Hay 5,000 3.8% 10.00 4/22/07 31,450 79,700
</TABLE>
- ---------------
(1) The referenced stock options have an exercise price equal to the fair market
value of Common Stock on the date of grant as defined in the underlying
stock option plan, and become exercisable in three equal annual installments
commencing one year after the date of grant. Because WE JAC Common Stock is
not publicly or otherwise actively traded, the stock options plans require
the board of directors to determine the fair market value of WE JAC Common
Stock on the date of grant. Since WE JAC Common Stock is not publicly or
otherwise actively traded, there can be no assurance that the board of
directors' determination approximates the fair market value of WE JAC Common
Stock were such a trading market to develop.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values. The following table sets forth certain information with respect to the
exercise of stock options by WE JAC's named executive officers during fiscal
year 1997 and information concerning the number and value of unexercised stock
options at June 30, 1997. The value of unexercised stock options is based on the
Board of Directors determination that the fair market value of WE JAC Common
Stock was $10.00 on June 30, 1997. No stock options or SAR's were exercised
during the fiscal year ended June 30, 1997. As of June 30, 1997 no SARs were
outstanding.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF THE UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1997 JUNE 30, 1997
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John F. Ripley 31,033 162,067 $91,462 $ 182,927
Arnold Janofsky 5,833 15,667 10,208 20,417
Grant G. Nicolai 4,167 8,333 7,292 14,583
James A. Hay 5,000
</TABLE>
53
<PAGE>
As of the closing of the Offering Mr. Ripley will hold options to purchase
193,100 shares of Common Stock (at a weighted average exercise price of $8.69),
Mr. Hay will hold options to purchase 5,000 shares of Common Stock (at an
exercise price of $10.00), Mr. Janofsky will hold options to purchase 21,500
shares of Common Stock (at a weighted average exercise price of $8.58), Mr.
Kendrick will hold options to purchase 5,000 shares of Common Stock (at an
exercise price of $10.00), and Mr. Nicolai will hold options to purchase 12,500
shares of Common Stock (at a weighted average exercise price of $8.25). These
options result from the manner in which options to purchase WE JAC common stock
that were granted to such holders prior to the Combination are to be converted
into options to purchase the Company's Common Stock in connection with to the
Combination.
EMPLOYMENT ARRANGEMENTS
Mr. Ripley entered into an employment agreement with Precision Tune Auto
Care, Inc., WE JAC's principal operating subsidiary, pursuant to which Mr.
Ripley agreed to serve as Precision Tune Auto Care's President and Chief
Executive Officer for a period of three years commencing July 1, 1995. The
agreement also provides that Mr. Ripley will serve as a member of WE JAC's board
of directors. The agreement provides that Mr. Ripley will receive a base salary
of $200,000 per annum and a performance bonus of 10% of his base salary if the
corporation's before-tax net profits exceed $2,000,000. Mr. Ripley is provided
an additional bonus of 5% of his base salary for each $100,000 of before-tax net
profit over $2,000,000 earned by the Company up to a maximum of 50% of his base
salary during the fiscal year. Under the terms of the employment agreement, Mr.
Ripley is required to maintain the confidentiality of proprietary business or
technical information he obtains in the course of his employment with WE JAC,
and he is prohibited from competing with WE JAC in the United States during any
time he is performing duties for WE JAC and for a period of two years
thereafter. In the event Mr. Ripley's employment is terminated by WE JAC other
than for cause, or is terminated by Mr. Ripley for good reason, Mr. Ripley will
be entitled to receive a severance benefit equal to his base salary in effect at
the time of termination for the remainder of his initial term or 18 months,
whichever is greater, and will be entitled to receive any salary and benefits
accrued, vested or unpaid as of the date of termination. In the event of such
termination, Mr. Ripley also will be entitled to receive a pro rata portion of
his performance bonus. The Company intends to execute a new employment agreement
with Mr. Ripley containing terms substantially identical to the terms of his
agreement with WE JAC immediately following the closing of the Offering.
In connection with Mr. Ripley's employment, WE JAC granted to Mr. Ripley an
option to purchase an aggregate of 80,338 shares of WE JAC's common stock at an
exercise price of $7.05 per share, subject to antidilution adjustments. In
connection with the option agreement, WE JAC and Mr. Ripley also entered into an
agreement providing that in the event WE JAC issues any common stock or any
other securities convertible into or exercisable for common stock (other than
the issuance of common stock to employees pursuant to employee benefit plans),
Mr. Ripley shall be granted, at the time of such issuance, an option to purchase
such number of shares as will result in his having a right to purchase (pursuant
to outstanding options or otherwise) or holding as a result of the exercise, in
whole or in part, 5% of WE JAC's common stock, assuming the exercise or
conversion of all outstanding options, warrants or rights or similar securities
that are convertible into or exercisable for shares of common stock. This
agreement terminates upon the consummation of the Offering. Pursuant to this
antidilution agreement, Mr. Ripley has been awarded additional options as
follows: 7,920 for a private offering of 149,850 shares at a price of $8.00 per
share, and 4,842 for options awarded to board members and warrants issued to WE
JAC's commercial lender at a price of $10.00 per share.
On October 23, 1996, WE JAC awarded Mr. Ripley 100,000 additional options
to purchase WE JAC Common Stock at an exercise price of $10 per share. All of
the options are to vest on the date that the Combination is consummated. The
options will expire and will not vest in the event the Combination is not
consummated. For additional information concerning the options awarded to Mr.
Ripley and the manner and basis on which they will be converted into Common
Stock in the Combination, see "The Combination -- Interests of Certain Persons."
Each of Messrs. Hay, Janofsky, Kendrick and Nicolai have entered into
employment agreements to serve as senior vice presidents for a period of three
years commencing August 1, 1997. Mr. Klumb has entered into an employment
agreement to serve as a vice president for a period of three years commencing on
the date the Company successfully completes its initial public offering. The
agreements provide that each senior vice president will receive a base salary of
$120,000 per annum, Mr. Klumb will receive a base salary of $90,000 per annum,
and each of them will be entitled to receive a performance bonus under a plan to
be developed for all of the Company's senior vice presidents and vice
presidents, respectively. Under the terms of the each employment agreement, each
senior vice president and Mr. Klumb is required to maintain the confidentiality
of proprietary business or technical information obtained during the course of
employment with the Company. Each senior vice president is prohibited from
competing with the Company in the United States during the time he is employed
by
54
<PAGE>
the Company and for a period of two years thereafter. Mr. Klumb is prohibited
from competing with the Company in the United States during the time he is
employed by the Company and for a period of one year thereafter. In the event
any senior vice president's employment is terminated by the Company other than
for cause, or is terminated by the senior vice president for good reason, the
senior vice president will be entitled to receive a severance benefit equal to
18 months of base salary in effect at the time of termination and will be
entitled to receive any salary and benefits accrued, vested or unpaid as of the
date of termination as well as any other benefits to which the employee is
entitled under any benefit plan, policy or program maintained by the Company in
which the senior vice president participated. Mr. Klumb's agreement contains
substantially the same severance benefit upon termination of his employment by
the Company other than for cause, or by him for good reason as that received by
the senior vice presidents with the exception that his benefit will be equal to
12 months of his base salary in effect at the time of termination.
COMPENSATION PURSUANT TO PLANS
Stock Option Plans. As a result of the Combination, the Company has
reserved a total of 175,000 shares of Common Stock for issuance pursuant to the
WE JAC Stock Option Plan. This plan was established in August 1995 to provide
incentives to members of the Board of Directors of WE JAC and key employees to
expand and improve the profits and prosperity of WE JAC. The plan provides for
the grant of incentive stock options and non-qualified stock options. As of the
date of this Prospectus, all of the options available for grant under the plan
have been granted and are outstanding, and no options have been exercised. The
exercise price for each share under option is to be not less than the "fair
market value" of the Company's stock at the date of grant as determined in good
faith by the Company's Board of Directors upon the recommendation of the
Committee administering the plan. In determining the fair market value of WE
JAC's common stock at the date of grant, the Board of Directors considered a
number of factors including the financial condition and business prospects of
the Company and any advice solicited or received from outside advisors. All of
the options granted to date have exercise prices ranging from $8.00 to $10.00.
With respect to substantially all of the options currently granted, one-third of
the shares under each option are exercisable one year from the date of grant,
another one-third are exercisable two years from the date of grant, and the
final one-third are exercisable three years from the date of grant.
The Company has also adopted a 1997 Precision Auto Care Stock Option Plan
and has reserved 400,000 shares of Common Stock for issuance pursuant to this
plan. The terms of the 1997 Precision Auto Care Stock Option Plan are identical
in all material respects to the WE JAC Stock Option Plan.
1997 Employee Stock Purchase Plan. As a result of the Combination, the
Company has reserved a total of 20,000 shares of Common Stock for issuance
pursuant to the WE JAC 1997 Employee Stock Purchase Plan (the "Plan"). This Plan
was established to promote the long-term success of WE JAC by providing
employees of WE JAC the opportunity to become shareholders. The Plan commenced
on November 1, 1996. Employees who are participating in the Plan have until
October 31, 1997 to acquire the shares they had subscribed for at a purchase
price of 85% of the "fair market value" of WE JAC's common stock on the date of
grant, as determined in good faith by the Company's Board of Directors or by an
independent appraiser. Participating employees purchase the shares with amounts
they have contributed to the Plan through payroll deductions of up to 10% of the
employees base income, lump sum cash payments, or a combination of both. The
Board set the fair market value of common stock at the November 1 and February 1
grant dates at $8.00 per share and at the May 1 grant date at $10.00 per share.
The Plan has been fully subscribed by WE JAC's employees. The Plan provides that
the Company may repurchase any shares of common stock issued to an employee for
a period of 90 days following the employee's termination of employment. Any such
repurchases are to be made at the then current fair market value of WE JAC
common stock. The Company will assume these options in accordance with their
terms in connection with the Combination.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Company's Articles of Incorporation and Bylaws, the Company
is obligated to indemnify each of its directors and officers to the fullest
extent permitted by law with respect to all liability and losses suffered and
reasonable expenses incurred by such person in any action, suit or proceeding in
which such person was or is made or threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer of the Company. The Company is obligated to pay the reasonable
expenses of the directors or officers incurred in defending such proceedings if
the indemnified party agrees to repay all amounts advanced by the Company if it
is ultimately determined that such indemnified party is not entitled to
indemnification. See "Description of Capital Stock -- Limitations on Liability
of Officers and Directors."
55
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth information regarding the beneficial ownership
of the Common Stock by (i) each person known to the Company who will be the
beneficial owner of more than 5% of the outstanding shares of Common Stock
following the consummation of the Offering and the Combination, (ii) each
director and executive officer of the Company, (iii) all directors and executive
officers of the Company as a group and (iv) each Selling Shareholder. Unless
otherwise indicated, each of the shareholders listed below has sole voting and
investment power with respect to the shares beneficially owned. The information
is presented as in effect immediately following the Combination and the
consummation of the Offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
--------------------
SHARES
OFFERED NUMBER PERCENT
------- --------- -------
<S> <C> <C> <C>
DIRECTORS AND OFFICERS
John F. Ripley(2)............................................................................. 205,050 3.85
Lynn E. Caruthers(3).......................................................................... 135,381 2.63
James A. Hay.................................................................................. 0 0
Arnold Janofsky(4)............................................................................ 7,794 *
Peter Kendrick................................................................................ 0 0
Grant G. Nicolai(5)........................................................................... 11,919 *
William R. Klumb.............................................................................. 12,800 43,286 *
Woodley A. Allen(6)........................................................................... 12,000 *
George Bavelis................................................................................ 83,817 1.63
Bernard H. Clineburg(6)....................................................................... 12,500 *
Clarence E. Deal.............................................................................. 205,229 4.00
Effie Eliopulos............................................................................... 15,600 251,551 4.90
Bassam N. Ibrahim(6).......................................................................... 13,850 *
Richard O. Johnson............................................................................ 56,497 1.10
Arthur Kellar(6).............................................................................. 155,029 3.01
Harry G. Pappas, Jr.(7)...................................................................... 27,500 *
Gerald Zamensky(8)........................................................................... 106,003 2.06
All directors and executive officers as a group (17 persons).................................. 1,327,406 24.57
SELLING SHAREHOLDERS
ABACUS (Nominees) Limited..................................................................... 12,400 3,804 *
Jack N. Bohm, Trustee E. Bohm Jr.............................................................. 1,200 7,420 *
Robert & Mary Ann Burguieres.................................................................. 5,200 1,636 *
Capitol Tune, Inc............................................................................. 28,000 0
Constellate Auto Care Co., Ltd................................................................ 7,700 2,300 *
Judith A. Finley.............................................................................. 5,000 19,947 *
John W. King.................................................................................. 7,700 2,300 *
Frank Loeffler................................................................................ 2,000 8,268 *
Signet Bank................................................................................... 5,440 0 0
Summit Bank................................................................................... 21,760 0 0
W.C. & Sally Wills............................................................................ 15,200 4,800 *
</TABLE>
- ---------------
* Represents less than 1%.
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Includes options to purchase 193,100 shares Mr. Ripley may exercise within
60 days of the Offering. The stockholder's address is 748 Miller Drive,
S.E., Leesburg, Virginia 20175.
(3) Includes 36,750 shares held by CARFAM Associates and 77,938 shares held by
Caruthers Properties, Ltd., limited partnerships in which Ms. Caruthers
holds limited partnership interests and options to purchase 10,000 shares
which Ms. Caruthers may exercise within 60 days of the Offering.
(4) Includes options to purchase 5,833 shares that are exercisable within 60
days of the Offering.
(5) Includes options to purchase 4,167 shares that are exercisable within 60
days of the Offering.
(6) Includes options to purchase 10,000 shares that are exercisable within 60
days of the Offering.
(7) Includes options to purchase 12,500 shares that are exercisable within 60
days of the Offering.
(8) Includes 47,176 shares held by Mr. Zamensky's spouse.
56
<PAGE>
THE COMBINATION
Simultaneously with, and as a condition to, the closing of the Offering,
the Company will consummate the Combination. The consideration to be paid by the
Company in the Combination will consist of shares of Common Stock, as set forth
in the Combination Agreement, which provides for the allocation of shares of
Common Stock among the Constituent Companies and their owners.
THE COMPANIES
The following description summarizes the business conducted by the Company
and each of the Constituent Companies.
The Company. The Company was formed in April 1997 solely for the purpose of
consummating the Combination. The Company has not conducted any operations and
has no material assets or liabilities.
WE JAC. WE JAC is the parent corporation of Precision Tune Auto Care, Inc.,
a Virginia corporation ("PTAC"). Precision Tune, an automotive service
specialist, has been engaged in the business of providing quality comprehensive
automobile maintenance services since 1976. At June 30, 1997, these services
were provided at 556 Precision Tune Auto Care centers owned and operated by
Precision Tune Auto Care franchisees. The automotive maintenance services
provided by Precision Tune Auto Care centers includes the diagnosis, maintenance
and repair of ignition systems, fuel systems, computerized engine control
systems, cooling systems, starting/charging systems, emissions control systems,
engine drive train systems, electrical systems, air conditioning systems, oil
and other fluid systems and brake systems. WE JAC derives a substantial portion
of its revenues from the distribution of automotive parts and equipment to
Precision Tune Auto Care centers and others. Another division of PTAC
distributes a complete line of quality ignition parts, oil and air filters,
brake parts, diagnostic equipment, signage and other items necessary and
incidental to the outfitting and operating of Precision Tune Auto Care centers.
Miracle Industries. Miracle Industries commenced operations in 1990 and is
involved in the manufacture, sale and distribution of car wash chemicals which
it sells directly and through a limited network of distributors. Miracle
Industries also owns and operates ten self-service car wash centers located
throughout central Ohio which facilities include in the aggregate 55
self-service bays and seven automatic bays. Each car wash center is supported by
self-serve vacuums, carpet shampooers and vending machines to provide additional
car wash accessories. In addition to operating its own car wash facilities,
Miracle Industries is actively engaged in the sale, service, and installation of
car wash facilities for third parties throughout Ohio. Miracle Industries owns
HydroSpray, which is a manufacturer of self-service and touchless automatic car
wash equipment. HydroSpray operates a manufacturing facility in Cedar Falls,
Iowa and sells and installs car wash equipment in the United States, Mexico and
Canada. HydroSpray is a successor to Don R. Havens Car Wash Systems which was
engaged in the manufacture of touchless car wash equipment since the mid-1980's.
Miracle Industries also owns a 50% interest in Indy Venture, L.L.C., an Indiana
limited liability company which owns and operates three car wash centers and one
Lube Depot fast oil change and lube centers in Indiana.
Lube Ventures. Lube Ventures commenced operations in 1994 and is engaged in
the manufacture of modular buildings specifically designed for the fast oil
change and lube business and in the sale of franchise rights to its "Lube Depot"
fast oil change and lube systems throughout the United States. Lube Ventures
markets its buildings to both franchisees and non-franchisees and utilizes the
buildings in its operation of its Company-owned store. While the Lube Ventures
modular building is specifically designed for the oil change industry, the
company has made sales outside the oil change industry on a limited basis. Lube
Ventures operates one Company-owned Lube Depot centers and has franchised 21
Lube Depot centers.
Rocky Mountain I. Rocky Mountain I was founded in 1987 and owns and
operates one self-service car wash center in the Denver metropolitan area. This
car wash has seven self-service and one automatic bay and utilizes the
HydroSpray proprietary operating system. The site is usually staffed by one
attendant during specified business hours seven days a week.
Rocky Mountain II. Rocky Mountain II has been in operation since 1988.
Rocky Mountain II owns and operates seven self-service car wash centers in the
Denver metropolitan area. The Company operates an aggregate of 33 self-service
and 6 automatic bays. Three of the car wash sites utilize the HydroSpray
proprietary system and the remainder are operated through control systems
located at each car wash site. The HydroSpray system is being phased in at Rocky
Mountain II's other car wash sites and the Company intends to use a portion of
the net proceeds from the Offering to complete this upgrade following the
closing of the Combination.
Miracle Partners. Miracle Partners commenced operations in 1988 and owns
and operates five car wash centers in the State of Ohio. Miracle Partners is
currently operating 41 bays throughout its system, one of which is a completely
automated
57
<PAGE>
bay which utilizes the HydroSpray system and 40 of which are self-service car
wash bays. Miracle Partners also owns and operates a Lube Depot franchise and
leases property to a Lube Depot fast oil change and lube center franchisee.
Prema Properties. Prema Properties, which was founded in 1994, owns and
operates seven car wash centers in Ohio and owns a 50% equity interest in
another car wash it is responsible for operating. The centers are located
primarily in central Ohio and the Cleveland, Ohio area. The eight car wash
centers contain in the aggregate 47 self-service units and six automatic units.
Six of the automatic units have been installed within the last two years and all
of the automatic units include HydroSpray car wash equipment. At each of the car
wash sites, the company has vending equipment and self-serve vacuums to provide
additional services to the customer. Each of the car wash centers has a
part-time attendant assigned to it and the company utilizes area managers in
both the Cleveland area and in central Ohio. In addition to the company's car
wash operations, Prema Properties is the owner/operator of a Lube Depot
franchise unit located in Brookpark, Ohio.
Ralston Car Wash. Ralston Car Wash has owned and operated one self-service
car wash center in the Denver metropolitan area since 1990. The car wash
consists of 9 self-service and one automatic bay and the center utilizes the
HydroSpray proprietary operating system. The car wash is usually staffed by an
attendant during specified business hours seven days a week.
KBG. KBG does not conduct any operations and has been formed solely for the
purpose of conveying the computer software portion of the HydroSpray proprietary
operating system to the Company in the Combination.
COMBINATION PURCHASE PRICE
The Company will exchange in the Combination 2,780,695 shares of Common
Stock (valued at $30.6 million, based upon an assumed initial Offering price of
$11.00 per share) for all of the capital stock and membership interests in the
Constituent Companies. The Company plans to use approximately $18.5 million of
the net proceeds from the Offering to discharge certain outstanding indebtedness
of the Constituent Companies assumed by the Company in connection with the
Combination. Approximately 1,061,806 shares of Common Stock (valued at $11.7
million based upon an assumed initial Offering price of $11.00 per share) will
be delivered to owners of the Constituent Companies who are executive officers
or directors of the Company. As a result of the delivery of such shares and
shares such persons will be able to obtain upon the exercise of options which
will be exercisable within 60 days of the Combination, such persons will
beneficially own approximately 24.6% of the outstanding Common Stock immediately
following the Offering and deducting the shares of Common Stock offered by the
Selling Shareholders. See "Risk Factors -- Control by Management and Principal
Shareholders," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Certain Transactions" and "Shares Eligible for Future Sale" and the
Unaudited Pro Forma Combined Financial Statements appearing elsewhere in this
Prospectus.
The following table sets forth the shares of the Company's common stock to
be exchanged by the Company with the owners of each of the Constituent Companies
in the Combination:
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-----------------------------
BEFORE AFTER
CONSTITUENT COMPANY SHARES OFFERING(1) OFFERING(1)(2)
- -------------------------------------------------------------------------------------- ---------- ----------- --------------
<S> <C> <C> <C>
WE JAC Corporation.................................................................... 1,333,625 48.0% 26.6%
Miracle Industries, Inc............................................................... 749,250 26.9 14.7
Lube Ventures, Inc.................................................................... 169,168 6.1 3.3
Prema Properties, LLC................................................................. 148,889 5.4 2.9
Miracle Partners, Inc................................................................. 94,320 3.4 1.8
Rocky Mountain Ventures, Inc.......................................................... 64,223 2.3 1.3
Rocky Mountain Ventures II, Inc....................................................... 179,648 6.5 3.5
Ralston Car Wash, LLC................................................................. 29,161 1.0 0.6
KBG, LLC.............................................................................. 12,411 0.4 0.2
---------- ----------- --------------
Total............................................................................ 2,780,695 100.0% 55.0%
---------- ----------- --------------
---------- ----------- --------------
</TABLE>
- ---------------
(1) Does not give effect to the exercise of any options that will be held by
directors and officers of Precision Auto Care or 27,200 warrants for which
the Company has been notified will be exercised in connection with the sale
of shares of Common Stock being offered by certain Selling Shareholders.
(2) Assumes the Underwriters' over-allotment option is not exercised.
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<PAGE>
The number and value of shares to be exchanged by the Company with respect
to each of the Constituent Companies, except WE JAC, was determined by
arm's-length negotiations between the Company and the representatives of the
respective Constituent Companies. The factors considered by the Company in
determining the consideration to be paid included, the historical operating
results, the net worth, the levels and types of indebtedness and the future
prospects of each of the Constituent Companies. The negotiations between WE JAC
and the Company were not arm's-length due to substantial overlap in management
of the Company and WE JAC at the time of such negotiation. However, because the
terms of all of the Combination Agreement value each Constituent Company in
relation to the value of each of the other Constituent Companies, the value of
WE JAC was subject to scrutiny by and negotiation with representatives of the
other Constituent Companies.
Upon consummation of the Combination, the Company will hold all of the
issued and outstanding shares of the capital stock and membership interests of
the Constituent Companies.
THE COMBINATION AGREEMENT
Common Stock
The shares of the Company's common stock issuable upon the closing of the
Combination to various owners of the Constituent Companies generally will be
freely tradeable without restrictions under the Securities Act except that
shares of the Company's Common Stock received by persons who are deemed to be
"affiliates" (as that term is defined in Rule 144 of the Securities Act) of a
Constituent Company may be resold by such affiliates only in transactions
permitted by the resale provisions of Rule 145 or as otherwise permitted under
the Securities Act. In addition, the terms of the Combination Agreement provide
that holders who receive in excess of 3,000 shares of the Company's Common Stock
pursuant to the Combination will be prohibited from selling or otherwise
disposing of the shares of the Company's Common Stock for value for a period of
180 days following the consummation of the Offering. The Company expects that
2,682,895 shares of the Company's Common Stock issued in the Combination will be
subject to this 180-day restriction. See "Shares Eligible for Future Sale."
Representations and Warranties of the Constituent Companies
The Combination Agreement contains customary representations and warranties
from each of the Constituent Companies relating to, among other things, the due
organization and good standing of each Constituent Company, a description of the
capital structure and equity ownership of the Constituent Company, the amount
and nature of the Constituent Company's contingent liabilities, the title to the
Constituent Company's assets, the insurance coverage maintained by each
Constituent Company, the accuracy of the Constituent Company's financial
statements, the status of litigation involving each Constituent Company, and
compliance with applicable laws.
Limited Escrow Arrangements
Indemnity Escrow. Pursuant to the Combination Agreement, the Company will
deposit into escrow at the Closing of the Combination 10% of the shares issuable
to each former owner of a Constituent Company (the "Indemnity Escrow Shares") in
order to satisfy claims it may have with respect to the breach of certain
representations, warranties and covenants made by such Constituent Company in
the Combination Agreement. Except in the case of fraud, the Company will not be
able to proceed against any owner individually in the event that the Company's
losses exceed the amounts represented by the Indemnity Escrow Shares. In the
event that the Company validly asserts a claim for indemnification against the
Indemnity Escrow Shares, the Company will be able to reacquire, liquidate and
retire Indemnity Escrow Shares of the former owners of a Constituent Company
with a value equal to the full amount of the damages, liabilities and expenses,
including reasonable attorney's fees, suffered or incurred by the Company as a
result of any such breach. The Company also will have the right to retire,
reacquire and liquidate Indemnity Escrow Shares if it suffers damages by reason
of any untrue statement of a material fact relating to the Constituent Company
or its owners that is contained in any preliminary prospectus, a registration
statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or any omission to state therein a material fact relating to
the Constituent Company or its owners required to be stated therein or necessary
to make such statements therein not misleading.
The number of Indemnity Escrow Shares the Company shall be entitled to
reacquire, liquidate and retire shall be equal to the amount determined by
dividing the amount of the damages, costs and expenses incurred by the Company
by the Initial Public Offering price. When the Company proceeds against
Indemnity Escrow Shares attributable to a Constituent Company the Indemnity
Escrow Shares of each former owner of that Constituent Company shall be
reacquired, liquidated and retired
59
<PAGE>
ratably. The Indemnity Escrow Shares will remain in escrow until the first
anniversary of closing or until any unresolved claim in respect of them has been
finally resolved in cases where a claim has been asserted by the Company prior
to the first anniversary of closing. Accordingly, each former owner of the
applicable Constituent Company shall receive his ratable portion of any
Indemnity Escrow Shares which remain in escrow on the first anniversary of
closing (or immediately following the time that a final determination has been
made with respect to such shares in the case of unresolved claims which have
been asserted by the Company prior to the first anniversary of closing).
Indebtedness Escrow. The Combination Agreement further provides that the
debt level of each Constituent Company will not exceed a specified level as of
the closing of the Combination. For purposes of the Combination Agreement, debt
means and includes all indebtedness of a Constituent Company for borrowed money,
capitalized lease obligations and guarantees of the obligations of others.
Pursuant to the Combination Agreement, the Company will deposit into escrow at
the Closing an additional 10% of the shares issuable to the owners of the
Constituent Companies at the Closing of the Combination (the "Indebtedness
Escrow Shares") in order to secure compliance with the maximum debt levels
allowed each of the Constituent Companies as of the closing of the Combination.
To the extent that the actual debt level of a Constituent Company exceeds the
specified debt level, the Company will have the right to reacquire, liquidate
and retire Indebtedness Escrow Shares having a value equal to the dollar amount
of the excess debt. Indebtedness Escrow Shares of the former owners of the
Constituent Company reacquired, liquidated or retired by the Company shall be
valued at the Offering Price. The table below sets forth the required debt level
for each Constituent Company.
<TABLE>
<CAPTION>
DEBT LEVEL AT REQUIRED DEBT LEVEL
CONSTITUENT COMPANY JUNE 30, 1997 AT CLOSING
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
WE JAC $9,379,000 $10,600,000
Miracle Industries 5,442,000(1) 6,064,000(1)
Lube Ventures 1,301,000 1,235,000
Rocky Mountain I 478,314 478,000
Rocky Mountain II 1,640,802 1,761,000
Miracle Partners 1,353,199 1,600,000
Prema Properties 3,007,616 3,075,000(2)
Ralston Car Wash 239,386 240,000
</TABLE>
- ---------------
(1) Includes approximately $1,200,000 of indebtedness of a partnership which is
guaranteed by Miracle Industries and in which Miracle Industries holds a 50%
partnership interest.
(2) Includes $75,000 of indebtedness of a partnership which is guaranteed by
Prema Properties and in which Prema Properties hold a 50% partnership interest.
Under the terms of the Combination Agreement, the required debt levels
specified above may be increased to reflect certain transactions permitted by
the terms of the Combination Agreement or transactions approved by a majority
vote of a committee comprising two WE JAC representatives and one representative
of each of the Ohio Group and All Other Constituent Companies.
Escrowed Shares Are Exclusive Remedy. As noted above, except in the case of
fraud, in the event that the Company suffers losses in excess of the Indemnity
Escrow Shares or in the event that the difference between a Constituent
Company's debt level at Closing and its required debt level exceeds the value of
the Indebtedness Escrow Shares, the Company will have no further remedy against
the Constituent Company or the owners because the obligations of the Constituent
Company and the owners are limited to the amount of the Indemnity Escrow Shares
and the Indebtedness Escrow Shares, respectively. In the event that the losses
the Company suffers with respect to a Constituent Company (including losses
which arise because a Constituent Company's debt level is higher than the level
required at Closing) exceed the value of the Indemnity Escrow Shares or
Indebtedness Escrow Shares, the business and financial condition of the Company
could be materially adversely affected.
Indemnification by the Company
Pursuant to the Combination Agreement, the Company has agreed to indemnify,
defend and hold harmless each of the owners of the Constituent Companies and
their respective successors and assigns against any and all claims, losses,
damages, liabilities and expenses, including reasonable attorney's fees,
suffered because of (i) the untruth, inaccuracy, misrepresentation, omission,
breach or nonfulfillment by the Company or any representation, warranty,
covenant or other agreement contained in the Combination Agreement or (ii) any
untrue statement of a material fact relating to the Company that is contained
60
<PAGE>
in the preliminary prospectus, the Registration Statement or any prospectus
forming a part thereof, or any amendment thereof or supplement thereto, or
arising out of or based on any omission or alleged omission to state therein a
material fact relating to the Company required to be stated therein or necessary
to make the statements therein not misleading.
Conditions Precedent to the Closing of the Combination Agreement
The obligation of the Company to consummate the Combination is subject to
certain conditions, including among others, (i) that the financial statements of
each of the Constituent Companies comply in all material respects with all
applicable accounting requirements and are fairly presented in conformity with
generally accepted accounting principles, (ii) that favorable opinions of
counsel to the owners of the Constituent Companies are received by the Company,
(iii) that all necessary consents have been received, (iv) that the Registration
Statement has become effective, (v) that the aggregate amount of cash required
to be paid to Constituent Company owners who validly perfect their right to
dissent to certain mergers which form a part of the Combination (or have voted
against a merger and are entitled to later perfect their right to dissent by
taking additional actions following closing in accordance with applicable laws)
shall not exceed 10% of the net cash proceeds estimated to be realized by the
Company in the Offering, assuming that each such dissenting owner would be
entitled to receive for his shares in the Constituent Company cash in an amount
equal to the initial Offering price, multiplied by the number of shares of the
Company Common Stock that they would have been entitled to receive had they not
exercised dissenters' rights, (vi) that specified percentages (which in no case
are lower than 75%) of the total equity ownership of each Constituent Company
which the Company is to acquire pursuant to exchange offers which form a part of
the Combination are tendered to the Company pursuant to such exchange offers and
(viii) the Offering is consummated. The obligation of each Constituent Company
and its owners to consummate the Combination is subject to certain conditions,
including the accuracy of the representations and warranties of the Company
contained in the Combination Agreement, the receipt of a favorable opinion of
counsel to the Company and the receipt of an opinion of Ernst & Young LLP with
respect to certain tax matters.
ASSUMPTION OF OPTION PLANS AND STOCK OPTIONS
Pursuant to the terms of the Combination Agreement, the Company will assume
all of the outstanding stock option plans, stock purchase plans and stock option
agreements to which WE JAC is a party. As a result of the foregoing, options to
purchase 465,100 shares of WE JAC Common Stock at a weighted average exercise
price of $8.84 per share will be converted into options to purchase an identical
number of shares of the Company's Common Stock at the same weighted exercise
price per share upon the consummation of the Combination. See "Certain
Transactions."
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
In connection with the Combination, certain individuals entered into
employment agreements with the Company. For a discussion of the employment
agreements between the Company and its executive officers, see
"Management -- Employment Agreements." In addition, each holder of 10% or more
of the common stock or membership interests of a Constituent Company is required
to execute and deliver an Agreement Not to Compete in favor of the Company. The
terms of these agreements generally provide that, for a period of four years
following the Closing of the Combination, such persons will not compete with the
Company in the line of business engaged in by the Constituent Company of which
such person is a stockholder or member as of Closing within specified geographic
areas.
REAL ESTATE OPTIONS AND RELATED LEASE ARRANGEMENTS
Under the terms of the Combination Agreement partnerships formed by owners
of Lube Ventures, Prema Properties and Miracle Partners have been granted the
option to purchase specified parcels of real estate from the Company following
closing. If these options are exercised, the Company will lease these parcels of
real estate back from the partnership on terms and conditions set forth in the
Combination Agreement. For additional information concerning these options and
the terms of the related leases see "Certain Transactions".
DISTRIBUTIONS PRIOR TO CLOSING
The Combination Agreement provides that, prior to the closing of the
Combination, each of the Constituent Companies which are subject to taxation
under Subchapter S of the Internal Revenue Code or as partnerships shall be
entitled to distribute to their shareholder or members, on a pro rata basis,
cash in amounts sufficient to enable them to discharge their federal, state and
local income tax liabilities which will arise by reason of their being
stockholders or members thereof during tax year 1997. The Combination Agreement
also provides that the Constituent Companies shall have the right to declare and
pay to their stockholders or members cash dividends or distributions in an
amount equal to the amount of the professional
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<PAGE>
fees and expenses paid by such Constituent Company prior to the Closing in
connection with the transactions contemplated by the Combination Agreement.
The Combination Agreement permits certain of the Constituent Companies to
distribute prior to the Closing to their stockholders and members certain assets
held, directly or indirectly, by such Constituent Companies. In this regard,
Rocky Mountain I is permitted to distribute to its stockholders a certain
$190,000 promissory note held by Rocky Mountain I or the cash proceeds thereof;
Lube Ventures is permitted to distribute to its members certain unimproved real
estate; Prema Properties is permitted to distribute to its members certain
improved rental real estate and unimproved real estate; and Miracle Industries
is permitted to distribute to its stockholders certain improved rental real
estate, unimproved real estate and a car wash and is also permitted to cause
Indy Ventures to distribute certain unimproved real estate and a car wash to its
members (including Miracle Industries, which may redistribute such property to
its stockholders).
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Common Stock Issued in Combination. In connection with the Combination,
certain officers and directors of the Company will receive shares of Common
Stock with respect to the shares of common stock or membership interests, as the
case may be, they currently hold in their respective Constituent Companies as
follows: Woodley A. Allen: 2,000 shares; George Bavelis: 83,817 shares; Lynn E.
Caruthers: 125,381 shares; Bernard H. Clineburg: 2,500 shares; Clarence E. Deal:
205,229 shares; Effie Eliopulos: 251,551 shares; Bassam N. Ibrahim: 3,850
shares; Arnold Janofsky: 1,961 shares; Richard O. Johnson: 56,497 shares; Arthur
Kellar: 145,029 shares; William R. Klumb: 56,086 shares; Grant G. Nicolai: 7,752
shares; Harry G. Pappas, Jr.: 15,000 shares; John F. Ripley: 11,950 shares; and
Gerald Zamensky: 106,003 shares.
Conversion and Acceleration of Stock Options. Pursuant to the terms of the
Combination Agreement and the terms of outstanding WE JAC stock options, all of
the options to purchase WE JAC Common Stock that are outstanding on the closing
date are to be converted into options to purchase the Company's Common Stock.
Because WE JAC Common Stock is being converted into the Company's Common Stock
on a one-share-for-one-share basis, each option to purchase WE JAC Common Stock
shall be converted into an option to purchase the same number of shares of the
Company's Common Stock at the same exercise price. The chart below indicates as
to the specified directors and officers of the Company the number of options
that each person will hold following closing and the current weighted average
exercise price per share.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTION HOLDER OPTION SHARES EXERCISE PRICE PER SHARE
- ---------------------------------------------- ------------- ------------------------
<S> <C> <C>
Woodley A. Allen 10,000 $10.00
Lynn E. Caruthers 10,000 10.00
Bernard Clineburg 10,000 10.00
Bassam N. Ibrahim 10,000 10.00
James A. Hay 5,000 10.00
Arnold Janofsky 21,500 8.58
Arthur Kellar 10,000 10.00
Robert Kelly 10,000 10.00
Grant G. Nicolai 12,500 8.25
Harry G. Pappas, Jr. 12,500 10.00
John F. Ripley 193,100 8.69
</TABLE>
The vesting of options held by the executives and directors of WE JAC
identified in the table above (other than Messrs. Hay, Janofsky and Nicolai)
will accelerate and vest upon consummation of the Combination. Accordingly,
options to purchase 142,500 shares of WE JAC Common Stock (which, pursuant to
the Combination, will be converted into options to purchase 142,500 shares of
Precision Auto Care Common Stock at the same price per share) in the aggregate
held by such directors and executive officers of WE JAC will vest immediately
following consummation of the Combination.
Grants of Additional Options. The Company intends to grant each of Mr.
Klumb and Ms. Eliopulos options to purchase 12,500 shares of Common Stock
effective at the closing of the Combination. Such options will have an exercise
price per share equal to the initial offering price and one third of the options
will vest on each of the first three anniversary dates of the Combination. The
Company also intends to grant options to purchase an aggregate of 37,500 shares
of Common Stock to two other former owners of Constituent Companies other than
WE JAC. These options will be effective at the closing of the Combination and
will have an exercise price equal to the initial public offering price. One
third of the options will vest on each of the first three anniversary dates of
the Combination.
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<PAGE>
REAL ESTATE TRANSACTIONS
Under the terms of the Combination Agreement, certain real property which
the Company will acquire from Lube Ventures, Prema Properties, and Miracle
Partners, by reason of the mergers and exchange offers forming the Combination,
will be subject to the terms of certain options granted to limited partnerships
formed by the owners of Lube Ventures, Prema Properties and Miracle Partners.
Pursuant to the Combination Agreement each of the partnerships will be granted
the option to purchase certain real estate (the 27,000 square foot modular
building manufacturing facility in the case of Lube Ventures, nine car wash
centers in the case of Prema Properties, and five car wash centers in the case
of Miracle Partners).
The options may only be exercised during a one year period which will
commence on the second anniversary date of the Combination. If the options are
exercised in whole or in part, the limited partnerships would purchase the
parcels of real estate at a purchase price equal to their then-current fair
market value. The Company would then be required to lease the real estate back
from the partnerships on a triple net basis and at a base rent equal to the fair
rental value of the property. The leases would have an initial term of ten years
and the Company would have the right to renew the leases for two successive ten
year terms.
Mr. Bavelis, Mr. Deal and Ms. Eliopulos, directors of the Company, will
each have a 15.12% interest in the partnership holding the options covering the
Prema Properties parcels of real estate. Mr. Deal and Ms. Elipulos will hold a
50% and 25% interest, respectively, in the partnership holding the option to
pruchase the Lube Ventures parcel of real estate. Mr. Deal will hold 100% of the
partnership interests in the partnership holding the options to purchase the
Miracle Partners' parcels of real estate.
FRANCHISE TRANSACTIONS
Under the terms of the Combination Agreement, the Company has agreed to
sell six Precision Auto Wash franchises and eight Precision Lube Express
franchises to companies formed by certain former owners of the Constituent
Companies (other than WE JAC). Five of the Precision Auto Wash and Precision
Lube Express centers will be combined and operated on five sites. The other four
franchises will be operated on four sites. The other four franchises will be
operated as stand-alone operations. The companies formed by the former owners
will pay the standard initial franchise fees. Such companies will pay standard
royalties, in the case of Precision Auto Wash, and $400 per month on single bay
Precision Lube Express centers and $500 per month on double bay Precision Lube
Express franchises instead of the variable monthly royalties charged to other
franchisees.
The Company has also agreed to sell the Precision Auto Wash equipment and
the Precision Lube Express modular buildings to these businesses at a discount
of 10% from the normal price at which the equipment and buildings are sold by
the Company to its high volume distributors. This will result in a discount of
approximately $250,000 in the aggregate from such prices. Gene Deal, a director
of the Company, has interests ranging from 16.5% to 33% in five of the companies
which will own, in the aggregate, five of the Precision Lube Express franchises
and three of the Precision Auto Wash franchises. Effie Eliopulos, a director of
the Company, has interests ranging from 16.5% to 75% in companies which will
own, in the aggregate, four of the Precision Lube Express franchises and four of
the Precision Auto Wash franchises. Mr. Klumb, a director of the Company, owns a
25% interest in a company that will operate one of the Precision Lube Express
franchises. Mr. Bavelis, a director of the Company, owns a 25% interest in a
company that will operate one of the Precision Auto Wash franchises.
OTHER TRANSACTIONS
Under the terms of the Combination Agreement, the Company will discharge
substantially all of the indebtedness of each of the Constituent Companies at
closing. Messrs. Bavelis, Deal, Klumb, Zamensky, and Ms. Eliopulos have
personally guaranteed indebtedness in the principal amounts of $2.6 million,
$3.4 million, $2.4 million, $2.4 million, and $7.6 million, respectively, that
is to be discharged at closing.
COMPANY POLICY
It is anticipated that future transactions with affiliates of the Company
will be minimal and will be approved by a majority of the disinterested members
of the Board of Directors or will be made on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 19,000,000 shares of Common Stock and
1,000,000 shares of preferred stock, $.01 par value per share (the "Preferred
Stock"). Upon completion of the Offering and giving effect to the Combination,
the Company will have 5,135,895 shares of Common Stock and no shares of
Preferred Stock outstanding. The following description of capital stock of the
Company is qualified in its entirety by reference to the Company's Articles of
Incorporation, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Additional shares of Common
Stock are reserved for issuance upon exercise of employee and director stock
options. See "Management -- Compensation Pursuant to Plans."
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
on which shareholders are entitled to vote generally. Shareholders have no right
to cumulate their votes in the election of directors. Accordingly, holders of a
majority of the outstanding shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Holders of Common Stock may receive dividends and other distributions when, as
and if declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not intend to declare or pay any dividends
on the shares of its Common Stock in the near future. See "Dividend Policy." In
the event of a voluntary or involuntary liquidation, dissolution or winding up
of the Company, after any preferential amounts to be distributed to the
Preferred Stock and any other class or series of stock having a preference over
the outstanding Common Stock, the holders of Common Stock are entitled to share
ratably in proportion to the number of shares held by each holder in all assets
remaining after payment of liabilities, including all distributions to holders
of Preferred Stock having a liquidation preference over the Common Stock. The
Company's Articles of Incorporation states that no holder of any class or series
of stock of the Company shall have any preemptive rights. The Company may, in
its sole discretion, redeem certain of the shares of the Company's stock in
accordance with Virginia Law. All outstanding shares of Common Stock are, and
the shares offered hereby will be, when issued and paid for, fully paid and
non-assessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may become subordinate, to the rights of holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future from time to time.
PREFERRED STOCK
Under the Articles of Incorporation, the Board of Directors is authorized
to issue Preferred Stock, in one or more series, and to fix the number of shares
constituting such series and the designation of such series, the voting powers
(if any) of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any qualifications,
limitations or restrictions thereof, of the shares of such series. The Company
has no present intention to issue any series of Preferred Stock.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Articles of Incorporation provide for mandatory
indemnification of the officers and directors of the Company to the fullest
extent permitted by Virginia law, including some instances in which
indemnification is otherwise discretionary under Virginia law. The Articles of
Incorporation contains provisions that eliminate the personal liability of the
Company's directors for monetary damages resulting from breaches of their
fiduciary duty as directors other than for acts or omissions which involve
intentional misconduct or a knowing violation of law, payment of unlawful
distributions, or for any transaction from which the director derived an
improper personal benefit. The Company believes that these provisions are
essential to attracting and retaining qualified persons as directors.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, and the
Company is not aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
ANTI-TAKEOVER PROVISIONS
Under the Virginia Stock Corporation Act's control share acquisitions law,
voting rights of shares of stock of a Virginia corporation acquired by an
acquiring person at ownership levels of (i) more than 20% but less than 33 1/3%,
(ii) more than 33 1/3% but less than a majority or (iii) a majority or more of
all outstanding shares of voting stock may, under certain circumstances, be
denied unless conferred by a special stockholder vote of a majority of the
outstanding shares entitled to vote for
64
<PAGE>
directors, other than shares held by the acquiring person and officers and
certain directors of the corporation or, among other exceptions, such
acquisition of shares is made pursuant to a merger agreement with the
corporation. If authorized in the corporation's articles or by-laws (and the
Company's articles contain this authorization), the statute also permits the
corporation to redeem the acquired shares at the average per share price paid
for them if the voting rights are not approved or if the acquiring person does
not file a "control share acquisition statement" with the corporation within
sixty days of the last acquisition of such shares. If voting rights are approved
for control shares comprising more than fifty percent of the corporation's
outstanding stock, objecting shareholders may have the right to have their
shares repurchased by the corporation for "fair value."
The Virginia Stock Corporation Act sets forth restrictions on "affiliated
transactions" (including, among other various transactions: (i) mergers; (ii)
share exchanges; (iii) sales, leases, exchanges, mortgages, pledges, transfers
or other dispositions of assets of the Company having an aggregate fair market
value of more than 5% of the Company's net worth; (iv) certain reclassifications
of securities; and (v) dissolutions involving an "interested shareholder"
(generally the beneficial owner of more than 10% of any class of the
corporation's outstanding voting shares). During the three years following the
date a shareholder becomes an interested shareholder, any affiliated transaction
with the interested shareholder must be approved by both a majority of the
"disinterested directors" (those directors who were directors before the
interested shareholder became an interested shareholder or who were recommended
for election by a majority of disinterested directors) and by the affirmative
vote of the holders of two-thirds of the corporation's voting shares other than
shares beneficially owned by the interested shareholder. The foregoing
supermajority voting requirement does not apply to affiliated transactions if
(i) the affiliated transaction has been approved by a majority of the
disinterested directors, or (ii) subject to certain additional requirements, in
the affiliated transaction the holders of each class or series of voting shares
will receive consideration meeting specified fair price and other requirements
designed to insure that all shareholders receive fair and equivalent
consideration, regardless of when they tender their shares.
The Company's Articles of Incorporation contain certain anti-takeover
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and that may have the
effect of delaying, deferring or preventing a future takeover or change in
control of the Company unless such takeover is approved by the Board of
Directors. These provisions include the classification of the Board of Directors
into three classes. Each class of directors is to serve for a three-year term.
Such provisions may also render the removal of the current Board of Directors
more difficult than would be the case in the absence of such provisions.
The Company's Articles of Incorporation and Bylaws provide that the Board
of Directors shall consist of not less than 10 and not more than 20 directors
(subject to any rights of the holders of shares of Preferred Stock to elect
additional directors), with the exact number to be fixed by the Board of
Directors pursuant to a resolution adopted by a majority of the entire Board.
The Board of Directors is divided into three classes of directors, which classes
are as nearly equal in number as possible. One class of directors is elected
each year for a term of three years. Directors may be removed from office only
for cause and only by the affirmative vote of the holders of at least 80% of the
voting power of all outstanding shares of capital stock of the Company entitled
to vote generally in the election of directors (the "Voting Stock"), voting as a
single class. Subject to any rights of the holders of shares of Preferred Stock,
vacancies in the Board of Directors and newly created directorships are filled
for the unexpired term only by the vote of a majority of the remaining directors
in office. Pursuant to the Articles of Incorporation, advance notice of
shareholder nominations for the election of directors must be given in the
manner provided in the Company's Bylaws. The Bylaws provide that written notice
of the intent of a shareholder to make a nomination at, or to bring other
business before, a meeting of shareholders must be delivered to the Secretary of
the Company generally not less than 90 days prior to the anniversary of the date
of the previous year's meeting, in the case of an annual meeting, and not
earlier than the 90th day prior to the meeting and not later than the close of
business on the later of the 70th day prior to the special meeting or the 10th
day following the day on which public announcement of the date of the special
meeting is first made, in the case of a special meeting. The notice must contain
certain background information about the shareholder and, in the case of an
intent to make a nomination, the nominee and the number of shares of the
Company's capital stock beneficially owned by the nominee.
Under the Articles of Incorporation and Bylaws, except as otherwise
required by law and subject to the rights of the holders of shares of Preferred
Stock, shareholders may not call a special meeting of shareholders. Only the
Board of Directors, pursuant to a resolution adopted by a majority of the entire
Board, may call a special meeting of shareholders. The Virginia Stock
Corporation Act provides that any action required or permitted to be taken by
shareholders of a corporation may be taken without a meeting, without prior
notice, and without a shareholder vote if a written consent or consents setting
forth the action to be taken is signed by the holders of outstanding shares of
capital stock having the requisite number of votes that would be necessary to
authorize or take such action at a meeting of shareholders. The Company's
Articles of
65
<PAGE>
Incorporation requires that shareholder action be taken at a meeting of
shareholders and prohibits shareholder action by written consent.
The purpose of certain provisions of the Articles of Incorporation and
Bylaws discussed above relating to (i) a classified Board of Directors; (ii) the
removal of directors and the filling of vacancies; (iii) the prohibition of
shareholder action by written consent; and (iv) the supermajority voting
requirements for the repeal of provisions (i) through (iii) is to help assure
the continuity and stability of the business strategies and policies of the
Company and to discourage certain types of transactions that involve an actual
or threatened change of control of the Company. They are designed to make it
more difficult and time-consuming to change majority control of the Board of
Directors and thus to reduce the vulnerability of the Company to an unsolicited
takeover proposal or to an unsolicited proposal for the restructuring or sale of
all or part of the Company. Such provisions in the Company's Articles of
Incorporation and Bylaws may make more difficult or discourage a proxy contest,
or the assumption of control, by a holder of a substantial block of shares of
Common Stock, or the removal of the incumbent Board of Directors, and could thus
increase the likelihood that incumbent directors will retain their positions.
The provisions of the Articles of Incorporation and Bylaws and the Virginia
Stock Corporation Act help ensure that the Board of Directors, if confronted
with an unsolicited proposal from a third party who has acquired a block of
shares of Common Stock, will have sufficient time to review the proposal and
develop appropriate alternatives, if any, on behalf of the Company's
shareholders. These provisions are intended to encourage persons seeking to
acquire control of the Company to initiate such an acquisition through
arm's-length negotiations with the Board of Directors. Such provisions may have
the effect of discouraging a third party from making an unsolicited tender offer
or otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its shareholders.
The Articles of Incorporation require the vote of the holders of 80% or
more of the voting power of the outstanding shares of voting stock of the
corporation, voting together as a single class to amend the provisions of the
Articles of Incorporation and Bylaws which govern (i) redemption rights, (ii)
the Board of Directors, (iii) shareholder actions, (iv) the amendment of the
Articles of Incorporation and Bylaws, and (v) the limitation of director and
officer liability and indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Union Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of Common Stock into the public market after
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price for the Common Stock and the ability of the
Company to raise equity capital. The Company can make no prediction as to the
effect, if any, that the sale or availability for future sale of shares of
additional Common Stock will have on the market price of the Common Stock
prevailing from time to time.
Upon completion of the Offering, the Company will have 5,135,895 shares of
Common Stock outstanding (assuming no exercise of options or warrants after the
date of this Prospectus). These shares will consist of 2,780,695 shares of
Common Stock issued to the owners of the Constituent Companies in the
Combination, 55,200 shares to be issued upon the exercise of common stock
warrants simultaneous with this Offering, and 2,300,000 shares of Common Stock
issuable in the Offering. See "The Combination."
The 2,440,000 shares of Common Stock sold in the Offering (plus any
additional shares sold upon exercise of the Underwriters' over-allotment option)
will be freely tradable, except that any shares purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"), may generally only be sold in compliance with the limitations of
Rule 144 ("Rule 144") under the Securities Act, as described below.
2,569,955 of the 2,780,695 shares of Common Stock that will be issued to
the owners of the Constituent Companies will be registered under the Securities
Act, and, accordingly, such shares will be freely tradeable, except that shares
acquired in the Combination by an Affiliate of a Constituent Company may
generally only be sold in compliance with Rule 145 under the Securities Act
("Rule 145") as described below. In addition pursuant to the terms of the
Combination Agreement, the Constituent Company owners who receive more than
3,000 shares of Common Stock in the Combination will not be permitted to sell
any shares of Common Stock issued to them at the closing of the Combination for
a period of 180 days following such closing. After the expiration of such
180-day period, all of such shares (other than shares held by Affiliates of the
Company or the Constituent Companies) may be sold freely. Of the shares of
Common Stock that will be issued to the owners of the Constituent Companies,
2,576,381 shares will be subject to this 180-day restriction.
66
<PAGE>
The remaining 210,740 shares that will be issued in the Combination will be
issued in transactions which the Company believes will be exempt from
registation under the Securities Act. Unless such shares are registered under
the Securities Act, such shares generally may be sold only in compliance with
Rule 144 under the Securities Act after they have been held for a period of one
year. Selling Shareholders have included 28,400 of such shares in the
registration statement covering this initial public offering and, as noted
above, such shares will be freely tradeable unless they are purchased by an
Affiliate of the Company. The Company has agreed to register the balance of such
shares under the Securities Act on behalf of the holders upon their request
following the expiration of the 180 day lock-up period referenced above.
As noted above, shares of Common Stock held by Affiliates of the Company or
the Constituent Companies may only be sold in compliance with the limitations of
Rule 144 under the Securities Act or in compliance with Rule 145, as the case
may be. Pursuant to Rule 144 and Rule 145 as currently in effect, beginning 90
days after the Offering (in the case of the Combination shares which were
registered under the Securities Act, and one year after the Offering in the case
of the Combination shares which were not registered under the Securities Act), a
person (or persons whose shares are aggregated) is entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly reported trading volume of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 and 145 are also subject to
certain restrictions relating to the manner of sale, notice and the availability
of current public information about the Company. These provisions will be
binding upon Affiliates of Constituent Companies for a period of one year
following the date on which the Combination is consummated, in the case of the
shares they acquired in the Combination which were registered under the
Securities Act and for a period of two years in the case of shares they acquired
in the Combination which were not registered under the Securities Act. Following
such times, such persons will be able to sell their shares of Common Stock
freely, so long as they are not an Affiliate of the Company at that time. A
person who is not an Affiliate of the Company at any time during the
three-months preceding a sale will be entitled to sell such shares immediately
without regard to volume limitations, manner of sale provisions or notice or
other requirements of Rule 144.
In addition to the shares of Common Stock that will be outstanding, an
aggregate of up to 642,100 shares of Common Stock could be issued upon exercise
of options and warrants that will be outstanding after the Offering. These
options and warrants will be exercisable as follows: (i) options and warrants to
purchase up to 384,352 shares of Common Stock will be exercisable immediately;
(ii) options to purchase an additional 109,065 shares of Common Stock will
become exercisable between the closing of the Offering and the first anniversary
of the closing of the Offering; (iii) options to purchase an additional 74,833
shares of Common Stock will become exercisable between the first anniversary of
the closing of the Offering and the second anniversary of the closing of the
Offering; (iv) options to purchase an additional 69,676 shares of Common Stock
will become exercisable between the second anniversary of the closing of the
Offering and the third anniversary of the closing of the Offering; and (v)
options to purchase an additional 4,174 shares of Common Stock will become
exercisable between the third anniversary of the closing of the Offering and the
fourth anniversary of the closing of the Offering. The Company intends to file
one or more registration statements on Form S-8 under the Securities Act to
register all shares of Common Stock subject to these stock options and warrants.
The Company expects to file these registration statements promptly after the
closing of this Offering, and such registration statements will become effective
upon filing. The shares covered by these registration statements will be
eligible for sale in the public markets, subject to the lock-up agreements
discussed above, if applicable.
67
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom A.G. Edwards &
Sons, Inc. and Ferris, Baker Watts, Incorporated are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the underwriting agreement (the "Underwriting
Agreement"), to purchase from the Company and the Selling Shareholders the
numbers of shares of Common Stock set forth below opposite their respective
names at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
A.G. Edwards & Sons, Inc..........................................................
Ferris, Baker Watts, Incorporated.................................................
Total........................................................................
---------
---------
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any of such shares are
purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the initial
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share of
Common Stock. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share to other dealers. The initial
offering price and the concessions and discount to dealers may be changed by the
Underwriters after the initial public offering.
The Company has granted to the Underwriters an option exercisable for 30
days from the date of this Prospectus, to purchase up to an additional shares
of Common Stock at the initial offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Common Stock offered hereby.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters and controlling persons, if any, against, certain liabilities,
including liabilities under the Securities Act or will contribute to the
payments the Underwriters or any controlling persons may be required to make in
respect thereof.
The Company, its directors and executive officers and certain existing
shareholders (including the Selling Shareholders) have agreed for a period of
180 days from the date of this Prospectus, not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, grant any option to purchase, or
otherwise dispose (or announce any offer, sale, grant of any option to purchase
or other disposition) of any shares of Common Stock, or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock in
the public market without the prior written consent of A.G. Edwards & Sons, Inc.
on behalf of the Underwriters provided, however, the Company may grant stock
options under, and issue shares of Common Stock upon the exercise of outstanding
stock options granted under, the Company's stock option plans.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial offering price of the Common Stock will be
determined by negotiations between the Company and the Representatives. Among
the factors to be considered in determining the initial offering price include
the financial and operational history and trends of the Company, the history of
and the prospects for the industry in which the Company competes, an assessment
of the Company's management, its past and present operations, its past and
present earnings and the trend of such earnings, the general condition of the
securities markets at the time of the Offering and the price-earnings multiples
and market prices of publicly traded companies the Representatives and the
Company believe to be comparable to the Company.
Application has been made to include the Common Stock for quotation on the
Nasdaq National Market under the symbol "PACI." The Company has been advised by
the Representatives that each of the Representatives presently intend to make a
market in the Common Stock offered hereby, however, the Representatives are not
obligated to do so, and any market making activity may be discontinued at any
time. There can be no assurance that an active public market for the Common
Stock will develop and continue after the Offering.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions
68
<PAGE>
effected in accordance with Rule 104 of Regulation M promulgated under the
Securities Exchange Act of 1934, as amended, pursuant to which such persons may
bid for or purchase the Common Stock for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more Common Stock in connection with
the Offering than they are committed to purchase from the Company, and in such
case may purchase Common Stock in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 345,000 shares of
Common Stock, by exercising the over-allotment option referred to above. In
addition, the Underwriters may impose "penalty bids" under contractual
arrangements with dealers whereby they may reclaim from a dealer participating
in the Offering for the account of the Underwriters the selling concession with
respect to the Common Stock that is distributed in the offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
prices of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
Ferris, Baker Watts, Incorporated ("FBW") was engaged by WE JAC Corporation
to provide financial advisory and investment banking services in connection with
the formation of the Company and the structuring of the Combination. In
connection with the engagement, FBW has received a financial advisory fee of
$40,000 and will receive an additional $160,000 upon consummation of the
Combination.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock are being passed upon for the Company by Miles & Stockbridge, a
Professional Corporation, Baltimore, Maryland. Certain legal matters will be
passed upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements appearing in this Prospectus and Registration
Statement of WE JAC Corporation for the three years in the period ended June 30,
1997, of Miracle Industries for the two years in the period ended December 31,
1996, of Lube Ventures for the year ended December 31, 1996 and of Prema
Properties for the year ended December 31, 1996, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which is a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and the exhibits and schedules filed
as a part thereof. Statements contained in the Prospectus concerning the
provisions or contents of any contract, agreement or any other document referred
to herein are not necessarily complete. With respect to each such contract,
agreement or document filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matters
involved, and each statement shall be deemed qualified in its entirety by such
reference to the copy of the applicable document filed with the Commission. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of the Registration Statement and the exhibits and schedules
thereto can be obtained from the Public Reference Section of the Commission upon
payment of prescribed fees. The Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
that site is http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Upon effectiveness of the Registration Statement, the Company will become
subject to the informational and periodic reporting requirements of the Exchange
Act, and in accordance therewith, will file periodic reports, proxy statements
and other information with the Commission. Such periodic reports, proxy
statements and other information will be available for inspection and copying at
the public reference facilities and other regional offices referred to above.
The Company intends to register the securities offered by the Registration
Statement under the Exchange Act simultaneously with the effectiveness of the
Registration Statement and to furnish its shareholders with annual reports
containing audited financial statements and quarterly reports for the first
three fiscal quarters of each fiscal year containing unaudited interim financial
information.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WE JAC CORPORATION
Report of Independent Auditors....................................................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1997.................................................... F-3
Consolidated Statements of Operations for the three years in the period ended June 30, 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the three years in the period ended June 30, 1997................ F-5
Consolidated Statements of Cash Flows for the three years in the period ended June 30, 1997.......................... F-6
Notes to Consolidated Financial Statements........................................................................... F-7
MIRACLE INDUSTRIES, INC.
Report of Independent Auditors....................................................................................... F-16
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited)........................... F-17
Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 and the six months ended June
30, 1996 and 1997 (unaudited)..................................................................................... F-18
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1996 and 1997 (unaudited)................................................................... F-19
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the six months ended June
30, 1996 and 1997 (unaudited)..................................................................................... F-20
Notes to Consolidated Financial Statements........................................................................... F-21
LUBE VENTURES, INC.
Report of Independent Auditors....................................................................................... F-27
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)................................................. F-28
Statements of Operations for the years ended December 31, 1995 (unaudited) and 1996 and the six months ended June 30,
1996 and 1997 (unaudited)......................................................................................... F-29
Statements of Changes in Stockholders' Equity for the years ended December 31, 1995 (unaudited) and 1996 and the six
months ended June 30, 1996 and 1997 (unaudited)................................................................... F-30
Statements of Cash Flows for the years ended December 31, 1995 (unaudited) and 1996 and the six months ended June 30,
1996 and 1997 (unaudited)......................................................................................... F-31
Notes to Financial Statements........................................................................................ F-32
PREMA PROPERTIES, LTD.
Report of Independent Auditors....................................................................................... F-36
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)................................................. F-37
Statements of Operations and Members' Equity for the years ended December 31, 1995 (unaudited) and 1996 and the six
months ended June 30, 1996 and 1997 (unaudited)................................................................... F-38
Statements of Cash Flows for the years ended December 31, 1995 (unaudited) and 1996 and the six months ended June 30,
1996 and 1997 (unaudited)......................................................................................... F-39
Notes to Financial Statements........................................................................................ F-40
PRECISION AUTO CARE, INC.
Report of Independent Auditors....................................................................................... F-43
Balance Sheet as of June 30, 1997.................................................................................... F-44
Note to Financial Statement.......................................................................................... F-45
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
WE JAC CORPORATION
We have audited the accompanying consolidated balance sheets of WE JAC
Corporation and subsidiary as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the three years in the period ended June 30, 1997. Our audits also included the
financial statement schedule. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WE JAC Corporation and subsidiary at June 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the three
years in the period ended June 30, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Vienna, Virginia
August 15, 1997
F-2
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 751,472 $ 576,608
Accounts receivable, net of allowance of $534,009 and $301,227............................... 3,012,906 4,080,216
Inventory.................................................................................... 1,133,858 768,496
Notes receivable, current portion, net of allowance of $97,281 and $136,526.................. 363,759 512,960
Prepaid expenses............................................................................. 361,646 404,300
Deferred costs............................................................................... -- 1,211,257
Deferred income taxes........................................................................ 880,000 257,000
----------- -----------
Total current assets........................................................................... 6,503,641 7,810,837
Notes receivable, noncurrent portion, net of allowance of $82,175 and $61,085.................. 1,041,607 1,360,958
Property, plant and equipment, net............................................................. 939,327 853,626
Other assets:
Franchise rights, net of accumulated amortization of $8,715,572 and $9,682,348............... 16,298,618 15,879,157
Deferred loan costs, net..................................................................... 159,804 89,292
Deposits, trademarks and other............................................................... 711,290 700,398
----------- -----------
Total other assets............................................................................. 17,169,712 16,668,847
----------- -----------
Total assets................................................................................... $25,654,287 $26,694,268
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................................................... $ 3,383,172 $ 5,202,650
Income taxes payable......................................................................... 757,011 680,000
Current maturities, notes payable............................................................ 129,550 161,098
Current maturities, term loan................................................................ 1,600,000 7,066,667
Current maturities, revolving line-of-credit................................................. -- 1,529,301
Deferred revenue, current portion............................................................ 453,882 413,465
----------- -----------
Total current liabilities...................................................................... 6,323,615 15,053,181
Notes payable, net of current portion.......................................................... 645,413 622,308
Term loan, net of current portion.............................................................. 4,533,333 --
Revolving line-of-credit, net of current portion............................................... 1,554,108 --
Deferred revenue, net of current portion....................................................... 997,308 529,837
Lease deposits................................................................................. 194,557 194,557
----------- -----------
Total liabilities.............................................................................. 14,248,334 16,399,883
Stockholder's equity:
Common stock, $.01 par; 2,600,000 shares authorized; 1,562,393 and 1,580,740 shares issued;
1,562,393 and 1,333,700 shares outstanding, in 1996 and 1997, respectively................ 15,624 15,807
Additional paid-in capital................................................................... 8,302,396 8,407,722
Retained earnings............................................................................ 3,087,933 4,342,813
Treasury stock, at cost; 247,040 shares in 1997.............................................. -- (2,471,957)
----------- -----------
Total stockholders' equity..................................................................... 11,405,953 10,294,385
----------- -----------
Total liabilities and stockholder's equity..................................................... $25,654,287 $26,694,268
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
Royalty....................................................................... $12,845,393 $12,998,505 $13,755,440
Equipment and parts........................................................... 12,178,256 12,203,414 11,852,062
Franchise..................................................................... 1,246,737 1,316,055 1,551,097
Other......................................................................... 308,569 216,340 298,332
----------- ----------- -----------
Total sales..................................................................... 26,578,955 26,734,314 27,456,931
Direct cost:
Royalty....................................................................... 7,240,287 7,211,061 7,788,266
Equipment and parts........................................................... 11,310,372 11,280,924 11,085,165
Franchise..................................................................... 1,082,280 1,063,895 1,239,444
Other......................................................................... 409,046 152,195 178,299
----------- ----------- -----------
Total direct cost............................................................... 20,041,985 19,708,075 20,291,174
----------- ----------- -----------
Contribution (exclusive of amortization shown separately below)................. 6,536,970 7,026,239 7,165,757
General and administrative expense.............................................. 2,887,746 2,276,124 2,521,775
Amortization of franchise rights................................................ 1,015,581 964,311 968,072
Company-owned stores held for resale (loss)..................................... (351,537) (454,668) 29,194
----------- ----------- -----------
Operating income................................................................ 2,282,106 3,331,136 3,705,104
Other income (expense):
Interest expense.............................................................. (1,230,015) (1,031,705) (1,056,597)
Interest income............................................................... 92,477 67,353 147,638
Other......................................................................... (1,297,352) (118,798) (270,405)
----------- ----------- -----------
(2,434,890) (1,083,150) (1,179,364)
Income (loss) before income tax expense and extraordinary gain.................. (152,784) 2,247,986 2,525,740
Provision for income taxes...................................................... 71,743 1,177,810 1,270,860
----------- ----------- -----------
Income (loss) before extraordinary gain......................................... (224,527) 1,070,176 1,254,880
Extraordinary gain on repurchase of stock warrants related to debt (net of
applicable income taxes of $156,000).......................................... 157,328 -- --
----------- ----------- -----------
Net income (loss)............................................................... $ (67,199) $ 1,070,176 $ 1,254,880
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
--------- ------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994................... 1,414,418 $14,144 $7,160,983 $2,084,956 -- $ 9,260,083
Net loss................................. -- -- -- (67,199) -- (67,199)
--------- ------- ---------- ---------- ----------- -----------
Balance at June 30, 1995................... 1,414,418 14,144 7,160,983 2,017,757 -- 9,192,884
Private placement of stock............... 147,975 1,480 1,141,413 -- -- 1,142,893
Net income............................... -- -- -- 1,070,176 -- 1,070,176
--------- ------- ---------- ---------- ----------- -----------
Balance at June 30, 1996................... 1,562,393 15,624 8,302,396 3,087,933 -- 11,405,953
Issuances of common stock................ 18,347 183 105,326 -- -- 105,509
Treasury stock purchase.................. (247,040) -- -- -- (2,471,957) (2,471,957)
Net income............................... -- -- -- 1,254,880 -- 1,254,880
--------- ------- ---------- ---------- ----------- -----------
Balance at June 30, 1997................... 1,333,700 $15,807 $8,407,722 $4,342,813 $(2,471,957) $10,294,385
--------- ------- ---------- ---------- ----------- -----------
--------- ------- ---------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................................ $ (67,199) $ 1,070,176 $ 1,254,880
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 1,441,923 1,234,705 1,251,462
Loss on disposal of property, plant, and equipment............................. -- 306,705 207,256
Extraordinary gain on repurchase of stock warrants............................. (313,828) -- --
Deferred income taxes.......................................................... (261,000) (67,000) 623,000
Changes in operating assets and liabilities:
Accounts and notes receivable............................................... (64,097) (768,799) (1,535,862)
Inventory................................................................... 49,706 (43,044) 365,362
Prepaid expenses, recoverable income taxes, deposits and other.............. (157,981) (72,420) (1,193,484)
Accounts payable and accrued liabilities.................................... 1,442,618 (1,349,981) 1,819,478
Income taxes payable........................................................ (345,576) 701,363 (77,011)
Deferred revenue, net....................................................... 224,524 (549,833) (507,888)
----------- ----------- -----------
Net cash provided by operating activities........................................ 1,949,090 461,872 2,207,193
INVESTING ACTIVITIES:
Purchases of property and equipment............................................ (504,520) (358,392) (296,088)
Purchase of franchise agreements and rights.................................... -- (754,545) (545,730)
Purchase of trademarks......................................................... -- (62,949) (49,535)
----------- ----------- -----------
Net cash used in investing activities............................................ (504,520) (1,175,886) (891,353)
FINANCING ACTIVITIES:
Repurchase of stock warrants................................................... (750,000) -- --
Treasury stock purchases....................................................... -- -- (2,471,957)
Issuance of common stock....................................................... -- 1,142,893 105,509
Loan acquisition costs......................................................... (220,603) (39,374) (41,226)
Proceeds from term loan and line of credit..................................... 8,408,058 -- 2,816,667
Proceeds from notes payable.................................................... 472,626 1,593,808 101,642
Repayments of long-term debt and notes payable................................. (9,761,636) (1,764,374) (2,001,339)
----------- ----------- -----------
Net cash (used in) provided by financing activities.............................. (1,851,555) 932,953 (1,490,704)
----------- ----------- -----------
Net change in cash and cash equivalents.......................................... (406,985) 218,939 (174,864)
Cash and cash equivalents at beginning of year................................... 939,518 532,533 751,472
----------- ----------- -----------
Cash and cash equivalents at end of year......................................... $ 532,533 $ 751,472 $ 576,608
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
WE JAC Corporation (WE JAC or the Company) is a Delaware Corporation that
was incorporated on December 23, 1986. The Company commenced operations when it
acquired all of the stock of Precision Tune Auto Care, Inc., a Virginia
corporation, on April 30, 1987. On April 30, 1987, WE JAC Acquisitions, Inc., a
wholly owned subsidiary of WE JAC, acquired all of the stock of Precision Tune
Auto Care, Inc. (Precision Tune Auto Care), and the two companies were merged.
Precision Tune Auto Care was the surviving company and became a wholly owned
subsidiary of WE JAC. The acquisition was accounted for by WE JAC as a purchase
for financial accounting purposes, and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed on the basis of
estimated fair values. On July 25, 1989, Precision Tune Auto Care acquired
National 60 Minute Tune, Inc. (N60MT).
NATURE OF OPERATIONS
Precision Tune Auto Care, Inc. is an international franchising company
which sells individual franchises for automotive service businesses known as
Precision Tune Auto Care centers, as well as development rights for multiple
franchises in specific geographic areas. A Precision Tune Auto Care center is a
retail service business specializing in automotive maintenance services,
including engine performance, oil change and lubrication, and brake services.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
WE JAC Corporation and its wholly owned subsidiary, Precision Tune Auto Care.
During 1996, Precision Tune Auto Care operated thirteen Precision Tune Auto Care
centers. As of June 30, 1996, the Company had divested ten of these centers,
leaving three still in operation. During the year ended June 30, 1997, the
Company divested the three remaining Precision Tune Auto Care centers. Revenues
and expenses from the company-owned centers are included as a net amount in the
consolidated statements of operations and are listed in detail in the table
below. All significant intercompany transactions and balances have been
eliminated in consolidation.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue........................................................................... $ 3,597,772 $ 2,980,153 $ 195,866
Expense........................................................................... (3,949,309) (3,434,821) (166,672)
----------- ----------- -----------
$ (351,537) $ (454,668) $ 29,194
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from the sale of a franchise as certain
obligations to the franchisee are met.
The Company, through its Precision Tune Auto Care subsidiary, enters into
domestic Area Subfranchise Agreements and international Master License
Agreements (Agreements) which grant the subfranchisor and master licensor,
respectively, the right to sell, on the Company's behalf, Precision Tune Auto
Care franchises (PTAC franchise) within a specific geographic region. Revenue
from the sale of area subfranchise rights is deferred and recognized ratably
over the terms of the Agreement, generally 10 years, because the Company's
obligation under the Agreement does not depend significantly upon the number of
PTAC franchises opened. The Company's continuing obligations to its area
subfranchisors include training in system procedures and techniques, a copy of
the Company's uniform franchise offering circulars, samples of advertising and
promotional materials, the prompt processing of applications of prospective
franchisees, and other assistance considered reasonable by the Company. The
Company is also required to promptly remit the area subfranchisor's portion of
collected fees and, upon written request, to furnish summary reports of gross
sales and fees of franchisees in the area subfranchisor's territory. Revenue
from the sale of master license rights is recognized upon signing the Agreement
as the Company is not required to support the international PTAC franchises as
there is no contractual agreement between the Company and the international PTAC
franchisees.
F-7
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
The Company's royalty revenues are recognized as earned and in accordance
with specific terms of each Agreement. At the end of any accounting period,
royalty revenue estimates are made for the franchisees' revenues earned but not
yet reported. The royalty revenue accrual is adjusted in the subsequent period
as a result of immaterial differences between franchisees' actual and estimated
revenues.
Revenue from the sale of parts is recognized when the parts are shipped
from the Company's warehouse.
Revenue from the sale of equipment is recognized when notification is
received from the manufacturer that the equipment has been shipped to the PTAC
franchisee.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid instruments with
original maturities of three months or less.
INVENTORY
Inventory consists primarily of auto parts and is priced at the lower of
cost or market, using the moving-average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets. The
estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and leasehold improvements.................................... 7-15
Furniture and fixtures................................................. 3-8
Equipment.............................................................. 3-8
Other items............................................................ 3-7
</TABLE>
FRANCHISE RIGHTS
Purchase price in excess of the fair market value of net assets acquired is
included in franchise agreements and is amortized principally over 30 years on a
straight-line basis.
The Company occasionally repurchases franchise rights. The decision to
repurchase is made solely at management's discretion and is not a contractual
obligation. The Company also will periodically obtain possession of franchise
rights by exchanging notes payable or exercising rights outlined in the
franchise agreements. The Company's policy is to capitalize the rights
reacquired at the lower of the cost of reacquisition or fair market value. The
Company amortizes the repurchased franchise rights over ten years using an
accelerated method.
DEFERRED LOAN COSTS
Deferred loan costs are amortized and charged to interest expense over the
initial term of the loan.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities. A valuation allowance is established, if necessary, to reduce
deferred income tax assets to the amount expected to be realized. For financial
reporting purposes, the Company computes its federal and state income taxes on a
separate company basis.
STOCK BASED COMPENSATION
On July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
F-8
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
value of stock options or to continue to follow the intrinsic value method set
forth in APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
but disclose the pro forma effects on net income (loss) had the fair value of
the options been expensed. The Company has elected to continue to apply APB 25
in accounting for its stock option incentive plans. (See Note 9).
SEGMENT REPORTING
The Company believes that it operates in one industry segment -- as a
franchisor of the Precision Tune Auto Care brand name automotive services.
The Company intends to adopt Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS No. 131), in fiscal year 1998. SFAS No. 131 changes the way companies
report segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
The adoption of SFAS No. 131 is not expected to materially impact the Company's
financial position or results of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets or other assets for impairment
periodically. In completing this evaluation, the estimated future undiscounted
cash flows associated with the asset is compared to the asset's carrying amount
to determine if a write-down is required. If a write-down is required, the
Company prepares a discounted cash flow analysis to determine the amount of the
write-down.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable and
notes receivable. The Company periodically performs credit evaluations of
customers' financial condition.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CHANGE IN FISCAL YEAR END
In February 1996, the Board of Directors approved a change in the Company's
fiscal year end from April 30 to June 30. All years presented reflect this
change.
2. DEFERRED COSTS
During the latter part of 1997, the Company incurred approximately
$1,221,000 in expenses related to its efforts to raise permanent equity capital.
These costs are being deferred and will be deducted from the equity proceeds
once the transaction is completed, or the Company's portion will be charged to
operations if the Company's initial public offering (IPO) is not completed. If
the IPO is not completed, several other companies that are a party to a merger
and exchange offer transaction that would occur simultaneously with the IPO,
have agreed to reimburse the Company for their portion of the costs, estimated
at 45% of the total. At June 30, 1997, most of these costs are unpaid and are
included in accounts payable and accrued liabilities.
F-9
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Land...................................................................... $ 57,865 $ 57,865
Building and leasehold improvements....................................... 131,552 128,551
Furniture and fixtures.................................................... 561,159 829,256
Equipment................................................................. 797,463 561,831
Other items............................................................... 51,866 36,631
---------- ----------
1,599,905 1,614,134
Accumulated Depreciation.................................................. (660,578) (760,508)
---------- ----------
Property, plant and equipment, net........................................ $ 939,327 $ 853,626
---------- ----------
---------- ----------
</TABLE>
During the years ended June 30, 1995, 1996 and 1997, the Company's
depreciation expense was $208,000, $217,000, and $175,000 respectively.
4. INCOME TAXES
Income tax expense consists of the following items:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Current tax expense - federal and state...................... $ 488,743 $1,244,810 $ 647,860
Deferred tax expense (benefit) - federal and state........... (261,000) (67,000) 623,000
--------- ---------- ----------
Total income tax expense..................................... $ 227,743 $1,177,810 $1,270,860
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The effective tax rate differed from the statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Statutory federal rate.......................................................... 34% 34% 34%
Franchise agreement amortization................................................ 147 11 11
State taxes..................................................................... 22 5 5
Permanent differences due to purchase accounting................................ (32) -- --
Other........................................................................... (29) 2 --
---- ------ ------
Effective tax rate.............................................................. 142% 52% 50%
---- ------ ------
---- ------ ------
</TABLE>
The percentages for 1995 are distorted due to the small pretax operating
loss and the impact of the extraordinary gain on repurchase of stock warrants
related to debt.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. The significant temporary differences result from
different revenue recognition policies and amortization methods. Significant
components of the Company's deferred tax liabilities and assets are as follows:
F-10
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES -- Continued
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1997
---------- --------
<S> <C> <C>
Deferred tax liabilities:
Area rights................................................................. $ 153,585 $252,342
Expense related to acquisition.............................................. 135,151 153,537
Royalties................................................................... 44,000 44,000
Other, net.................................................................. -- 14,000
---------- --------
Total deferred tax liabilities.............................................. 332,736 463,879
Deferred tax assets:
Reserve for bad debts....................................................... 267,620 127,424
Deferred revenue............................................................ 896,567 593,455
Other, net.................................................................. 96,184 --
---------- --------
Total deferred tax assets................................................... 1,260,371 720,879
Valuation allowance for deferred tax assets................................. (47,635) --
---------- --------
Deferred tax assets, net of allowance....................................... 1,212,736 720,879
---------- --------
Net deferred tax assets..................................................... $ 880,000 $257,000
---------- --------
---------- --------
</TABLE>
During the years ended June 30, 1995, 1996 and 1997, respectively, the
Company paid income taxes of $771,000 and $150,000 and $756,000, respectively.
5. TERM LOAN AND REVOLVING LINE OF CREDIT
The Company has a $10,500,000 credit facility (the Loan Agreement or
Facility) with its primary lender (the Lender) which consists of an $8,000,000
term loan and a $2,500,000 revolving line of credit and is secured by all the
assets of the Company. The term loan accrues interest, payable monthly,
calculated daily, at a rate equal to the index rate (which approximates the
prime rate) plus 2% (10.25% and 10.50% at June 30, 1996 and June 30, 1997,
respectively). On January 27, 1997, the third amendment (the Amendment) to the
Loan Agreement was executed which provided, among other things, an increase in
the term loan of approximately $2,700,000. The Amendment required the proceeds
from the term loan increase to be used to repurchase shares of the Company's
common stock and warrants from a related party (See Note 9) and to satisfy
working capital requirements. As consideration for the term loan increase, the
Company granted warrants to the Lender and another bank (See Note 9). The
$8,000,000 term loan is payable in monthly installments of approximately
$133,000 with the balance due on April 1, 1998. At June 30, 1996 and 1997,
approximately $6,133,000 and $7,067,000, respectively, was outstanding under the
term loan. The Company has begun discussions with its lender and expects to
negotiate an extension of the Facility to April 1, 2001.
The revolving line of credit accrues interest, payable monthly, at the
lender's prime rate plus 1 1/2%. Collection of the Company's accounts receivable
and proceeds from other Collateral, as defined in the Loan Agreement, are
applied daily to reduce principal amounts outstanding under the revolving line
of credit. Unpaid principal and interest outstanding on the revolving line of
credit is payable April 1, 1998. At June 30, 1996 and 1997, approximately
$1,554,000 and $1,529,000, respectively, were outstanding under the revolving
line of credit.
The Loan Agreement contains affirmative, negative and financial covenants.
Among these covenants is a requirement to submit additional payments if "excess
cash flow," as defined in the lending agreement, is generated by the Company. As
of June 30, 1997, the Company was not in compliance with a provision of the Loan
Agreement which restricts capital expenditures. The Lender subsequently agreed
to amend the terms of the capital requirements covenant for the year ended June
30, 1997.
During the years ended June 30, 1995, 1996 and 1997, the Company paid
interest of approximately $1,166,000, $875,000 and $845,000, respectively.
F-11
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1997
--------- ----------
<S> <C> <C>
Various notes and obligations payable in monthly installments. Notes
payable to banks, principal and interest payable in monthly and quarterly
installments at interest rates ranging from 10% to prime plus 3%,
collateralized by liens on vehicles and equipment........................ $ 774,963 $ 783,406
Less: current maturities................................................... (129,550) (161,098)
--------- ----------
Long-term portion.......................................................... $ 645,413 $ 622,308
--------- ----------
--------- ----------
</TABLE>
7. LEASE COMMITMENTS
At June 30, 1997, the Company has lease commitments for office space, a
training center, and a number of service center locations. These leases expire
between 1997 and 2008, with renewal options in certain of the leases. Most of
the service center location leases are subleased to franchisees. Rent expense
for office space and warehouse facilities of approximately $300,000, $308,000
and $326,000 is included in operating expenses for the year ended June 30, 1995,
1996 and 1997, respectively. Rent expense for service center locations of
approximately $465,000, $488,000 and $100,000 is recorded net of sublease income
of $114,000, $288,000 and $912,000, for the years ended June 30, 1995, 1996 and
1997, respectively.
The future minimum lease payments and related sublease payments for leases
with terms in excess of one year as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM SUBLEASE
LEASE PAYMENTS INCOME NET
-------------- ---------- ----------
<S> <C> <C> <C>
1998.................................................... $1,104,000 $ 820,000 $ 284,000
1999.................................................... 899,000 535,000 364,000
2000.................................................... 743,000 371,000 372,000
2001.................................................... 663,000 353,000 310,000
2002.................................................... 617,000 353,000 264,000
Thereafter.............................................. 1,176,000 1,148,000 28,000
-------------- ---------- ----------
$5,202,000 $3,580,000 $1,622,000
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
The above minimum lease payment schedule includes lease payments and
sublease income for N60MT and PTW, Inc. For a majority of the N60MT leases
referred to above, the sublessor remits payments directly to the landlord.
8. RELATED PARTY TRANSACTIONS
Pursuant to a Management Agreement approved by the Board of Directors of
Precision Tune Advertising Fund, Inc. (P.T.A.F., Inc.) (which includes both
franchisees and Company personnel), the Company manages the operation of
P.T.A.F., Inc. - the national advertising fund for Precision Tune Auto Care
centers. The Company charged P.T.A.F., Inc. $384,000, $384,000 and $416,000 for
administrative and other expenses incurred on behalf of P.T.A.F., Inc., during
the years ended June 30, 1995, 1996, and 1997, respectively. Based on the timing
of receipts and disbursements, it is common for amounts to be due to and from
the Company and P.T.A.F., Inc. At June 30, 1996 and 1997, the net amounts due
from P.T.A.F., Inc. were $45,000 and $44,000, respectively. These amounts are
included in accounts receivable.
Mr. John F. Ripley loaned the Company the sum of $250,000 on June 10, 1996,
in connection with the Company's acquisition of Acc-U-Tune. The funds were
loaned to the Company at an interest rate of prime plus 2%. The entire loan was
repaid by the Company to Mr. Ripley on June 17, 1996, including interest of
approximately $500.
F-12
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY
COMMON STOCK
During the year ended June 30, 1996, the Company completed a private
placement of 147,975 shares of Common Stock and received proceeds of
approximately $1,143,000, net of direct expenses of approximately $41,000.
TREASURY STOCK
In January 1997, the Company purchased from a former officer of the Company
and another company 247,040 shares of outstanding common stock and options to
purchase another 84,865 shares of common stock for a total price of
approximately $2,472,000. The transaction was recorded as treasury stock at
cost. To finance the purchase, the Company borrowed from its term loan in
January 1997. (See Note 5).
COMMON STOCK OPTION PLANS
In February 1996, the Company adopted the Executive Stock Option Plan under
which 175,000 shares of WE JAC Corporation common stock were reserved for the
exercise of options granted to employees or directors of the Company. The Board
of Directors determines the recipients of the award to be granted, exercise
price, vesting period, and number of shares underlying the options.
The Company applies APB 25 in accounting for its Stock Option Plan, and,
accordingly, recognizes compensation expense for any difference between the fair
value of the underlying common stock and the grant price of the option at the
date of grant. The effect of applying SFAS No. 123 on 1996 and 1997 net income
and pro forma net loss as stated below is not necessarily representative of the
effects on reported net income or loss for future years due to, among other
things, (1) the vesting period of the stock options, and (2) the fair market
value of additional stock option grants in future years. Had compensation
expense been determined based upon the fair market value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123, the Company's net income in 1996 and 1997 would have been approximately
$1,037,000 and $1,140,000, respectively. The fair value of the options granted
during 1996 and 1997 are estimated as $2.02 and $2.59 per share, respectively,
on the date of grant using the minimum value method with the following
assumptions: dividend yield 0%, risk-free interest rate of 6%, expected life of
5 years, and a 10 year contractual life.
Additional information with respect to Stock Option activity is summarized
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............................... 84,865 $ 2.23 84,865 $ 2.23 315,991 $ 6.31
Options granted.............................................. -- -- 231,126 7.80 213,974 10.00
Options exercised............................................ -- -- -- -- -- --
Options canceled or expired.................................. -- -- -- -- (97,365) 3.00
------ ------- -------
Outstanding, end of year..................................... 84,865 $ 2.23 315,991 $ 6.31 432,600 $ 9.79
------ -------- ------- -------- ------- --------
------ -------- ------- -------- ------- --------
Options exercisable.......................................... 84,865 $ 2.23 87,865 $ 2.43 111,875 $ 8.52
------ -------- ------- -------- ------- --------
------ -------- ------- -------- ------- --------
</TABLE>
The options outstanding at June 30, 1997 range in price from $7.05 to
$10.00 and have a weighted average remaining contractual life of 9.21 years.
During July 1995, the Board of Directors granted the current President of
the Company an option to purchase 80,338 shares of WE JAC Corporation common
stock at $7.05 per share. The number of shares shall increase proportionally in
order that the option continues to equal five percent of the Company's fully
diluted, issued and outstanding common stock less shares pursuant to employee
stock option and stock purchase plans. The per share price of all additional
options are at the then fair market value of the Company's common stock. At June
30, 1997, additional options totaling 12,762 have been
F-13
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY -- Continued
granted. The option expires ten years from the date of the grant. The options
vest in three equal annual installments commencing one year from the date of the
grant.
On October 23, 1996, the Board of Directors granted the current President
of the Company an option to purchase 100,000 shares of WE JAC at $10.00 per
share. One half of the options vest upon the earlier of (1) the first
anniversary date of an IPO, or (2) the time following an IPO when any of the
stock of the Company held by the directors and executive officers may be sold.
The remaining 50,000 options vest upon the earlier of (1) the second anniversary
date of an IPO, or (2) the time following an IPO when any of the stock of the
Company held by the directors and executive officers may be sold.
In November 1995 and 1996, the Company offered an Employee Stock Purchase
Plan (the Plan) to encourage and facilitate the purchase of Common Stock by
employees of the Company. Under the Plan, employees of the Company who elect to
participate may purchase Common Stock at 85% of the fair market value of the
Common Stock on the commencement date of each offering period. The Plan permits
an enrolled employee to make contributions through the use of payroll deductions
or lump sum payments. The aggregate amount of stock which may be purchased under
the November 1996 plan is 20,000 shares.
COMMON STOCK WARRANTS
In December 1995, an area subfranchisor was issued a warrant to purchase
28,000 shares of common stock at the then current fair market value of $7.07 per
share. The warrants were exercisable beginning in fiscal year 1996. The warrants
expire December 31, 2002.
On January 27, 1997, the Company granted its Lender and another bank
warrants (Warrant Shares) to purchase 12,000 and 3,000 shares, respectively, of
Common Stock at $8.00 per share. The Warrant Shares expire upon the earlier of
the fifth anniversary of an IPO or April 1, 1998. Commencing June 30, 1997, the
number of Warrant Shares will be increased by 77.3336 and 19.3334 shares per
day, respectively, until the earlier of the date of the IPO or March 31, 1998.
10. JOINT VENTURE WITH PRAXIS CORPORATION
During the year ended June 30, 1996, the Company acquired a fifteen percent
interest in a joint venture with Praxis Corporation in exchange for the area
development rights to Puerto Rico and $100,000. Revenue was recognized for the
exchange of the area development rights in the amount of $100,000. The Company
also obtained an option to acquire an additional fifteen percent interest over a
three year period for a total of $150,000. The goal of the joint venture is to
incorporate a company for the purpose of acquiring and carrying on a parts
distribution business in Latin America. The Company accounts for its investment
in the joint venture using the cost method.
11. EMPLOYEES' SAVINGS PLAN
The Company maintains a 401(k) plan under which the Company may contribute
up to 50% of an employee's first 6% of compensation deferred under the plan.
Employees become eligible after attaining the age of 21 and completing six
months of employment with the Company. The employees may elect to contribute up
to 15% of their annual compensation subject to limitations set forth in the
Internal Revenue Code. Employees' contributions vest immediately. The matching
contribution vests 20% after two years and in increments of 20% each additional
year.
12. PURCHASE OF FRANCHISE RIGHTS
During the year ended June 30, 1996, Bay Area Precision, Inc. (BAP), an
area subfranchisor of the Company, acquired all of the stock of Acc-U-Tune
(AUT). AUT owned twenty-six franchise agreements located in the San Francisco
Bay Area. The Company purchased from BAP the franchise agreements and trademarks
of AUT for $850,000. Simultaneously, the Company granted BAP additional area
franchise rights for the territory occupied by the AUT franchises. The franchise
rights acquired from BAP were valued at the acquisition price less the area
franchise rights sold. Accordingly, no revenue or expense was recognized by the
Company relating to this transaction.
F-14
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CONTINGENCIES
The Company is involved in certain litigation and is subject to unasserted
claims arising in the ordinary course of business. In the opinion of counsel and
management, the ultimate liability, if any, arising from the settlement of these
cases will not have a material adverse effect on the financial operations or
position of the Company.
14. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In late August 1997, the Company plans to enter into a Plan of
Reorganization and Agreement for Share Exchange Offers (the Agreement) with
Precision Auto Care, Inc., a newly formed corporation. In connection with the
Agreement, Precision Auto Care, Inc. formed a wholly-owned subsidiary, WE JAC
Acquisition Company. If the agreement is approved by the Company's stockholders,
WE JAC Acquisition Company will be merged into the Company and the Company will
become a wholly-owned subsidiary of Precision Auto Care, Inc. Each outstanding
share of the Company will be converted into a right to receive a share of
Precision Auto Care, Inc. common stock.
F-15
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheets of Miracle
Industries, Inc. (an S Corporation) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Miracle
Industries, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
March 28, 1997
F-16
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1995 1996 1997
----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 287,580 $ 83,388 $ 59,786
Accounts receivable, less allowance of
$4,000 and $40,000 at December 31, 1995
and 1996, respectively........................................................ 214,911 794,377 610,218
Inventories...................................................................... 428,301 1,771,496 1,873,727
Prepaid expenses and other current assets........................................ 79,781 26,644 28,613
----------- ---------- -----------
Total current assets............................................................... 1,010,573 2,675,905 2,572,344
Investment in Indy Ventures, Ltd................................................... -- 251,286 407,468
Property and equipment, net........................................................ 2,641,115 3,853,375 3,746,280
Notes receivable-related parties................................................... 150,000 -- --
Intangible assets, net:
Goodwill......................................................................... 482,294 1,515,664 1,626,428
Other............................................................................ 117,302 155,104 135,592
----------- ---------- -----------
599,596 1,670,768 1,762,020
----------- ---------- -----------
Total assets....................................................................... $ 4,401,284 $8,451,334 $8,488,112
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 223,000 $ 469,948 $ 444,950
Lines of credit.................................................................. 100,000 395,766 758,652
Accounts payable, trade.......................................................... 140,301 1,198,825 794,161
Accrued taxes and other liabilities.............................................. 157,233 490,251 502,957
----------- ---------- -----------
Total current liabilities.......................................................... 620,534 2,554,790 2,500,720
Long-term debt, net of current portion............................................. 1,681,741 3,449,605 3,809,406
Minority interest in subsidiary.................................................... -- 174,720 163,620
----------- ---------- -----------
Total liabilities.................................................................. 2,302,275 6,179,115 6,473,746
Stockholders' equity:
Common stock, no par value; 100,000 shares
authorized; 33,254 issued and outstanding
at December 31, 1995 and 36,919 issued and
33,619 outstanding at December 31, 1996....................................... 1,973,200 2,339,700 2,476,100
Retained earnings (deficit)...................................................... 125,809 262,519 (131,734)
----------- ---------- -----------
2,099,009 2,602,219 2,344,366
Treasury stock, at cost (3,300 shares)........................................... -- (330,000) (330,000)
----------- ---------- -----------
Total stockholders' equity......................................................... 2,099,009 2,272,219 2,014,366
----------- ---------- -----------
Total liabilities and stockholders' equity......................................... $ 4,401,284 $8,451,334 $8,488,112
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes.
F-17
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1995 1996 1996 1997
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product and equipment sales....................................... $2,259,758 $8,091,675 $2,948,604 $2,786,412
Services.......................................................... 974,412 976,209 570,052 464,986
---------- ---------- ----------- -----------
3,234,170 9,067,884 3,518,656 3,251,398
Cost of sales and operations:
Product and equipment sales....................................... 1,938,418 6,879,500 2,494,359 2,562,722
Services.......................................................... 499,820 565,890 288,714 302,637
---------- ---------- ----------- -----------
2,438,238 7,445,390 2,783,073 2,865,359
Gross profit........................................................ 795,932 1,622,494 735,583 386,039
General and administrative expenses................................. 561,138 1,126,030 486,668 539,233
---------- ---------- ----------- -----------
Operating income (loss)............................................. 234,794 496,464 248,915 (153,194)
Other income (expense):
Other income (expense), net....................................... 3,200 26,579 (50,692) (21,372)
Interest income................................................... 10,495 13,290 -- 74
Interest expense.................................................. (181,600) (341,629) (136,378) (230,861)
---------- ---------- ----------- -----------
(167,905) (301,760) (187,070) (252,159)
---------- ---------- ----------- -----------
Income (loss) before minority interest.............................. 66,889 194,704 61,845 (405,353)
Minority interest in earnings (loss) of subsidiary.................. -- 24,720 (6,390) (11,100)
---------- ---------- ----------- -----------
Net income (loss)................................................... $ 66,889 $ 169,984 $ 68,235 $ (394,253)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-18
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------
TOTAL
NUMBER OF RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
--------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1995.............................. 32,909 $ 1,938,700 $ 58,920 $ -- $ 1,997,620
Issuance of common stock............................... 345 34,500 -- -- 34,500
Net income for 1995.................................... -- -- 66,889 -- 66,889
--------- ----------- ---------- --------- -------------
Balance at December 31, 1995............................. 33,254 1,973,200 125,809 -- 2,099,009
Issuance of common stock............................... 3,665 366,500 -- -- 366,500
Purchase of treasury stock............................. (3,300) -- -- (330,000) (330,000)
Net income for 1996.................................... -- -- 169,984 -- 169,984
Distributions to stockholders.......................... -- -- (33,274) -- (33,274)
--------- ----------- ---------- --------- -------------
Balance at December 31, 1996............................. 33,619 2,339,700 262,519 (330,000) 2,272,219
Net loss (unaudited)................................... -- -- (394,253) -- (394,253)
Issuance of common stock (unaudited)................... 1,364 136,400 -- -- 136,400
--------- ----------- ---------- --------- -------------
Balance at June 30, 1997 (unaudited)..................... 34,983 $ 2,476,100 $ (131,734) $(330,000) $ 2,014,366
--------- ----------- ---------- --------- -------------
--------- ----------- ---------- --------- -------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------ --------------------------
1995 1996 1996 1997
--------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................................... $ 66,889 $ 169,984 $ 68,235 $(394,253)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................................. 287,431 413,275 186,055 253,004
Other.......................................................... -- 65,879 -- 11,100
Changes in operating assets and liabilities:
Accounts receivable......................................... 78,354 (466,637) (896,220) 184,159
Inventories................................................. (5,550) (460,041) (1,136,437) (258,413)
Prepaid expenses and other current assets................... (26,305) 108,668 38,565 (17,543)
Accounts payable............................................ (85,621) 655,763 794,859 (404,664)
Accrued taxes and other liabilities......................... (40,972) 109,186 410,161 25,592
--------- ----------- ----------- -----------
Net cash provided by (used in) operating activities.............. 274,226 596,077 (534,782) (601,018)
INVESTING ACTIVITIES
Purchases of property and equipment............................ (161,336) (1,521,082) (1,212,041) (92,905)
Issuance of notes receivable -- related parties............... (150,000) -- 200,000 --
Purchase of intangible assets.................................. -- -- (854,180) (163,768)
--------- ----------- ----------- -----------
Net cash used in investing activities............................ (311,336) (1,521,082) (1,866,221) (256,673)
FINANCING ACTIVITIES
Proceeds from long-term debt................................... 553,662 2,181,947 2,003,041 359,801
Repayments of long-term debt................................... (315,000) (1,464,360) (42,340) (24,998)
Net proceeds on Line of Credit................................. -- -- 282,000 362,886
Distributions to stockholders.................................. -- (33,274) (33,274) --
Purchase of treasury stock..................................... -- (330,000) (330,000) --
Issuance of common shares...................................... 34,500 366,500 302,500 136,400
--------- ----------- ----------- -----------
Net cash provided by financing activities........................ 273,162 720,813 2,181,927 834,089
--------- ----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents............. 236,052 (204,192) (219,076) (23,602)
Cash and cash equivalents, beginning of period................... 51,528 287,580 287,580 83,388
--------- ----------- ----------- -----------
Cash and cash equivalents, end of period......................... $ 287,580 $ 83,388 $ 68,504 $ 59,786
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
In 1996, the Company purchased 90% of the capital stock of HydroSpray by
converting a $500,000 note receivable into common shares of HydroSpray. See Note
3.
See accompanying notes.
F-20
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
Policies
NATURE OF OPERATIONS
Miracle Industries, Inc. and subsidiary (the Company) owns and operates 10
self-serve car wash facilities in Central Ohio, and distributes and installs car
wash equipment, chemicals and supplies nationwide.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its 90% owned subsidiary, HydroSpray Car Wash Equipment Co., Ltd.
(HydroSpray). HydroSpray was formed in February 1996 to acquire the assets of
Don R. Havens Company. HydroSpray manufactures and installs brushless automatic
car wash equipment. All significant intercompany accounts and transactions have
been eliminated upon consolidation.
The Company's 50% investment interest in Indy Ventures, Inc. is accounted
for using the equity method. The Company recorded an $1,800 loss related to this
investment in 1996 which is included in other expense.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of cash equivalents and trade accounts receivable. The
Company places its cash and cash equivalents with high quality financial
institutions. The Company periodically performs credit evaluations of its
customers' financial condition. Large sales of car wash equipment require
advance deposits with the balance due upon delivery and installation of the
system. A majority of the Company's revenues are to self-serve and automatic car
wash owners and operators.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market using the average
cost method and consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- --------
<S> <C> <C>
Manufacturing raw materials................................................. $ 524,239 $ 37,395
Work-in-process............................................................. 882,362 --
Finished goods.............................................................. 11,393 40,057
Equipment and supplies for resale........................................... 336,802 327,703
Other supplies.............................................................. 16,700 23,146
---------- --------
$1,771,496 $428,301
---------- --------
---------- --------
</TABLE>
REVENUE RECOGNITION
Car wash revenues are recognized at the time of service. Revenues earned on
sales of car wash equipment, chemicals and supplies are recognized upon shipment
to customers.
LONG-LIVED ASSETS, INCLUDING INTANGIBLE ASSETS AND GOODWILL
The Company periodically evaluates its long-lived assets to determine
whether any events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. This evaluation is based on the nature of
the asset, the future economic benefit of the asset, historical or future
profitability measures and external market conditions. If factors
F-21
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING -- Continued
indicate that the carrying amount of the asset may not be recoverable, the
Company would determine whether an impairment had occurred through the use of an
undiscounted cash flow analysis. If an impairment has occurred, the Company
would recognize a loss for the difference between the carrying amount and the
estimated fair value of the asset. No such impairments have occurred.
Intangible assets consist of loan fees, organization costs, covenants not
to compete, original product formulas, software development and goodwill. Loan
costs are amortized over the term of the loans, which range up to ten years.
Organization costs are amortized on a straight line basis over five years.
Covenants not-to-compete are amortized on a straight line basis over five years
and are fully amortized at December 31, 1996. Original product formulas are
amortized on a straight line basis over twenty five years. Software development
costs are being amortized over three years. Goodwill, which represents the
excess of the purchase price over the fair value of tangible net assets
acquired, is amortized on a straight line basis principally over forty years.
Amortization expense of approximately $114,000 and $90,000 was recorded during
1996 and 1995, respectively.
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Loan costs................................................................ $ 112,546 $ 112,547
Organization costs........................................................ 196,271 161,330
Covenant not-to-compete................................................... 200,000 200,000
Product formulas.......................................................... 50,000 50,000
Software development...................................................... 36,800 --
Goodwill.................................................................. 1,612,620 499,500
---------- ----------
2,208,237 1,023,377
Accumulated amortization.................................................. (537,469) (423,781)
---------- ----------
$1,670,768 $ 599,596
---------- ----------
---------- ----------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally on a straight line basis over the estimated useful lives of the
related assets. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements............................................ 40
Equipment............................................................. 10
Vehicles.............................................................. 5
Office furniture and equipment........................................ 6-10
</TABLE>
INCOME TAXES
Miracle Industries, Inc. is a subchapter S Corporation for federal income
tax purposes. HydroSpray Car Wash Equipment Company, Ltd. is a partnership for
federal income tax purposes. The tax effects of the companies' income or loss
are passed through to the shareholders or partners individually, and no income
tax expense or liability for federal income tax purposes is provided for in
these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, accounts receivable, accounts
payable and borrowings under its short term line of credit arrangements
approximate their fair values.
F-22
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING -- Continued
ADVERTISING COSTS
Costs of advertising are expensed when incurred and totaled approximately
$221,000 and $50,000 during the years ended December 31, 1996 and 1995,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect certain amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Land...................................................................... $ 646,650 $ 607,650
Buildings and improvements................................................ 2,267,290 1,242,799
Equipment................................................................. 1,330,741 1,059,162
Vehicles.................................................................. 204,810 177,779
Office furniture and equipment............................................ 187,142 126,303
---------- ----------
4,636,633 3,213,693
Accumulated depreciation.................................................. (783,258) (572,578)
---------- ----------
Net property, plant and equipment......................................... $3,853,375 $2,641,115
---------- ----------
---------- ----------
</TABLE>
Depreciation expense was approximately $206,000 and $185,000 during 1996
and 1995, respectively.
3. ACQUISITIONS
Effective February 29, 1996, the Company acquired a 90% interest in
HydroSpray. The acquisition was accounted for as a purchase and accordingly, the
purchase price has been allocated to the assets purchased, and liabilities
assumed based on the fair values at the date of acquisition. The excess purchase
price over the fair value of net assets acquired was approximately $1.1 million,
which the Company recorded as goodwill. The results of operations of the
acquired business have been consolidated with those of the Company since the
date of acquisition. The Company has the option to purchase the remaining 10% of
HydroSpray for $300,000. The net purchase price of HydroSpray was allocated as
follows:
<TABLE>
<S> <C>
Current assets......................................................................... $ 1,127,260
Property, plant and equipment.......................................................... 798,700
Goodwill............................................................................... 1,113,120
Current liabilities.................................................................... (1,044,031)
Long-term liabilities.................................................................. (1,345,049)
-----------
Net assets acquired.................................................................. $ 650,000
-----------
-----------
</TABLE>
The pro forma unaudited results of operations for the years ended December
31, 1996 and assuming the purchase of HydroSpray had been consummated as of
January 1, 1996, are as follows:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Revenues............................................ $9,308,389
----------
Net income.......................................... $ 74,728
----------
----------
</TABLE>
F-23
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. LINES OF CREDIT
Miracle Industries, Inc. has two $100,000 revolving lines of credit with a
bank. Interest accrues at prime plus one-half percent and is payable monthly.
HydroSpray has a $250,000 revolving line of credit with a bank. Interest accrues
at the prime rate and is payable monthly. The lines are collateralized by
specific assets of the Company and are guaranteed by the stockholders of the
company. At December 31, 1996 and 1995, $54,200 and $100,000 was available under
these lines.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
Note payable to a bank; monthly payments of $15,000 plus interest at prime
plus 1/2% through August 2005; collateralized by specific assets and
guaranteed by the stockholders of the company........................... $1,544,000 $1,724,000
Note payable to a bank; monthly payments of $17,267 plus interest at the
prime rate (fixed at 8.25% until March 1998) through March 2006;
collateralized by specific assets and guaranteed by the stockholders of
the company............................................................. 1,326,039 --
Note payable to a former stockholder; annual payments of $50,000 plus
interest at 6% through March 2001; collateralized by treasury stock..... 250,000 --
Notes payable to banks in monthly installments plus interest at rates
ranging from 6.75% to 10.75%; collateralized by specific assets and/or
guaranteed by stockholders of the company............................... 438,693 180,741
Notes payable to various local community and economic development
organization; monthly and semi-annual payments including interest up to
6%; some collateralized by specific assets and guaranteed by
stockholders of the company............................................. 112,324 --
Other..................................................................... 248,497 --
---------- -----------
Total long-term debt...................................................... 3,919,553 1,904,741
Less current maturities................................................... 469,948 223,000
---------- -----------
Long-term debt, net of current maturities................................. $3,449,605 $1,681,741
---------- -----------
---------- -----------
</TABLE>
Maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 469,948
1998............................................................ 471,594
1999............................................................ 429,514
2000............................................................ 417,557
2001............................................................ 537,152
Thereafter...................................................... 1,593,788
----------
$3,919,553
----------
----------
</TABLE>
Loan agreements with the Company's two major bank lenders require the
Company to maintain certain financial ratios and covenants. These ratios and
covenants include, but are not limited to, cash flow ratio, ratio of liabilities
to tangible net worth, minimum tangible net worth requirements and minimum debt
service coverage. The Company was not in compliance with certain covenants as of
December 31, 1996; however, lenders granted waivers of defaults through March
28, 1998.
The Company paid interest of approximately $342,000 and $182,000 during
1996 and 1995, respectively.
F-24
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. COMMITMENTS
At December 31, 1996, the Company has lease commitments for two car wash
facilities, vehicles and equipment. Rent expense under these operating leases of
approximately $104,000 and $36,000 is included in operating expenses for 1996
and 1995, respectively. The future minimum lease payments under non-cancelable
operating leases with terms in excess of one year as of December 31 are as
follows:
<TABLE>
<S> <C>
1997.............................................................. $111,000
1998.............................................................. 59,000
1999.............................................................. 38,000
2000.............................................................. 39,000
2001.............................................................. 40,000
Thereafter........................................................ 84,000
--------
$371,000
--------
--------
</TABLE>
The Company co-guaranteed $1,000,000 of borrowings by Indy Ventures, Ltd.
(Note 1). HydroSpray has guaranteed approximately $260,000 owed by a customer
who financed a car wash equipment package during 1996.
7. RELATED PARTY TRANSACTIONS
PREMA PROPERTIES, LTD.
The Company sold supplies and equipment of approximately $282,000 and
$100,000 during 1996 and 1995, respectively, to Prema Properties, Ltd., a car
wash operation of which three stockholders of Miracle Industries collectively
own 45%.
DON R. HAVENS COMPANY
A $50,000 note receivable from Don R. Havens Company outstanding at
December 31, 1995, was applied towards the purchase of HydroSpray in February
1996 (Note 1).
LUBE VENTURES, INC.
During 1995, the Company loaned Lube Ventures, Inc. $100,000 payable on
demand plus interest at 9%. Lube Ventures is wholly owned by three stockholders
of the Company. During 1996, the Company purchased $113,000 of equipment from
Lube Ventures and applied the total principal and interest due towards that
purchase.
NOTES RECEIVABLE
At December 31, 1995, the Company is owed $150,000 in notes receivable from
related parties.
MANAGEMENT FEE
The Company had a five-year management agreement with a related management
company jointly owned by four common stockholders that expired in August 1996.
The annual management fee was $85,000. Expense for 1996 and 1995 was $56,700 and
$85,000, respectively.
CONSULTING AGREEMENT
The Company agreed to compensate a consultant in shares of common stock
valued at $100 per share up to $30,000 per year through 1998. At December 31,
1996 and 1995, the Company accrued compensation expense of $30,000 and issued
300 shares of common stock.
F-25
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. PROFIT SHARING PLAN
In 1996, the Company adopted a 401(k) profit sharing plan under which it
may make discretionary matching contributions. Employees become eligible after
attaining the age of 21 and completing one year of service. Employees may elect
to contribute up to 15% of their annual compensation subject to limitations set
forth by the Internal Revenue Service. Matching contributions vest after seven
years of service. The Company made a matching contribution in 1996 of
approximately $8,400.
9. SUBSEQUENT EVENT
During February 1997, a stockholder loaned the Company $500,000 for
short-term working capital requirements. The note accrues interest at prime plus
one-half percent (1/2%) and is due August 1997.
10. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In August 1997, the Company plans to enter into a Plan of Reorganization
and Agreement for Share Exchange Offers (the Agreement) with Precision Auto
Care, Inc., a newly formed corporation. In connection with the Agreement,
Precision Auto Care, Inc. formed a wholly-owned subsidiary, Miracle Industries
Acquisition Company. If the Agreement is approved by the Company's stockholders,
Miracle Industries Acquisition Company will be merged into the Company and the
Company will become a wholly-owned subsidiary of Precision Auto Care, Inc. Each
outstanding share of the Company's common stock will be converted into a right
to receive 21.442 shares of Precision Auto Care, Inc. common stock.
F-26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
TO THE STOCKHOLDERS
OF LUBE VENTURES, INC.
We have audited the accompanying balance sheet of Lube Ventures, Inc. (an S
corporation) as of December 31, 1996 and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lube Ventures, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
March 21, 1997
F-27
<PAGE>
LUBE VENTURES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................................... $ 63,143 $ 152,668
Accounts receivable............................................................................ 105,535 328,321
Inventory...................................................................................... 515,017 459,612
Prepaid expenses............................................................................... 4,817 3,132
------------ -----------
Total current assets............................................................................. 688,512 943,733
Investment in Wintersville Lube Depot, LLC....................................................... 83,375 --
Property and equipment, net...................................................................... 881,707 860,740
Intangible assets, net........................................................................... 45,489 58,510
Other............................................................................................ -- 5,808
------------ -----------
Total assets..................................................................................... $1,699,083 $ 1,868,791
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................... $ 83,070 $ 139,425
Accrued expenses............................................................................... 48,747 27,379
Demand note payable to a related party......................................................... 60,000 40,000
Line of credit................................................................................. 250,000 250,000
Customer deposits.............................................................................. 76,133 68,347
Current portion, long term debt................................................................ 131,984 65,100
Deferred revenue............................................................................... 32,000 14,001
------------ -----------
Total current liabilities........................................................................ 681,934 604,252
Long term debt, net of current portion........................................................... 628,142 945,753
------------ -----------
Total liabilities................................................................................ 1,310,076 1,550,005
Stockholders' equity:
Common shares, $1 stated value; 850 shares authorized, 100 shares issued and outstanding....... 100 100
Additional paid-in capital..................................................................... 743,856 743,856
Accumulated deficit............................................................................ (354,949) (425,170)
------------ -----------
Total stockholders' equity....................................................................... 389,007 318,786
------------ -----------
Total liabilities and stockholders' equity....................................................... $1,699,083 $ 1,868,791
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
LUBE VENTURES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------- ---------------------------
1995 1996 1996 1997
----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Product........................................................... $ 1,165,689 $1,751,272 $ 594,733 $ 690,119
Service........................................................... 134,680 231,058 55,100 56,681
Franchise and royalty............................................. -- 71,004 11,681 62,411
----------- ---------- ----------- -----------
1,300,369 2,053,334 661,514 809,211
Cost of goods sold.................................................. 1,447,283 1,497,510 565,732 695,363
----------- ---------- ----------- -----------
Gross profit...................................................... (146,914) 555,824 95,782 113,848
General and administrative expenses................................. 196,451 326,560 226,698 159,899
----------- ---------- ----------- -----------
Operating income (loss)............................................. (343,365) 229,264 (130,916) (46,051)
Other income (expense):
Interest expense.................................................. (130,059) (123,090) (51,866) (50,754)
Non-operating rebates............................................. 36,633 -- -- 301
Other............................................................. 5,000 3,625 1,000 26,283
----------- ---------- ----------- -----------
(88,426) (119,465) (50,866) (24,170)
----------- ---------- ----------- -----------
Net income (loss)................................................... $ (431,791) $ 109,799 $(181,782) $ (70,221)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-29
<PAGE>
LUBE VENTURES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------
NUMBER ADDITIONAL TOTAL
OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (unaudited).......................... 100 $100 $ 149,900 $ (32,957) $ 117,043
Net loss for 1995 (unaudited)................................. -- -- (431,791) (431,791)
Contributed capital (unaudited)............................... -- -- 593,956 -- 593,956
------ ------ ---------- ----------- -------------
Balance at December 31, 1995 (unaudited)........................ 100 100 743,856 (464,748) 279,208
Net income for 1996........................................... -- -- -- 109,799 109,799
------ ------ ---------- ----------- -------------
Balance at December 31, 1996.................................... 100 100 743,856 (354,949) 389,007
Net loss (unaudited).......................................... -- -- -- (70,221) (70,221)
------ ------ ---------- ----------- -------------
Balance at June 30, 1997 (unaudited)............................ 100 $100 $ 743,856 $(425,170) $ 318,786
------ ------ ---------- ----------- -------------
------ ------ ---------- ----------- -------------
</TABLE>
See accompanying notes.
F-30
<PAGE>
LUBE VENTURES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- ---------------------------
1995 1996 1996 1997
----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................................... $(431,791) $ 109,799 $(181,782) $ (70,221)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization....................................... 49,043 78,740 47,184 35,375
Changes in operating assets and liabilities:
Accounts receivable.............................................. (94,098) (11,437) (11,668) (222,786)
Inventory........................................................ 88,016 (91,801) (62,819) 55,405
Accounts payable and accrued expenses............................ 125,659 (12,306) 41,335 27,201
Deferred revenue................................................. -- 32,000 -- (17,999)
Other............................................................ 55,278 15,023 40,664 (22,896)
----------- --------- ----------- -----------
Net cash provided by (used in) by operating activities................ (207,893) 120,018 (127,086) (215,921)
INVESTING ACTIVITIES
Purchase of property and equipment.................................. (449,373) (132,416) (93,983) (8,656)
Purchase of intangible assets....................................... (26,984) -- -- --
Net sale of investment.............................................. -- -- -- 83,375
----------- --------- ----------- -----------
Net cash provided by (used in) investing activities................... (476,357) (132,416) (93,983) 74,719
FINANCING ACTIVITIES
Net proceeds (payments) long-term debt.............................. (13,983) 115,560 136,308 250,727
Net proceeds (payments) of related party loans...................... 169,478 (130,339) 9,661 (20,000)
Proceeds from contributed capital................................... 593,956 -- -- --
----------- --------- ----------- -----------
Net cash (used in) provided by financing activities................... 749,451 (14,779) 145,969 230,727
----------- --------- ----------- -----------
Net (decrease) increase in cash....................................... 65,201 (27,177) (75,100) 89,525
Cash, beginning of period............................................. 25,119 90,320 90,320 63,143
----------- --------- ----------- -----------
Cash, end of period................................................... $ 90,320 $ 63,143 $ 15,220 $ 152,668
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
See accompanying notes.
F-31
<PAGE>
LUBE VENTURES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Lube Ventures, Inc. (the Company) manufactures and franchises modular
automobile oil change and lubrication facilities and owns and operates one
automobile lubrication retail site, which services individual motorists.
Franchisees purchase a modular oil change facility, pay an initial franchise
fee, pay royalty fees of 5% of monthly franchise gross revenues or a flat
monthly rate.
INVESTMENT
The Company's 50% investment interest in Wintersville Lube Depot, LLC, a
limited liability company, is accounted for using the equity method. The Company
recorded income of approximately $2,600 in 1996 related to this investment which
is included in other income. (See Note 7).
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of cash equivalents and trade accounts receivable. The
Company places its cash and cash equivalents with high quality financial
institutions. The Company periodically performs credit evaluations of its
customers' financial condition. Although customers are occasionally granted
interim credit, sales of modular units are typically paid in full upon delivery
and installation of the unit. The market for quick automobile oil change and
lubrication services is primarily individuals and businesses owning automobiles.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are priced at the lower of cost or market using the average
cost method and consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Manufacturing raw materials....................................... $131,391
Work-in-process................................................... 22,348
Finished goods.................................................... 325,851
Supplies.......................................................... 35,427
--------
$515,017
--------
--------
</TABLE>
REVENUE RECOGNITION
Revenues from automobile oil change and lubrication services are generally
paid in cash and are recognized at the time of service. Revenue earned on sales
of modular automobile lubrication units is recognized upon shipment to
customers. Revenue from the sale of a franchise is recognized once certain
obligations to the franchisee are met. Revenue from royalty fees are recognized
when received.
LONG-LIVED ASSETS
The Company periodically evaluates its long-lived assets to determine
whether any events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. This evaluation is based on the nature of
the asset, the future economic benefit of the asset, historical or future
profitability measures and external market conditions. If factors indicate that
the carrying amount of the asset may not be recoverable, the Company would
determine whether an impairment had occurred through the use of an undiscounted
cash flow analysis. If an impairment has occurred, the Company would recognize a
loss for the difference between the carrying amount and the estimated fair value
of the asset. No such impairments have occurred.
F-32
<PAGE>
LUBE VENTURES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
INTANGIBLE ASSETS
Intangible assets consist primarily of franchise rights, facility plans and
drawings and organization costs and are amortized on a straight line basis over
five years. Amortization expense was approximately $12,000 and $10,000 during
1996 and 1995, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally on a straight line basis over the estimated useful lives of the
related assets. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements............................................. 40
Equipment.............................................................. 10
Vehicles............................................................... 5
Office furniture and equipment......................................... 6-10
</TABLE>
INCOME TAXES
The Company is a subchapter S corporation for federal income tax purposes.
The tax effects of the Company's income or loss are passed through to the
shareholders individually, and no income tax expense or liability for federal
income tax purposes is provided for in these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, accounts receivable, accounts
payable and borrowings under its short term lines of credit arrangements
approximate their fair values.
ADVERTISING COSTS
Costs of advertising are expensed when incurred and totaled approximately
$78,000 and $69,000 during the years ended December 31, 1996 and 1995,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Land.................................................................................... $202,275
Buildings and improvements.............................................................. 466,140
Equipment............................................................................... 37,762
Vehicles................................................................................ 112,698
Office furniture and equipment.......................................................... 108,202
Property under capital lease............................................................ 62,971
------------
990,048
Accumulated depreciation................................................................ (108,341)
------------
Net property, plant and equipment....................................................... $881,707
------------
------------
</TABLE>
F-33
<PAGE>
LUBE VENTURES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. PROPERTY, PLANT AND EQUIPMENT -- Continued
Depreciation expense was approximately $66,000 and $39,000 in 1996 and
1995, respectively. The cost and net book value of assets recorded under capital
leases was $62,971 at December 31, 1996. Amortization of leased assets is
included in depreciation and amortization expense.
3. FRANCHISE OBLIGATIONS, FEES AND ROYALTIES
The Company offers its modular oil change and lubrication units to
customers through ten year franchise agreements. The purchased franchise, "Lube
Depot," provides the franchisee the lubrication unit, auxiliary equipment,
training, delivery and assembly. During 1996, the Company recorded $60,600 in
franchise fee revenue and $10,400 in royalty revenue. Included in intangible
assets at December 31, 1996 are franchise organization costs of approximately
$19,000.
4. LINE OF CREDIT
The Company has a $250,000 revolving line of credit with a bank which
expires in November 1999. Interest accrues at prime plus one and one-half
percent and is payable monthly. The line is collateralized by real estate,
equipment, inventories and is guaranteed by the stockholders of the Company. At
December 31, 1996, no further borrowings were available under the line.
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Notes payable to banks and capital lease obligations, monthly payments ranging from $500
to $5,000 plus interest rates ranging from 9.5% to 10.75%, collateralized by specific
assets and guaranteed by the stockholders of the Company............................... $ 760,126
Less current maturities.................................................................. (131,984)
---------
Long-term debt, net of current maturities................................................ $ 628,142
---------
---------
</TABLE>
Maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997...................................................................................... $131,984
1998...................................................................................... 143,086
1999...................................................................................... 147,848
2000...................................................................................... 100,170
2001...................................................................................... 69,951
Thereafter................................................................................ 167,087
--------
$760,126
--------
--------
</TABLE>
The Company was not in compliance with covenants in certain loan agreements
with respect to approximately $328,000 of outstanding long-term debt. The
lenders involved have amended the related agreements to permit the Company to be
in compliance with such covenants through March 21, 1998.
The Company paid interest of approximately $123,000 and $130,000 during
1996 and 1995, respectively.
6. RELATED PARTY TRANSACTIONS
MIRACLE INDUSTRIES, INC.
During 1995, the Company borrowed $100,000 from Miracle Industries, Inc., a
related party through common ownership, payable on demand plus interest at 9%.
During 1996, the Company sold two modular lubrication facilities and a computer
for a total sales price of $113,000 to Miracle Industries, Inc. In lieu of cash
payment, Miracle Industries, Inc. applied the purchase price to the principal
and interest balance due.
F-34
<PAGE>
LUBE VENTURES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. RELATED PARTY TRANSACTIONS -- Continued
MIRACLE PARTNERS, INC.
During 1996, the Company borrowed $81,500 from Miracle Partners, Inc. The
balance was repaid at December 31, 1996. A $25,000 note payable to Miracle
Partners, Inc. outstanding at December 31, 1995, was repaid during 1996.
ACCOUNTS RECEIVABLE
At December 31, 1996, the Company is owed approximately $67,000 in accounts
receivable from related parties.
DEMAND NOTES PAYABLE
At December 31, 1996, the Company owes $60,000 in demand notes to related
parties.
7. SUBSEQUENT EVENTS
In February 1997, the Company sold its 50% interest in Wintersville Lube
Depot, LLC for $100,000.
Effective March 6, 1997, the Company received a guaranty loan in the amount
of $750,000 from the First National Bank of Zanesville. Seventy-five percent of
the loan is guaranteed by the U.S. Small Business Administration. The interest
rate on the guaranteed portion is 9.75% and 8.25% on the unguaranteed portion,
to be adjusted every five years. The loan will expire in March 2020. The
majority of the proceeds were used to pay off the line of credit and selected
outstanding debt balances.
8. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In August 1997, the Company plans to enter into a Plan of Reorganization
and Agreement for Share Exchange Offers (the Agreement) with Precision Auto
Care, Inc., a newly formed corporation. In connection with the Agreement,
Precision Auto Care, Inc. formed a wholly-owned subsidiary, Lube Ventures
Acquisition Company. If the Agreement is approved by the Company's stockholders,
Lube Ventures Acquisition Company will be merged into the Company and the
Company will become a wholly-owned subsidiary of Precision Auto Care, Inc. Each
outstanding share of the Company's common stock will be converted into a right
to receive 1,691.680 shares of Precision Auto Care, Inc. common stock.
F-35
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND PARTNERS
PREMA PROPERTIES, LTD.
We have audited the accompanying balance sheet of Prema Properties, Ltd. (a
Limited Liability Company) as of December 31, 1996 and the related statements of
operations, members' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prema Properties, Ltd., as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
March 21, 1997
F-36
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................................... $ 66,825 $ 31,960
Inventory...................................................................................... 12,000 12,000
------------ -----------
Total current assets............................................................................. 78,825 43,960
Investment....................................................................................... 67,698 67,698
Property and equipment, net...................................................................... 3,108,087 3,031,981
------------ -----------
Total assets..................................................................................... $3,254,610 $ 3,143,639
------------ -----------
------------ -----------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Note payable, related party.................................................................... $ 448,793 $ 578,793
Accounts payable............................................................................... 85,080 48,363
Current maturities, capital lease obligations.................................................. 14,960 16,500
Current maturities, long term debt............................................................. 172,600 228,300
------------ -----------
Total current liabilities........................................................................ 721,433 871,956
Capital lease obligations, net of current maturities............................................. 114,242 105,479
Long term debt, net of current maturities........................................................ 2,226,097 2,078,544
------------ -----------
Total liabilities................................................................................ 3,061,772 3,055,979
Total members' equity............................................................................ 192,838 87,660
------------ -----------
Total liabilities and members' equity............................................................ $3,254,610 $ 3,143,639
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-37
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------------------------
1995 1996 1996 1997
----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................................................. $ 353,854 $ 672,161 $ 311,927 $ 389,682
Direct operating costs.................................................. 234,738 608,705 374,278 323,263
----------- --------- ----------- -----------
Gross profit.......................................................... 119,116 63,456 (62,351) 66,419
General and administrative expenses..................................... 24,834 52,354 31,060 23,454
----------- --------- ----------- -----------
Operating income (loss)................................................. 94,282 11,102 (93,411) 42,965
Other income (expense):
Interest expense...................................................... (76,659) (214,143) (77,935) (148,143)
Other income (expense)................................................ (4,380) 10,578 -- --
----------- --------- ----------- -----------
(81,039) (203,565) (77,935) (148,143)
----------- --------- ----------- -----------
Net (loss) income....................................................... 13,243 (192,463) (171,346) (105,178)
Members' equity, beginning of year...................................... 372,058 385,301 385,301 192,838
----------- --------- ----------- -----------
Members' equity, end of year............................................ $ 385,301 $ 192,838 $ 213,955 $ 87,660
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
See accompanying notes.
F-38
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................................. $ 13,243 $ (192,463) $ (171,346) $(105,178)
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization.................................... 86,490 164,473 65,790 101,844
Other............................................................ 4,380 (10,578) -- --
Changes in operating assets and liabilities:
Inventory..................................................... (4,500) (7,500) (12,500) --
Accounts payable.............................................. 10,457 74,623 25,629 (36,717)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities................ 110,070 28,555 (92,427) (40,051)
INVESTING ACTIVITIES
Net purchases of property and equipment.......................... (122,248) (1,931,950) (1,640,376) (25,738)
Purchase of investment........................................... (61,500) -- -- --
Other............................................................ -- (23,365) -- --
----------- ----------- ----------- -----------
Net cash used in investing activities:............................. (183,748) (1,955,315) (1,640,376) (25,738)
FINANCING ACTIVITIES
Proceeds from notes payable...................................... 185,000 348,793 117,398 130,000
Principal payments under capital lease obligation................ -- (4,548) -- (7,223)
Proceeds from long-term debt..................................... -- 1,766,482 1,700,954 55,700
Principal payments on long-term debt............................. (83,230) (146,780) -- (147,553)
----------- ----------- ----------- -----------
Net cash provided by financing activities.......................... 101,770 1,963,947 1,818,352 30,924
----------- ----------- ----------- -----------
Net increase (decrease) in cash.................................... 28,092 37,187 85,549 (34,865)
Cash, beginning of period.......................................... 1,546 29,638 29,638 66,825
----------- ----------- ----------- -----------
Cash, end of period................................................ $ 29,638 $ 66,825 $ 115,187 $ 31,960
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-39
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Prema Properties, Ltd. (the Company), owns and operates self-serve car wash
facilities and a quick lube facility in seven locations throughout Ohio.
Virtually all of the Company's customers are individual automobile owners.
INVESTMENTS
The Company's 50% investment interest in Tamarack Circle Car Wash, a
general partnership, is accounted for using the equity method. The Company
recorded approximately $11,000 of income in 1996 related to this investment
which is included in other income.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of chemicals and supplies and are priced at the lower
of cost or market using the average cost method.
REVENUE RECOGNITION
Car wash revenues are received in cash and recognized at the time of
service.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally on a straight line basis over the estimated useful lives of the
related assets. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements................................. 40
Equipment.................................................. 10
</TABLE>
INCOME TAXES
The Company is an Ohio limited liability corporation, and is treated as a
partnership for federal income tax purposes. The tax effect of the Company's
income or loss is passed through to the members individually and no income tax
expense or liability for federal income tax purposes is provided for in these
financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, accounts payable and demand
notes payable approximate their fair values.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect certain amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-40
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1996:
<TABLE>
<S> <C>
Land........................................................................ $ 471,352
Buildings and improvements.................................................. 1,118,934
Equipment................................................................... 1,764,726
----------
3,355,012
Accumulated depreciation.................................................... (246,925)
----------
Net property, plant and equipment........................................... $3,108,087
----------
----------
</TABLE>
Depreciation expense was approximately $164,000 and $86,000 during 1996 and
1995 respectively. During 1996, the Company purchased approximately $134,000 in
office equipment under capital leases. The net book value of these assets was
approximately $128,000 at December 31, 1996. Amortization of leased assets is
included in depreciation and amortization expense.
3. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Various notes payable to banks; monthly payments ranging from $1,200 to
$9,600, plus interest at rates ranging from 9% to 10.25%; collateralized
by real estate............................................................ $2,398,697
Less current maturities..................................................... 172,600
----------
Long-term debt, net of current maturities................................... $2,226,097
----------
----------
</TABLE>
Maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997................................................ $ 172,600
1998................................................ 326,000
1999................................................ 514,500
2000................................................ 123,500
2001................................................ 133,900
Thereafter.......................................... 1,128,197
----------
$2,398,697
----------
----------
</TABLE>
The Company paid interest of approximately $214,000 and $77,000 during 1996
and 1995, respectively.
Included in 1996 interest expense is approximately $31,000 of interest paid
to a related party. (See Note 5).
F-41
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. CAPITAL LEASE OBLIGATIONS
The future minimum lease payments under capital lease obligations as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................................................................... $ 31,862
1998.......................................................................... 37,884
1999.......................................................................... 40,895
2000.......................................................................... 40,895
2001.......................................................................... 27,264
--------
Net minimum lease payments.................................................... 178,800
Amount representing interest.................................................. (49,598)
--------
Present value of net minimum lease payments, including current maturities of
$14,960..................................................................... $129,202
--------
--------
</TABLE>
5. RELATED PARTY TRANSACTIONS
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
The Company purchased car wash supplies and equipment of approximately
$282,000 and $100,000 during 1996 and 1995, respectively from Miracle
Industries, Inc., a company with common ownership. At December 31, 1996,
accounts payable to Miracle Industries, Inc. totaled approximately $59,000.
NOTE PAYABLE
The Company holds a note payable to Pella Company, which bears interest at
9.25% and is payable on demand. Pella Company is a related party through common
ownership, and manages the operations of the Company. The note was extended to
the Company to finance the purchase of additional property and equipment. At
December 31, 1996 the balance due was approximately $449,000. (See Note 3).
6. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In August 1997, the Company plans to enter into a Plan of Reorganization
and Agreement for Exchange Share Offers (the Agreement) with Precision Auto
Care, Inc., a newly formed corporation. In connection with the Agreement,
Precision Auto Care, Inc. has agreed to make an offer to exchange 1,488.890
shares of Precision Auto Care, Inc. common stock for each outstanding one
percentage membership interest of the Company.
F-42
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
PRECISION AUTO CARE, INC.
We have audited the accompanying balance sheet of Precision Auto Care, Inc.
as of June 30, 1997. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Precision Auto Care, Inc. at
June 30, 1997 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
August 15, 1997
F-43
<PAGE>
PRECISION AUTO CARE, INC.
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Cash............................................................................................................... $1,000
------
------
LIABILITIES AND STOCKHOLDER EQUITY
Preferred stock, $.01 par; 1,000,000 shares authorized;
0 shares issued and outstanding................................................................................. $ --
Common stock; $.01 par; 19,000,000 shares authorized; 100 shares issued and
outstanding..................................................................................................... 1
Additional paid-in capital......................................................................................... 999
------
$1,000
------
------
</TABLE>
See accompanying Notes.
F-44
<PAGE>
PRECISION AUTO CARE, INC.
NOTE TO FINANCIAL STATEMENT
JUNE 30, 1997
1. ORGANIZATION
Precision Auto Care, Inc. was incorporated in April 1997 and has conducted
no business as of June 30, 1997 and was organized to carry out a proposed Plan
of Reorganization and Agreement for Exchange Share Offers.
F-45
<PAGE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER TO SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE OFFICERS OF THE COMPANY SINCE THE DATE
HEREOF OR SINCE THE DATE AS OF WHICH INFORMATION IS SET FORTH HEREIN.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................. 3
Summary Financial Data.......................... 5
Risk Factors.................................... 7
Use of Proceeds................................. 13
Dividend Policy................................. 14
Capitalization.................................. 15
Dilution........................................ 15
Unaudited Pro Forma Combined Financial
Statements.................................... 16
Selected Financial Data......................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 23
Business........................................ 35
Management...................................... 50
Principal and Selling Shareholders.............. 56
The Combination................................. 57
Certain Transactions............................ 62
Description of Capital Stock.................... 64
Shares Eligible for Future Sale................. 66
Underwriting.................................... 68
Legal Matters................................... 69
Experts......................................... 69
Available Information........................... 69
Index to Financial Statements................... F-1
</TABLE>
------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,440,000 SHARES
[Precision Auto Care Logo]
COMMON STOCK
--------------------------
P R O S P E C T U S
--------------------------
A.G. EDWARDS & SONS, INC.
FERRIS, BAKER WATTS
Incorporated
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses in connection with the
distribution of the securities being registered hereunder, other than
underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission Fee.................................................. $ 8,817
NASD filing fee......................................................................... 3,500
Blue Sky fees and expenses.............................................................. 10,000
Printing and engraving expenses......................................................... 200,000
Legal fees and expenses................................................................. 1,050,000
Accounting fees and expenses............................................................ 710,000
Transfer agent and registrar's fees..................................................... 10,000
Miscellaneous expenses.................................................................. 7,683
----------
Total.............................................................................. $2,000,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of the Company provide that, to the fullest
extent permitted by the Virginia Stock Corporation Act, the Company shall
indemnify current and former directors and officers of the Company against any
and all liabilities and expenses in connection with their services to the
Company in such capacities. The Articles of Incorporation further mandate that
the Company shall advance expenses to its directors and officers to the full
extent permitted by the Virginia Stock Corporation Act. The Articles of
Incorporation also permit the Company, by action of its Board of Directors, to
indemnify its employees and agents with the same scope and effect as the
foregoing indemnification of directors and officers.
The Articles of Incorporation of the Company provide that, to the fullest
extent permitted by the Virginia Stock Corporation Act, no director or officer
of the Company shall be personally liable to the Company or its stockholders for
monetary damages. Under current Virginia law, the effect of this provision is to
eliminate the rights of the Company and its stockholders to recover monetary
damages against a director or officer except for the director or officer's (a)
willful misconduct, (b) knowing violation of any criminal law or of any federal
or state securities law, including (without limitation), any claim of unlawful
insider trading or manipulation of the market for any security, or (c) payment
of unlawful distributions, including dividends and stock redemptions.
The Articles of Incorporation of the Company authorize the Company to
purchase liability insurance for its officers and directors and the Company
currently maintains such insurance coverage on behalf of its officers and
directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the organization of the Company, 100 shares of Common
Stock were issued to WE JAC Corporation for a purchase price of $1,000 in
transactions which were exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section
4(2) thereof. WE JAC Corporation represented that it was acquiring such shares
for investment purposes only and not with a view to distribution within the
meaning of the Securities Act. The stock certificates representing such shares
bear restrictive legends. Such shares will be canceled in connection with the
closing of the Mergers.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement among Precision Auto Care, Inc. (the "Company"), A.G. Edwards & Sons, Inc.
and Ferris, Baker Watts, Incorporated.*
2.1 Plan of Reorganization and Agreement for Combination of Businesses dated as of August 27, 1997 by and
among the Company, WE JAC Corporation, Miracle Industries, Inc., Lube Ventures, Inc., Rocky Mountain
Ventures, Inc., Rocky Mountain Ventures II, Inc., Miracle Partners, Inc., Prema Properties, LLC, Ralston
Car Wash, LLC and KBG LLC.*
3.1 Articles of Incorporation of the Company.**
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<S> <C>
3.2 By-Laws of the Company.**
4.1 Form of stock certificate.*
5 Opinion of Miles & Stockbridge, a Professional Corporation.*
10.1 WE JAC Corporation 1996 Stock Option Plan.**
10.2 WE JAC Corporation 1997 Employee Stock Purchase Plan.**
10.3 Precision Auto Care 1997 Stock Option Plan.**
10.4 Employment Agreement between the Company and John F. Ripley*.
10.5 Employment Agreement between the Company and James A. Hay.**
10.6 Employment Agreement between the Company and William Klumb*.
10.7 Employment Agreement between the Company and Arnold Janofsky.**
10.8 Employment Agreement between the Company and Grant G. Nicolai.**
10.9 Employment Agreement between the Company and Peter Kendrick.**
10.10 Consulting Agreement between the Company and Ernest Malas.*
10.11 Statement of Understanding among Precision Tune Auto Care, Inc. and the Association of Precision Tune Area
Subfranchisors Members dated October 12, 1997*
21 Subsidiaries of the Company.**
23.1 Consents of Ernst & Young LLP, independent auditors.*
23.2 Consent of Miles & Stockbridge, a Professional Corporation (included in the opinion filed as Exhibit 5).*
24 Powers of Attorney.**
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions of its
Certificate of Incorporation, Bylaws or laws of the Commonwealth of Virginia or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters at
the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration in reliance upon Rule 403A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Pre-effective Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Baltimore, State of Maryland, on October 20, 1997.
PRECISION AUTO CARE, INC.
By:__________________*_________________
JOHN F. RIPLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on this 20th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------------------------------------- -----------------
<S> <C> <C>
* Director October 20, 1997
----------------------------------------
LYNN E. CARUTHERS
* President and Chief Executive Officer and October 20, 1997
----------------------------------------
JOHN F. RIPLEY Director
/s/ Peter Kendrick Senior Vice President -- Finance (Principal October 20, 1997
----------------------------------------
PETER KENDRICK Financial and Accounting Officer)
* Director October 20, 1997
----------------------------------------
WOODLEY A. ALLEN
* Director October 20, 1997
----------------------------------------
GEORGE BAVELIS
* Director October 20, 1997
----------------------------------------
BERNARD H. CLINEBURG
* Director October 20, 1997
----------------------------------------
CLARENCE E. DEAL
* Director October 20, 1997
----------------------------------------
EFFIE ELIOPULOS
* Director October 20, 1997
----------------------------------------
BASSAM IBRAHIM
* Director October 20, 1997
----------------------------------------
ARTHUR KELLAR
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------------------------------------- -----------------
<S> <C> <C>
Director October 20, 1997
----------------------------------------
RICHARD O. JOHNSON
* Director October 20, 1997
----------------------------------------
HARRY G. PAPPAS, JR.
* Director October 20, 1997
----------------------------------------
GERALD ZAMENSKY
* Director October 20, 1997
----------------------------------------
WILLIAM R. KLUMB
*By:/s/ Arnold Janofsky
----------------------------------------
ARNOLD JANOFSKY
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
WE JAC CORPORATION AND SUBSIDIARY
FOR YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COL. C
COL. A COL. B ADDITIONS COL. D
- ---------------------------------------------- ------------- -------------------------------- -------------
BALANCE AT CHARGED TO CHARGED TO OTHER (1)
BEGINNING OF COSTS AND ACCOUNTS -- DEDUCTIONS --
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE
- ---------------------------------------------- ------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Year ended June 30, 1997:
Deducted from assets accounts:
Allowance for doubtful accounts 534,009 704,915 937,697
Allowance for notes receivable 179,456 133,666 115,511
---------------------------- -------------
Total 713,465 838,581 1,053,208
Year ended June 30, 1996:
Deducted from assets accounts:
Allowance for doubtful accounts 414,339 394,577 274,907
Allowance for notes receivable 232,305 46,949 99,798
---------------------------- -------------
Total 646,644 441,526 374,705
Year ended June 30, 1995:
Deducted from assets accounts:
Allowance for doubtful accounts 624,567 248,568 458,796
Allowance for notes receivable 272,555 (40,250)
---------------------------- -------------
Total 897,122 208,318 458,796
<CAPTION>
COL. A COL. E
- ---------------------------------------------- ---------------
BALANCE AT END
DESCRIPTION OF PERIOD
- ---------------------------------------------- ---------------
<S> <C>
Year ended June 30, 1997:
Deducted from assets accounts:
Allowance for doubtful accounts 301,227
Allowance for notes receivable 197,611
-------
Total 498,838
Year ended June 30, 1996:
Deducted from assets accounts:
Allowance for doubtful accounts 534,009
Allowance for notes receivable 179,456
-------
Total 713,465
Year ended June 30, 1995:
Deducted from assets accounts:
Allowance for doubtful accounts 414,339
Allowance for notes receivable 232,305
-------
Total 646,644
</TABLE>
- ---------------
(1) Represents accounts written off against the reserve.
S-1
Exhibit 1
PRECISION AUTO CARE, INC.
(a Virginia corporation)
Common Stock
UNDERWRITING AGREEMENT
Dated: _________ __, 1997
<PAGE>
PRECISION AUTO CARE, INC.
UNDERWRITING AGREEMENT
_________ __, 1997
A.G. EDWARDS & SONS, INC.
FERRIS, BAKER WATTS, INCORPORATED
As Representatives of the Several
Underwriters Named in SCHEDULE A hereto
c/o A.G. Edwards & Sons, Inc.
One North Jefferson Avenue
St. Louis, Missouri 63103
Dear Sirs:
Precision Auto Care, Inc., a Virginia corporation (the "Company"),
proposes to issue and sell to the underwriters named in SCHEDULE A
(collectively, the "Underwriters") an aggregate of 2,300,000 shares of Common
Stock, $.01 par value per share (the "Common Stock"), of the Company and the
persons listed on SCHEDULE B (the "Selling Shareholders") propose to sell to the
Underwriters an aggregate of 140,000 shares of Common Stock in such
denominations as are set forth opposite each Selling Shareholder's name on
SCHEDULE B (the "Firm Shares"). The Firm Shares are to be sold to each
Underwriter, acting severally and not jointly, in such amounts as are set forth
in SCHEDULE A opposite the name of such Underwriter.
The Company also grants to the Underwriters, severally and not jointly,
the option described in Section 2 hereof to purchase, on the same terms as the
Firm Shares, up to 366,000 additional shares of Common Stock (the "Option
Shares") solely to cover over-allotments. The Firm Shares, together with all or
any part of the Option Shares, are collectively herein called the "Shares."
The proceeds to the Company from the sale to the Underwriters of the
Firm Shares will be used in part to repay certain indebtedness assumed by the
Company in connection with the Company's acquisition of each of the entities
named on SCHEDULE C (each such entity, a "Constituent Company" and,
collectively, the "Constituent Companies"). The acquisition of a Constituent
Company (or group of affiliated Constituent Companies) is hereinafter referred
to as an "Acquisition" and the acquisition of the Constituent Companies is
hereinafter referred to as the "Acquisitions." Each Acquisition will be effected
pursuant to that certain Plan of Reorganization and Agreement for Share Exchange
Offers by and among the Company, and the Constituent Companies, and the
exhibits, agreements, documents and schedules entered into or delivered in
connection therewith (the "Combination Agreement").
<PAGE>
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to and agrees with each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-34439) with
respect to the Shares, including a preliminary prospectus, has been prepared by
the Company in conformity in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the applicable
rules and regulations (the "Securities Act Regulations") of the Securities and
Exchange Commission (the "Commission"), and has been filed with the Commission;
and such amendments to such registration statement as may have been required
prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Copies of such registration statement
and amendment or amendments and of each related preliminary prospectus, and the
exhibits, financial statements and schedules have been delivered to you. The
Company has prepared in the same manner, and proposes so to file with the
Commission, one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of final
prospectus, (ii) if the Company does not rely on Rule 434 of the Securities Act,
a final prospectus in accordance with Rules 430A and 424(b) of the Securities
Act Regulations or (iii) if the Company relies on Rule 434 of the Securities
Act, a term sheet relating to the Shares that shall identify the preliminary
prospectus that it supplements containing such information as is required or
permitted by Rules 434, 430A and 424(b) of the Securities Act. The Company also
may file a related registration statement with the Commission pursuant to Rule
462(b) of the Securities Act for the purpose of registering certain additional
shares of Common Stock, which registration statement will be effective upon
filing with the Commission. As filed, such amendment, any registration statement
filed pursuant to Rule 462(b) of the Securities Act and any term sheet and form
of final prospectus, or such final prospectus, shall include all Rule 430A
Information (as defined below) and, except to the extent that you shall agree in
writing to a modification, shall be in all respects in the form furnished to you
prior to the date and time that this Agreement was executed and delivered by the
parties hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond that
contained in the latest preliminary prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
A Registration Statement on Form S-4 (file No. 333-34449) with
respect to the shares of Common Stock to be issued to the shareholders of the
Constituent Companies pursuant to the terms of the Combination Agreement,
including a prospectus and joint proxy statement (the "S-4 Registration
Statement"), has been prepared by the Company in conformity in all material
respects with the requirements of the Securities Act and the Securities Act
Regulations of the Commission, and has been filed with the Commission and such
amendments to such registration statement as may have been required prior to the
date hereof have been filed with the Commission, and such amendments have been
similarly prepared. Copies of such registration statement and amendment or
amendments and of each related preliminary prospectus, prospectus,
-2-
<PAGE>
joint proxy statement and the exhibits, financial statements and schedules, as
finally amended and revised, have been delivered to you.
The term "Registration Statement" as used in this Agreement
shall mean the registration statement referenced in Section 1(a) above at the
time such registration statement becomes effective and, in the event any
post-effective amendment thereto becomes effective prior to the Closing Time (as
hereinafter defined), shall also mean such registration statement as so amended;
provided, however, that such term shall also include all Rule 430A Information
contained in any Prospectus and any Term Sheet (as hereinafter defined) and
deemed to be included in such registration statement at the time such
registration statement becomes effective as provided by Rule 430A of the
Securities Act Regulations. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referenced in Section 1(a) above and any preliminary
prospectus included in the Registration Statement at the time it becomes
effective that omits Rule 430A Information. The term "Prospectus" as used in
this Agreement shall mean (a) if the Company relies on Rule 434 of the
Securities Act, the Term Sheet relating to the Shares that is first filed
pursuant to Rule 424(b)(7) of the Securities Act, together with the Preliminary
Prospectus identified therein that such Term Sheet supplements or (b) if the
Company does not rely on Rule 434 of the Securities Act, the prospectus relating
to the Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Securities Act Regulations or, if no filing
pursuant to Rule 424(b) of the Securities Act Regulations is required, shall
mean the form of final prospectus included in the Registration Statement at the
time such Registration Statement becomes effective. The term "Rule 430A
Information" means information with respect to the Shares and the offering
thereof permitted pursuant to Rule 430A of the Securities Act Regulations to be
omitted from the Registration Statement when it becomes effective. The term
"462(b) Registration Statement" means any registration statement filed with the
Commission pursuant to Rule 462(b) under the Securities Act (including the
Registration Statement and any Preliminary Prospectus or Prospectus incorporated
therein at the time such registration statement becomes effective). The term
"Term Sheet" means any term sheet that satisfies the requirements of Rule 434 of
the Securities Act. Any reference to the "date" of a Prospectus that includes a
Term Sheet shall mean the date of such Term Sheet.
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and no proceedings for that
purpose have been instituted or threatened by the Commission or the state
securities or blue sky authority of any jurisdiction, and each Preliminary
Prospectus and any amendment or supplement thereto, at the time of filing
thereof, conformed in all material respects to the requirements of the
Securities Act and the Securities Act Regulations, and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information furnished in
writing to the Company by an Underwriter expressly for use in the Registration
Statement or any 462(b) Registration Statement.
(c) When the Registration Statement, the S-4 Registration Statement and
any 462(b) Registration Statement shall become effective, or any Term Sheet that
is part of the Prospectus is
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filed with the Commission pursuant to Rule 434, when the Prospectus is first
filed pursuant to Rule 424(b) of the Securities Act Regulations, when any
amendment to the Registration Statement, the S-4 Registration Statement or any
462(b) Registration Statement becomes effective, and when any supplement to the
Prospectus or any Term Sheet is filed with the Commission and at the Closing
Time and Date of Delivery (as hereinafter defined), (i) the Registration
Statement, the S-4 Registration Statement, the 462(b) Registration Statement,
the Prospectus, the Term Sheet and any amendments thereof and supplements
thereto will conform in all material respects with the applicable requirements
of the Securities Act and the Securities Act Regulations, and (ii) neither the
Registration Statement, the S-4 Registration Statement, the 462(b) Registration
Statement, the Prospectus, any Term Sheet nor any amendment or supplement
thereto will contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company by
an Underwriter expressly for use in the Registration Statement or any 462(b)
Registration Statement.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the Commonwealth of Virginia with
all requisite corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus. The Company is and, after giving effect to the
Acquisitions, will be duly qualified to transact business as a foreign
corporation and is in good standing in each of the jurisdictions in which the
ownership or leasing of its properties or the nature or conduct of its business
as described in the Registration Statement and the Prospectus requires such
qualification, except where the failure to do so would not have a material
adverse effect on the condition (financial or other), business, properties, net
worth or results of operations of the Company and the Subsidiaries (as
hereinafter defined) taken as a whole.
(e) The entities named on SCHEDULE D constitute all of the entities
that will be subsidiaries of the Company, direct or indirect, after giving
effect to the Acquisitions. These entities are hereinafter collectively referred
to as the "Subsidiaries." Each Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the state
of its incorporation with all requisite corporate power and authority to own,
lease and operate its properties and conduct its business as described in the
Registration Statement and the Prospectus. Each Subsidiary is duly qualified to
transact business in all jurisdictions in which the conduct of its business as
described in the Registration Statement and the Prospectus conducted requires
such qualification, except where the failure to do so would not have a material
adverse effect on the condition (financial or other), business, properties, net
worth or results of operations of the Company and the Subsidiaries taken as a
whole.
(f) The Company has full corporate right, power and authority to enter
into this Agreement and the Combination Agreement, to issue, sell and deliver
the Shares as provided hereby and to consummate the transactions contemplated
hereby and thereby. The filing of the Registration Statement, any amendments or
supplements thereto, and any 462(b) Registration Statement has been duly
authorized by the Board of Directors of the Company. This Agreement
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<PAGE>
and the Combination Agreement have been duly authorized, executed and delivered
by the Company and constitute valid and binding agreements of the Company,
enforceable in accordance with their terms, except to the extent that
enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization or other laws of general applicability relating to or affecting
creditors' rights, or by general principles of equity whether considered at law
or at equity and except to the extent enforcement of the indemnification
provisions set forth in Section 6 of this Agreement may be limited by federal or
state securities laws or the public policy underlying such laws.
(g) The issue and sale of the Shares by the Company and the performance
of this Agreement and the Combination Agreement and the consummation of the
transactions herein contemplated will not result in a violation of the Company's
articles of incorporation or bylaws or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any properties or
assets of the Company or its subsidiaries under, any statute, or under any
indenture, mortgage, deed of trust, note, loan agreement, sale and leaseback
arrangement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which they are bound or to which any of the
properties or assets of the Company or its subsidiaries is subject, or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or its Subsidiaries or their properties, except to
such extent as does not materially adversely affect the business of the Company
and its Subsidiaries taken as a whole; no consent, approval, authorization,
order, registration or qualification of or with any court or governmental agency
or body is required for the consummation of the transactions herein
contemplated, except such as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or under the Act or Rules and Regulations
or any state securities laws.
(h) The Shares to be issued and sold to the Underwriters hereunder have
been validly authorized by the Company. When issued and delivered against
payment therefor as provided in this Agreement, the Shares will be duly and
validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares which have not been
satisfied or waived. No person or entity holds a right to require or participate
in the registration under the Securities Act of the Shares pursuant to the
Registration Statement which has not been satisfied or waived; and, except as
set forth in the Prospectus, no person holds a right to require registration
under the Securities Act of any shares of Common Stock of the Company at any
other time which has not been satisfied or waived.
(i) The Company's authorized, issued and outstanding capital stock is
as disclosed in the Prospectus. The shares of Common Stock to be issued to the
shareholders of the Constituent Companies have been duly authorized and, when
issued and delivered to the purchasers thereof upon delivery of the
consideration therefor as provided in the Combination Agreement, will be validly
issued, fully paid and non assessable, and the issuance of such shares will not
be subject to any statutory preemptive rights of shareholders or any other
rights to purchase.
(j) Except as set forth on SCHEDULE D, all of the issued shares of
capital stock of each of the Subsidiaries, after giving effect to the
Acquisitions, will be duly authorized and validly issued, fully paid and
nonassessable and will be
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owned, directly or indirectly through another Subsidiary, by the Company free
and clear of all liens, security interests, pledges, charges, encumbrances,
defects, shareholders' agreements, voting trusts, equities or claims of any
nature whatsoever. No options, warrants or other rights to purchase, agreements
or other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries, after giving
effect to the Acquisitions, will be outstanding. Other than the Subsidiaries,
the Company does not own, directly or indirectly, any capital stock or other
equity securities of any other corporation or any ownership or membership
interest in any partnership, limited liability company, joint venture or other
association.
(k) Except as disclosed in the Prospectus, there are no, and after
giving effect to the Acquisition there will not be, any outstanding (i)
securities or obligations of the Company or any of the Subsidiaries convertible
into or exchangeable for any capital stock of the Company or any such
Subsidiary, (ii) warrants, rights or options to subscribe for or purchase from
the Company or any such Subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (iii) obligations of
the Company or any such Subsidiary to issue any shares of capital stock, any
such convertible or exchangeable securities or obligation, or any such warrants,
rights or options.
(l) The Company and the Subsidiaries have, and after giving effect to
the Acquisitions, will have, good and marketable title in fee simple to all real
property purported to be owned, if any, and good title to all personal property
owned by them, in each case free and clear of all liens, security interests,
pledges, charges, encumbrances, mortgages and defects, except such as are
disclosed in the Prospectus or such as do not materially and adversely affect
the value of such property and do not interfere with the use made or proposed to
be made of such property by the Company and the Subsidiaries; and any real
property and buildings held under lease by the Company or any Subsidiary are
held under valid, existing and enforceable leases, with such exceptions as are
disclosed in the Prospectus or are not material to the Company and the
Subsidiaries taken as a whole and do not interfere with the use made or proposed
to be made of such property and buildings by the Company or such Subsidiary.
Neither the Company nor any Subsidiary has any notice or knowledge of any
material claim of any sort which has been, or may be, asserted by anyone adverse
to the Company's or any Subsidiary's rights as lessee or sublessee under any
lease or sublease described above, or affecting or questioning the Company's or
any of its Subsidiary's rights to the continued possession of the leased or
subleased premises under any such lease or sublease in conflict with the terms
hereof which claim is or would be material to the Company and the Subsidiaries
taken as a whole.
(m) The financial statements of the Company, the Constituent Companies
and the Subsidiaries included in the Registration Statement, the S-4
Registration Statement and Prospectus present fairly in all material respects
the financial position of the Company, the Constituent Companies and the
Subsidiaries (other than KBG, LLC) as of the dates indicated and the results of
operations and cash flows for the Company, the Constituent Companies and the
Subsidiaries for the periods specified, all in conformity with generally
accepted accounting principles applied on a consistent basis. The financial
statement schedules included in the Registration Statement and the amounts in
the Prospectus under the captions "Prospectus
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<PAGE>
Summary -- Summary Financial Data," "Unaudited Pro Forma Combined Financial
Statements" and "Selected Financial Data" fairly present in all material
respects the information shown thereby and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. The financial statement schedules included in the S-4
Registration Statement and the amounts in the S-4 Registration Statement under
the captions "Summary Pro Forma Condensed Combined Financial Data," "WE JAC
Selected Consolidated Financial Data," "Miracle Industries Selected Consolidated
Financial Data," "Lube Ventures Selected Financial Data," "Rocky Mountain I
Selected Financial Data," "Rocky Mountain II Selected Financial Data," "Miracle
Partners Selected Financial Data," "Prema Properties Selected Financial Data,"
and "Ralston Car Wash Selected Financial Data," fairly present in all material
respects the information shown thereby and have been compiled on a basis
consistent with the financial statements included in the S-4 Registration
Statement. The unaudited pro forma financial information (including the related
notes) included in the Registration Statement, S-4 Registration Statement, the
Prospectus or any Preliminary Prospectus complies as to form in all material
respects to the applicable accounting requirements of the Securities Act and the
Securities Act Regulations, and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents in all
material respects with respect to the Company, the Constituent Companies and the
Subsidiaries, the financial position, results of operations and other
information purported to be shown thereby at the respective dates and for the
respective periods specified.
(n) Ernst & Young LLP who have examined and are reporting upon the
audited financial statements and schedules included in the Registration
Statement and the S-4 Registration Statement, are, and were during the periods
covered by their reports included in the Registration Statement, the S-4
Registration Statement and the Prospectus, independent public accountants within
the meaning of the Securities Act and the rules and regulations of the
Commission thereunder.
(o) None of the Company or the Subsidiaries has sustained, since June
30, 1997, any material loss or interference with its business from fire,
explosion, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or arbitrators' or court or governmental
action, order or decree; and, since the respective dates as of which information
is given in the Registration Statement, the S-4 Registration Statement and the
Prospectus, and except as otherwise stated in the Registration Statement, the
S-4 Registration Statement and Prospectus, there has not been (i) any material
change in the capital stock, long-term debt, obligations under capital leases or
short-term borrowings of the Company and the Subsidiaries taken as a whole, or
(ii) any material adverse change, or any development which could reasonably be
seen as involving a prospective material adverse change, in or affecting the
business, prospects, properties, assets, results of operations or condition
(financial or other) of the Company and the Subsidiaries taken as a whole.
(p) The Company and the Subsidiaries are not, and after giving effect
to the Acquisitions, will not be in violation of their respective charters, or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to
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<PAGE>
cure or both, would constitute a default in the due performance and observance
of any obligation, agreement, term, covenant, consideration or condition
contained in any indenture, mortgage, deed of trust, loan agreement, note, lease
or other agreement or instrument to which any such entity is a party or to which
any such entity or any of its properties is subject. The consummation of the
transactions contemplated hereby and in the Combination Agreement and the
fulfillment of the terms hereof and thereof will not conflict with or result in
a breach of any of the terms or provisions of, or constitute a default under,
(i) any indenture, mortgage, deed of trust or other agreement or instrument to
which the Company or any Subsidiary is a party, except for any such breach or
default which would not have a material adverse effect on the Company or any of
the Subsidiaries, individually or in the aggregate, or (ii) the Articles of
Incorporation or Bylaws of the Company or any Subsidiary or any order, rule or
regulation applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction over the Company or any Subsidiary or any of their respective
properties or assets. None of the Company or the Subsidiaries is or will be,
after giving effect to the Acquisition, in violation of, or in default with
respect to, any statute, rule, regulation, order, judgment or decree, except as
may be properly described in the Prospectus or such as in the aggregate do not
now have and will not in the future have a material adverse effect on the
financial position, results of operations or business of the Company and the
Subsidaries taken as a whole.
(q) There is not pending or threatened, any action, suit, proceeding,
inquiry or investigation against the Company, the Subsidiaries or any of their
respective officers and directors or to which the properties, assets or rights
of any such entity are subject, before or brought by any court or governmental
agency or body or board of arbitrators that are required to be described in the
Registration Statement, the S-4 Registration Statement or the Prospectus but are
not described as required.
(r) The descriptions in the Registration Statement, the S-4
Registration Statement and the Prospectus of the contracts, leases and other
legal documents thereby described present fairly the information required to be
shown, and there are no contracts, leases, or other documents of a character
required to be described in the Registration Statement, the S-4 Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required.
(s) The Company and each of the Subsidiaries have conducted and
operated their businesses in material conformity with all the statutes, common
laws, ordinances, decrees, orders, rules and regulations, including franchising
laws, of the jurisdictions in which each such entity is conducting business
except where the failure to so conduct or operate their business would not have
a material adverse effect on the Company and the Subsidiaries taken as a whole.
Without limiting the foregoing (but subject to the exception taken in the last
clause of the preceding sentence), the Company and the Subsidiaries own or
possess, and after giving effect to the Acquisitions, will own or possess, and
the Company and the Subsidiaries are, and after giving effect to the
Acquisitions, will be in material compliance with the terms, provisions and
conditions of all permits, licenses, franchises, operating certificates, orders,
authorizations, registrations, qualifications, consents or approvals of any
court, arbitrator or arbitral body, or any federal, state,
-8-
<PAGE>
local or foreign governmental agency, instrumentality or similar organization,
domestic or foreign (hereinafter each individually a "Permit" and collectively,
"Permits") necessary to own and use the properties and assets of the Company and
each of the Subsidiaries, respectively, and to operate their respective
businesses in all locations in which such businesses are currently being
operated and as described in the Prospectus; as to the Company and each
Subsidiary, each such Permit is and, after giving effect to the Acquisitions,
will be valid and in full force and effect and there is and, after giving effect
to the Acquisitions, will be no litigation, arbitration, audit, investigation or
other proceeding pending or, to the Company's knowledge, threatened which may
cause any such Permit of and from all authorities to be revoked, withdrawn,
canceled, suspended or not renewed. Neither the Company nor any of the
Subsidiaries is aware of any existing or imminent matter that may have a
material adverse effect on any of their operations or business prospects of the
Company and the Subsidiaries taken as a whole other than as specifically
disclosed in the Prospectus. No director, officer, agent or employee of the
Company or any of the Subsidiaries, or to the Company's knowledge any other
person associated with or acting for or on behalf of the Company or any of the
Subsidiaries, has directly or indirectly made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment to any person,
private or public, regardless or form, whether in money, property or services
(i) to obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business obtained, or (iii) to obtain special
concessions or for special concessions already obtained for or in respect of the
Company or any of the Subsidiaries.
(t) The Company and the Subsidiaries are not, and after giving effect
to the Acquisitions, will not be in violation of any federal or state law or
regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic material (other than violations
which would not have a material adverse effect on the Company and the
Subsidiaries taken as a whole) and the Company and each Subsidiary have, and
after giving effect to the Acquisitions, will have received all permits,
licenses or other approvals required of them under applicable federal and state
occupational safety and health and environmental laws and regulations to conduct
their respective businesses, and the Company and each Subsidiary is, and after
giving effect to the Acquisitions, will be in material compliance with all the
terms and conditions of any such permit, license or approval, except any such
violation of law or regulation, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not, individually or in the
aggregate, result in a material adverse change in or affecting the condition
(financial or otherwise), of the Company and the Subsidiaries taken as a whole,
except as described in the Prospectus.
(u) The Company and each of the Subsidiaries own or possess, and after
giving effect to the Acquisitions, will own or possess adequate licenses or
other rights to use all patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names, copyrights,
trade secrets, franchises, software, proprietary or other confidential
information and intangible properties and assets (collectively, "Intellectual
Property") described in the Prospectus as owned by or used by the Company or any
Subsidiary or which is necessary to the conduct of its business as now conducted
or proposed to be conducted as described in the Prospectus. Neither the Company
nor any of the Subsidiaries is aware of any infringement of or
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<PAGE>
conflict with the rights or claims of others with respect to any of the
Company's or any Subsidiary's Intellectual Property which management of the
Company believes could have a material adverse effect on the condition
(financial or otherwise), business or prospects of the Company and the
Subsidiaries taken as a whole. Neither the Company nor any of the Subsidiaries
is aware of any infringement of any of the Company's or any of the Subsidiaries'
Intellectual Property rights by any third party which management of the Company
believes could have a material adverse effect on the condition (financial or
otherwise), business or prospects of the Company and the Subsidiaries taken as a
whole.
(v) Each of the Company's and the Subsidiaries' respective systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting controls insofar as those objectives pertain
to the prevention or detection of errors or irregularities in amounts that would
be material in relation to the Company's or the Subsidiaries' financial
statements; and, none of the Company, the Subsidiaries, nor any employee or
agent thereof, has made any payment of funds of the Company or the Subsidiaries
or received or retained any funds, and no funds of the Company or the
Subsidiaries have been set aside to be used for any payment, in each case in
violation of any law, rule or regulation.
(w) The Company and each of the Subsidiaries have filed on a timely
basis all necessary federal, state, local and foreign income and franchise tax
returns required to be filed through the date hereof and have paid all taxes
shown as due thereon; and no material tax deficiency has been asserted against
any such entity, nor does any such entity know of any tax deficiency which is
likely to be asserted against any such entity which if determined adversely to
any such entity, could materially adversely affect the business, prospects,
properties, assets, results of operations or condition (financial or otherwise)
of the Company and the Subsidiaries taken as a whole. All material tax
liabilities are adequately provided for on the respective books of such
entities.
(x) None of the employees of the Company or any Subsidiary is covered
by collective bargaining agreements. No labor dispute with the employees of the
Company or any Subsidiary exists or, to the best knowledge of the Company, is
threatened or imminent that could result in a material adverse change in or
affecting the condition, financial or otherwise, of the Company and the
Subsidiaries taken as a whole, except as described in or contemplated by the
Prospectus.
(y) The Company and each of the Subsidiaries maintain insurance (issued
by insurers of recognized financial responsibility) of the types and in the
amounts generally deemed adequate for their respective businesses and,
consistent with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and personal
property owned or leased by the Company and the Subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect.
(z) Each of the Company, the Subsidiaries, and their officers,
directors or affiliates has not taken and will not take, directly or indirectly,
any action designed to, or that might reasonably
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be expected to, cause or result in or constitute the stabilization or
manipulation of any security of the Company or to facilitate the sale or resale
of the Shares.
(aa) The Company is not, will not become as a result of the
transactions contemplated hereby and thereby, or will not conduct its respective
businesses in a manner in which the Company would become, "an investment
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
(bb) No Subsidiary of the Company is currently prohibited, nor, after
giving effect to the Acquisitions will be prohibited, directly or indirectly,
from paying any dividends to the Company, from making any other distributions on
such Subsidiary's capital stock, from repaying to the Company any loans or
advances to such Subsidiary or from transferring the Subsidiary's property or
assets to the Company or any other Subsidiary of the Company, except as
disclosed in the Prospectus.
(cc) Neither the Company, any Subsidiary nor any of their respective
officers, directors or other affiliates has (A) taken, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares or (B) since the filing of the Registration Statement (1) sold, bid for,
purchased or paid anyone any compensation for soliciting purchases of, the
Shares or (2) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(dd) Neither the Company, any Subsidiary nor any director, officer,
agent, employee or other person associated with or acting on behalf of the
Company or any Subsidiary has, directly or indirectly, used any corporate funds
for unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity; made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment, using corporate funds.
(ee) The Company and each Subsidiary has delivered or made available to
you prior to the date the Registration Statement was declared effective copies
of all pension, retirement, profit-sharing, deferred compensation, stock option,
employee stock ownership, severance pay, vacation, bonus or other incentive
plans, all other written employee programs, arrangements or agreements, all
medical, vision, dental or other health plans, all life insurance plans and all
other employee benefit plans or fringe benefit plans, including, without
limitation, "employee benefit plans" as that term is defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
adopted, maintained, sponsored in whole or in part or contributed to by the
Company, any Subsidiary or their predecessors for the benefit of employees,
retirees, dependents, spouses, directors, independent contractors or other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors or other beneficiaries
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<PAGE>
are eligible to participate as of the date of this Agreement (collectively, the
"Company Benefit Plans").
The Company and each Subsidiary (and each predecessor of the Company or
such Subsidiary that adopted or contributed to a Company Benefit Plan) has
maintained all Company Benefit Plans (including filing all reports and returns
required to be filed with respect thereto) in accordance with their terms and in
compliance with the applicable terms of ERISA, the Internal Revenue Code and any
other applicable federal and state laws, except for any breach or violation
which would not have, individually or in the aggregate, a material adverse
effect on the financial position, results of operations or business of the
Company. Each Company Benefit Plan which is intended to be qualified under
Section 401(a) of the Internal Revenue Code has either received a favorable
determination letter from the Internal Revenue Service or will timely request
such a letter prior to the expiration of any remedial amendment period
applicable without penalty to the Company Benefit Plan under the Internal
Revenue Code and has at all times been maintained in accordance with Section 401
of the Internal Revenue Code, except where any failure to so maintain such
Company Benefit Plan would not have, individually or in the aggregate, a
material adverse effect on the financial position, results of operations or
business of the Company. Neither Company nor any Subsidiary has engaged in a
transaction with respect to any Company Benefit Plan that, assuming the taxable
period of such transaction expired as of the date hereof, would subject the
Company or any Subsidiary to a tax or penalty imposed by either Section 4975 of
the Internal Revenue Code or Section 502(i) of ERISA in amounts which are
reasonably likely to have, individually or in the aggregate, a material adverse
effect on the financial position, results of operations or business of the
Company.
Neither Company nor any Subsidiary is obligated to provide
post-retirement medical benefits or any other unfunded post-retirement welfare
benefits (except continuation coverage under the Consolidated Omnibus Budget
Reconciliation Act required to be provided by ERISA Section 601), which such
liabilities to the Company or such Subsidiary would have, individually or in the
aggregate, a material adverse effect on the financial position, results of
operations or business of the Company. Neither the Company, any Subsidiary nor
any member of a group of trades or businesses under common control (as defined
in ERISA Sections 4001(a)(14) and 4001(b)(1)) with the Company or such
Subsidiary have at any time within the last six years sponsored, contributed to
or been obligated under Title I or IV of ERISA to contribute to a "defined
benefit plan" (as defined in ERISA Section 3(35)). Within the last six years,
neither the Company, any Subsidiary nor any member of a group of trades or
businesses under common control (as defined in ERISA Sections 4001(a)(14) and
4001(b)(1)) with Company or such Subsidiary have had an "obligation to
contribute" (as defined in ERISA Section 4212) to a "multiemployer plan" (as
defined in ERISA Sections 4001(a)(3) and 3(37)(A)).
(ff) The Company's hardware and software systems include design,
performance and functionality so that the Company does not reasonably expect to
experience invalid or incorrect results or abnormal hardware or software
operation related to calendar year 2000. The Company's hardware and software
systems include calendar year 2000 date conversion and compatibility
capabilities, including, but not limited to, date data century recognition, same
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century and multiple century formula and date value calculations, and user
interface date data values that reflect the century.
(gg) The Underwriters may rely upon the representations and warranties
of the Company and the Constituent Companies contained in the Combination
Agreement as if such representations and warranties were set forth herein, and
the Company believes that the Underwriters are justified in relying on such
representations and warranties, provided however, that, for the purposes of the
Underwriters reliance thereon, such representations and warranties shall not
survive the Closing.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING
SHAREHOLDERS.
Each Selling Shareholder severally represents and warrants to and
agrees with each Underwriter and the Company that:
(a) All authorizations and consents necessary for the execution and
delivery by such Selling Shareholder of this Agreement and the sale and delivery
of the Shares to be sold by such Selling Shareholder hereunder have been given
and are in full force and effect on the date hereof and will be in full force
and effect on the Closing Date (and, if applicable, the Option Closing Date).
(b) Such Selling Shareholder has, and on the Closing Date (and, if
applicable, the Option Closing Date) will have good and valid title to the
Shares to be sold by such Selling Shareholder, free and clear of all liens,
mortgages, pledges, encumbrances, claims, equities and security interests
whatsoever, and will have, full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Shareholder hereunder.
(c) Upon delivery of and payment for such Shares hereunder, the several
Underwriters will acquire valid and unencumbered title to such Shares to be sold
by such Selling Shareholder hereunder, free and clear of all liens, mortgages,
pledges, encumbrances, claims, equities and security interests whatsoever.
(d) The consummation by such Selling Shareholder of the transactions
contemplated herein and the fulfillment by such Selling Shareholder of the terms
hereof will not result in a violation or breach of any terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, note,
loan agreement, sale and leaseback arrangement or other agreement or instrument
to which such Selling Shareholder is a party, or of any order, rule or
regulation applicable to such Selling Shareholder of any court or of any
regulatory body of an administrative agency or other governmental body having
jurisdiction.
(e) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to or which might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Company's
Common Stock, and such Selling Shareholder is not aware of any such action taken
or to be taken by affiliates of such Selling Shareholder.
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(f) When the Registration Statement becomes effective and at all times
subsequent thereto, such information in the Registration Statement and
Prospectus and any amendments or supplements thereto as specifically refers to
such Selling Shareholder will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(g) Certificates in negotiable form representing all of the Shares to
be sold by such Selling Shareholder hereunder have been placed in the custody of
John F. Ripley and Arnold Janofsky (the "Custodians") under a Custody Agreement
(the "Custody Agreement"), duly executed and delivered by such Selling
Shareholder, with the Custodians having the authority to deliver the Shares to
be sold by such Selling Shareholder hereunder, and that such Selling shareholder
has duly executed and delivered a Power of Attorney (the "Power of Attorney")
appointing John F. Ripley and Arnold Janofsky as such Selling Shareholder's
attorneys-in-fact (the "Attorneys-in-Fact") with the Attorneys-in-Fact having
authority to execute and deliver this Agreement on behalf of such Selling
Shareholder, to determine the purchase price to be paid by the Underwriters to
the Selling Shareholders as provided in Section 3, to authorize the delivery of
the Shares to be sold by it hereunder and otherwise to act on behalf of such
Selling Shareholder in connection with the transactions contemplated by this
Agreement and such Custody Agreement.
(h) The Shares represented by the certificates held in custody for such
Selling Shareholder under the Custody Agreement are subject to the interests of
the Underwriters hereunder, and the arrangements made by such Selling
Shareholder for such custody, and the appointment by such Selling Shareholder
for such custody, and the appointment by such Selling Shareholder of the
Custodians under the Custody Agreement and of the Attorneys-in-Fact by the Power
of Attorney, are to that extent irrevocable.
(i) The obligations of such Selling Shareholders hereunder shall not be
terminated by operation of law, whether by the death or incapacity of any
individual Selling Shareholder or by the occurrence of any other event, and if
any Selling Shareholder should die or become incapacitated, or if any other such
event should occur before the delivery of the Shares hereunder, certificates
representing the Shares shall be delivered by or on behalf of each Selling
Shareholder in accordance with the terms and conditions of this Agreement and of
the Custody Agreement, and actions taken by the Custodians pursuant to the
custody Agreement or by the Attorneys-in-Fact pursuant to the Power of Attorney
shall be as valid as if such death, incapacity or other event had not occurred,
regardless of whether or not the Custodians or Attorneys-in-Fact, or any of
them, shall have received notice of such death, incapacity or other event.
(j) Such Selling Shareholder is not prompted to sell shares of Common
Stock by any information concerning the Company or any of its subsidiaries which
is not included in the Registration Statement.
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SECTION 3. SALE AND DELIVERY OF THE SHARES TO THE UNDERWRITERS;
CLOSING.
(a) On the basis of the representations and warranties hereby
contained, and subject to the terms and conditions herein set forth, the Company
agrees to issue and sell and the Selling Shareholders agree to sell to each of
the Underwriters the Firm Shares, and each Underwriter agrees, severally and not
jointly, to purchase from the Company and the Selling Shareholders the number of
Firm Shares set forth opposite the name of such Underwriter in SCHEDULE A (the
proportion which each Underwriter's share of the total number of the Firm Shares
bears to the total number of Firm Shares is hereinafter referred to as such
Underwriter's "underwriting obligation proportion"), at a purchase price of
$__________ per share.
(b) In addition, on the basis of the representations and warranties
contained herein, and subject to the terms and conditions set forth herein, the
Company hereby grants an option to the Underwriters, severally and not jointly,
to purchase up to an additional 351,000 Option Shares at the same purchase price
as shall be applicable to the Firm Shares. The option will expire if not
exercised within the thirty (30) day period after the date of the Prospectus by
giving written notice to the Company. The option granted hereby may be exercised
in whole or in part (but not more than once), only for the purpose of covering
over-allotments that may be made in connection with the offering and
distribution of the Firm Shares. The notice of exercise shall set forth the
number of Option Shares as to which the several Underwriters are exercising the
option, and the time and date of payment and delivery thereof. Such time and
date of delivery (the "Date of Delivery") shall be determined by you but shall
not be later than three full business days after the exercise of such option,
nor in any event prior to the Closing Time. If the option is exercised as to all
or any portion of the Option Shares, the Option Shares as to which the option is
exercised shall be purchased by the Underwriters, severally and not jointly, in
their respective underwriting obligation proportions.
(c) Payment of the purchase price for and delivery of certificates in
definitive form representing the Firm Shares shall be made at the offices of
Miles & Stockbridge, 10 Light Street, Baltimore, Maryland 21202 or at such other
place as shall be agreed upon by the Company and you, at 10:00 a.m., either (i)
on the third full business day after the execution of this Agreement, or (ii) at
such other time not more than ten full business days thereafter as you and the
Company shall determine (unless, in either case, postponed pursuant to the terms
hereof), (such date and time of payment and delivery being hereby called the
"Closing Time"). In addition, in the event that any or all of the Option Shares
are purchased by the Underwriters, payment of the purchase price for and
delivery of certificates in definitive form representing the Option Shares shall
be made at the offices of Miles & Stockbridge in the manner set forth above, or
at such other place as the Company and you shall determine, on the Date of
Delivery as specified in the notice from you to the Company. Payment for the
Firm Shares and the Option Shares shall be made to the Company and the Selling
Shareholders by wire transfer in same-day funds to the accounts designated to
the Underwriters in writing by the Company and the Attorneys-in-Fact against
delivery to you for the respective accounts of the Underwriters of the Shares to
be purchased by them.
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(d) The certificates representing the Shares to be purchased by the
Underwriters shall be in such denominations and registered in such names as you
may request in writing at least two full business days before the Closing Time
or the Date of Delivery, as the case may be. The certificates representing the
Shares will be made available at the offices of A.G. Edwards & Sons, Inc. or at
such other place as A.G. Edwards & Sons, Inc. may designate for examination and
packaging not later than 10:00 a.m. at least one full business day prior to the
Closing Time or the Date of Delivery as the case may be.
(e) After the Registration Statement becomes effective, you intend to
offer the Shares to the public as set forth in the Prospectus, but after the
initial public offering of such Shares you may in your discretion vary the
public offering price.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
The Company and, where expressly indicated, the Selling Shareholders,
covenants and agrees with each Underwriter as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective under the Securities Act as soon as practicable
after the execution and delivery of this Agreement (if not yet effective at the
date and time that this Agreement is executed and delivered by the parties
hereto). If the Company elects to rely upon Rule 430A of the Securities Act
Regulations or the filing of the Prospectus is otherwise required under Rule
424(b) of the Securities Act Regulations, the Company will comply with the
requirements of Rule 430A and will file the Prospectus, properly completed,
pursuant to the applicable provisions of Rule 424(b), or a Term Sheet pursuant
to and in accordance with Rule 434, within the time period prescribed. If the
Company elects to rely upon Rule 462(b), the Company shall file a 462(b)
Registration Statement with the Commission in compliance with Rule 462(b) by
10:00 p.m., Washington, D.C. time on the date of this Agreement, and the Company
shall at the time of filing either pay to the Commission the filing fee for the
Rule 462(b) Registration Statement or give irrevocable instructions for the
payment of such fee. The Company will notify you immediately, and confirm the
notice in writing, (i) when the Registration Statement, 462(b) Registration
Statement or any post-effective amendment to the Registration Statement, shall
have become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission to amend the Registration
Statement or 462(b) Registration Statement or amend or supplement the Prospectus
or for additional information, and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or any
462(b) Registration Statement or of any order preventing or suspending the use
of any Preliminary Prospectus or the suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the institution or
threatening of any proceeding for any such purposes. The Company will use every
reasonable effort to prevent the issuance of any such stop order or of any order
preventing or suspending such use and, if any such order is issued, to obtain
the withdrawal thereof at the earliest possible moment.
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(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement (i) to the Prospectus, if
the Company has not elected to rely upon Rule 430A, (ii) if the Company has
elected to rely upon Rule 430A, to either the Prospectus included in the
Registration Statement at the time it becomes effective or to the Prospectus
filed in accordance with Rule 424(b) or any Term Sheet filed in accordance with
Rule 434, or (iii) if the Company has elected to rely upon Rule 462(b), to any
462(b) Registration Statement, in any case if you shall not have previously been
advised and furnished a copy thereof a reasonable time prior to the proposed
filing, or if you or counsel for the Underwriters shall object to such amendment
or supplement.
(c) The Company has furnished or will furnish to you, at its expense,
as soon as available, four copies of the Registration Statement as originally
filed and of all amendments thereto, whether filed before or after the
Registration Statement becomes effective, copies of all exhibits and documents
filed therewith and signed copies of all consents and certificates of experts,
as you may reasonably request, and has furnished or will furnish to each
Underwriter, one conformed copy of the Registration Statement as originally
filed and of each amendment thereto.
(d) The Company will deliver to each Underwriter, at the Company's
expense, from time to time, as many copies of each Preliminary Prospectus as
such Underwriter may reasonably request, and the Company hereby and thereby
consents to the use of such copies for purposes permitted by the Securities Act.
The Company will deliver to each Underwriter, at the Company's expense, as soon
as the Registration Statement shall have become effective and thereafter from
time to time as requested during the period when the Prospectus is required to
be delivered under the Securities Act, such number of copies of the Prospectus
(as supplemented or amended) as each Underwriter may reasonably request. The
Company will comply to the best of its ability with the Securities Act and the
Securities Act Regulations so as to permit the completion of the distribution of
the Shares as contemplated in this Agreement and in the Prospectus. If the
delivery of a prospectus is required at any time prior to the expiration of nine
months after the time of issue of the Prospectus or any Term Sheet in connection
with the offering or sale of the Shares and if at such time any events shall
have occurred as a result of which the Prospectus or any Term Sheet as then
amended or supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
thereby, in light of the circumstances under which they were made when such
Prospectus or any Term Sheet is delivered not misleading, or, if for any reason
it shall be necessary during such same period to amend or supplement the
Prospectus or any Term Sheet in order to comply with the Securities Act or the
rules and regulations thereunder, the Company will notify you and upon your
request prepare and furnish without charge to each Underwriter and to any dealer
in securities as many copies as you may from time to time reasonably request of
an amended Prospectus or any Term Sheet or a supplement to the Prospectus or any
Term Sheet or an amendment or supplement to any such incorporated document which
will correct such statement or omission or effect such compliance, and in case
any Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue of the
Prospectus or any Term Sheet, upon your request but at the expense of such
Underwriter, the Company will prepare and deliver to such Underwriter as many
copies as you may request of an amended or supplemented Prospectus or any Term
Sheet complying with Section 10(a)(3) of the Securities Act.
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(e) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(f) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the Securities Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the Securities Act
and Rule 158 thereunder and covering a period of at least 12 months beginning
after the effective date of the Registration Statement.
(g) The Company will use the net proceeds received by it from the sale
of the Shares in the manner specified in the Prospectus under the caption "Use
of Proceeds."
(h) The Company will furnish to its securityholders, as soon as
practicable after the end of each respective period, annual reports (including
financial statements audited by independent public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year. During a period of five years after the date hereof, the Company
will furnish to you: (i) concurrently with furnishing such reports to its
securityholders, statements of operations of the Company for each of the first
three quarters in the form furnished to the Company's securityholders; (ii)
concurrently with furnishing to its securityholders, a balance sheet of the
Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of securityholders' equity of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to securityholders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. (the "NASD"); (v) every material press
release in respect of the Company or its affairs which is released by the
Company and which is filed with the Commission on Form 8-K; and (vi) any
additional information of a public nature concerning the Company or its business
that you may reasonably request. During such five-year period, the foregoing
financial statements shall be on a consolidated basis, and shall be accompanied
by similar financial statements for any significant subsidiary that is not so
consolidated.
(i) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, neither the
Company nor any Selling Shareholder will, without the prior written consent of
A.G. Edwards & Sons, Inc., offer, pledge,
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issue, sell, contract to sell, grant any option for the sale of, or otherwise
dispose of, or announce any offer, pledge, sale, grant of any option to purchase
or other disposition, directly or indirectly, any shares of Common Stock or
securities convertible into, exercisable or exchangeable for, shares of Common
Stock, except as provided in Sections 2 and 3 of this Agreement and other than
pursuant to the Company's stock option plans.
(j) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(k) The Company will cause the Shares to be listed, subject to notice
of issuance, on the Nasdaq National Market tier of the Nasdaq Stock Market and
will maintain the listing of the Shares on the Nasdaq National Market or the New
York Stock Exchange unless such listing is not permitted pursuant to the rules
and regulations of the Nasdaq Stock Market or the New York Stock Exchange, as
appropriate.
(l) The Company is familiar with the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder, and has in the past conducted
its affairs, and will in the future conduct its affairs, in such a manner so as
to ensure that the Company was not and will not be an "investment company" or an
entity "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(m) Neither the Company nor any Selling Shareholder will, and the
Company will use its best efforts to cause its officers, directors and
affiliates not to, (i) take, directly or indirectly prior to termination of the
underwriting syndicate contemplated by this Agreement, any action designed to
stabilize or manipulate the price of any security of the Company, or which may
cause or result in, or which might in the future reasonably be expected to cause
or result in, the stabilization or manipulation of the price of any security of
the Company, to facilitate the sale or resale of any of the Shares, (ii) sell,
bid for, purchase or pay anyone any compensation for soliciting purchases of the
Shares or (iii) pay or agree to pay to any person any compensation for
soliciting any order to purchase any other securities of the Company.
(n) If at any time during the 30-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus) and after written
notice from you advising the Company to the effect set forth above, the Company
agrees to forthwith consult with you concerning the substance dissemination of a
press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(o) The Company has provided to the Representatives agreements executed
by those persons listed on SCHEDULE D which provide that except pursuant to this
Agreement or with the prior written consent of A.G. Edwards & Sons, Inc., for a
period of 180 days from the date of the Prospectus, such person will not,
directly or indirectly, offer for sale, sell, grant any options, rights
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or warrants with respect to any shares of Common Stock, securities convertible
into Common Stock or any capital stock of the Company, or otherwise dispose of
any shares of Common Stock or such other securities or capital stock.
(p) SCHEDULE F attached hereto sets forth the names of all persons
whom, pursuant to the terms of the Combination Agreement, have agreed that for a
period of 180 days from the date of the consummation of the Acquisitions, they
will not, directly or indirectly, offer for sale, sale, grant any options,
rights or warrants with respect to any shares of Common Stock, securities
convertible into Common Stock or any capital stock of the Company, or otherwise
dispose of any shares of Common Stock or such other securities or capital stock,
and the Company will use its commercially reasonable best efforts to ensure that
such persons abide by such provision of the Combination Agreement for a period
of not less than 180 days from the Prospectus.
(r) Prior to the Closing Date (and, if applicable, the Option Closing
Date), neither the Company or any Selling Shareholder will issue any press
releases or other communications directly or indirectly and will hold no press
conferences with respect to the Company or any of its subsidiaries, the
financial condition, results of operations, business, properties, assets or
liabilities of the Company or any of its subsidiaries, or the offering of the
Shares, without your prior written consent, which consent will not be
unreasonably withheld.
(s) The Company will use its commercially reasonable best efforts to do
and perform all things required or necessary to be done and performed under this
Agreement by it prior to the Closing Date or the Option Closing Date, as the
case may be.
SECTION 5. COVENANTS OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder covenants and agrees with each of the
Underwriters:
(a) During the period beginning on the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, such Selling
Shareholder will not, without your prior written consent, sell, offer to sell,
contract to sell, solicit an offer to buy, grant any option for the purchase or
sale of, assign, pledge, distribute or otherwise transfer, dispose of or
encumber (or make any announcement with respect to any of the foregoing),
directly or indirectly, any shares of Common Stock, or any options, rights,
warrants or other securities convertible into or exercisable or exchangeable for
Common Stock or evidencing any right to purchase or subscribe for shares of
Common Stock, whether or not beneficially owned by the undersigned, except as
provided in Section 2.
(b) Such Selling Shareholder will not (A) take, directly or indirectly,
prior to the termination of the underwriting syndicate contemplated by this
Agreement, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of any of
the Shares, (B) sell, bid for, purchase or pay anyone any compensation for
soliciting purchases of, the Shares or (C) pay to or agree to pay any person any
compensation for soliciting another to purchase any other securities of the
Company.
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SECTION 6. PAYMENT OF EXPENSES.
The Company will pay and bear all costs, fees and expenses incident to
the performance of its obligations under this Agreement (excluding fees and
expenses of counsel for the Underwriters, except as specifically set forth
below), including (a) the preparation, printing and filing of the Registration
Statement (including financial statements and exhibits), as originally filed and
as amended, the Preliminary Prospectuses, the Prospectus and any Term Sheet and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to the Underwriters, (b) the preparation, printing and distribution of this
Agreement, the certificates representing the Shares, the Blue Sky Memoranda and
any instruments relating to any of the foregoing, (c) the issuance and delivery
of the Shares to the Underwriters, including any transfer taxes payable upon the
sale of the Shares to the Underwriters (other than transfer taxes on resales by
the Underwriters), (d) the fees and disbursements of the Company's counsel and
accountants, (e) the qualification of the Shares under the applicable securities
laws in accordance with the terms of this Agreement, including filing fees and
fees and disbursements of counsel for the Underwriters in connection therewith
and in connection with the Blue Sky Memoranda (which shall not exceed $10,000),
(f) all costs, fees and expenses in connection with the notification to the
Nasdaq National Market of the proposed issuance of the Shares, (g) filing fees
relating to the review of the offering by the NASD, (h) all filing fees, fees
and disbursements of counsel and printing costs incurred in connection with the
qualification of the Shares for sale in Canada (which shall not exceed $10,000);
(i) the transfer agent's and registrar's fees and all miscellaneous expenses
referred to in Part II of the Registration Statement, (j) costs related to
travel and lodging incurred by the Company and its representatives relating to
meetings with and presentations to prospective purchasers of the Shares
reasonably determined by the Underwriters to be necessary or desirable to effect
the sale of the Shares to the public, and (k) all other costs and expenses
incident to the performance of the Company's obligations hereunder (including
costs incurred in closing the purchase of the Option Shares, if any) that are
not otherwise specifically provided for in this section. The Company, upon your
request, will provide funds in advance for filing fees in connection with "blue
sky" qualifications. The Underwriters may deem the Company to be the primary
obligor with respect to all costs, fees and expenses to be paid by the Company
and/or on behalf of the Selling Shareholders.
If the sale of the Shares provided for hereby is not consummated because
any condition to the obligations of the Underwriters set forth in Section 7
hereof is not satisfied, because of any termination pursuant to Section 10
hereof or because of any refusal, inability or failure on the part of the
Company to perform any agreement hereby or comply with any provision hereof
other than by reason of default by any of the Underwriters, the Company will
reimburse the Underwriters severally on demand for all reasonable out-of-pocket
expenses reasonably incurred by the Underwriters in reviewing the Registration
Statement and the Prospectus, and in investigating and making preparations for
the marketing of the Shares.
SECTION 7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the Underwriters to purchase and pay for (i) the Firm
Shares that they have respectively agreed to purchase pursuant to this Agreement
(and any Option Shares as to
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which the option granted in Section 3 has been exercised and the Date of
Delivery determined by you is the same as the Closing Time) at the Closing Time
and (ii) the Option Shares at the Date of Delivery of the Option Shares, are
subject to the accuracy of the representations and warranties of the Company
contained hereby as of the Closing Time or the Date of Delivery, as the case may
be, and to the accuracy of the representations and warranties of the Company
contained in certificates of any officer of the Company delivered pursuant to
the provisions hereof, to the performance by the Company of their obligations
hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 p.m. on the date of this Agreement or, with your consent, at a later
time and date not later, however, than 5:30 p.m. on the first business day
following the date hereof, or at such later time or on such later date as you
may agree to in writing; if the Company has elected to rely upon Rule 462(b),
the 462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement; and at the Closing Time no
stop order suspending the effectiveness of the Registration Statement or any
462(b) Registration Statement shall have been issued under the Securities Act
and no proceedings for that purpose shall have been instituted or shall be
pending or, to your knowledge or the knowledge of the Company, shall be
contemplated by the Commission, and any request on the part of the Commission
for additional information shall have been complied with to the satisfaction of
counsel for the Underwriters. If the Company has elected to rely upon Rule 430A,
a Prospectus or a Term Sheet containing the Rule 430A Information shall have
been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A).
(b) At the Closing Time, you shall have received a favorable opinion of
Miles & Stockbridge, a Professional Corporation, counsel for the Company, dated
as of the Closing Time, together with signed or reproduced copies of such
opinion for each of the other Underwriters, in form and substance satisfactory
to counsel for the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the Commonwealth of
Virginia with the corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus. The Company is, and after giving effect to the
Acquisitions will be, duly qualified to transact business as a foreign
corporation and is in good standing in each of the jurisdictions in which the
ownership or leasing of the Company's properties or the nature or conduct of its
business requires such qualification, except where the failure to do so would
not have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole.
(ii) Each of the Subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
state of its incorporation. Each such entity has all requisite corporate power
and authority to own, lease and operate its properties and conduct its business
as described in the Registration Statement and the Prospectus. Each such
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entity is duly qualified to do business and is in good standing as a foreign
corporation in each other jurisdiction in which the ownership or leasing of its
properties or the nature or conduct of its business requires such qualification,
except where the failure to do so would not have a material adverse effect on
the condition (financial or other), business, properties, net worth or results
of operations of the Company and the Subsidiaries taken as a whole.
(iii) The Company has the corporate power and authority to
enter into this Agreement and the Combination Agreement, to issue, sell and
deliver the Shares as provided hereby and to consummate the transactions
contemplated hereby and thereby. This Agreement and the Combination Agreement
have been duly authorized, executed and delivered by the Company and, assuming
due authorization, execution and delivery by the Underwriters, constitute valid
and binding agreements of the Company, enforceable in accordance with their
terms, except to the extent enforceability may be limited by bankruptcy,
insolvency, moratorium, reorganization or other laws affecting creditors' rights
or by general principles of equity whether considered at law or in equity and
except to the extent that enforcement of the indemnification provisions set
forth in Section 8 of this Agreement may be limited by federal or state
securities laws or the public policy underlying such laws.
(iv) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares, the execution, delivery and performance of this
Agreement and the Combination Agreement by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby, has been made
or obtained and is in full force and effect, except such as may be necessary
under state securities laws or required by the NASD in connection with the
purchase and distribution of the Shares by the Underwriters, as to which such
counsel need express no opinion. No consents or waivers from any other person
are required in connection with the execution and delivery by the Company of
this Agreement and the Combination Agreement and the consummation of the
transactions contemplated hereby and thereby, except such as have been obtained
or made.
(v) Neither the issuance, sale and delivery by the Company of
the Shares, nor the execution, delivery and performance of this Agreement or the
Combination Agreement, nor the consummation of the transactions contemplated
hereby or thereby will conflict with or result in a breach or violation of any
of the terms and provisions of, or (with or without the giving notice or the
passage of time or both) constitute a default under, the charter or by-laws of
the Company or the Subsidiaries, respectively, or, under any indenture,
mortgage, deed of trust, loan agreement, note, lease or other agreement or
instrument filed as an exhibit to the Registration Statement or S-4 Registration
Statement or attached to or incorporated by reference into the Combination
Agreement to which the Company or the Subsidiaries, respectively, is a party or
to which the Company or the Subsidiaries, respectively, any of their respective
properties or other assets, is subject; or, to such counsel's knowledge, any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company or the Subsidiaries, respectively.
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(vi) The Common Stock conforms in all material respects as to
legal matters to the description thereof contained in the Registration Statement
and the Prospectus under the heading "Description of Capital Stock."
(vii) The Shares to be issued and sold to the Underwriters
hereunder have been validly authorized by the Company. When issued and delivered
against payment therefor as provided in this Agreement, such Shares will be
validly issued, fully paid and nonassessable. To such counsel's knowledge, no
preemptive rights of shareholders exist with respect to any of the Shares which
have not been satisfied or waived. To such counsel's knowledge, no person or
entity holds a right to require or participate in the registration under the
Securities Act of the Shares pursuant to the Registration Statement which has
not been satisfied or waived; and, except as set forth in the Prospectus, no
person holds a right to require registration under the Securities Act of any
shares of Common Stock of the Company at any other time which has not been
satisfied or waived. The form of certificates evidencing the Shares complies
with all applicable requirements of Virginia law.
(viii) The shares of Common Stock to be issued to the
shareholders of the Constituent Companies have been duly authorized and, when
issued and delivered to the purchasers thereof upon delivery of the
consideration therefor as provided in the Combination Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such shares will not
be subject to any statutory preemptive rights of shareholders or, to the best of
such counsel's knowledge, any other rights to purchase.
(ix) The Company has duly authorized and validly issued
capital stock as set forth in the Prospectus under the caption "Capitalization."
(x) After giving effect to the Acquisitions, all of the issued
shares of capital stock of each of the Subsidiaries will be duly authorized and
validly issued, fully paid and nonassessable and will be owned directly, or
indirectly through another Subsidiary, by the Company free and clear of all
liens, security interests, pledges, charges, encumbrances, defects,
shareholders' agreements, voting trusts, equities or claims of any nature
whatsoever. To the knowledge of such counsel, other than the Subsidiaries, the
Company does not own, directly or indirectly, any capital stock or other equity
securities of any other corporation or any ownership interest in any
partnership, joint venture or other association.
(xi) To such counsel's knowledge, except as disclosed in the
Prospectus, there are, and after giving effect to the Acquisitions there will
be, no outstanding (A) securities or obligations of the Company or any of its
Subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such Subsidiary, (B) warrants, rights or options to subscribe for
or purchase from the Company or any such Subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such Subsidiary to issue any shares of capital
stock, any such convertible or exchangeable securities or obligation, or any
such warrants, rights or options.
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(xii) To such counsel's knowledge, none of the Company or the
Subsidiaries is in violation of their respective charter or by-laws, and no
material default exists, and no event has occurred nor state of facts exist
which, with notice or after the lapse of time to cure or both, would constitute
a material default in the due performance and observance of any obligation,
agreement, term, covenant, or condition contained in any indenture, mortgage,
deed of trust, loan agreement, note, lease or other agreement or instrument to
which any such entity is a party or to which any such entity or any of its
properties is subject and which is filed as an exhibit to the Registration
Statement or the S-4 Registration Statement or attached to or incorporated by
reference into the Combination Agreement.
(xiii) To such counsel's knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation against the
Company, the Subsidiaries or any of their respective officers and directors or
to which the properties, assets or rights of any such entity are subject, before
or brought by any court or governmental agency or body or board of arbitrators,
that are required to be described in the Registration Statement, the S-4
Registration Statement or the Prospectus but are not described as required. To
such counsel's knowledge, the Company and the Subsidiaries are not in violation
of any law, ordinance, administrative or governmental rule or regulation of the
Commonwealth of Virginia or the United States of America applicable to the
Company or the Subsidiaries, or any decree of any court or governmental agency
or body having jurisdiction over the Company or the Subsidiaries which would
have a material adverse effect on the Company and the Subsidiaries taken as a
whole.
(xiv) The descriptions in the Registration Statement, the S-4
Registration Statement and the Prospectus of the contracts, leases and other
legal documents thereby described present fairly in all material respects the
information required to be shown and there are no contracts, leases or other
documents known to such counsel of a character required to be described in the
Registration Statement, the S-4 Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement or the S-4 Registration
Statement which are not described or filed as required.
(xv) The Registration Statement, the S-4 Registration
Statement and any 462(b) Registration Statement have become effective under the
Securities Act and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement, the S-4 Registration Statement
or any 462(b) Registration Statement has been issued and no proceeding for that
purpose has been instituted or is pending or contemplated under the Securities
Act. Other than financial statements and other financial and operating data and
schedules contained therein, as to which counsel need express no opinion, the
Registration Statement, the S-4 Registration Statement any 462(b) Registration
Statement, all Preliminary Prospectuses, the Prospectus and any amendment or
supplement thereto, appear on their face to conform as to form in all material
respects with the requirements of the Securities Act and the rules and
regulations thereunder.
(xvi) The Company is not, or solely as a result of the
consummation of the transactions contemplated hereby and thereby will not
become, an "investment company," or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended.
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(xvii) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly
in all material respects a summary of the information required to be shown under
the Securities Act and the Securities Act Regulations. The information in the
Prospectus under the caption "Shares Available for Future Sale" to the extent
that it constitutes matters of law or legal conclusions, has been reviewed by
such counsel, is correct in all material respects and presents fairly in all
material respects the information required to be disclosed thereby under the
Securities Act and the Securities Act Regulations.
(xviii) Upon delivery and transfer of the consideration to be
given by the respective parties thereto, each of the Acquisitions will have been
consummated in accordance with the terms of the Combination Agreement.
Such counsel shall also state that, in connection with the
Registration Statement, the S-4 Registration Statement and any 462(b)
Registration Statement and in accordance with their understanding with the
Company, they have advised the Company as to the requirements of the Act and the
Rules and Regulations and rendered other legal advice and assistance to the
Company pertaining to the Registration Statement, the S-4 Registration
Statement, any 462(b) Registration Statement and the Preliminary Prospectus and
the Prospectus. Rendering such advice and assistance involved, among other
things, discussions and inquiries concerning various legal and related subjects,
and reviews of and reports on certain corporate records, documents and
proceedings. Such counsel shall also state that they participated in conferences
with the Underwriters' representatives and those of the Company, the
Underwriters' counsel and the Company's independent accountants at which the
contents of the Registration Statement, the S-4 Registration Statement, any
462(b) Registration Statement, the Preliminary Prospectus and the Prospectus and
related matters were discussed and revised.
Such counsel shall state that, on the basis of the information
which was developed in the course of the performance of the services referred to
above, considered in the light of their understanding of the applicable law and
the experience such counsel has gained through their practice thereunder, no
facts have come to such counsel's attention that has caused them to believe that
the Registration Statement, the S-4 Registration Statement and any 462(b)
Registration Statement, on their respective effective dates and as of the
Closing Date, contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus,
or any amendment or supplement thereto made prior to the date hereof, as of its
issue date and as of the Closing Date, contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading (except that such counsel need not
express any belief regarding the financial statements or related schedules or
any other financial or statistical information contained in or incorporated by
reference into the Registration Statement, the S-4 Registration Statement, any
462(b) Registration Statement or the Prospectus, or any amendment or supplement
thereto).
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In rendering such opinions set forth in this Section 7(b),
such counsel may rely on the following:
(1) as to matters involving the application of laws
other than the laws of the United States and jurisdictions in which
they are admitted, to the extent such counsel deems proper and to the
extent specified in such opinion, upon an opinion or opinions (in form
and substance reasonably satisfactory to Underwriters' counsel) of
other counsel familiar with the applicable laws, and
(2) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various jurisdictions, having custody of documents respecting the
existence or good standing of the Company provided that copies of all
such opinions, statements or certificates shall be delivered to
Underwriters' counsel. The opinion of counsel for the Company shall
state that the opinion of any other counsel, or certificate or written
statement, on which such counsel is relying is in form satisfactory to
such counsel and that you and they are justified in relying thereon.
(c) On the Closing Date (and, if applicable, the Option Closing Date),
you shall have received a favorable opinion of ___________________, counsel to
the Selling Shareholders, dated as of the Closing Time, together with signed or
reproduced copies of such opinion for each of the Underwriters, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) Each Selling Shareholder has duly authorized, executed and
delivered the Custody Agreement and Power of Attorney, appointing ____________
and ________________ as such Selling Shareholder's Custodians with authority to
take custody of and deliver the Shares as represented by certificates on behalf
of such Selling Shareholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement and appointing _______________ and
_________________ as such Selling Shareholder's attorneys-in-fact with authority
to execute and deliver this Agreement on behalf of such Selling Shareholder and
otherwise to act on behalf of such Selling Shareholder in connection with the
transactions contemplated by this Agreement and the Power of Attorney.
(ii) Each Selling Shareholder has full legal right, power and
authority to enter into this Agreement and the Combination Agreement to sell,
assign, transfer and deliver the Shares to be sold by such Selling Shareholder
and to consummate the transactions contemplated hereby and thereby. This
Agreement and the Combination Agreement have been duly authorized, executed and
delivered on behalf of the Selling Shareholders, and, assuming due
authorization, execution and delivery by the Underwriters, constitute valid and
legally binding agreements of the Selling Shareholders enforceable in accordance
with their terms, except to the extent the enforceability may be limited by
bankruptcy, insolvency, moratorium, reorganization or other laws affecting
creditors' rights or by general principles of equity whether considered at law
or in equity and except to the extent that enforcement of the indemnification
provisions set forth in Section 8
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of this Agreement may be limited by federal or state securities laws or the
public policy underlying such laws.
(d) At the Closing Time, you shall have received a favorable opinion
from Alston & Bird LLP, counsel for the Underwriters, dated as of the Closing
Time, with respect to the incorporation of the Company, the issuance and sale of
the Shares, the Registration Statement, the Prospectus and other related matters
as the Underwriters may reasonably require, and the Company shall have furnished
to such counsel such documents as they may reasonably request for the purpose of
enabling them to pass on such matters.
(e) At the Closing Time, (i) the Registration Statement, the S-4
Registration Statement, any 462(b) Registration Statement, and the Prospectus,
as they may then be amended or supplemented, shall contain all statements that
are required to be stated thereby under the Securities Act and the Securities
Act Regulations and in all material respects shall conform to the requirements
of the Securities Act and the Securities Act Regulations; the Company shall have
complied in all material respects with Rule 430A (if it shall have elected to
rely thereon) and neither the Registration Statement, the S-4 Registration
Statement, any 462(b) Registration Statement, nor the Prospectus, as they may
then be amended or supplemented, shall contain an untrue statement of a material
fact or omit to state a material fact required to be stated thereby or necessary
to make the statements thereby not misleading, (ii) there shall not have been,
since the respective dates as of which information is given in the Registration
Statement, any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole, whether or not arising in the
ordinary course of business, (iii) no action, suit or proceeding at law or in
equity shall be pending or, to the best of the Company's knowledge, threatened
against the Company that could reasonably be expected to be decided materially
adversely to the Company and would be required to be set forth in the Prospectus
other than as set forth thereby and no proceedings shall be pending or, to the
best knowledge of the Company, threatened against the Company before or by any
federal, state or other commission, board or administrative agency whereby an
unfavorable decision, ruling or finding could materially adversely affect the
business, prospects, assets, results of operations or condition (financial or
otherwise) of the Company, other than as set forth in the Prospectus, (iv) the
Company shall have complied with all agreements and satisfied all conditions on
their part to be performed or satisfied at or prior to the Closing Time, and (v)
the representations and warranties of the Company set forth in Section 1 hereof
shall be accurate as though expressly made at and as of the Closing Time. At the
Closing Time, you shall have received a certificate executed by the President
and Chief Executive Officer and the Senior Vice President - Finance of the
Company dated as of the Closing Time, to such effect and with respect to the
following additional matters: (A) the Registration Statement and the S-4
Registration Statement have become effective under the Securities Act and no
stop order suspending the effectiveness of the Registration Statement or the S-4
Registration Statement or preventing or suspending the use of the Prospectus has
been issued, and no proceedings for that purpose have been instituted or are
pending or, to the best of their knowledge, threatened under the Securities Act;
and (B) they have reviewed the Registration Statement, the S-4 Registration
Statement and the Prospectus and, when the Registration Statement, the S-4
Registration Statement and any 462(b) Registration Statement became effective
and at all times subsequent thereto up to the
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delivery of such certificate, the Registration Statement, the S-4 Registration
Statement, any 462(b) Registration Statement and the Prospectus and any
amendments or supplements thereto contained all statements and information
required to be included thereby or necessary to make the statements thereby not
misleading and neither the Registration Statement, the S-4 Registration
Statement any 462(b) Registration Statement, nor the Prospectus nor any
amendment or supplement thereto included any untrue statement of a material fact
or omitted to state any material fact required to be stated thereby or necessary
to make the statements thereby not misleading, and, since the effective date of
the Registration Statement, there has occurred no event required to be set forth
in an amended or supplemented Prospectus that has not been so set forth.
(f) You shall have received from Ernst & Young, LLP letters dated,
respectively, the date hereof (or, if the Registration Statement has been
declared effective prior to the execution and delivery of this Agreement, dated
such effective date and the date of this Agreement) and the Closing Time and the
Date of Delivery, in form and substance satisfactory to you.
(g) At the Closing Time, you shall have received from Ernst & Young,
LLP a letter, in form and substance satisfactory to you and dated as of the
Closing Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to Section 5(e) above, except that the specified date
referred to shall be a date not more than five days prior to the Closing Time.
(h) At the Closing Time, Alston & Bird LLP, counsel for the
Underwriters shall have been furnished with all such documents, certificates and
opinions as they may request for the purpose of enabling them to pass upon the
issuance and sale of the Shares as contemplated in this Agreement and in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements of the Company, the performance of any of the covenants
of the Company, or the fulfillment of any of the conditions hereby contained;
and all proceedings taken by the Company at or prior to the Closing Time in
connection with the authorization, issuance and sale of the Shares as
contemplated in this Agreement shall be reasonably satisfactory in form and
substance to you and to counsel for the Underwriters. The Company will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
(i) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or the
Underwriters' participation in the same.
(j) The Company and each Selling Shareholder shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties contained hereby and related matters as the
Representatives may reasonable have requested.
(k) The Shares shall be approved for quotation on the Nasdaq National
Market, subject to notice of issuance.
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(l) The Company shall have delivered to you written lock-up agreements
from the officers and directors of the Company listed on SCHEDULE E pursuant to
which such persons agree with the Representatives not to offer, sell or dispose
of any Common Stock of the Company, or any securities convertible into or
exercisable or exchangeable therefor or derivative therefrom, for a period of
180 days after the date of this Agreement, directly or indirectly, except with
the prior consent of A.G. Edwards & Sons, Inc.
(m) At or prior to the Closing Date, each Combination shall have been
consummated on terms that conform in all material respects to the description
thereof in the S-4 Registration Statement and the Prospectus and the
Underwriters shall have received true and correct copies of all material
documents pertaining thereto and evidence satisfactory to the Underwriters of
the consummation thereof.
(n) Subsequent to the date hereof, there shall not have occurred any of
the following: (i) if there has occurred or accelerated any outbreak of
hostilities or other national or international calamity or crisis or change in
economic or political conditions the effect of which on the financial markets of
the United States is such as to make it, in your reasonable judgment,
impracticable to market the Shares or enforce contracts for the sale of the
Shares, or (ii) if trading generally on the New York Stock Exchange or in the
over-the-counter market has been suspended, or limitations on prices for trading
(other than limitations on hours or numbers of days of trading, including any
suspension of program trading resulting from a fifty (50) point fluctuation in
the Dow Jones Industrial Average) have been fixed, or maximum ranges for prices
for securities have been required, by such exchange or the NASD or by order of
the Commission or any other governmental authority, or (iii) if a banking
moratorium has been declared by federal or New York or Missouri authorities, or
(iv) any federal or state statute, regulation, rule or order of any court or
other governmental authority has been enacted, published, decreed or otherwise
promulgated which in your reasonable opinion materially adversely affects or
will materially adversely affect the business or operations of the Company, or
(v) any action has been taken by any federal, state or local government or
agency in respect of its monetary or fiscal affairs which in your reasonable
opinion has a material adverse effect on the securities markets in the United
States.
If any of the conditions specified in this Section 7 shall not
have been fulfilled when and as required by this Agreement to be fulfilled, this
Agreement may be terminated by you on notice to the Company at any time at or
prior to the Closing Time, and such termination shall be without liability of
any party to any other party, except as provided in Section 6. Notwithstanding
any such termination, the provisions of Section 8 shall remain in effect.
The several obligations of the Underwriters to purchase Option
Shares hereunder are subject to the satisfaction on and as of any Date of
Delivery for Option Shares of the conditions set forth in this Section 5, except
that, if any Date of Delivery for Option Shares is other than the Closing Time,
the certificates, opinions and letters referred to in paragraphs (b), (c) and
(e) shall be revised to reflect the sale of Option Shares.
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SECTION 8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject under the Securities Act, or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) (i) arise out of or are based upon any breach of any warranty or
covenant of the Company hereby contained, (ii) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus, the Registration Statement, any 462(b) Registration
Statement or the Prospectus, or any amendment or supplement thereto or (iii)
arise out of or are based upon the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement, any 462(b) Registration
Statement, the Prospectus, or any amendment or supplement thereto, a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement, any
462(b) Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by any Underwriter expressly for use therein, provided
further, that the indemnification contained in this Section 8(a) with respect to
the Preliminary Prospectus shall not inure to the benefit of any Underwriter on
account of any losses, claims, damages or liabilities if the untrue statement or
alleged untrue statement or omission or alleged omission of a material fact
contained in the Preliminary Prospectus was corrected in the Prospectus and the
Underwriter failed to send or otherwise deliver at or prior to the written
confirmation of the sale of Shares a copy of the Prospectus (as then amended or
supplemented) if the Company has previously furnished sufficient copies thereof
to the Underwriter on a timely basis. In addition to its other obligations under
this Section 8(a), the Company agrees that, as an interim measure during the
pendency of any such claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 8(a), upon receipt of an itemized
statement therefor, it will reimburse the Underwriters on a monthly basis for
all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. Any
such interim reimbursement payments that are not made to an Underwriter within
30 days of a request for reimbursement shall bear interest at the prime rate (or
reference rate or other commercial lending rate for borrowers of the highest
credit standing) published from time to time by The Wall Street Journal (or if
not reported thereby by some other authoritative source to be selected by the
Representatives) (the "Prime Rate") from the date of such request. In the event
that it is ultimately determined that such advances or similar payments are
improper or that an Underwriter or the Underwriters are not entitled to such
payments, the Underwriter or Underwriters, as the case may be, shall reimburse
the Company for such payments, together with
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interest at the Prime Rate from the date of the advance by the Company to the
date of payment by the Underwriter or Underwriters, as the case may be. This
indemnity agreement shall be in addition to any liabilities that the Company may
otherwise have. The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened action or claim or related cause of action or portion of
such cause of action in respect of which indemnification may be sought hereunder
(whether or not such Underwriter is a party to such action or claim), unless
such settlement, compromise or consent includes an unconditional release of such
Underwriter from all liability arising out of such action or claim (or related
cause of action or portion thereof).
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter within the meaning of the Securities Act to the
same extent as such agreement applies to the Underwriters.
(b) Each Selling Shareholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject under the Securities Act,
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) (i) arise out of or are based upon any breach of any
warranty or covenant of such Selling Shareholder hereby contained, (ii) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement, any 462(b) Registration Statement or the Prospectus, or any amendment
or supplement thereto, or (iii) arise out of or are based upon the omission or
alleged omission to state in any Preliminary Prospectus, the Registration
Statement, any 462(b) Registration Statement, the Prospectus, or any amendment
or supplement thereto, a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action; provided however, that each Selling Shareholder
listed on SCHEDULE G shall only be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement, any 462(b)
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by such Selling Shareholder expressly for use therein, provided further,
that such Selling Shareholder shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement, any 462(b)
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter expressly for use therein, provided further, that
such Selling Shareholder shall not be liable for any amounts in excess of the
net proceeds received by such Selling Shareholder from the sale of Shares
hereunder. In addition to its other obligations under this Section 8(b), each
Selling Shareholder agrees that, as an interim measure during the pendency of
any such claim, action, investigation, inquiry or other proceeding arising out
of or based upon any statement or omission, or any alleged statement or
omission,
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<PAGE>
described in this Section 8(b), it will reimburse the Underwriters on a monthly
basis for all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of such Selling Shareholder's obligation to
reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to an
Underwriter within 30 days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request. This indemnity agreement shall be
in addition to any liabilities that such Selling Shareholder may otherwise have.
No Selling Shareholder will, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened action or claim or related cause of action or portion of
such cause of action in respect of which indemnification may be sought hereunder
(whether or not such Underwriter is a party to such action or claim), unless
such settlement, compromise or consent includes an unconditional release of such
Underwriter from all liability arising out of such action or claim (or related
cause of action or portion thereof).
The indemnity agreement in this Section 8(b) shall extend upon the same terms
and conditions to, and shall inure to the benefit of, each person, if any, who
controls any Underwriter within the meaning of the Securities Act to the same
extent as such agreement applies to the Underwriters.
(c) Each Underwriter, severally but not jointly, will indemnify and
hold the Company and each Selling Shareholder harmless against any losses,
claims, damages or liabilities to which the Company may become subject, under
the Securities Act, or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
breach of any warranty or covenant by such Underwriter hereby contained or any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement, any 462(b) Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state thereby a
material fact required to be stated thereby or necessary to make the statements
thereby not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement any
462(b) Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to the Company by such Underwriter expressly for use therein; and will
reimburse the Company or such Selling Shareholder for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such loss, claim, damage, liability or action. In addition to its
other obligations under this Section 8(c), the Underwriters agree that, as an
interim measure during the pendency of any such claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section 8(c),
they will reimburse the Company or such Selling Shareholder on a monthly basis
for all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of their obligation to reimburse the Company or
such Selling
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<PAGE>
Shareholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. Any such
interim reimbursement payments that are not made to the Company within 30 days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement shall be in addition to any
liabilities that the Underwriters may otherwise have. No Underwriter will,
without the prior written consent of the Company or such Selling Shareholder,
settle or compromise or consent to the entry of judgment in any pending or
threatened action or claim or related cause of action or portion of such cause
of action in respect of which indemnification may be sought hereunder (whether
or not the Company or such Selling Shareholder is a party to such action or
claim), unless such settlement, compromise or consent includes an unconditional
release of the Company or such Selling Shareholder from all liability arising
out of such action or claim (or related cause of action or portion thereof).
The indemnity agreement in this Section 8(c) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer and
director of the Company and each person, if any, who controls the Company within
the meaning of the Securities Act to the same extent as such agreement applies
to the Company.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party, notify the indemnifying party in writing of the commencement
thereof; no indemnification provided for in subsection (a), (b) or (c),
contribution provided for in subsection (d) or other remedy under common law or
otherwise shall be available to any party who shall fail to give notice as
provided in this subsection (d) if the party to whom notice was not given was
prejudiced by the failure to give such notice. In case any such action shall be
brought against any indemnified party and it shall notify the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate thereby and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, except that if the
indemnified party has been advised by reputable counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
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<PAGE>
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in subsection (a),
(b) and (c) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the indemnifying parties, shall be settled by
arbitration conducted pursuant to the Code of Arbitration Procedure of the
National Association of Securities Dealers, Inc. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, thereby electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in subsections (a),
(b) and (c) hereof and will not resolve the ultimate propriety or enforceability
of the obligation to indemnify for expenses that is created by the provisions of
subsections (a), (b) and (c).
(f) In order to provide for just and equitable contribution
in circumstances under which the indemnity provided for in this Section 8 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company and the Selling
Shareholders, on the one hand and the Underwriters on the other shall contribute
to the aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by such indemnity incurred by the Company, and one or more of the
Underwriters, as incurred, in such proportions that (a) the Underwriters are
responsible pro rata for that portion represented by the percentage that the
underwriting discount appearing on the cover page of the Prospectus bears to the
public offering price (before deducting expenses) appearing thereon, and (b) the
Company and the Selling Shareholders are responsible for the balance, provided,
however, that no person guilty of fraudulent misrepresentations (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand, and the
Underwriters on the other shall contribute to the aggregate losses in such
proportion as is appropriate to reflect not only the relative benefits referred
to above but also the relative fault of the Company and the Selling
Shareholders, on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Company or the Selling
Shareholders, on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Selling
Shareholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 8(e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(f). The amount paid
or payable by a party as a result of the losses, claims, damages or liabilities
referred to above shall be deemed to
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<PAGE>
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim. Notwithstanding
the provisions of this Section 8(f), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. The Underwriters' obligations in this Section 8(f)
to contribute are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 8(f), each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as such Underwriter,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company,
within the meaning of Section 15 of the Securities Act shall have the same
rights to contribution as the Company.
(g) The indemnification provided pursuant to Section 8 (a)(I)
above shall not survive the closing of the transactions completed by this
Agreement. In addition, underwriting discounts and commissions which would have
been payable to the Underwriters by the Company in the event closing occurs
shall not be considered losses and the Underwriters shall not be entitled to
seek payment of such amounts pursuant to Section 8 (a)(i) or otherwise if
closing does not occur
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.
The representations, warranties, indemnities, agreements and other
statements of the Company, or its officers, and each Selling Shareholder set
forth in or made pursuant to this Agreement will remain operative and in full
force and effect regardless of any investigation made by or on behalf of the
Company, such Selling Shareholder or any Underwriter or controlling person, and
with respect to an Underwriter, the Company or such Selling Shareholder, will
survive delivery of and payment for the Shares or termination of this Agreement.
SECTION 10. EFFECTIVE DATE OF AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective immediately as to Sections 4
and 6 and, as to all other provisions, (i) if at the time of execution of this
Agreement the Registration Statement has not become effective, at 10:00 a.m., on
the first full business day following the effectiveness of the Registration
Statement, or (ii) if at the time of execution of this Agreement the
Registration Statement has been declared effective, at 10:00 a.m. on the first
full business day following the date of execution of this Agreement; but this
Agreement shall nevertheless become effective at such earlier time after the
Registration Statement becomes effective as you may determine on and by notice
to the Company or by release of any of the Shares for sale to the public. For
the purposes of this Section 10, the Shares shall be deemed to have been so
released upon the release of publication of any newspaper advertisement relating
to the Shares or upon the release by you of telegrams (i) advising the
Underwriters that the Shares are released for public offering, or (ii) offering
the Shares for sale to securities dealers, whichever may occur first. By giving
notice
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<PAGE>
before the time this Agreement becomes effective, you, as representative of the
several Underwriters, or the Company, may prevent this Agreement from becoming
effective, without liability of any party to any other party, except that the
Company shall remain obligated to pay its costs and expenses to the extent
provided in Section 6 hereof.
(b) You may terminate this Agreement, by notice to the Company, at any
time at or prior to the Closing Time (i) in accordance with Section 7(m) of this
Agreement, or (ii) if there has been since the respective dates as of which
information is given in the Registration Statement, any material adverse change,
or any development involving a prospective material adverse change, in or
affecting the business, prospects, management, properties, assets, results of
operations or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, whether or not arising in the ordinary course of
business, or (iii) if there has occurred or accelerated any outbreak of
hostilities or other national or international calamity or crisis or change in
economic or political conditions the effect of which on the financial markets of
the United States is such as to make it, in your reasonable judgment,
impracticable to market the Shares or enforce contracts for the sale of the
Shares, or (iv) if trading in any securities of the Company has been suspended
by the Commission or by the Nasdaq National Market or if trading generally on
the New York Stock Exchange or in the over-the-counter market has been
suspended, or minimum prices for trading have been fixed by such exchange or the
NASD or by order of the Commission or any other governmental authority having
jurisdiction, or (v) if a banking moratorium has been declared by federal or New
York or Missouri authorities, or (vi) any federal or state statute, regulation,
rule or order of any court or other governmental authority has been enacted,
published, decreed or otherwise promulgated which in your reasonable opinion
materially adversely affects or will materially adversely affect the business or
operations of the Company, or (vii) any action has been taken by any federal,
state or local government or agency in respect of its monetary or fiscal affairs
which in your reasonable opinion has a material adverse effect on the securities
markets in the United States.
(c) If this Agreement is terminated pursuant to this Section 10, such
termination shall be without liability of any party to any other party, except
to the extent provided in Section 6. Notwithstanding any such termination, the
provisions of Section 8 shall remain in effect.
SECTION 11. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS.
If one or more of the Underwriters shall fail at the Closing Time to
purchase the Shares that it or they are obligated to purchase pursuant to this
Agreement (the "Defaulted Securities"), you shall have the right, within 36
hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms set forth in this Agreement; if, however, you have not completed such
arrangements within such 36-hour period, then:
(a) If the aggregate number of Firm Shares which are Defaulted
Securities does not exceed 10 percent of the aggregate number of Firm Shares to
be purchased pursuant to this Agreement, the non-defaulting Underwriters shall
be obligated to purchase the full amount thereof
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<PAGE>
in the proportions that their respective underwriting obligation proportions
bear to the underwriting obligations of all non-defaulting Underwriters, and
(b) If the aggregate number of Firm Shares which are Defaulted
Securities exceeds 10 percent of the aggregate number of Firm Shares to be
purchased pursuant to this Agreement, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section 11 shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default that does not result in a
termination of this Agreement, either you or the Company shall have the right to
postpone the Closing Time for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus that
may hereby or thereby be made necessary. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 11.
SECTION 12. DEFAULT BY THE COMPANY.
If the Company shall fail at the Closing Time to sell and deliver the
aggregate number of Firm Shares that it is obligated to sell, then this
Agreement shall terminate without any liability on the part of any
non-defaulting party, except to the extent provided in Section 6 and except that
the provisions of Section 8 shall remain in effect.
No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect to such default.
SECTION 13. NOTICES.
All notices and other communications under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered, mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed c/o A.G. Edwards & Sons, Inc., One North
Jefferson Avenue, St. Louis, Missouri 63103, Attention: ___________________
(with a copy sent in the same manner to Alston & Bird LLP, Attention: Joel J.
Hughey). Notices to the Company, shall be directed to the Company at 748 Miller
Drive, S.E., Post Office Box 5000, Leesburg, Virginia 22075, Attention: John F.
Ripley (with a copy sent in the same manner to Miles & Stockbridge, A
Professional Corporation, Attention: John B. Frisch).
SECTION 14. PARTIES.
This Agreement is made solely for the benefit of and is binding upon
the Underwriters, the Company, to the extent provided in Section 8, any person
controlling the Company, or any of the Underwriters, the officers and directors
of the Company, and their respective executors, administrators, successors and
assigns and subject to the provisions of Section 8, no other person
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<PAGE>
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser, as such purchaser,
from any of the several Underwriters of the Shares.
All of the obligations of the Underwriters hereunder are several and
not joint.
SECTION 15. GOVERNING LAW AND TIME.
This Agreement shall be governed by the laws of the State of Missouri.
Specified time of the day refers to United States Eastern Time. Time shall be of
the essence of this Agreement.
SECTION 16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts and when a
counterpart has been executed by each party, all such counterparts taken
together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, and upon the
acceptance hereof by A.G. Edwards & Sons, Inc., on behalf of each of the
Underwriters, this instrument will become a binding agreement among the Company,
the Selling Shareholders and the several Underwriters in accordance with its
terms. It is understood that your acceptance of this letter on behalf of each of
the Underwriters is pursuant to the authority set forth in the Agreement among
Underwriters, a copy of which shall be submitted to the Company for examination,
upon request, but without warranty on your part as to the authority of the
signers thereof.
Very truly yours,
PRECISION AUTO CARE, INC.
By:
____________________________
Name:
Title:
By:
____________________________
Attorney-in-Fact for the
Selling Shareholders
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above:
A.G. EDWARDS & SONS, INC.
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<PAGE>
FERRIS, BAKER WATTS, INCORPORATED
By: A.G. Edwards & Sons, Inc.
By:
_________________________________
(Authorized Representative)
ON BEHALF OF EACH OF THE UNDERWRITERS
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SCHEDULE A
UNDERWRITERS
Number of
Firm Shares
Underwriter to be Purchased
- ----------- ---------------
A.G. Edwards & Sons, Inc..................
Ferris, Baker Watts, Incorporated.........
TOTAL ____________
============
<PAGE>
SCHEDULE B
SELLING SHAREHOLDERS
Number of
Firm Shares
Selling Shareholder to be Purchased
- ------------------- ---------------
TOTAL _____________
=============
<PAGE>
SCHEDULE C
CONSTITUENT COMPANIES
WE JAC CORPORATION MIRACLE INDUSTRIES, INC.
a Delaware corporation an Ohio corporation
LUBE VENTURES, INC. MIRACLE PARTNERS, INC.
an Ohio corporation an Ohio corporation
ROCKY MOUNTAIN VENTURES, INC. ROCKY MOUNTAIN VENTURES II, INC.
a Colorado corporation a Colorado corporation
PREMA PROPERTIES, LTD. RALSTON CAR WASH, LTD.
and Ohio limited liability company a Colorado limited liability company
and
KBG, LLC
a _______ limited liability company
<PAGE>
SCHEDULE D
SUBSIDIARIES
<PAGE>
SCHEDULE E
SCHEDULE OF PERSONS SUBJECT TO LOCK-UP AGREEMENTS
<PAGE>
SCHEDULE F
SCHEDULE OF PERSONS SUBJECT TO TRANSFER RESTRICTIONS UNDER THE COMBINATION
AGREEMENT
<PAGE>
SCHEDULE G
SCHEDULE OF PERSONS SUBJECT TO LIMITATIONS ON INDEMNIFICATION
OBLIGATIONS PURSUANT TO SECTION 7(B)
Exhibit 2.1
PLAN OF REORGANIZATION
AND
AGREEMENT FOR SHARE EXCHANGE OFFERS
DATED AS OF AUGUST [27], 1997
BY AND AMONG
PRECISION AUTO CARE, INC.
a Virginia corporation
(the "Holding Company")
<TABLE>
<S> <C>
WE JAC CORPORATION MIRACLE INDUSTRIES, INC.
a Delaware corporation an Ohio corporation
("WEJAC") ("Miracle Industries")
LUBE VENTURES, INC. MIRACLE PARTNERS, INC.
a Delaware corporation a Delaware corporation
("Lube Ventures") ("Miracle Partners")
ROCKY MOUNTAIN VENTURES, INC. ROCKY MOUNTAIN VENTURES II, INC.
a Colorado corporation a Colorado corporation
("Rocky Mountain I") ("Rocky Mountain II")
PREMA PROPERTIES, LTD. RALSTON CAR WASH, LTD.
an Ohio limited liability a Colorado limited liability
company company
("Prema Properties") ("Ralston Car Wash")
</TABLE>
and
THE KARL BYRER GROUP, INC.
a Colorado corporation
("KBG")
<PAGE>
<PAGE>
TABLE OF CONTENTS
i
<PAGE>
<PAGE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 5.5(j) Sales of Assets Outside of Ordinary Course
Schedule 5.14 Option Property of Prema Property
Schedule 5.15 Option Property of Lube Ventures
Schedule 5.16 Option Property of Miracle Partners
Schedule 13.5 Encumbrances against Software
Schedule 19.1 Debt Level Guarantees
Schedule 22.1 WE JAC Options and Warrants
Schedule 23.1 Debt to be Discharged
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Articles of Incorporation
Exhibit B By Laws
Exhibit C Non-Compete Agreements
Exhibit D Tax Opinion
Exhibit E Financial Statements
</TABLE>
ii
<PAGE>
<PAGE>
PLAN OF REORGANIZATION
AND
AGREEMENT FOR SHARE EXCHANGE OFFERS
THIS PLAN OF REORGANIZATION AND AGREEMENT FOR SHARE EXCHANGE OFFERS
(together with the Schedules and Exhibits hereto, hereinafter referred to as
this "Agreement") is made and entered into as of the 27th day of August, 1997,
by and among PRECISION AUTO CARE, INC., a Virginia corporation (the "Holding
Company"), WE JAC CORPORATION, a Delaware corporation, having its principal
place of business at 748 Miller Drive, S.E., Leesburg, Virginia ("WE JAC"),
MIRACLE INDUSTRIES, INC., a Ohio corporation having its principal place of
business at 1458 Park Avenue West, Mansfield, Ohio 44906 ("Miracle Industries"),
LUBE VENTURES, INC., a Delaware corporation having its principal place of
business at 1237 West Fourth Street, Mansfield, Ohio 44906 ("Lube Ventures"),
MIRACLE PARTNERS, INC., a Delaware corporation having its principal place of
business at 1237 West Fourth Street, Mansfield, Ohio 44906 ("Miracle Partners"),
PREMA PROPERTIES, LTD., an Ohio limited liability company having its principal
place of business at 52 East 15th Avenue, Columbus, Ohio 43201 ("Prema
Properties"), ROCKY MOUNTAIN VENTURES, INC., a Colorado corporation having its
principal place of business at 15200 East Girard Avenue, Suite 2700, Aurora,
Colorado 80014-5039 ("Rocky Mountain I"), ROCKY MOUNTAIN VENTURES II, INC., a
Colorado corporation having its principal place of business at 15200 East Girard
Avenue, Suite 2700, Aurora, Colorado 80014-5039 ("Rocky Mountain II"), RALSTON
CAR WASH, LTD., a Colorado limited liability company having its principal place
of business at 15200 East Girard Avenue, Suite 2700, Aurora, Colorado 80014-5039
("Ralston Car Wash"), and THE KARL BYRER GROUP, INC., a Colorado corporation
having its principal place of business at 2171 S. Trenton Way #215, Denver,
Colorado 80231 ("KBG").
Certain capitalized terms used herein without definition shall have the
meanings given to such terms in Section 25.10 hereof.
EXPLANATORY STATEMENT:
1. WE JAC is the holder, directly and indirectly, of all of the issued and
outstanding capital stock of, among other corporations, Precision Tune Auto
Care, Inc., a Virginia corporation, which are engaged in the businesses of (i)
owning and operating retail centers devoted to providing automotive services for
automobiles and light trucks and (ii) franchising a system of operating such
retail centers; and
2. Miracle Industries is engaged in the businesses of (i) owning and
operating a chain of car washes in the central Ohio area and (ii) manufacturing
chemicals for use by operators of car wash businesses, and is the holder of a
90% membership interest in Hydro Spray Car Wash Equipment Co., Ltd., an Ohio
limited liability company ("Hydro-Spray") and a 50% membership interest in Indy
Ventures, L.L.C., an Indiana limited liability company ("Indy Ventures") and
HydroSpray is engaged in the business of manufacturing and selling equipment
designed for use in the car wash business; and Indy Ventures is engaged in the
business of owning and operation a chain of car wash businesses in the
Indianapolis, Indiana area; and
3. Prema Properties is engaged in the business of owning and operating a
chain of car washes, as well as a franchised "Lube Depot" fast lube center, in
the Columbus, Ohio area; and
4. Lube Ventures is engaged in the businesses of (i) manufacturing and
selling modular fast lube center buildings, (ii) owning and operating fast lube
centers and (iii) franchising a system for the operation of fast lube centers;
and
5. Rocky Mountain I, Rocky Mountain II and Ralston Car Wash are each
engaged in the business of owning and operating car washes in the greater
Denver, Colorado area; and
6. Miracle Partners is engaged in the business of owning and operating a
chain of car washes in the Columbus, Ohio area; and
7. KBG has developed a proprietary computer software system designed to
operate car wash centers; and
8. Each of the parties hereto believes that it would be in their respective
best interests to combine the ownership of their respective businesses in the
manner provided for herein, and, in connection with such combination, to
initiate an initial public offering of a portion of the capital stock of the
Holding Company following such combination;
NOW, THEREFORE, this Agreement witnesseth that, in consideration of the
foregoing premises and the mutual covenants and agreements of the parties
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
A-1
<PAGE>
<PAGE>
ARTICLE I
FORMATION OF HOLDING COMPANY
AND
REGISTRATION OF A PORTION OF THE SHARES OF THE HOLDING COMPANY
FOR OFFER AND SALE TO THE PUBLIC
SECTION 1.1 FORMATION OF HOLDING COMPANY.
1.1.1 Form of Holding Company. Each of the parties to this Agreement hereby
confirms and ratifies their authorization and approval of the formation by WE
JAC, on their behalf, of a corporation under the laws of the Commonwealth of
Virginia, known as "Precision Auto Care, Inc." Following the consummation of the
transactions described in Article III hereof, the corporation so formed by WE
JAC shall be the "holding company" for the various subsidiary corporations and
other entities that will arise as a result of the transactions contemplated
hereby, and such corporation shall be referred to hereinafter as the "Holding
Company." WE JAC has capitalized the Holding Company initially by contributing
to the Holding Company the amount of $1000, for which WE JAC has received in
exchange 100 shares of the Common Stock, par value $.01 of the Holding Company,
as the nominee of each of the parties hereto. All of the shares of Common Stock
of the Holding Company issued to WE JAC pursuant to its initial capitalization
shall be redeemed by the Holding Company substantially contemporaneously with,
but immediately prior to, the consummation of the transactions contemplated by
the provisions of Article III of this Agreement.
1.1.2 Charter and Bylaws. The Articles of Incorporation of the Holding
Company shall be substantially in the form attached hereto as Exhibit A and the
Bylaws of the Holding Company shall be substantially in the form attached hereto
as Exhibit B. Neither the Articles of Incorporation nor the Bylaws of the
Holding Company shall be amended or modified in any manner prior to the Closing
of the transactions contemplated hereby, except with the prior written consent
of each of the parties to this Agreement.
1.1.3 Initial Officers and Directors. The initial officers of the Holding
Company shall be the following persons, each of whom shall hold the offices and
have the titles indicated opposite their respective names, and shall serve in
such capacities until the first annual meeting of the Board of Directors of the
Holding Company held after the first annual meeting of the stockholders of the
Holding Company, or until his or her earlier death or resignation, or until such
later time as may be specified in a written Employment Agreement with such
person, and until his or her respective successor shall have been duly elected
and qualified:
<TABLE>
<CAPTION>
NAME OFFICES AND TITLES
- --------------------- -----------------------------------------------------------------------------------------------
<S> <C>
Lynn E. Caruthers Chairman of the Board
Bernard H. Clineberg Vice Chairman of the Board
John F. Ripley President and Chief Executive Officer
Arnold Janofsky Senior Vice President, Secretary & General Counsel
Peter Kendrick Senior Vice President, Chief Financial Officer and Treasurer
Grant G. Nicolai Senior Vice President -- Franchise Development
James A. Hay Senior Vice President -- Retail Operations
William R. Klumb Vice President -- Precision Auto Wash Operations
Paul E. Bernstein Vice President -- Communications
Karl W. Byrer Vice President -- Precision Auto Wash Development
Alan Caldwell Vice President -- Precision Auto Care and Precision Lube Express Operations
Carol Cothern Vice President -- Controller
Effie Eliopulos Vice President
Glyn D. Massingill Vice President -- Precision Auto Care M&D
Kevin Rooney Vice President -- Franchise Sales
</TABLE>
Notwithstanding anything contained in the Articles of Incorporation or the
Bylaws which may be inconsistent or to the contrary, none of the persons named
herein to serve as an initial officer of the Holding Company shall be removed
from any such office prior to the closing of the IPO except with the prior
written approval of each of the parties to this Agreement.
The parties have agreed that the initial Board of Directors of the Holding
Company shall consist of thirteen (13) directors, of which the WE JAC Group
shall have the right to designate seven (7) directors, the Ohio Group shall have
the right to designate five (5) directors and the Rocky Mountain Group shall
have the right to designate one (1) director. Consistent with
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the foregoing, the parties agree that the initial directors of the Holding
Company shall be the following persons, each of whom shall be appointed to the
Class of directorship indicated opposite their respective names, and shall serve
in such capacities until the expiration of the term of the Class of directorship
to which he or she has been appointed, as provided in the Articles of
Incorporation of the Holding Company, or until his or her earlier death or
resignation, and until his or her respective successor shall have been duly
elected and qualified:
<TABLE>
<CAPTION>
NAME CLASS OF DIRECTORS
- ------------------------- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Lynn E. Caruthers III (initial 3 year term)
John F. Ripley I (initial 1 year term)
Harry G. Pappas, Jr. I (initial 1 year term)
Woodley A. Allen II (initial 2 year term)
Bernard H. Clineburg III (initial 3 year term)
Bassam Ibrahim II (initial 2 year term)
Arthur Kellar II (initial 2 year term)
Effie Eliopulos III (initial 3 year term)
Richard O. Johnson I (initial 1 year term)
Gerald Zamensky II (initial 2 year term)
George Bavelis III (initial 3 year term)
C. Eugene Deal I (initial 1 year term)
William R. Klumb III (initial 3 year term)
</TABLE>
Notwithstanding anything contained in the Articles of Incorporation or the
Bylaws which may be inconsistent or to the contrary, none of the persons named
herein to serve as an initial director of the Holding Company shall be removed
as a director prior to the closing of the IPO except with the prior written
approval of the Participant Group which was entitled to designate such person as
a director of the Holding Company. In the event that a director dies or resigns
prior to the closing of the IPO, the Participant Group which was entitled to
designate such person as a director of the Holding Company shall have the right
to designate his successor.
The parties have further agreed that, initially, there shall be at least 3
committees of the Board of Directors of the Holding Company; namely, an Audit
Committee, an Executive Committee and a Finance Committee. Although the members
of the Audit Committee and the Executive Committee have yet to be determined,
Effie Eliopulos, William R. Klumb, John F. Ripley and Lynn E. Caruthers shall be
the initial members of the Finance Committee. The Finance Committee shall have
all of the powers of the Board of Directors delegated to the Finance Committee
pursuant to the Bylaws of the Holding Company as well as the power and authority
to take the actions contemplated by Section 18.3 of this Agreement.
Notwithstanding anything contained in the Articles of Incorporation or the
Bylaws which may be inconsistent or to the contrary, none of the persons named
herein to serve as an initial member of the Finance Committee shall be removed
by the Board of Directors as a member of the Finance Committee prior to the
closing of the IPO except with the prior written approval of the Participant
Group which was entitled to designate such person as a director of the Holding
Company.
SECTION 1.2 REGISTRATION OF SHARES OF THE HOLDING COMPANY.
1.2.1 Engagement of Securities Counsel. Each of the parties hereby agrees
and consents to, and ratifies, the prior engagement by WE JAC on behalf of the
Holding Company of the law firm of Miles & Stockbridge, a Professional
Corporation, a Maryland professional corporation ("M&S"), to act as counsel to
the Holding Company, and agrees that the legal fees of such legal counsel and
the expenses incurred by them in rendering services for the Holding Company
shall be deemed to be part of the Transaction Expenses. Each of the parties
hereto (other than WE JAC) hereby acknowledges that it or he understands that
(i) M&S has represented WE JAC and its Subsidiaries as its principal outside
legal counsel, (ii) M&S has represented, and will continue to represent, WE JAC
in connection with the negotiations relating to this Agreement and the
preparation of this Agreement, and (iii) M&S also will be representing the
Holding Company in connection with negotiations relating to this Agreement. Each
such party acknowledges that it has been advised by M&S and their respective
legal counsel that there may be potential conflicts of interest as a result of
such dual representation by M&S. WE JAC further acknowledges that it has been
advised by M&S that in the event of a conflict between WE JAC and the Holding
Company, M&S could not ethically favor either WE JAC's or the Holding Company's
interests over the interests of the other, and that M&S' representation of the
Holding Company in connection with these transactions may limit the protections
that normally would be afforded to WE JAC by the attorney/client privilege
doctrine as it relates to communications between WE JAC and M&S relating to
these matters and that M&S may be required to disclose to the other parties to
this Agreement certain otherwise
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confidential communications between WE JAC and M&S. The parties to this
Agreement also understand and agree that in the event that any dispute or
controversy should arise by and between or by and among any of the parties to
this Agreement (other than disputes between WE JAC and the Holding Company), M&S
will continue to represent WE JAC and its interests in connection with such
dispute or controversy. Nevertheless, despite having been advised as to these
matters, each of the parties hereto, in the interest of cost-savings and
efficiency, consents to the dual representation by M&S of the Holding Company
and WE JAC. M&S may rely on the acknowledgments, agreements and consents of the
parties pursuant to this Section 1.2.1.
1.2.2 Engagement of Underwriters. Each of the parties hereby agrees and
consents to, and ratifies, the prior engagement by WE JAC on behalf of the
Holding Company of the firm of A.G. Edwards & Sons, Inc. to act as the lead
underwriter for the proposed IPO and the engagement by WE JAC on behalf of the
Holding Company of Ferris Baker Watts, Incorporated to act as co- managing
underwriter for the proposed IPO.
1.2.3 Engagement of Certified Public Accountants. Each of the parties
hereby agrees and consents to, and ratifies, the prior engagement by WE JAC on
behalf of the Holding Company of the accounting firm of Ernst & Young LLP
("Ernst & Young") to act as the certified independent public accountants for the
Holding Company, and agrees that the fees of such accounting firm and the
expenses incurred by Ernst & Young in rendering services for the Holding Company
shall be deemed to be part of the Transaction Expenses.
1.2.4 Preparation of Registration Statement(s).
(a) Form S-4 Registration Statement; Proxy Statement. From and after
the date hereof, the Holding Company shall (and each of the parties hereto
agrees to devote its or his reasonable best efforts to cause the Holding Company
to) prepare a registration statement or registration statements (including a
joint proxy statement or proxy statements to be included therein) on Form S-4
for registration with the Commission of each of the shares of the Common Stock
of the Holding Company to be issued by the Holding Company in connection with
the transactions contemplated by Article III hereof, and file such Form S-4
Registration Statement with the Commission as soon as reasonably practicable.
Each of the parties hereto further agrees to cooperate with the other parties
and the Holding Company in connection with the preparation thereof and to devote
its reasonable best efforts to having the same declared effective by the
Commission.
(b) Form S-1 Registration Statement. From and after the date hereof,
the Holding Company shall (and each of the parties hereto agrees to devote its
or his reasonable best efforts to cause the Holding Company to) prepare a
registration statement (and the prospectus to be included in such registration
statement) on Form S-1 for registration with the Commission for offer and sale
to the public following the Closing on account of the Holding Company of
2,645,000 shares of the Common Stock of the Holding Company, and up to 19% of
the number of shares to be issued to the Selling Stockholders and the Selling
Members by the Holding Company pursuant to the transactions contemplated by
Article III, and shall file such Form S-1 Registration Statement with the
Commission as soon as reasonably practicable. Each of the parties hereto further
agrees to cooperate with the other parties in the preparation thereof, and to
devote its reasonable best efforts to having such Form S-1 Registration
Statement declared effective by the Commission.
(c) Obligations of the Holding Company. The Holding Company shall (i)
use its reasonable best efforts to prepare and file with the Commission the
registration statements, proxy statements and prospectuses contemplated hereby,
and shall use its reasonable best efforts thereafter to cause such registration
statements to become and remain effective until the sale or exchange of all of
the shares of the Common Stock of the Holding Company covered thereby; (ii)
prepare and file with the Commission such amendments and supplements to the
registration statements and the prospectuses filed by the Holding Company as may
be reasonably necessary to keep such registration statements effective until the
sale or exchange of all of the shares of the Common Stock of the Holding Company
covered thereby; (iii) use its reasonable best efforts to register or qualify
the shares of the Common Stock of the Holding Company covered by such
registration statements under the securities or blue sky laws of such
jurisdictions as may be applicable to the transactions contemplated by Article
III hereof or as may be directed by the underwriter in the IPO; and (iv) do any
and all other acts and things which may be reasonably necessary or advisable to
enable the Holding Company to consummate the issuance, sale or exchange of the
shares of the Common Stock of the Holding Company in such jurisdictions.
(d) Information to be Provided to the Holding Company. Each of the
Predecessor Companies agrees that, from and after the date hereof through and
including the earlier to occur of the Closing or the termination of this
Agreement, in order to enable the Holding Company to prepare and file the
registration statements contemplated by this Agreement, it shall provide to the
Holding Company and to the underwriters for the proposed IPO (and to their
respective employees, counsel, accountants and other representatives), so long
as each remains a party to this Agreement, all information concerning the
business,
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operations, assets, liabilities, properties, indebtedness, condition, finances
or prospects of such Predecessor Company reasonably available to the management
of such Predecessor Company, and such other material information as may be
reasonably necessary to ensure that the information so requested may be properly
evaluated so as not to be misleading. Each of the Predecessor Companies hereby
further represents and warrants to the Holding Company that all of the
information to be provided to the Holding Company or the underwriters pursuant
to the terms of this Section 1.2.4(d) by such Predecessor Company shall not
contain any untrue or misleading statement of a material fact or omit to state a
material fact necessary in order to make the statements contained therein not
misleading.
(e) Effective Date of Registration Statements. The parties shall use
their reasonable best efforts to cause the Holding Company to file all such
registration statements with the Commission on or before August 28, 1997 and to
have all such registration statements declared effective by the Commission, such
that the Closing and the IPO may be consummated on or before November 14, 1997.
ARTICLE II
TRANSACTION EXPENSES
SECTION 2.1 AGREEMENT AS TO TRANSACTION EXPENSES.
Except as otherwise provided for herein, all attorneys', brokers',
accountants', investment banking and finders fees and other expenses incurred by
each of the Predecessor Companies prior to the date hereof in connection with
the preparation and negotiation of this Agreement and the transactions
contemplated hereby that the parties have agreed will be Transaction Expenses
pursuant to the terms of the Memorandum of Understanding and which are to be
incurred by each of the Predecessor Companies from and after the date hereof in
taking all actions contemplated by this Agreement to be taken prior to or at the
Closing of the transactions contemplated by this Agreement (other than Income
Taxes and other Taxes imposed upon gross receipts and recordation, transfer,
stamp duties, documentary or notarial fees or Taxes imposed upon or incurred by
any of the parties in connection with the transactions contemplated by this
Agreement and other fees and expenses that the parties have specified herein
will not be considered part of the Transaction Expenses), or otherwise
reasonably necessary to consummate the Closing and the IPO, including those
expenses that the parties have agreed will be Transaction Expenses pursuant to
Sections 1.2.1 and 1.2.3 of this Agreement, except for costs and expenses
previously or hereafter incurred by the Predecessor Companies for meals, travel
and lodging of its officers, agents and representatives and managerial time
incurred in connection with or devoted to the transactions contemplated hereby
(collectively, the "Transaction Expenses"), will be paid for or contributed to
by the Contributing Companies as follows (hereinafter, the "Transaction Expense
Shares"): the members of the Ohio Group will be responsible, jointly and
severally, for 32.5% of the aggregate dollar amount of the Transaction Expenses;
the members of the Rocky Mountain Group will be responsible, jointly and
severally, for 8.3% of the aggregate dollar amount of the Transaction Expenses;
Miracle Partners will be responsible for 2.9% of the aggregate dollar amount of
the Transaction Expenses; and the members of the WE JAC Group will be
responsible, jointly and severally, for 56.3% of the aggregate dollar amount of
the Transaction Expenses. KBG will not be obligated to contribute to the
Transaction Expenses, unless KBG shall fail to comply with the provisions of
Section 3.2.4(a) of this Agreement or fail to exchange its Membership Interest
in KBG, LLC for shares of the Common Stock of the Holding Company pursuant to
the terms of the KBG Exchange. If KBG shall fail to comply with the provisions
of Section 3.2.4(a) of this Agreement or fail to exchange its Membership
Interest in KBG, LLC for shares of the Common Stock of the Holding Company
pursuant to the terms of the KBG Exchange, KBG shall be liable to contribute
$100,000 toward the Transaction Expenses, as liquidated damages for its failure
to do so, which amount shall be allocated and disbursed to the Contributing
Companies in accordance with their respective Transaction Expense Shares.
SECTION 2.2 ACCOUNTING FOR TRANSACTION EXPENSES.
From and after the date hereof through and including the Closing or the
earlier termination of this Agreement, the Holding Company and each of the
Contributing Companies shall maintain detailed records of all Transaction
Expenses incurred by them and shall account to each other for the Transaction
Expenses they have incurred on a monthly basis.
SECTION 2.3 REIMBURSEMENT OF CERTAIN FEES AND EXPENSES.
Notwithstanding the terms of the Memorandum of Understanding, from and
after the date hereof through and including the Closing or the earlier
termination of this Agreement, each of the Contributing Companies and the
Holding Company shall pay for all of the Transaction Expenses that are comprised
of fees and expenses of third party providers of services (including
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investment bankers, lawyers, accountants, printers and architectural and
environmental consultants) incurred by them respectively through the Closing
Date (the "Professional Expenses") as the same become due and payable, and,
notwithstanding anything contained herein which may be inconsistent or to the
contrary, each of the Contributing Companies shall be entitled to declare and
pay, prior to the Closing Date, a dividend or distribution in an amount equal to
the aggregate dollar amount actually expended by such Contributing Company for
Professional Expenses in connection with the transactions contemplated hereby
(the "Professional Expense Dividend");provided, however, that each Contributing
Company shall only be entitled to declare such a dividend or distribution and to
the extent that, such Professional Expenses would qualify as Transaction
Expenses pursuant to the terms of this Agreement. If this Agreement shall
terminate and the transactions contemplated hereby shall not be consummated, to
the extent that they have not already done so, each of the Contributing
Companies shall, within 10 business days following the date of such termination,
make appropriate contributions to and reimbursements of each of the other
Contributing Companies in respect of all Transaction Expenses incurred by each
such Contributing Company and the Holding Company through the date of the
termination of this Agreement in accordance with their respective Transaction
Expense Shares (it being understood and agreed that the obligations of each of
the Contributing Companies to contribute to and to reimburse the other
Contributing Companies in respect of Transaction Expenses shall survive the
termination of this Agreement). If, however, the Closing of the transactions
contemplated hereby shall be consummated, the Holding Company shall discharge,
out of the net cash proceeds received by the Holding Company in the IPO, all of
the Transaction Expenses incurred by the Holding Company and each of the
Contributing Companies which have not been discharged as of the Closing Date. No
interest shall be payable on any declared but unpaid Professional Expense
Dividend.
ARTICLE III
PLAN OF REORGANIZATION
AND
AGREEMENT FOR SHARE EXCHANGE OFFERS
SECTION 3.1 PLAN OF REORGANIZATION OF CORPORATE PREDECESSOR COMPANIES.
3.1.1 Formation of Merger Subsidiaries. Following the execution of this
Agreement and prior to the Closing Date, the Holding Company shall form, solely
for the purpose of consummating the transactions contemplated by this Section
3.1, five subsidiary corporations (hereinafter referred to as the "Merger
Subsidiaries") under the laws of the jurisdictions which correspond to the
jurisdiction in which the corporation into which each such Merger Subsidiary
shall merged as hereinafter provided, which shall be known, respectively, as
follows: (i) "WE JAC Acquisition Subsidiary, Inc." (hereinafter referred to as
"WE JAC Acquisition"); (ii) "Miracle Industries Acquisition Subsidiary, Inc."
(hereinafter referred to as "Miracle Industries Acquisition"); (iii) "Lube
Ventures Acquisition Subsidiary, Inc." (hereinafter referred to as "Lube
Ventures Acquisition"); (iv) "Rocky Mountain I Acquisition Subsidiary, Inc."
(hereinafter referred to as "Rocky Mountain I Acquisition"); and (v) "Rocky
Mountain II Acquisition Subsidiary, Inc." (hereinafter referred to as "Rocky
Mountain II Acquisition").
3.1.2 Merger of WE JAC Acquisition with and into WE JAC.
(a) WE JAC Merger. Subject to the prior satisfaction of each of the
conditions precedent set forth in Section 4.1 hereof, and of each of the
conditions precedent set forth in Section 4.2, which have not been waived in
writing by WE JAC, and of each of the conditions precedent set forth in Section
4.10, which have not been waived in writing by the Holding Company, on the
Closing Date, WE JAC Acquisition shall be merged with and into WE JAC (the "WE
JAC Merger"); whereupon, (i) the separate existence of WE JAC Acquisition shall
cease; (ii) WE JAC shall continue in existence and shall thereafter possess all
of the purposes and powers of WE JAC Acquisition; (iii) WE JAC shall succeed to
all of the assets, rights, properties, licenses, franchises and privileges of WE
JAC Acquisition (if any), which shall be transferred to, vested in and devolved
upon WE JAC without further act or deed, subject to all of the debts and
obligations of WE JAC Acquisition (if any); and (iv) WE JAC shall thereafter be
liable and responsible for all of the liabilities, duties, indebtedness,
obligations and responsibilities of WE JAC Acquisition (if any). The Certificate
of Incorporation and Bylaws of WE JAC in effect as of the Effective Time of the
WE JAC Merger shall continue to be the Certificate of Incorporation and Bylaws
of WE JAC. In addition, as part of the WE JAC Merger, each warrant and option to
purchase shares of WE JAC Common Stock issued and outstanding immediately prior
to the Effective Time of the WE JAC Merger shall be converted into a warrant or
an option, as the case may be, to purchase the same number of shares of the
Common Stock of the Holding Company on the same terms as set forth in such
warrant or option.
(b) Conversion of Shares. As part of the WE JAC Merger, each share of
the WE JAC Common Stock issued and outstanding immediately prior to the
Effective Time of the WE JAC Merger (other than WE JAC Dissenting Shares) shall
be
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converted into one share of the Common Stock of the Holding Company, and all of
the authorized but unissued shares of WE JAC, if any, shall be canceled and
retired, all without the need for further act or deed. Each of the shares of the
capital stock of WE JAC Acquisition issued and outstanding at the Effective Time
of the WE JAC Merger shall be converted into one share of the Common Stock, par
value $0.01, of WE JAC, which shall be held of record by the Holding Company
following the WE JAC Merger.
(c) WE JAC Dissenting Shares. Notwithstanding the foregoing, each of
the shareholders of WE JAC shall have the rights provided to them under Section
262 of the Delaware Corporation Law (the "DCL") as in effect at the Effective
Time of the WE JAC Merger ("WE JAC Dissenter's Rights") with respect to their
shares of WE JAC Common Stock, and, notwithstanding anything contained herein
which may be inconsistent or to the contrary, none of the shares of WE JAC
Common Stock issued and outstanding at the Effective Time of the WE JAC Merger
that are held by any WE JAC shareholder who has the right, to the extent that
such right is available by law, to exercise WE JAC Dissenter's Rights pursuant
thereto shall be converted into shares of the Holding Company Common Stock
pursuant to the WE JAC Merger, unless such shareholder shall have failed to
perfect his or her WE JAC Dissenter's Rights or shall have withdrawn or lost the
same in accordance with the terms of the DCL. If, however, any WE JAC
shareholder shall fail to perfect or shall withdraw or lose his or her WE JAC
Dissenter's Rights with respect to his or her shares of WE JAC Common Stock,
each of his or her shares shall be deemed to have been converted into shares of
the Common Stock of the Holding Company as provided for herein effective as of
the Effective Time of the WE JAC Merger.
(d) WE JAC Merger Filings. The WE JAC Merger shall be accomplished as
follows: WE JAC and WE JAC Acquisition shall each cause a Certificate of Merger
in form suitable for filing with the Delaware Secretary of State (the "WE JAC
Certificate of Merger") to be executed by the appropriate officers of each of
them and filed with the Delaware Secretary of State on the Closing Date.
(e) Effective Time of the WE JAC Merger. The WE JAC Merger shall
become effective at the time that the WE JAC Certificate of Merger shall become
effective with the Delaware Secretary of State in accordance with the DCL (the
"Effective Time of the WE JAC Merger").
(f) Surrender and Exchange of Common Stock of WE JAC. After the
Effective Time of the WE JAC Merger, each holder of shares of WE JAC Common
Stock outstanding as of the Effective Time of the WE JAC Merger (other than
shares held by those holders who have perfected or could perfect WE JAC
Dissenter's Rights) shall surrender to the Exchange Agent all outstanding
certificates theretofore evidencing shares of the Common Stock of WE JAC, and
shall receive in exchange therefor, upon delivery to the Exchange Agent together
with satisfactory and customary delivery requirements, certificates evidencing
the full number of shares of the Common Stock of the Holding Company into which
such shares of the WE JAC Common Stock have been converted pursuant to the WE
JAC Merger, less the number of Indemnity Escrow Shares and Debt Level Escrow
Shares attributable to each such holder, plus a cash payment in lieu of
fractional shares in the amount determined under Section 3.3. Until so
surrendered or exchanged, each outstanding certificate evidencing shares of the
WE JAC Common Stock shall be deemed for all purposes solely as evidencing the
number of shares of the Common Stock of the Holding Company into which such
shares shall have been converted pursuant to the WE JAC Merger; provided,
however, that no dividends or other distributions, if any, declared by the
Holding Company after the Effective Time of the WE JAC Merger in respect of any
shares of the Common Stock of the Holding Company payable to holders of record
after the Effective Time of the WE JAC Merger shall be paid to the holders of
any unsurrendered certificates evidencing shares of WE JAC Common Stock until
such certificates shall have been surrendered to the Exchange Agent. After the
surrender and exchange of such certificates, the record holders thereof will be
entitled to receive any such dividends or distributions, without interest
thereon, to the extent that the same shall have become payable with respect to
the number of shares of the Common Stock of the Holding Company for which such
certificate was exchangeable. The Exchange Agent shall be authorized to require
an indemnification agreement or the posting of a bond or other financial
accommodation satisfactory to the Exchange Agent from any holder of shares of WE
JAC Common Stock in the event that such holder shall allege that any certificate
evidencing shares of the WE JAC Common Stock shall have been lost, stolen or
destroyed prior to surrender thereof to the Exchange Agent.
3.1.3 Merger of Lube Ventures Acquisition with and into Lube Venture.
(a) Lube Ventures Merger. Subject to the prior satisfaction of each of
the conditions precedent set forth in Section 4.1 hereof, and of each of the
conditions precedent set forth in Section 4.3, which have not been waived in
writing by Lube Ventures, and of each of the conditions precedent set forth in
Section 4.10, which have not been waived in writing by the Holding Company, on
the Closing Date, Lube Ventures Acquisition shall be merged with and into Lube
Ventures (the "Lube Ventures Merger"); whereupon, (i) the separate existence of
Lube Ventures Acquisition shall cease; (ii) Lube Ventures shall
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continue in existence and shall thereafter possess all of the purposes and
powers of Lube Ventures Acquisition; (iii) Lube Ventures shall succeed to all of
the assets, rights, properties, licenses, franchises and privileges of Lube
Ventures Acquisition (if any), which shall be transferred to, vested in and
devolved upon Lube Ventures without further act or deed, subject to all of the
debts and obligations of Lube Ventures Acquisition (if any); and (iv) Lube
Ventures shall thereafter be liable and responsible for all of the liabilities,
duties, indebtedness, obligations and responsibilities of Lube Ventures
Acquisition (if any). The Certificate of Incorporation and Bylaws of Lube
Ventures in effect as of the Effective Time of the Lube Ventures Merger shall
continue to be the Certificate of Incorporation and Bylaws of Lube Ventures.
(b) Conversion of Shares. As part of the Lube Ventures Merger, each of
the 100 shares of the Lube Ventures Common Stock issued and outstanding
immediately prior to the Effective Time of the Lube Ventures Merger (other than
Lube Ventures Dissenting Shares) shall be converted into 1,691.68 shares of the
Common Stock of the Holding Company and all of the authorized but unissued
shares of Lube Ventures, if any, shall be canceled and retired, all without the
need for further act or deed. Each of the shares of the capital stock of Lube
Ventures Acquisition issued and outstanding at the Effective Time of the Lube
Ventures Merger shall be converted into one share of the Common Stock, par value
$0.00, of Lube Ventures, all which shall be held of record by the Holding
Company following the Lube Ventures Merger.
(c) Lube Ventures Dissenting Shares. Notwithstanding the foregoing,
each of the shareholders of Lube Ventures shall have the rights provided to them
under Section 262 of the DCL as in effect at the Effective Time of the Lube
Ventures Merger ("Lube Ventures Dissenter's Rights") with respect to their
shares of Lube Ventures Common Stock, and, notwithstanding anything contained
herein which may be inconsistent or to the contrary, none of the shares of Lube
Ventures Common Stock issued and outstanding at the Effective Time of the Lube
Ventures Merger that are held by a Lube Ventures shareholder who has the right,
to the extent that such right is available by law, to exercise Lube Ventures
Dissenter's Rights pursuant thereto shall be converted into shares of the
Holding Company Common Stock pursuant to the Lube Ventures Merger, unless such
shareholder shall have failed to perfect his or her Lube Ventures Dissenter's
Rights or shall have withdrawn or lost the same in accordance with the terms of
the DCL. If, however, any Lube Ventures shareholder shall fail to perfect or
shall withdraw or lose his or her Lube Ventures Dissenter's Rights with respect
to his or her shares of Lube Ventures Common Stock, each of his or her shares
shall be deemed to have been converted into shares of the Holding Company Common
Stock as provided for herein effective as of the Effective Time of the Lube
Ventures Merger.
(d) Merger Filings. The Lube Ventures Merger shall be accomplished as
follows: Lube Ventures and Lube Ventures Acquisition shall each cause a
Certificate of Merger (the "Lube Ventures Certificate of Merger") in form
suitable for filing with the Delaware Secretary of State to be executed by its
appropriate officers and filed with the Delaware Secretary of State in
accordance with the DCL on the Closing Date.
(e) Effective Time of the Lube Ventures Merger. The Lube Ventures
Merger shall become effective at the time that the Lube Ventures Certificate of
Merger shall become effective with the Delaware Secretary of State shall become
effective in accordance with the DCL (the "Effective Time of the Lube Ventures
Merger").
(f) Surrender and Exchange of Common Stock of Lube Ventures. After the
Effective Time of the Lube Ventures Merger, each holder of shares of Lube
Ventures Common Stock outstanding as of the Effective Time of the Lube Ventures
Merger (other than shares held by those holders who have perfected or could
perfect Lube Ventures Dissenter's Rights) shall surrender to the Exchange Agent
all outstanding certificates theretofore evidencing shares of the Common Stock
of Lube Ventures, and shall receive in exchange therefor, upon delivery to the
Exchange Agent together with satisfactory and customary delivery requirements,
certificates evidencing the greatest whole number of shares of the Common Stock
of the Holding Company into which such shares of the Lube Ventures Common Stock
have been converted pursuant to the Lube Ventures Merger, less the number of
Indemnity Escrow Shares and Debt Level Escrow Shares attributable to each such
holder, plus a cash payment in lieu of fractional shares in the amount
determined under Section 3.3. Until so surrendered or exchanged, each
outstanding certificate evidencing shares of the Lube Ventures Common Stock
shall be deemed for all purposes solely as evidence of the number of shares of
the Common Stock of the Holding Company into which such shares shall have been
converted pursuant to the Lube Ventures Merger; provided, however, that no
dividends or other distributions, if any, declared by the Holding Company after
the Effective Time of the Lube Ventures Merger in respect of any shares of the
Common Stock of the Holding Company payable to holders of record after the
Effective Time of the Lube Ventures Merger shall be paid to the holders of any
unsurrendered certificates evidencing shares of Lube Venture Common Stock until
such certificates shall have been surrendered to the Exchange Agent. After the
surrender and exchange of such certificates, the record holders thereof will be
entitled to receive any such dividends or distributions, without interest
thereon, to the extent that the same shall have become payable with respect to
the number of shares of the Common Stock of the Holding Company for which such
certificate was exchangeable. The Exchange Agent shall be authorized to require
an indemnification agreement or the
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posting of a bond or other financial accommodation satisfactory to the Exchange
Agent from any holder of shares of Lube Ventures Common Stock in the event that
such holder shall allege that any certificate evidencing shares of the Lube
Ventures Common Stock shall have been lost, stolen or destroyed prior to
surrender thereof to the Exchange Agent.
3.1.4 Merger of Miracle Industries Acquisition with and into Miracle
Industries.
(a) Miracle Industries Merger. Subject to the prior satisfaction of
each of the conditions precedent set forth in Section 4.1 hereof, and of each of
the conditions precedent set forth in Section 4.4, which have not been waived in
writing Miracle Industries, and of each of the conditions precedent set forth in
Section 4.10, which have not been waived in writing by the Holding Company, on
the Closing Date, Miracle Industries Acquisition shall be merged with and into
Miracle Industries (the "Miracle Industries Merger"); whereupon, (i) the
separate existence of Miracle Industries Acquisition shall cease; (ii) Miracle
Industries shall continue in existence and shall thereafter possess all of the
purposes and powers of Miracle Industries Acquisition; (iii) Miracle Industries
shall succeed to all of the assets, rights, properties, licenses, franchises and
privileges of Miracle Industries Acquisition (if any), which shall be
transferred to, vested in and devolved upon Miracle Industries without further
act or deed, subject to all of the debts and obligations of Miracle Industries
Acquisition (if any); and (iv) Miracle Industries shall thereafter be liable and
responsible for all of the liabilities, duties, indebtedness, obligations and
responsibilities of Miracle Industries Acquisition (if any). The Certificate of
Incorporation and Bylaws of Miracle Industries in effect as of the Effective
Time of the Miracle Industries Merger shall continue to be the Certificate of
Incorporation and Bylaws of Miracle Industries.
(b) Conversion of Shares. As part of the Miracle Industries Merger,
each of the 34,943 shares of the Miracle Industries Common Stock issued and
outstanding immediately prior to the Effective Time of the Miracle Industries
Merger (other than Miracle Industries Dissenting Shares) shall be converted into
21.442 shares of the Holding Company Common Stock and all of the authorized but
unissued shares of Miracle Industries, if any, shall be canceled and retired,
all without the need for further act or deed. Each of the shares of the capital
stock of Miracle Industries Acquisition issued and outstanding at the Effective
Time of the Miracle Industries Merger shall be converted into one share of the
Common Stock, par value $0.00, of Miracle Industries, all which shall be held of
record by the Holding Company following the Miracle Industries Merger.
(c) Miracle Industries Dissenting Shares. Notwithstanding the
foregoing, each of the shareholders of Miracle Industries shall have the rights
provided to them under Section 1701.84(A) of the Ohio General Corporation Law
(the "OGCL") as in effect at the Effective Time of the Miracle Industries Merger
("Miracle Industries Dissenter's Rights") with respect to their shares of
Miracle Industries Common Stock, and, notwithstanding anything contained herein
which may be inconsistent or to the contrary, none of the shares of Miracle
Industries Common Stock issued and outstanding at the Effective Time of the
Miracle Industries Merger that are held by a Miracle Industries shareholder who
has the right, to the extent that such right is available by law, to exercise
Miracle Industries Dissenter's Rights pursuant thereto shall be converted into
shares of the Common Stock of the Holding Company pursuant to the Miracle
Industries Merger, unless such shareholder shall have failed to perfect his or
her Miracle Industries Dissenter's Rights or shall have withdrawn or lost the
same in accordance with the terms of the OGCL. If, however, any Miracle
Industries shareholder shall fail to perfect or shall withdraw or lose his or
her Miracle Industries Dissenter's Rights with respect to his or her shares of
Miracle Industries Common Stock, each of his or her shares shall be deemed to
have been converted into shares of the Common Stock of the Holding Company as
provided for herein effective as of the Effective Time of the Miracle Industries
Merger.
(d) Merger Filings. The Miracle Industries Merger shall be
accomplished as follows: Miracle Industries and Miracle Industries Acquisition
shall each cause Articles of Merger in form suitable for filing with the Ohio
Secretary of State (the "Miracle Industries Articles of Merger") to be executed
by its appropriate officers and filed with the Ohio Secretary of State in
accordance with OGCL on the Closing Date.
(e) Effective Time of the Miracle Industries Merger. The Miracle
Industries Merger shall become effective at the time that the Miracle Industries
Articles of Merger shall become effective with the Ohio Secretary of State in
accordance with the OGCL (the "Effective Time of the Miracle Industries
Merger").
(f) Surrender and Exchange of Common Stock of Miracle Industries.
After the Effective Time of the Miracle Industries Merger, each holder of shares
of Miracle Industries Common Stock outstanding as of the Effective Time of the
Miracle Industries Merger (other than shares held by those holders who have
perfected or could perfect Miracle Industries Dissenter's Rights) shall
surrender to the Exchange Agent all outstanding certificates theretofore
evidencing shares of the Common Stock of Miracle Industries, and shall receive
in exchange therefor, upon delivery to the Exchange Agent satisfactory and
customary delivery requirements, certificates evidencing the greatest whole
number of shares of the Common Stock of the Holding
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Company into which such shares of the Miracle Industries Common Stock have been
converted pursuant to the Miracle Industries Merger, less the number of
Indemnity Escrow Shares and Debt Level Escrow Shares attributable to each such
holder, plus a cash payment in lieu of fractional shares as determined pursuant
to Section 3.3. Until so surrendered or exchanged, each outstanding certificate
evidencing shares of the Miracle Industries Common Stock shall be deemed for all
purposes solely as evidence of the number of shares of the Common Stock of the
Holding Company into which such shares shall have been converted pursuant to the
Miracle Industries Merger; provided, however, that no dividends or other
distributions, if any, declared by the Holding Company after the Effective Time
of the Miracle Industries Merger in respect of any shares of the Common Stock of
the Holding Company payable to holders of record after the Effective Time of the
Miracle Industries Merger shall be paid to the holders of any unsurrendered
certificates evidencing shares of Miracle Industries Common Stock until such
certificates shall have been surrendered to the Exchange Agent. After the
surrender and exchange of such certificates, the record holders thereof will be
entitled to receive any such dividends or distributions, without interest
thereon, to the extent that the same shall have become payable with respect to
the number of shares of the Common Stock of the Holding Company for which such
certificate was exchangeable. The Exchange Agent shall be authorized to require
an indemnification agreement or the posting of a bond or other financial
accommodation satisfactory to the Exchange Agent from any holder of shares of
Miracle Industries Common Stock in the event that such holder shall allege that
any certificate evidencing shares of the Miracle Partners Common Stock shall
have been lost, stolen or destroyed prior to surrender thereof to the Exchange
Agent.
3.1.5 Merger of Rocky Mountain I Acquisition with and into Rocky Mountain
I.
(a) Rocky Mountain I Merger. Subject to the prior satisfaction of each
of the conditions precedent set forth in Section 4.1 hereof, and of each of the
conditions precedent set forth in Section 4.5, which have not been waived in
writing by Rocky Mountain I, and of each of the conditions precedent set forth
in Section 4.10, which have not been waived in writing by the Holding Company,
on the Closing Date, immediately following the consummation of the transactions
contemplated by Section 3.2 of this Agreement, Rocky Mountain I Acquisition
shall be merged with and into Rocky Mountain I (the "Rocky Mountain I Merger");
whereupon, the separate existence of Rocky Mountain I Acquisition shall cease;
(ii) Rocky Mountain I shall continue in existence and shall thereafter possess
all of the purposes and powers of Rocky Mountain I Acquisition; (iii) Rocky
Mountain I shall succeed to all of the assets, rights, properties, licenses,
franchises and privileges of Rocky Mountain I Acquisition (if any), which shall
be transferred to, vested in and devolved upon Rocky Mountain I without further
act or deed, subject to all of the debts and obligations of Rocky Mountain I
Acquisition (if any); and (iv) Rocky Mountain I shall thereafter be liable and
responsible for all of the liabilities, duties, indebtedness, obligations and
responsibilities of Rocky Mountain I Acquisition (if any). The Articles of
Incorporation and Bylaws of Rocky Mountain I in effect as of the Effective Time
of the Rocky Mountain I Merger shall continue to be the Articles of
Incorporation and Bylaws of Rocky Mountain I.
(b) Conversion of Shares. As part of the Rocky Mountain I Merger, each
of the 5,198 shares of the Rocky Mountain I Common Stock issued and outstanding
immediately prior to the Effective Time of the Rocky Mountain I Merger (other
than Rocky Mountain I Dissenting Shares) shall be converted into 12.355 shares
of the Common Stock of the Holding Company and all of the authorized but
unissued shares of Rocky Mountain I, if any, shall be canceled and retired, all
without the need for further act or deed. Each of the shares of the capital
stock of Rocky Mountain I Acquisition issued and outstanding at the Effective
Time of the Rocky Mountain I Merger shall be converted into one share of the
Common Stock, par value $100.00, of Rocky Mountain I, all which shall be held of
record by the Holding Company following the Rocky Mountain I Merger.
(c) Rocky Mountain I Dissenting Shares. Notwithstanding the foregoing,
each of the shareholders of Rocky Mountain I shall have the rights provided to
them under Article 113 of the Colorado Business Corporation Act (the "CBCA") as
in effect at the Effective Time of the Rocky Mountain I Merger ("Rocky Mountain
I Dissenter's Rights") with respect to their shares of Rocky Mountain I Common
Stock, and, notwithstanding anything contained herein which may be inconsistent
or to the contrary, none of the shares of Rocky Mountain I Common Stock issued
and outstanding at the Effective Time of the Rocky Mountain I Merger that are
held by any Rocky Mountain I shareholder who has the right, to the extent that
such right is available by law, to exercise Rocky Mountain I Dissenter's Rights
pursuant thereto shall be converted into shares of the Holding Company Common
Stock pursuant to the Rocky Mountain I Merger, unless such shareholder shall
have failed to perfect his or her Rocky Mountain I Dissenter's Rights or shall
have withdrawn or lost the same in accordance with the terms of the CBCA. If,
however, any Rocky Mountain I shareholder shall fail to perfect or shall
withdraw or lose his or her Rocky Mountain I Dissenter's Rights with respect to
his or her shares of Rocky Mountain I Common Stock, each of his or her shares
shall be deemed to have been converted into shares of the Common Stock of the
Holding Company as provided for herein effective as of the Effective Time of the
Rocky Mountain I Merger.
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(d) Merger Filings. The Rocky Mountain I Merger shall be accomplished
as follows: Rocky Mountain I and Rocky Mountain I Acquisition shall each cause
Articles of Merger in form suitable for filing with the Colorado Secretary of
State (the "Rocky Mountain I Articles of Merger") to be executed by its
appropriate officers and filed with the Colorado Secretary of State on the
Closing Date.
(e) Effective Time of the Rocky Mountain I Merger. The Rocky Mountain
I Merger shall become effective at the time that the Rocky Mountain I Articles
of Merger shall become effective with the Colorado Secretary of State in
accordance with the CBCA (the "Effective Time of the Rocky Mountain I Merger").
(f) Surrender and Exchange of Common Stock of Rocky Mountain I. After
the Effective Time of the Rocky Mountain I Merger, each holder of shares of
Rocky Mountain I Common Stock outstanding as of the Effective Time of the Rocky
Mountain I Merger shall surrender to the Exchange Agent (other than those
holders who have perfected or could perfect Rocky Mountain I Dissenter's Rights)
all outstanding certificates theretofore evidencing shares of the Common Stock
of Rocky Mountain I, and shall receive in exchange therefor, upon delivery to
the exchange agent together with satisfactory and customary delivery
requirements, certificates evidencing the greatest whole number of shares of the
Common Stock of the Holding Company into which such shares of the Rocky Mountain
I Common Stock have been converted pursuant to the Rocky Mountain I Merger, less
the number of Indemnity Escrow Shares and Debt Level Escrow Shares attributable
to each such holder, plus a cash payment in lieu of fractional shares in the
amount determined pursuant to Section 3.3. Until so surrendered or exchanged,
each outstanding certificate evidencing shares of the Rocky Mountain I Common
Stock shall be deemed for all purposes solely as evidencing the number of shares
of the Common Stock of the Holding Company into which such shares shall have
been converted pursuant to the Rocky Mountain I Merger; provided, however, that
no dividends or other distributions, if any, declared by the Holding Company
after the Effective Time of the Rocky Mountain I Merger in respect of any shares
of the Common Stock of the Holding Company payable to holders of record after
the Effective Time of the Rocky Mountain I Merger shall be paid to the holders
of any unsurrendered certificates evidencing shares of Rocky Mountain I Common
Stock until such certificates shall have been surrendered to the Exchange Agent.
After the surrender and exchange of such certificates, the record holders
thereof will be entitled to receive any such dividends or distributions, without
interest thereon, to the extent that the same shall have become payable with
respect to the number of shares of the Common Stock of the Holding Company for
which such certificate was exchangeable. The Exchange Agent shall be authorized
to require an indemnification agreement or the posting of a bond or other
financial accommodation satisfactory to the Exchange Agent from any holder of
shares of Rocky Mountain I Common Stock in the event that such holder shall
allege that any certificate evidencing shares of the Rocky Mountain I Common
Stock shall have been lost, stolen or destroyed prior to surrender thereof to
the Exchange Agent.
3.1.6 Merger of Rocky Mountain II Acquisition with and into Rocky Mountain
II.
(a) Rocky Mountain II Merger. Subject to the prior satisfaction of
each of the conditions precedent set forth in Section 4.1 hereof, and of each of
the conditions precedent set forth in Section 4.6, which have not been waived in
writing by Rocky Mountain II, and of each of the conditions precedent set forth
in Section 4.10, which have not been waived in writing by the Holding Company,
on the Closing Date, immediately following the consummation of the transactions
contemplated by Section 3.2 of this Agreement, Rocky Mountain II Acquisition
shall be merged with and into Rocky Mountain II (the "Rocky Mountain II
Merger"); whereupon, (i) the separate existence of Rocky Mountain II Acquisition
shall cease; (ii) Rocky Mountain II shall continue in existence and shall
thereafter possess all of the purposes and powers of Rocky Mountain II
Acquisition; (iii) Rocky Mountain II shall succeed to all of the assets, rights,
properties, licenses, franchises and privileges of Rocky Mountain II Acquisition
(if any), which shall be transferred to, vested in and devolved upon Rocky
Mountain II without further act or deed, subject to all of the debts and
obligations of Rocky Mountain II Acquisition (if any); and (iv) Rocky Mountain
II shall thereafter be liable and responsible for all of the liabilities,
duties, indebtedness, obligations and responsibilities of Rocky Mountain II
Acquisition (if any). The Articles of Incorporation and Bylaws of Rocky Mountain
II in effect as of the Effective Time of the Rocky Mountain II Merger shall
continue to be the Articles of Incorporation and Bylaws of Rocky Mountain II.
(b) Conversion of Shares. As part of the Rocky Mountain II Merger,
each of the 14,539 shares of the Rocky Mountain II Common Stock issued and
outstanding immediately prior to the Effective Time of the Rocky Mountain II
Merger (other than Rocky Mountain II Dissenting Shares) shall be converted into
12.356 of shares of the Holding Company Common Stock, and all of the authorized
but unissued shares of Rocky Mountain II, if any, shall be canceled and retired,
all without the need for further act or deed. Each of the shares of the capital
stock of Rocky Mountain II Acquisition issued and outstanding at the Effective
Time of the Rocky Mountain II Merger shall be converted into one share of the
Common Stock,
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par value $1.00, of Rocky Mountain II, all which shall be held of record by the
Holding Company following the Rocky Mountain II Merger.
(c) Rocky Mountain II Dissenting Shares. Notwithstanding the
foregoing, each of the shareholders of Rocky Mountain II shall have the rights
provided to them under Article 113 of the CBCA as in effect at the Effective
Time of the Rocky Mountain II Merger ("Rocky Mountain II Dissenter's Rights")
with respect to their shares of Rocky Mountain II Common Stock, and,
notwithstanding anything contained herein which may be inconsistent or to the
contrary, none of the shares of Rocky Mountain II Common Stock issued and
outstanding at the Effective Time of the Rocky Mountain II Merger that are held
by any Rocky Mountain II shareholder who has the right, to the extent that such
right is available by law, to exercise Rocky Mountain II Dissenter's Rights
pursuant thereto shall be converted into shares of the Holding Company Common
Stock pursuant to the Rocky Mountain II Merger, unless such shareholder shall
have failed to perfect his or her Rocky Mountain II Dissenter's Rights or shall
have withdrawn or lost the same in accordance with the terms of the CBCA. If,
however, any Rocky Mountain II shareholder shall fail to perfect or shall
withdraw or lose his or her Rocky Mountain II Dissenter's Rights with respect to
his or her shares of Rocky Mountain II Common Stock, each of his or her shares
shall be deemed to have been converted into shares of the Holding Company Common
Stock as provided for herein effective as of the Effective Time of the Rocky
Mountain II Merger.
(d) Merger Filings. The Rocky Mountain II Merger shall be accomplished
as follows: Rocky Mountain II and Rocky Mountain II Acquisition shall each cause
Articles of Merger in form suitable for filing with the Colorado Secretary of
State (the "Rocky Mountain II Articles of Merger") to be executed by its
appropriate officers and filed with the Colorado Secretary of State on the
Closing Date.
(e) Effective Time of the Rocky Mountain II Merger. The Rocky Mountain
II Merger shall become effective at the time that the Rocky Mountain II Articles
of Merger become effective with the Colorado Secretary of State in accordance
with the CBCA (the "Effective Time of the Rocky Mountain II Merger").
(f) Surrender and Exchange of Common Stock of Rocky Mountain II. After
the Effective Time of the Rocky Mountain II Merger, each holder of shares of
Rocky Mountain II Common Stock outstanding as of the Effective Time of the Rocky
Mountain II Merger shall surrender to the Exchange Agent (other than those
holders who have perfected or could perfect Rocky Mountain II Dissenter's
Rights) all outstanding certificates theretofore evidencing shares of the Common
Stock of Rocky Mountain II, and shall receive in exchange therefor, upon
delivery to the exchange agent together with satisfactory and customary delivery
requirements, certificates evidencing the greatest whole number of shares of the
Common Stock of the Holding Company into which such shares of the Rocky Mountain
II Common Stock have been converted pursuant to the Rocky Mountain II Merger,
less the number of Indemnity Escrow Shares and Debt Level Escrow Shares
attributable to each such holder, plus a cash payment in lieu of fractional
shares in an amount determined pursuant to Section 3.3. Until so surrendered or
exchanged, each outstanding certificate evidencing shares of the Rocky Mountain
II Common Stock shall be deemed for all purposes solely as evidencing the number
of shares of the Common Stock of the Holding Company into which such shares
shall have been converted pursuant to the Rocky Mountain II Merger; provided,
however, that no dividends or other distributions, if any, declared by the
Holding Company after the Effective Time of the Rocky Mountain II Merger in
respect of any shares of the Common Stock of the Holding Company payable to
holders of record after the Effective Time of the Rocky Mountain II Merger shall
be paid to the holders of any unsurrendered certificates evidencing shares of
Rocky Mountain II Common Stock until such certificates shall have been
surrendered to the Exchange Agent. After the surrender and exchange of such
certificates, the record holders thereof will be entitled to receive any such
dividends or distributions, without interest thereon, to the extent that the
same shall have become payable with respect to the number of shares of the
Common Stock of the Holding Company for which such certificate was exchangeable.
The exchange agent shall be authorized to require an indemnification agreement
or the posting of a bond or other financial accommodation satisfactory to the
exchange agent from any holder of shares of Rocky Mountain II Common Stock in
the event that such holder shall allege that any certificate evidencing shares
of the Rocky Mountain II Common Stock shall have been lost, stolen or destroyed
prior to surrender thereof to the Exchange Agent.
SECTION 3.2 EXCHANGE OFFERS.
3.2.1 Miracle Partners Exchange Offer.
(a) As provided in Section 5.1, the Holding Company shall commence an
offer, in accordance with the terms and conditions set forth in the Form S-4
Registration Statement and the form of Letter of Transmittal reasonably
satisfactory to the Board of Directors of the Holding Company, to each of the
holders of the issued and outstanding shares of the capital stock of Miracle
Partners which offer shall provide that each of the 500 issued and outstanding
shares capital stock of Miracle
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Partners may be exchanged pursuant to such offer for 188.64 shares of the Common
Stock of the Holding Company (the "Miracle Partners Exchange Offer").
(b) Subject to the prior satisfaction of each of the conditions
precedent to the obligations of the Holding Company set forth in Sections 4.1
and 4.10, which have not been waived in writing by the Holding Company, at the
Closing, the Holding Company shall issue to each holder of shares of the capital
stock of Miracle Partners who elects to exchange his or her shares for shares of
the Common Stock of the Holding Company, against the receipt by the Exchange
Agent of all outstanding certificates evidencing shares of the capital stock of
Miracle Partners and other satisfactory and customary delivery requirements,
certificates evidencing the greatest whole number of shares of the Common Stock
of the Holding Company for which such shares may be exchanged as provided
herein, less the number of Indemnity Escrow Shares and Debt Level Escrow Shares
attributable to each such holder, plus a cash payment in lieu of fractional
shares in an amount determined pursuant to Section 3.3.
(c) The terms of the Miracle Partners Exchange Offer shall provide
that the tender by the holder of shares of the capital stock of Miracle Partners
of his or her shares for exchange pursuant to such offer shall be irrevocable.
The Exchange Agent shall be authorized to require an indemnification agreement
or the posting of a bond or other financial accommodation satisfactory to the
Exchange Agent from any holder of shares of the capital stock of Miracle
Partners who tenders his or her shares for exchange in the event that such
holder shall allege that any certificate evidencing shares of Miracle Partners
shall have been lost, stolen or destroyed prior to surrender thereof to the
Exchange Agent.
3.2.2 Prema Properties Exchange Offer.
(a) As provided in Section 5.1, the Holding Company shall commence an
offer, in accordance with the terms and conditions set forth in the Form S-4
Registration Statement and in a form of Letter of Transmittal reasonably
satisfactory to the Board of Directors of the Holding Company, to each of the
Prema Properties members to exchange an aggregate of 1,488.89 shares of the
Common Stock of the Holding Company for each 1% Percentage Interest in the
profits of Prema Properties represented by such Membership Interest (the "Prema
Properties Exchange Offer").
(b) Subject to the prior satisfaction of each of the conditions
precedent to the obligations of the Holding Company set forth in Sections 4.1
and 4.10, which have not been waived in writing by the Holding Company, at the
Closing, the Holding Company shall issue to each Prema Properties Member who
elects to exchange his or her Membership Interests for shares of the Common
Stock of the Holding Company pursuant to the Prema Properties Exchange Offer,
against the receipt by the Exchange Agent of an Assignment of Membership
Interest in a form reasonably satisfactory to the Board of Directors of the
Holding Company, duly executed with signatures guaranteed, and other
satisfactory and customary delivery requirements, certificates evidencing the
greatest whole number of shares of the Common Stock of the Holding Company for
which each such Membership Interest may be exchanged as provided herein, less
the number of Indemnity Escrow Shares and Debt Level Escrow Shares attributable
to each of the Prema Properties Members who elects to exchange his or her
Membership Interests for shares of the Common Stock of the Holding Company
pursuant to the Prema Properties Exchange Offer, plus cash payment in lieu of
fractional shares in the amount determined pursuant to Section 3.3.
(c) The Prema Properties Exchange Offer shall further provide that the
tender by a Prema Properties Member of his or her Membership Interest for
exchange in accordance with the Prema Properties Exchange Offer shall be
irrevocable.
3.2.3 Ralston Car Wash Exchange Offer.
(a) As provided in Section 5.1, the Holding Company shall commence an
offer, in accordance with the terms and conditions set forth in the Form S-4
Registration Statement and a form of Letter of Transmittal reasonably
satisfactory to the Board of Directors of the Holding Company to each of the
Ralston Car Wash Members to exchange 291.61 shares of the Common Stock of the
Holding Company for each 1% Percentage Interest in the profits of Ralston Car
Wash represented by such Membership Interest (the "Ralston Car Wash Exchange
Offer").
(b) Subject to the prior satisfaction of each of the conditions
precedent to the obligations of the Holding Company set forth in Sections 4.1
and 410, which have not been waived in writing by the Holding Company, at the
Closing, the Holding Company shall issue to each of the Ralston Car Wash Members
who elects to exchange his or her Membership Interest for shares of the Common
Stock of the Holding Company, against the receipt by the Exchange Agent of an
Assignment of Membership Interest in a form reasonably satisfactory to the Board
of Directors of the Holding Company, duly executed with signatures guaranteed,
and other satisfactory and customary delivery requirements, certificates
evidencing the greatest whole number of shares of the Common Stock of the
Holding Company for which each such Membership Interest
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may be exchanged as provided herein, less the number of Indemnity Escrow Shares
and Debt Level Escrow Shares attributable to each Ralston Car Wash Member who
elects to exchange his or her Membership Interest for shares of the Common Stock
of the Holding Company, plus a cash payment in lieu of fractional shares in the
amount determined pursuant to Section 3.3.
(c) The Ralston Car Wash Exchange Offer shall further provide that the
tender by any Ralston Car Wash Member of his or her Membership Interest for
exchange pursuant to the Ralston Car Wash Exchange Offer shall be irrevocable.
3.2.4 KBG Car Wash Exchange Offer.
(a) KBG has formed a limited liability company under and pursuant to
the laws of the State of Colorado known as "KBG, LLC."
(b) As provided in Section 5.1 the Holding Company shall commence an
offer to KBG, in accordance with the terms and conditions set forth in the Form
S-4 Registration Statement and a form of Letter of Transmittal reasonably
satisfactory to the Board of Directors of the Holding Company, to exchange an
aggregate of 12,411 shares of the Common Stock of the Holding Company for all of
the Membership Interests in KBG, LLC, subject to the compliance by KBG with the
terms of this Agreement (the "KBG Exchange Offer"). The terms of the KBG
Exchange Offer shall, among other things, require KBG to contribute to KBG, LLC
prior to the Closing Date, in exchange for all of the Membership Interests of
KBG, LLC, all of the right, title and interest of KBG and Byrer in and to the
Proprietary Car Wash Software System, together with any and all copyrights
therein, patents of any portion thereof, pending applications for patents of any
portion thereof, patent rights therein, and pending applications for
registrations of copyrights therein, anywhere in the world, and all of its
rights, title and interest in and to any and all licenses or privileges granted
by KBG with respect thereto, free and clear of any and all liens, claims,
charges, encumbrances, rights, licenses or privileges of any other party
whatsoever, except those approved in writing by the Board of Directors of the
Holding Company or its designee, pursuant to an Assignment of Intellectual
Property Rights in form and content reasonably acceptable to the Board of
Directors of the Holding Company.
(c) Pursuant to the KBG Exchange Offer, and subject to the prior
satisfaction of each of the conditions precedent to the obligations of the
Holding Company set forth in Sections 4.1 and 4.10, which have not been waived
in writing by the Holding Company, at the Closing, the Holding Company shall
issue to KBG, against the receipt by the Exchange Agent of an Assignment of
Membership Interests, duly executed with signatures guaranteed, covering all of
the Membership Interests of KBG, LLC, and other satisfactory and customary
delivery requirements, certificates evidencing the full number of shares of the
Common Stock of the Holding Company for which each such Membership Interest may
be exchanged as provided herein, less the number of Indemnity Escrow Shares
attributable to KBG.
SECTION 3.3 FRACTIONAL SHARES.
The Holding Company shall not issue any fractional shares pursuant to any
of the Subsidiary Mergers or any of the Exchange Offers. Rather, in lieu of the
issuance of fractional shares, the Holding Company shall issue to each holder of
shares of or a Membership Interest in a Predecessor Company who otherwise would
be entitled to receive fractional shares pursuant to consummation of any of the
Subsidiary Mergers or any of the Exchange Offers cash in an amount equal to the
product obtained by multiplying such fractional share interest by the price per
share at which shares of the Common Stock shall be offered to the public
pursuant to the IPO. No interest shall be paid by the Holding Company on any
cash payment to be made by the Holding Company in lieu of fractional shares.
ARTICLE IV
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES
SECTION 4.1 CONDITIONS TO THE OBLIGATIONS OF EACH OF THE PARTIES.
The obligations of each of the parties to this Agreement to consummate the
transactions contemplated by Article III to be consummated at the Closing and to
perform the other obligations under this Agreement which are to be performed at
and after the Closing are subject to the satisfaction at or prior to the Closing
of each of the conditions precedent set forth in this Section 4.1:
4.1.1 Effective Registration Statements.
(a) Form S-1 Registration Statement. A registration statement on Form
S-1 covering the issuance, offer and sale to the public by the Holding Company
of not more than 2,645,000 shares of the Common Stock of the Holding Company in
the
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proposed IPO for the account of the Company, and, subject to the limitations
provided for in Section 22.7 of this Agreement, such number of Combination
Shares that the Selling Stockholders and Selling Members shall have elected in
accordance with the terms of this Agreement to include therein, shall have been
filed by the Holding Company with the Commission in accordance with the
Securities Act and declared effective by the Commission, and be effective as of
the Closing Date, and no stop order shall have been issued and be in effect as
of the Closing Date with respect thereto.
(b) Form S-4 Registration Statement; Joint Proxy Statement. A
registration statement on Form S-4 covering the issuance by the Holding Company
of the shares of the Common Stock of the Holding Company to be issued by the
Holding Company pursuant to the transactions contemplated by Article III of this
Agreement shall have been filed by the Holding Company with the Commission in
accordance with the Securities Act and declared effective by the Commission, and
be effective as of the Closing Date, and no stop order shall have been issued
and be in effect as of the Closing Date with respect thereto.
4.1.2 Underwriting Agreement. The Holding Company shall have entered into
an underwriting agreement which shall provide for (i) the issuance and sale by
the Holding Company to the several underwriters who are parties to the
underwriting agreement, on a firm commitment basis, of all of the IPO Shares
(and, subject to the limitations provided for in this Agreement, all of the
Combination Shares that the Selling Stockholders and the Selling Members shall
have elected to include therein in accordance with the terms of this Agreement),
and (ii) the issuance and sale by the Holding Company of the IPO Shares (andsuch
Combination Shares) at a gross price to the public (before the deduction of
underwriting discounts) of at least $10 per share or such lower price as may be
approved by the Finance Committee or the Board of Directors of the Holding
Company pursuant to Section 18.3, and shall further provide that each of the IPO
Shares and Combination Shares to be offered and sold to the public shall be
deemed to be "stapled" and part of a common pool of shares, such that each
investor in the IPO shall be deemed to have purchased from the underwriters a
proportionate interest in the IPO Shares and the Combination Shares (the
"Underwriting Agreement"). The Underwriting Agreement shall be in full force and
effect as of the Closing Date, each of the conditions precedent to the
obligations of the parties thereunder shall have been satisfied or waived in
writing by the party entitled to the benefit thereof, and the underwriters shall
be ready, willing and able to perform their obligations thereunder, subject only
to the occurrence of the Closing hereunder.
4.1.3 Compliance with the Terms of this Agreement. Each of the parties to
this Agreement shall have performed or complied with in all material respects
all of the covenants and agreements made by each of them, respectively, which
are to be performed or complied with prior to the Closing Date or at the Closing
pursuant to the terms of this Agreement unless the failure to have so performed
or complied with such covenants and agreements in the aggregate has not had or
is not reasonably likely to have a Material Adverse Effect on the Predecessor
Companies taken as a whole.
4.1.4 Representations and Warranties True. Each of the representations and
warranties made by the parties to this Agreement pursuant to the terms of this
Agreement shall have been true and correct as of the date hereof and be true and
correct in all material respects as of the Closing Date (except with respect to
those representations and warranties made with respect to a certain date other
than the date of this Agreement or the Closing Date, which representations and
warranties need be true and correct only as of such certain date) unless the
falsety or inaccuracy of such representations and warranties in the aggregate
has not had or is not reasonably likely to have Material Adverse Effect on the
Predecessor Companies taken as a whole.
4.1.5 Consents and Approvals Obtained. Each of the parties shall have
obtained, prior to the Closing, all consents, approvals, waivers, and
authorizations from governmental authorities, courts, lenders and other third
parties whose consent, approval, waiver or authorization is necessary or
advisable in order to consummate the transactions contemplated hereby unless the
failure to obtain such consents, approvals, waivers or authorizations in the
aggregate is not reasonably likely to have a Material Adverse Effect on the
Predecessor Companies taken as whole.
4.1.6 No Injunctions or Restraining Orders. There shall be no injunction,
restraining order or decree of any nature whatsoever that is in effect which
restrains or prohibits the consummation of the transactions contemplated hereby.
4.1.7 Agreements Not to Compete. Each natural person who as of the Closing
Date is the holder of 10% or more of the common stock or membership interests of
a Predecessor Company (other than any such Person who is subject to another
agreement not to compete with the Holding Company) shall have entered into
Agreements Not to Compete with the Holding Company substantially in the forms
attached hereto collectively as Exhibit C and, subject to the occurrence of the
Closing, each such Agreement Not to Compete shall be in full force and effect as
of the Closing Date.
4.1.8 Waivers of Indemnification Rights. Each of the officers and directors
of the Corporate Predecessor Companies who also are Selling Stockholders and
entitled to be indemnified under the terms of the applicable charter or bylaws
of a Corporate Predecessor Company and each of the members of Prema Properties
and of Ralston Car Wash who also are Selling
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Members and entitled to be indemnified under an operating agreement of any
Predecessor Company shall have executed and delivered in favor of the Holding
Company and such Predecessor Company a written waiver of such rights to
indemnification from such Predecessor Company to the extent that the Holding
Company may be entitled to indemnification from each such Person pursuant to the
terms of this Agreement.
4.1.9 Closing Documentation. Each of the parties to this Agreement shall
have received duplicate originals of all of the documents, instruments or
certificates required by Article XV hereof to be executed and delivered by the
parties to this Agreement at the Closing.
4.1.10 Financial Statements. The Financial Statements of each of the
Predecessor Companies for their respective fiscal years of 1994, 1995, 1996 and
1997 (and any other applicable periods that the Holding Company reasonably
determines it must include in the registration statements that the Holding
Company intends to file with the Commission in the manner contemplated by this
Agreement) shall have been audited (except for unaudited financial statements
that the Holding Company reasonably determines can be included in such
registration statements) and shall comply in all material respects with GAAP and
the accounting requirements of the Securities Act and the Commission,
consistently applied. Each of the Predecessor Companies shall have provided to
the Holding Company consents from Ernst & Young to the inclusion of their audit
reports in all filings to be made by the Holding Company with the Commission,
"comfort letters" and such other assurances from Ernst & Young and its other
independent accountants that may be reasonably requested by the Holding Company
or any underwriter involved in the public offering by the Holding Company of its
common stock or other securities.
4.1.11 Exercise of Dissenter's Rights. The aggregate amount of cash that
will be required to be paid to the former stockholders of the Corporate
Predecessor Companies who validly exercise and perfect "dissenter's rights" with
respect to any applicable Subsidiary Merger under the laws of the jurisdiction
in which any such Corporate Predecessor Company shall be incorporated (or who
have voted against an applicable Subsidiary Merger and have taken the necessary
steps to perfect "dissenter's rights" and are entitled to perfect "dissenter's
rights" after the Closing by taking additional actions in accordance with
applicable law), assuming that each such dissenting stockholder would be
entitled to receive cash in exchange for each dissenting share of a Corporate
Predecessor Company equal to the gross price to the public (before the deduction
of underwriting discounts) of each of the IPO Shares multiplied by the exchange
ratio provided in Article III for each dissenting share shall not exceed 10% of
the amount of the net cash proceeds expected to be realized by the Holding
Company pursuant to the IPO.
4.1.12 Tender of Shares and Interests. The stockholders of Miracle Partners
shall have tendered to the Holding Company for exchange in accordance with the
terms of the Miracle Partners Exchange Offer all of the issued and outstanding
shares of the capital stock of Miracle Partners; the members of Prema Properties
(or other holders of interests in Prema Properties) shall have tendered to the
Holding Company for exchange in accordance with the terms of the Prema
Properties Exchange Offer all of their respective rights, title and interests in
and to Membership Interests in Prema Properties representing at least 75% of all
of the Percentage Interests in Prema Properties; the members of Ralston Car Wash
(or other holders of interests in Ralston Car Wash) shall have tendered to the
Holding Company for exchange in accordance with the terms of the Ralston Car
Wash Exchange Offer all of their respective rights, title and interests in and
to Membership Interests in Ralston Car Wash representing at least 95% of all of
the Percentage Interests in Ralston Car Wash; and KBG shall have tendered to the
Holding Company for exchange in accordance with the terms of the KBG Exchange
Offer all of its right, title and interest in and to all of the Membership
Interests in KBG, LLC.
4.1.13 Resignations of Officers and Directors of Predecessor Companies.
Each of the officers and directors of each of the Corporate Predecessor
Companies shall have resigned from their respective offices and directorships,
effective as of the Closing; the General Manager of Prema Properties shall have
resigned as General Manager, effective as of the Closing; and the Manager of
Ralston Car Wash shall have resigned as Manager, effective as of the Closing.
4.1.14 Environmental Due Diligence. With respect to each of the properties
of the Predecessor Companies, (i) the Holding Company shall have been satisfied
with the environmental condition of such property, (ii) each Predecessor Company
owning any property the environmental condition of which the Holding Company
finds unsatisfactory shall have remediated such unsatisfactory environmental
condition (or adequately provided for such remediation) to the satisfaction of
the Holding Company or (iii) each Predecessor Company owning any property the
environmental condition of which the Holding Company finds unsatisfactory and
the other parties hereto shall have agreed to an appropriate reduction in the
number of Combination Shares to be issued by the Holding Company to the Selling
Stockholders or Selling Members of such Predecessor Company as contemplated in
Section 5.20.
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SECTION 4.2 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF WE JAC.
In addition to the conditions precedent set forth in Section 4.1 above, the
obligations of WE JAC to consummate the transactions contemplated by Article III
to be consummated by WE JAC at the Closing and to perform its other obligations
under this Agreement which are to be performed at and after the Closing by WE
JAC are subject to the satisfaction at or prior to the Closing of each of the
conditions precedent set forth in this Section 4.2:
4.2.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
WE JAC and its shareholders, in substantially the form attached hereto as
Exhibit D.
4.2.2 Fairness Opinion. The Board of Directors of WE JAC shall have
received the written opinion of Ferris, Baker Watts, Incorporated, dated as of
the date that the Form S-4 Registration Statement is declared effective by the
Commission, that the terms of the WE JAC Merger and of this Agreement, as
ultimately negotiated by the parties, is fair, from a financial point of view,
to the shareholders of WE JAC.
4.2.3 Shareholder Approval. The shareholders of WE JAC shall have approved
and authorized the WE JAC Merger in the manner and by the vote required by its
Certificate of Incorporation and Bylaws and the applicable provisions of the
DCL.
SECTION 4.3 CONDITIONS TO THE OBLIGATIONS OF LUBE VENTURES.
In addition to the conditions precedent set forth in Section 4.1 above, the
obligations of Lube Ventures to consummate the transactions contemplated by
Article III to be consummated by Lube Ventures at the Closing and to perform its
other obligations under this Agreement which are to be performed at and after
the Closing by Lube Ventures are subject to the satisfaction at or prior to the
Closing of each of the conditions precedent set forth in this Section 4.3:
4.3.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
Lube Ventures and its shareholders, in substantially the form attached hereto as
Exhibit D.
4.3.2 Shareholder Approval. The shareholders of Lube Ventures shall have
approved and authorized the transactions contemplated by this Agreement in the
manner and by the vote required by its Certificate of Incorporation and Bylaws
and the applicable provisions of the DCL.
SECTION 4.4 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF MIRACLE INDUSTRIES.
In addition to the conditions precedent set forth in Section 4.1 above, the
obligations of Miracle Industries to consummate the transactions contemplated by
Article III to be consummated by Miracle Industries at the Closing and to
perform its other obligations under this Agreement which are to be performed at
and after the Closing by Miracle Industries are subject to the satisfaction at
or prior to the Closing of each of the conditions precedent set forth in this
Section 4.4:
4.4.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
Miracle Industries and its shareholders, in substantially the form attached as
Exhibit D.
4.4.2 Shareholder Approval. The shareholders of Miracle Industries shall
have approved and authorized the transactions contemplated by this Agreement in
the manner and by the vote required by its Certificate of Incorporation and
Bylaws and the applicable provisions of the DCL.
SECTION 4.5 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF ROCKY MOUNTAIN I.
In addition to the conditions precedent set forth in Section 4.1 above, the
obligations of Rocky Mountain I to consummate the transactions contemplated by
Article III to be consummated by Rocky Mountain I at the Closing and to perform
its other obligations under this Agreement which are to be performed at and
after the Closing by Rocky Mountain I are subject to the satisfaction at or
prior to the Closing of each of the conditions precedent set forth in this
Section 4.5:
4.5.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
Rocky Mountain I and its shareholders, in substantially the form attached as
Exhibit D.
4.5.2 Fairness Opinion. The Board of Directors of Rocky Mountain I shall
have received the written opinion of Quist Financial, Inc., dated as of the date
that the S-4 Registration Statement is declared effective by the Commission,
that the terms of the Rocky Mountain I and of this Agreement, as ultimately
negotiated by the parties, is fair, from a financial point of view, to the
shareholders of Rocky Mountain I.
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4.5.3 Shareholder Approval. The shareholders of Rocky Mountain I shall have
approved and authorized the transactions contemplated by this Agreement in the
manner and the vote required by its Articles of Incorporation and Bylaws and the
applicable provisions of the CBCA.
SECTION 4.6 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF ROCKY MOUNTAIN II.
In addition to the conditions precedent set forth in Section 4.1 above, the
obligations of Rocky Mountain II to consummate the transactions contemplated by
Article III to be consummated by Rocky Mountain II at the Closing and to perform
its other obligations under this Agreement which are to be performed at and
after the Closing by Rocky Mountain II are subject to the satisfaction at or
prior to the Closing of each of the conditions precedent set forth in this
Section 4.6:
4.6.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
Rocky Mountain II and its shareholders, in substantially the form attached as
Exhibit D.
4.6.2 Fairness Opinion. The Board of Directors of Rocky Mountain II shall
have received the written opinion of Quist Financial, Inc., dated as of the date
that the Form S-4 is declared effective by the Commission, that the terms of the
Rocky Mountain I and of this Agreement, as ultimately negotiated by the parties,
is fair, from a financial point of view, to the shareholders of Rocky Mountain
II.
4.6.3 Shareholder Approval. The shareholders of Rocky Mountain II shall
have approved and authorized the transactions contemplated by this Agreement in
the manner and the vote required by its Articles of Incorporation and Bylaws and
the applicable provisions of the CBCA.
SECTION 4.7 ADDITIONAL CONDITION TO THE OBLIGATIONS OF THE MIRACLE PARTNERS
STOCKHOLDERS.
Notwithstanding the fact that all tenders made by the holders of capital
stock of Miracle Partners in acceptance of the Miracle Partners Exchange Offer
will be irrevocable, subject to the terms of the Miracle Partners Exchange
Offer, the obligation of the holders of shares of the capital stock of Miracle
Partners to consummate the exchange of their shares at the Closing, and to
perform their other obligations under this Agreement which are to be performed
at and after the Closing, also are subject to the satisfaction at or prior to
the Closing of the following condition precedent:
4.7.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
Miracle Partners and its shareholders, in substantially the form attached as
Exhibit D.
SECTION 4.8 ADDITIONAL CONDITION TO THE OBLIGATIONS OF THE RALSTON CAR WASH
MEMBERS.
Notwithstanding the fact that all tenders of Membership Interests in
Ralston Car Wash made by the Ralston Car Wash Members in acceptance of the
Ralston Car Wash Exchange Offer will be irrevocable, subject to the terms of the
Ralston Car Wash Exchange Offer, the obligation of the Ralston Car Wash Members
to consummate the exchange of their Membership Interests in Ralston Car Wash at
the Closing, and to perform their other obligations under this Agreement which
are to be performed at and after the Closing, also are subject to the
satisfaction at or prior to the Closing of the each of the following conditions
precedent set forth in this Section 4.8:
4.8.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
the Ralston Car Wash Members, in substantially the form attached as Exhibit D.
SECTION 4.9 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF THE PREMA PROPERTIES
MEMBERS.
Notwithstanding the fact that all tenders of Membership Interests in Prema
Properties made by the Prema Properties Members in acceptance of the Prema
Properties Exchange Offer will be irrevocable, subject to the terms of the Prema
Properties Exchange Offer, the obligation of the Prema Properties Members to
consummate the exchange of their Membership Interests in Prema Properties at the
Closing, and to perform their other obligations under this Agreement which are
to be performed at and after the Closing, also are subject to the satisfaction
at or prior to the Closing of the following condition precedent:
4.9.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
the Prema Properties Members, in substantially the form attached as Exhibit D.
SECTION 4.10 ADDITIONAL CONDITION TO THE OBLIGATIONS OF THE HOLDING COMPANY.
In addition to the conditions precedent set forth in Section 4.1 above, the
obligations of the Holding Company to consummate the transactions contemplated
by Article III to be consummated by the Holding Company at the Closing and to
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cause the Merger Subsidiaries to consummate the Subsidiary Mergers in accordance
with the terms of Article III, and to perform its other obligations under this
Agreement which are to be performed at and after the Closing by the Holding
Company are subject to the satisfaction at or prior to the Closing of each of
the condition precedent set forth in this Section 4.10:
4.10.1 No Material Adverse Effects. None of the Predecessor Companies shall
have suffered any casualty and no event shall have occurred which has had a
Material Adverse Effect on such Predecessor Company or which would be reasonably
likely to have a Material Adverse Effect on such Predecessor Company following
the Closing.
SECTION 4.11 ADDITIONAL CONDITION TO THE OBLIGATIONS OF KBG.
Notwithstanding the fact that all tenders of Membership Interests in KBG,
LLC made by KBG in acceptance of the KBG Exchange Offer will be irrevocable,
subject to the terms of the KBG Exchange Offer, the obligation of KBG to
consummate the exchange of Membership Interests in KBG, LLC at the Closing, and
to perform other obligations under this Agreement which are to be performed at
and after the Closing, also are subject to the satisfaction at or prior to the
Closing of the following condition precedent:
4.11.1 Tax Opinion. Ernst & Young shall have rendered a written opinion to
KBG, in substantially the form attached as Exhibit D.
ARTICLE V
COVENANTS AND AGREEMENTS RELATING TO PRE-CLOSING PERIOD
SECTION 5.1
Special Shareholder Meetings/Exchange Officers. The parties shall cooperate
and use their reasonable best efforts to cause the Form S-4 Registration
Statement to be filed with, and declared effective by, the Securities and
Exchange Commission as soon as practicable. Each of WE JAC, Lube Ventures,
Miracle Industries, Rocky Mountain I and Rocky Mountain II shall call, provide
notice of, and convene a special meeting of its shareholders for the purpose of
considering and voting upon the approval of the transactions contemplated by,
and the adoption of the terms of, this Agreement (or solicit the appropriate
written consent of their shareholders). Such special meetings and consent
solicitations shall be conducted in accordance with the respective charters,
bylaws and the applicable corporation laws of the jurisdiction in which each
such party is incorporated. Each of Miracle Partners, Prema Properties, Ralston
Car Wash and KBG shall commence the Exchange Offers contemplated by this
Agreement in accordance with the terms of Section 3.2 hereof. The parties shall
cooperate in order to cause their respective special meetings and consent
solicitations and their respective Exchange Offers to be commenced as soon as
practicable and as soon as such meetings and Exchange Offers may be lawfully
called, conducted and commenced, taking into account the parties'
responsibilities under applicable securities laws, including the responsibility
to deliver the Joint Proxy Statement/Prospectus forming a part of the Form S-4
Registration Statement to each of the parties' respective stockholders or
members. The Boards of Directors of each of the Corporate Predecessor Companies
and the Managing Member of each of the LLC Predecessor Companies each
acknowledge and agree that such Proxy Statement-Prospectus shall state that each
such Board or Managing Member approves of and supports such transactions and the
terms of this Agreement and recommends that its respective stockholders vote in
favor of the same or tender their membership interests, as the case may be.
Furthermore, in the event that a special meeting of stockholders or shareholders
of any such corporation shall be held as provided for herein, at such special
meeting, the Boards of Directors of each of the Corporate Predecessor Companies
actively shall encourage its respective stockholders or shareholder to vote in
favor of the transactions contemplated hereby and in favor of the terms of this
Agreement.
SECTION 5.2 CORPORATE STATUS.
From and after the date hereof through and including the Closing Date or
the earlier termination of this Agreement, each of the corporate parties to this
Agreement shall take all actions, corporate or otherwise, reasonably necessary
or appropriate to maintain its respective status as a corporation validly
existing and in good standing under the laws of its the state of its
incorporation and to maintain its qualifications as a foreign corporation in
good standing under the laws of each jurisdiction in which the conduct of its
business or the ownership or operation of its assets and properties requires
such qualification. In addition, from and after the date hereof through and
including the Closing or the earlier termination of this Agreement, Miracle
Industries and Lube Ventures shall each take all actions, corporate or
otherwise, as may be reasonably necessary to maintain its respective election
under the Code to be subject to federal income taxation as a "small business
corporation" under Subchapter S of the Code.
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SECTION 5.3 STATUS OF LIMITED LIABILITY COMPANIES.
5.3.1 Prema Properties. From and after the date hereof through and
including the Closing Date or the earlier termination of this Agreement, Prema
Properties shall take all actions reasonably necessary or appropriate to
maintain the status of Prema Properties as a limited liability company validly
existing and in good standing under the laws of the state of its organization
and to maintain its qualifications as a foreign limited liability company in
good standing under the laws of each jurisdiction in which the conduct of its
business or the ownership or operation of its assets and properties requires
such qualification. In addition, from and after the date hereof through and
including the Closing Date or the earlier termination of this Agreement, Prema
Properties shall take all actions reasonably necessary or appropriate to
maintain the status of Prema Properties as a "partnership" for federal income
tax purposes.
5.3.2 Ralston Car Wash. From and after the date hereof through and
including the Closing Date or the earlier termination of this Agreement, Ralston
Car Wash shall take all actions reasonably necessary or appropriate to maintain
the status of Ralston Car Wash as a limited liability company validly existing
and in good standing under the laws of the state of its organization and to
maintain its qualifications as a foreign limited liability company in good
standing under the laws of each jurisdiction in which the conduct of its
business or the ownership or operation of its assets and properties requires
such qualification. In addition, from and after the date hereof through and
including the Closing Date or the earlier termination of this Agreement, Ralston
Car Wash shall take all actions reasonably necessary or appropriate to maintain
the status of Ralston Car Wash as a "partnership" for federal income tax
purposes.
5.3.3 Hydro-Spray and Indy Ventures. From and after the date hereof through
and including the Closing Date or the earlier termination of this Agreement,
Miracle Industries shall take all actions reasonably necessary or appropriate to
maintain the status of each of Hydro-Spray and Indy Ventures as limited
liability companies validly existing and in good standing under the laws of the
state of their respective organization and to maintain their respective
qualifications as foreign limited liability companies in good standing under the
laws of each jurisdiction in which the conduct of their respective businesses or
the ownership or operation of their respective assets and properties requires
such qualification. In addition, from and after the date hereof through and
including the Closing Date or the earlier termination of this Agreement, Miracle
Industries shall take all actions reasonably necessary or appropriate to
maintain the status of each of Hydro-Spray and Indy Ventures as a "partnership"
for federal income tax purposes.
SECTION 5.4 ACCESS TO INFORMATION.
Except as prohibited or limited by law or regulation, each of the parties
to this Agreement shall, from and after the date of this Agreement and until the
Closing Date or the earlier termination of this Agreement, provide to each of
the other parties, and their respective employees, counsel, accountants and
other representatives, so long as each remains a party to this Agreement, full
and complete access upon reasonable notice during normal business hours, to all
officers, employees, offices, properties, agreements, records and affairs of
such party and its business, and will provide copies of such information
concerning such party and its business as any other party hereto may reasonably
request in connection with the transactions contemplated by this Agreement.
SECTION 5.5 CONDUCT OF BUSINESSES OF PREDECESSOR COMPANIES PENDING CLOSING.
From and after the date hereof through the Closing Date or the earlier
termination of this Agreement, except with the prior written consent of a
majority of the Operating Committee each of the Predecessor Companies shall
conduct their respective businesses in the ordinary course in a manner
consistent with its past practices (it being understood and agreed that (i) the
Constituent Companies of the WE JAC Group shall have the right hereafter to
enter into strategic alliances, joint ventures and other arrangements even
though not consistent with its past practices if the Board of Directors of WE
JAC determines in good faith that to do so would be in the best interests of the
WE JAC Group and would not materially adversely affect the transactions
contemplated hereby. In addition, without limiting the generality of the
foregoing, each of the Predecessor Companies covenants and agreement that, from
and after the date hereof through and including the Closing, it shall abide by
and comply with the following:
(a) No Changes in Accounting Methods. None of the Predecessor
Companies shall adopt any change in any method of accounting or accounting
practice, except as contemplated or required by GAAP or in order to conform such
methods or practices to GAAP;
(b) No Amendments to Corporate or Similar Documents. None of the
Predecessor Companies shall, in the case of corporations, amend its charter or
by-laws, or, in the case of limited liability companies, amend its articles of
organization or
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operating agreement, and Miracle Industries shall not agree to any amendment of
the Articles of Organization or Operating Agreements of Hydra-Spray or Indy
Ventures;
(c) No New Employees or Employee Benefits. Except as may be required
in accordance with contractual obligations existing on the date hereof that are
contained in written agreements in effect on the date hereof which have been
disclosed in the Disclosure Letter submitted by such party to the other parties
pursuant to this Agreement, none of the Predecessor Companies shall employ any
additional employees otherwise than as may be necessary in the ordinary course
of business, pay to any current or former Employee any benefit that is not
required by any Employee Benefit Plan or Benefit Arrangement or adopt, amend, or
increase any benefits payable under, any Employee Benefit Plan or Benefits
Arrangement, trust, agreement or other arrangement covering any existing or
former Employee (or beneficiary or dependent);
(d) No Mergers, Etc. None of the Predecessor Companies shall merge or
consolidate with, or agree to merge or consolidate with, or purchase or agree to
purchase all or substantially all of the assets of, or otherwise acquire, or
make any investments in any other business entity or interest therein or enter
into any joint venture or similar arrangement with any other person, party or
business entity except as may be contemplated specifically by the terms of this
Agreement without the prior written consent of a majority or more of the
Operating Committee (it being understood and agreed that the purchase by
Precision Tune from time to time of area subfranchise rights or area development
rights from its area subfranchisors or master licensees shall not be deemed to
be a violation of the foregoing covenant);
(e) No Issuance or Redemption of Securities. Except as may be required
in accordance with obligations under options, warrants, or other contractually
enforceable obligations to sell or issue stock or equity interests or securities
convertible into or exchangeable for stock or equity interests, none of the
Predecessor Companies shall authorize for issuance, issue or sell any additional
shares of its capital stock or any additional equity interests or any securities
or obligations convertible into or exchangeable for shares of its capital stock
or equity interests or issue or grant any option, warrant or other right to
purchase any shares of its capital stock or equity interests or redeem, purchase
or otherwise acquire, or propose or commit to, redeem, purchase or otherwise
acquire, any shares of its capital stock or other equity interests or securities
or any securities or obligations convertible into or exchangeable for shares of
its capital stock or equity interests;
(f) No New Debt or Debt Restructuring. Except (i) in the ordinary
course of business, (ii) to pay Transaction Expenses or pay a Professional
Expense Dividend or pay Professional Expense Dividends, (iii) with the prior
approval of the Operating Committee or (iv) in connection with transactions
otherwise permitted by this Section 5.5, none of the Predecessor Companies shall
incur or agree to incur any Debt or restructure any existing Debt, nor shall any
of the Predecessor Companies make any loans, advances or capital contributions
to, or investments in, any Person without the prior written consent of a
majority or more of the Operating Committee.
(g) Payments; Amortization of Debt. From and after the date hereof,
each of the Predecessor Companies shall pay its current liabilities as they
become due and amortize its Debt in the ordinary course of business in
accordance with the contractual agreements evidencing such Debt, and, except in
accordance with contractual obligations existing on the date hereof that are
contained in written agreements in effect on the date hereof which have been
disclosed in the Disclosure Letter submitted by such party to the other parties
pursuant to this Agreement, none of the Predecessor Companies shall make, or
agree to make, except in the ordinary course of business, consistent with past
practices, any payments to any Person on account of Debt or otherwise without
the prior written consent of a majority or more of the Operating Committee or as
may be otherwise permitted by this Agreement (it being understood and agreed
that the purchase by Precision Tune from time to time of area subfranchise
rights or area development rights from its area subfranchisors or master
licensees shall not be deemed to be a violation of the foregoing covenant);
(h) No New Bids or Proposals. Except as may be approved in advance by
the Board of Directors of the Holding Company, none of the Predecessor Companies
shall make or submit any bid, proposal or commitment to provide services or to
purchase or distribute any products (in response to a request for proposal or
otherwise) otherwise than in the ordinary course of business consistent with its
past practices;
(i) No Dividends or Distributions. Except as provided for in Section
2.3, 5.17 and 5.18 of this Agreement, none of the Predecessor Companies shall
declare or distribute or pay any dividend or make any other distribution of cash
or any other asset to any stockholder, shareholder or member;
(j) No Sales of Assets Except in Ordinary Course. Except as provided
in Schedule 5.5(j), none of the Predecessor Companies shall sell or agree to
sell any assets, rights or properties otherwise than in the ordinary course of
business, or create, or suffer to exist, any Encumbrance on any of its assets,
rights and properties other than Encumbrances existing as of the date of this
Agreement;
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(k) No New Material Contracts Except in Ordinary Course. Except in the
ordinary course of business, none of the Predecessor Companies shall make any
capital expenditures exceeding $10,000 individually or enter into or become a
party to any arrangement or contract of a type that would require the
expenditure of more than $50,000 in any 12 month period or which would otherwise
be required to be disclosed by such party in its Disclosure Letter without the
prior written consent of a majority or more of the Operating Committee; and
(l) No Changes to Compensation Arrangements. Except as required by law
or contractual obligations existing on the date hereof that are contained in
written agreements in effect on the date hereof which have been disclosed in the
Disclosure Letter submitted by such party to the other parties pursuant to this
Agreement, none of the Predecessor Companies shall (i) increase in any manner
the compensation (other than increases in the ordinary course of business and
consistent with past practice) of, or enter into any new bonus or incentive
agreement or arrangement with, any of its Employees, officers or directors, (ii)
pay or agree to pay any pension, retirement allowance or similar employee
benefit to any Employee, officer, or director, (iii) enter into any new
employment, severance, consulting or other compensation agreement with any
existing Employee, officer, or director; (iv) commit itself to any additional
pension, profit-sharing, deferred compensation, group insurance, severance pay,
retirement or other employee benefit plan, fund or similar arrangement or amend
or commit itself to amend any of such plans, funds or similar arrangements in
existence on the date hereof.
SECTION 5.6 COVENANTS BINDING ONLY UPON KBG.
From and after the date hereof through and including the Closing, KBG
hereby covenants and agrees that it shall not sell, license, transfer, assign,
pledge or otherwise create any Encumbrance upon the Proprietary Car Wash
Computer Software except as contemplated by Section 3.2.4 of this Agreement.
SECTION 5.7 CONSENTS.
From and after the date hereof, each of the Predecessor Companies shall use
their reasonable best efforts to (i) obtain all consents, waivers and
authorizations and make all filings with and give all notices that may be
necessary or reasonably required to consummate the transactions contemplated
hereby, and (ii) cause each of the conditions precedent to the obligations of
each of the other parties to this Agreement to be satisfied.
SECTION 5.8 PUBLIC STATEMENTS.
From and after the date hereof until the earlier of the Closing or the
termination of this Agreement, none of the Predecessor Companies shall disclose
to any Person other than its shareholders or members the terms of this
Agreement, or release any information concerning any of the transactions
contemplated hereby, that is intended for or is reasonably likely to result in
public dissemination thereof without the prior written consent of a majority or
more of the Operating Committee.
SECTION 5.9 UPDATE OF DISCLOSURE.
From and after the date hereof through and including the earlier of the
Closing or the termination of this Agreement, each of the Predecessor Companies
shall promptly notify the other parties hereto of the occurrence of any material
facts or circumstances that would have required disclosure pursuant to the
representations and warranties made by such parties pursuant to the terms of
this Agreement if such facts or circumstances had been known to them prior to
the execution of this Agreement and of any other matters that would cause any
representation or warranty to be untrue, incorrect or misleading.
SECTION 5.10 EMPLOYEE BENEFIT CONTRIBUTIONS.
On or prior to the Closing Date, each of the Predecessor Companies shall
make, and shall cause each of its Affiliates to make, all contributions, and
shall pay all premiums, or shall cause each of its ERISA Affiliates to pay all
premiums, with respect to liabilities arising under any Benefit Arrangement or
Employee Benefit Plan provided to its current or former Employees, with respect
to liabilities or obligations which have accrued on or prior to the Closing Date
or which will accrue following the Closing Date in respect of periods prior to
and through the Closing Date.
SECTION 5.11 LOCK-UP; NO SHOPPING, SOLICITATIONS OR COMPETING NEGOTIATIONS.
Each of the parties to this Agreement hereby agrees that, from and after
the date hereof through and including the Closing or the earlier termination of
this Agreement, none of them shall encourage, solicit, entertain or hold any
negotiations or other discussions with any other Person relating to the possible
acquisition of all or any part of their respective businesses, whether pursuant
to a sale of assets, merger, consolidation, share exchange, tender offer or
otherwise.
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SECTION 5.12 AUDITS.
Promptly upon the execution of this Agreement, if and to the extent they
have not already done so, each of the Predecessor Companies shall assist Ernst
and Young, LLP with audits of their respective financial statements at such
dates and for such periods as the Holding Company reasonably determines it must
include in the registration statements the Holding Company files with the
Commission in the manner contemplated by this Agreement), and shall make their
respective books and records, financial statements, employees, officers and
facilities open to such auditors at reasonable hours upon reasonable advance
notice and to otherwise cooperate, and cause their respective certified public
accountants and other outside auditors to cooperate, with such auditors in
conducting such audits. Each of the Predecessor Companies also shall provide the
Holding Company with any unaudited financial statements for any periods the
Holding Company reasonably determines it must include in the registration
statements the Holding Company files with the Commission in the manner
contemplated by this Agreement. Each of the Predecessor Companies shall also
promptly provide to the Holding Company consents from Ernst & Young LLP to the
inclusion of their audit reports in filings with the Commission, "comfort
letters" and such other assurances from Ernst & Young LLP and other independent
accountants of such Predecessor Company that may reasonably be requested by the
Holding Company or any underwriter involved in the public offering of the
Holding Company's securities. All of the financial statements provided to the
Holding Company pursuant to this Section 5.12 shall be prepared in accordance
with GAAP (and Regulation S-X of the Commission) consistently applied.
SECTION 5.13 ACQUISITION BY MIRACLE INDUSTRIES OF MINORITY INTERESTS IN
HYDRO-SPRAY.
Promptly following the execution and delivery of this Agreement by each of
the parties hereto, Miracle Industries shall form a subsidiary corporation under
the laws of the State of Ohio solely for the purpose of acquiring the minority
membership interests in Hydro-Spray which are held currently by Donald Havens
and Dale Hughson, respectively, and shall cause such subsidiary corporation to
acquire such minority membership interests on or prior to the Closing Date (but
prior to the Closing) for an aggregate purchase price, including debts and
obligations, if any, assumed by Miracle Industries or such subsidiary
corporation in such transaction of not more than $300,000. In lieu of payment of
cash to such Hydro-Spray members for their membership interests in Hydro-Spray,
Miracle Industries may acquire such membership interests in consideration of the
issuance to such members of shares of common stock of Miracle Industries in
which case the exchange ratio set forth in Section 3.1.4(b) shall be reduced so
that the aggregate number of Combination Shares to be issued to shareholders of
Miracle Industries remains at $749,250. The acquisition agreement relating to
the acquisition of such minority interests shall be in a form approved by the
Holding Company, and, at a minimum, shall contain representations and warranties
and indemnities from the sellers of such interests which are customary for
transactions of this sort and shall impose covenants upon the sellers of such
interests which will obligate them not to compete with Miracle Industries or any
of its presently existing or hereafter created Affiliates (including the parties
to this Agreement) in the business of manufacturing and selling car wash
equipment.
SECTION 5.14 OPTION TO PURCHASE PROPERTY BY PREMA PROPERTY MEMBERS.
At the Closing Prema Properties shall execute and deliver to a partnership
to be comprised of the members of Prema Properties an Option Agreement pursuant
to which such partnership shall have the option to purchase the properties
described in Schedule 5.14 from Prema Properties on the following terms: (i) the
option shall be exercisable during the one year period commencing on the second
anniversary of the Closing Date; (ii) the option purchase price of each such
property shall be the fair market value of such property on the date of exercise
of the option which price shall be paid to Prema Properties in cash at the
closing of the transfer of such property; (iii) the closing on the sale of each
such property shall occur within 90 days of the later of the exercise of the
option or the determination of the purchase price therefor; (iv) all appraisal,
deed preparation, recording costs and transfer and documentary or similar taxes
shall be equally borne by the parties; (iv) all real estate taxes shall be
apportioned as of the date of the closing on the transfer of such property; and
(vii) all other terms of the transfer of such property shall be the customary
terms of transfer of commercial properties in the locale of such property. In
addition, the Option Agreement shall provide that upon the transfer of any such
property pursuant to the Option Agreement, Prema Properties or any assignee that
is an Affiliate of the Holding Company shall lease such property pursuant to a
Lease Agreement that contains the following terms: (i) the annual rent
throughout the initial and all renewal terms (including rent escalation factors)
shall be the fair rental value of the property; (ii) annual rent shall be paid
in monthly installments in advance; (iii) the annual rent shall be triple net to
the landlord; (iv) the Lease Agreement shall be for an initial term of ten years
and the tenant shall have options to renew for two successive renewal terms of
ten years each; and (v) all other terms of the lease of such property shall be
the customary terms of lease of commercial properties in the locale of such
property.
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SECTION 5.15 OPTION TO PURCHASE PROPERTY BY LUBE VENTURES STOCKHOLDERS.
At the Closing Lube Ventures shall execute and deliver to a partnership to
be comprised of the stockholders of Lube Ventures an Option Agreement pursuant
to which such partnership shall have the option to purchase the properties
described in Schedule 5.15 from Lube Ventures on the following terms: (i) the
option shall be exercisable during the one year period commencing on the second
anniversary of the Closing Date; (ii) the option purchase price of each such
property shall be the fair market value of such property on the date of exercise
of the option which price shall be paid to Lube Ventures in cash at the closing
of the transfer of such property; (iii) the closing on the sale of each such
property shall occur within 90 days of the later of the exercise of the option
or the determination of the purchase price therefor; (iv) all appraisal, deed
preparation, recording costs and transfer and documentary or similar taxes shall
be equally borne by the parties; (v) all real estate taxes shall be apportioned
as of the date of the closing on the transfer of such property; and (vi) all
other terms of the transfer of such property shall be the customary terms of
transfer of commercial properties in the locale of such property. In addition,
the Option Agreement shall provide that upon the transfer of any such property
pursuant to the Option Agreement, Lube Ventures or any assignee that is an
Affiliate of the Holding Company shall lease such property pursuant to a Lease
Agreement that contains the following terms: (i) the annual rent throughout the
initial and all renewal terms (including rent escalation factors) shall be the
fair rental value of the property; (ii) annual rent shall be paid in monthly
installments in advance; (iii) the annual rent shall be triple net to the
landlord; (iv) the Lease Agreement shall be for an initial term of ten years and
the tenant shall have options to renew for two successive renewal terms of ten
years each; and (v) all other terms of the lease of such property shall be the
customary terms of lease of commercial properties in the locale of such
property.
SECTION 5.16 OPTION TO PURCHASE PROPERTY BY MIRACLE PARTNERS STOCKHOLDERS.
At the Closing Miracle Partners shall execute and deliver to a partnership
to be comprised of the stockholders of Miracle Partners an Option Agreement
pursuant to which such partnership shall have the option to purchase the
properties described in Schedule 5.16 from Miracle Partners on the following
terms: (i) the option shall be exercisable during the one year period commencing
on the second anniversary of the Closing Date; (ii) the option purchase price of
each such property shall be the fair market value of such property on the date
of exercise of the option which price shall be paid to Miracle Partners in cash
at the closing of the transfer of such property; (iii) the closing on the sale
of each such property shall occur within 90 days of the later of the exercise of
the option or the determination of the purchase price therefor; (iv) all
appraisal, deed preparation, recording costs and transfer and documentary or
similar taxes shall be equally borne by the parties; (iv) all real estate taxes
shall be apportioned as of the date of the closing on the transfer of such
property; and (vii) all other terms of the transfer of such property shall be
the customary terms of transfer of commercial properties in the locale of such
property. In addition, the Option Agreement shall provide that upon the transfer
of any such property pursuant to the Option Agreement, Miracle Partners or any
assignee that is an Affiliate of the Holding Company shall lease such property
pursuant to a Lease Agreement that contains the following terms: (i) the annual
rent throughout the initial and all renewal terms (including rent escalation
factors) shall be the fair rental value of the property; (ii) annual rent shall
be paid in monthly installments in advance; (iii) the annual rent shall be
triple net to the landlord; (iv) the Lease Agreement shall be for an initial
term of ten years and the tenant shall have options to renew for two successive
renewal terms of ten years each; and (v) all other terms of the lease of such
property shall be the customary terms of lease of commercial properties in the
locale of such property.
SECTION 5.17 DISTRIBUTIONS OF UNRELATED ASSETS.
5.17.1 Distribution by Rocky Mountain I. Each of the parties hereto
acknowledges and agrees that, prior to the Closing, Rocky Mountain I shall have
the right to distribute to the holders of its capital stock cash received by
Rocky Mountain I pursuant to the repayment of the principal amount (discounted
due to early repayment) of the Promissory Note payable to the order of Rocky
Mountain I in the original principal amount of $195,000 that it received in
connection with the sale of its car wash located at 10685 East Mississippi
Avenue, Aurora, Colorado in July 1995.
5.17.2 Distribution by Miracle Partners. Each of the parties hereto
acknowledges and agrees that, prior to the Closing, Miracle Partners shall have
the right to distribute to the holders of its capital stock the real property
owned by it and known as Lot 362, Hamilton Road, Columbus, Ohio.
5.17.3 Distribution by Lube Ventures. Each of the parties hereto
acknowledges and agrees that, prior to the Closing, Lube Ventures shall have the
right to distribute to the holders of its capital stock the approximately 5
acres of real property owned by it and known as 1237 West Fourth Street,
Mansfield, Ohio that is not used by Lube Ventures.
5.17.4 Distribution by Miracle Industries. Each of the parties hereto
acknowledges and agrees that, prior to the Closing, Miracle Industries shall
have the right to distribute to the holders of its capital stock the following
parcels of real property
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owned by it: two houses and a vacant lot in Crestline, Ohio, a vacant lot in
Delaware, Ohio and the Cleveland Avenue, Columbus, Ohio car wash.
5.17.5 Distribution by Prema Properties. Each of the parties hereto
acknowledges and agrees that, prior to the Closing, Prema Properties shall have
the right to distribute to the holders of its Membership Interests the following
parcels of real property owned by it: the car wash located on Main Street in
Finley, Ohio and the shopping center and vacant land adjacent to the car wash in
Bellville, Ohio.
5.17.6 Conditions to Distributions. The parties agree that each
distribution permitted by this Section 5.17 shall be without cost to the
Predecessor Company (or Affiliate of the Predecessor Company) making such
distribution. In addition, with respect to the distributions of real property
contemplated by Section 5.17.2, 5.17.3, 5.17.4 and 5.17.5, each such
distribution shall be made subject to any Debt that is collateralized by such
real property and the distributing Predecessor Company (or Affiliate of a
Predecessor Company) shall be released from any liability (whether absolute or
contingent) with respect to such Debt unless such Debt is included in Schedule
19.1.
SECTION 5.18 CASH DISTRIBUTIONS BY SUBCHAPTER S CORPORATIONS AND LIMITED
LIABILITY COMPANIES.
Notwithstanding the provisions of Section 5.5, Miracle Industries, Lube
Ventures, Miracle Partners, Rocky Mountain I, Rocky Mountain II, Ralston Car
Wash and Prema Properties shall each be permitted to distribute on or before the
Closing Date to each of their respective stockholders and members cash in an
amount reasonably estimated to equal to the highest combined federal, state and
local income tax obligations of any their respective stockholders or members
which have or will arise solely by reason of being a stockholder or member
thereof during the tax period which will end on the Closing Date (it being
understood and agreed that calculation of such distribution shall not take into
account the tax effect, if any, of any the transactions contemplated by Sections
5.14, 5.15, 5.16 or 5.17 of this Agreement).
SECTION 5.19 NEGOTIATIONS WITH RESPECT TO ANCILLARY AGREEMENTS AND DOCUMENTS.
Promptly following the execution and delivery of this Agreement, the Ohio
Group and Miracle Partners shall cause the representatives of each of the Real
Estate Partnerships to enter into good faith negotiations with the Holding
Company concerning the form of the Option Agreements and the Lease Agreements
and to thereafter negotiate in good faith with respect to the form of the Option
Agreements and the Lease Agreements to be executed at the Closing shall have
been finalized on or before September 30, 1997. Following the execution and
delivery of this Agreement, the Holding Company and each of the Predecessor
Companies shall enter into good faith negotiations with respect to the forms of
opinions of counsel to be executed and delivered at the Closing, the terms of
the various letters of transmittal to be used by the Holding Company to make the
Exchange Offers and the terms of the various other documents, agreements and
instruments to be executed and delivered by each of the parties pursuant to the
terms of this Agreement, such that the forms of all such documents shall have
been finalized on or before September 30, 1997. Once the forms of each of the
documents referred to in this Section 5.19 shall have been finalized, each of
the parties shall certify their agreement with respect to the terms and forms
thereof by delivering written notice of their acceptance of the terms and forms
thereof to each of the other parties to this Agreement. Upon receipt by the
Holding Company of written notice from each of the Predecessor Companies that
the form a particular document has been accepted by each of them, the form of
such document shall be appended to this Agreement as an Exhibit hereto and shall
become a part of this Agreement without the need for further act or deed by any
of the parties. The failure of any of the parties to satisfy its obligations
under this Section 5.19 shall be deemed to be a material and willful breach of
this Agreement and shall entitle the other parties to exercise the rights and
remedies provided for in Section 21.1.1, in addition to such other rights and
remedies available to them pursuant to the terms of this Agreement.
SECTION 5.20 ENVIRONMENTAL DUE DILIGENCE.
5.20.1 Conduct of Due Diligence. From and after the date hereof, each of
the members of the Ohio Group and the Rocky Mountain Group shall permit
representatives of the Holding Company, and of environmental consulting firms
engaged by the Holding Company, to enter upon their respective properties from
time to time at reasonable hours upon reasonable advance notice in order to
evaluate the environmental condition of each such property and the operations of
the businesses of the members of the Ohio Group and the Rocky Mountain Group
thereon, and shall assist the Holding Company and its representatives in
conducting such evaluations.
5.20.2 Results of Due Diligence. As soon as reasonably practicable
following the receipt of the environmental evaluations referred to in Section
5.20.2, the Holding Company shall determine, in its sole but reasonable
discretion, the acceptability of the environmental condition of the properties
of each of the Predecessor Companies. Following such determination, the
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Holding Company shall provide notice to each of the Predecessor Companies of its
determination with respect to the environmental condition of the properties of
such Predecessor Company (it being understood that the Holding Company shall be
entitled to be unsatisfied with the environmental condition of the properties of
any Predecessor Company in the event that it shall determine that a reasonable
purchaser of the business of such Predecessor Company would determine not to
proceed with the purchase thereof or to reduce the consideration payable to the
Selling Stockholders or Selling Members thereof materially based on the
environmental condition of the properties of such Predecessor Company). If the
Holding Company shall be unsatisfied with the environmental condition of the
properties of such Predecessor Company, the Holding Company and such Predecessor
Company shall enter into good faith negotiations to agree on (i) a manner in
which such Predecessor Company can proceed to remedy, at its sole cost and
expense, any such environmental condition in a manner reasonably satisfactory to
the Holding Company such that each such environmental condition shall be
remedied on or before the Closing Date or that the financial costs of such
remediation shall otherwise be provided for by the Selling Stockholders or
Selling Members of such Predecessor Company or (ii) an appropriate reduction in
the number of Combination Shares to be issued by the Holding Company to the
Selling Stockholders or Selling Members of such Predecessor Company.
SECTION 5.21 ACTIONS BY AFFILIATES.
5.21.1 Agreements Not to Compete. Each Predecessor Company shall cause each
natural Person who as of the Closing Date is a holder of 10% or more of the
common stock or membership interests of such Predecessor Company (other than any
such Person who is subject to another agreement not to compete with the Holding
Company) to enter into an Agreement Not to Compete with the Holding Company as
contemplated by Section 4.1.7.
5.21.2 AFFILIATE AGREEMENTS.
Each Predecessor Company shall cause each Person who is an "Affiliate" as
defined in the Securities Act of such Predecessor Company to enter into an
affiliates agreement with the Holding Company acknowledging that such Person is
subject to the resale restrictions of Rule 145 promulgated under the Securities
Act.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF WE JAC
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, subject to the delivery
and acceptance of a definitive Disclosure Letter, WE JAC hereby makes the
following representations and warranties to the other parties to this Agreement
and to the Holding Company:
SECTION 6.1 ORGANIZATION AND GOOD STANDING.
6.1.1 WE JAC. WE JAC is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and has full corporate
power and authority to own, operate and lease its properties, and to conduct its
business as it is now being conducted, and is qualified to transact business as
a foreign corporation in each jurisdiction in which the operation of its
business or the ownership of its properties requires such qualification.
6.1.2 Subsidiaries of WE JAC. Precision Tune is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Virginia, and has full corporate power and authority to own,
operate and lease its properties, and to conduct its business as it is now being
conducted, and is qualified to transact business as a foreign corporation in
each jurisdiction in which the operation of its business or the ownership of its
properties requires such qualification. National 60 Minute Tune is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Washington, and has full corporate power and authority to own, operate
and lease its properties, and to conduct its business as it is now being
conducted, and is qualified to transact business as a foreign corporation in
each jurisdiction in which the operation of its business or the ownership of its
properties requires such qualification. PTW is a corporation duly organized,
validly existing and in good standing under the laws of the State of Washington,
and has full corporate power and authority to own, operate and lease its
properties, and to conduct its business as it is now being conducted, and is
qualified to transact business as a foreign corporation in each jurisdiction in
which the operation of its business or the ownership of its properties requires
such qualification.
SECTION 6.2 CAPITALIZATION OF WE JAC AND SUBSIDIARIES.
6.2.1 Authorized Capital; Outstanding Shares.
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(a) The authorized capital stock of WE JAC consists solely of
2,600,000 shares of a single class of common stock, $0.01 par value, of which
1,333,625 shares have been issued and are outstanding as of the date of this
Agreement. Each of the shares of the capital stock of WE JAC issued and
outstanding as of the date hereof has been duly authorized and validly issued
and is fully paid and non-assessable. None of the shares of the issued and
outstanding capital stock of WE JAC has been issued in violation of shareholder
preemptive rights. Except as disclosed in the WE JAC Disclosure Letter, WE JAC
has no issued or outstanding equity securities, debt securities or other
instruments which are convertible into or exchangeable for at any time equity
securities of WE JAC.
(b) The authorized capital stock of Precision Tune consists solely of
1,000 shares of a single class of common stock, $0.01 par value, of which 1,000
shares have been issued and are outstanding as of the date of this Agreement.
Each of the shares of the capital stock of Precision Tune issued and outstanding
as of the date hereof has been duly authorized and validly issued and is fully
paid and non-assessable. None of the shares of the issued and outstanding
capital stock of Precision Tune has been issued in violation of shareholder
preemptive rights. Precision Tune has no issued or outstanding equity
securities, debt securities or other instruments which are convertible into or
exchangeable for at any time equity securities of Precision Tune.
(c) The authorized capital stock of National 60 Minute Tune consists
solely of 50,000 shares of a single class of common stock, $1.00 par value, of
which 500 shares have been issued and are outstanding as of the date of this
Agreement. Each of the shares of the capital stock of National 60 Minute Tune
issued and outstanding as of the date hereof has been duly authorized and
validly issued and is fully paid and non-assessable. None of the shares of the
issued and outstanding capital stock of National 60 Minute Tune has been issued
in violation of shareholder preemptive rights. National 60 Minute Tune has no
issued or outstanding equity securities, debt securities or other instruments
which are convertible into or exchangeable for at any time equity securities of
National 60 Minute Tune.
(d) The authorized capital stock of PTW consists solely of 1,000,000
shares of a single class of common stock, $1.00 par value, of which 1,000 shares
have been issued and are outstanding as of the date of this Agreement. Each of
the shares of the capital stock of PTW issued and outstanding as of the date
hereof has been duly authorized and validly issued and is fully paid and
non-assessable. None of the shares of the issued and outstanding capital stock
of PTW has been issued in violation of shareholder preemptive rights. PTW has no
issued or outstanding equity securities, debt securities or other instruments
which are convertible into or exchangeable for at any time into equity
securities of PTW.
6.2.2 No Obligations to Issue or Redeem Shares.
(a) Except as disclosed in the WE JAC Disclosure Letter, WE JAC is not
subject to any commitment or obligation which would require the issuance or sale
of shares of its capital stock at any time under options, subscriptions,
warrants, rights, calls, preemptive rights, convertible obligations or any other
fixed or contingent obligations or which would provide the holder thereof with
the right to acquire any equity securities of WE JAC. Except as disclosed in the
WE JAC Disclosure Letter, WE JAC has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interest therein or to pay any dividend or make any other distribution in
respect thereof.
(b) Precision Tune is not subject to any commitment or obligation
which would require the issuance or sale of shares of its capital stock at any
time under options, subscriptions, warrants, rights, calls, preemptive rights,
convertible obligations or any other fixed or contingent obligations or which
would provide the holder thereof with the right to acquire any equity securities
of Precision Tune. Precision Tune has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interest therein or to pay any dividend or make any other distribution in
respect thereof.
(c) National 60 Minute Tune is not subject to any commitment or
obligation which would require the issuance or sale of shares of its capital
stock at any time under options, subscriptions, warrants, rights, calls,
preemptive rights, convertible obligations or any other fixed or contingent
obligations or which would provide the holder thereof with the right to acquire
any equity securities of National 60 Minute Tune. National 60 Minute Tune has no
obligation (contingent or other) to purchase, redeem or otherwise acquire any of
its equity securities or any interest therein or to pay any dividend or make any
other distribution in respect thereof.
(d) PTW is not subject to any commitment or obligation which would
require the issuance or sale of shares of its capital stock at any time under
options, subscriptions, warrants, rights, calls, preemptive rights, convertible
obligations or any other fixed or contingent obligations or which would provide
the holder thereof with the right to acquire any equity securities of PTW. PTW
has no obligation (contingent or other) to purchase, redeem or otherwise acquire
any of its equity securities or any interest therein or to pay any dividend or
make any other distribution in respect thereof.
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6.2.3 Ownership of Shares. As of the date hereof the WE JAC Disclosure
Letter contains a true, complete and accurate list of each of the record and
beneficial owners of the shares of the capital stock of WE JAC, together with
the name and address of each such holder. There are no agreements, pledges,
powers of attorney, assignments or similar agreements or arrangements either (i)
restricting the transferability of any of the shares of the capital stock of WE
JAC or (ii) which reasonably could be expected to prohibit or delay the
consummation of the transactions contemplated hereby.
SECTION 6.3 SUBSIDIARIES; INVESTMENTS.
Except for Precision Tune, WE JAC does not own any shares of capital stock
or equity securities of, or any interest in any other entity, and WE JAC has
good, valid and marketable title, free and clear of all Encumbrances, to all
shares of capital stock or equity securities of, or interests in, Precision
Tune. Precision Tune owns all of the issued and outstanding capital stock of
National 60 Minute Tune and PTW.
SECTION 6.4 EXECUTION AND EFFECT OF AGREEMENT.
WE JAC has the corporate power to enter into this Agreement and to perform
its obligations hereunder and, subject to the due authorization and approval of
its shareholders, to enter into and consummate the WE JAC Merger. This Agreement
has been duly executed and delivered by WE JAC and constitutes a legal, valid
and binding obligation of WE JAC, fully enforceable against WE JAC in accordance
with its terms; except as enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the exercise of judicial discretion in accordance with
general principles of equity.
SECTION 6.5 RESTRICTIONS.
The execution and delivery of this Agreement by WE JAC, the consummation of
the transactions contemplated hereby by WE JAC, and, subject to the due
authorization and approval of its shareholders, the performance of the
obligations of WE JAC hereunder, will not (a) violate any of the provisions of
the charter or by-laws of WE JAC, (b) violate or conflict with the provisions of
any Applicable Laws, (c) result in the creation of any Encumbrance upon any of
the assets, rights or properties of WE JAC, or (d) except as disclosed in the WE
JAC Disclosure Letter, conflict with, violate any provisions of, result in a
breach of or give rise to a right of termination, modification or cancellation
of, constitute a default of, or accelerate the performance required by, with or
without the passage of time or the giving of notice or both, the terms of any
material agreement, indenture, mortgage, deed of trust, security or pledge
agreement, lease, contract, note, bond, license, permit, authorization or other
instrument to which WE JAC or any of its Subsidiaries is a party or to which any
of any of the assets of WE JAC or any of its Subsidiaries are subject.
SECTION 6.6 CONSENTS.
Except as disclosed in the WE JAC Disclosure Letter and as may be required
by any Applicable Laws relating to franchising, no filing with, or consent,
waiver, approval or authorization of, or notice to, any governmental authority
or any third party is required to be made or obtained by WE JAC or any of its
Subsidiaries in connection with the execution and delivery of this Agreement or
any document or instrument contemplated hereby, the consummation of any of the
transactions contemplated hereby or the performance of any of their respective
obligations hereunder or thereunder.
SECTION 6.7 FINANCIAL STATEMENTS.
Attached hereto as Exhibit E are true and correct copies of the audited
consolidated balance sheets and related statements of income, cash flows and
changes in stockholders' equity of WE JAC as at June 30, 1995, 1996 and 1997 and
for the year periods then- ended (collectively, the "WE JAC Financial
Statements"). All of the WE JAC Financial Statements have been prepared in
accordance with GAAP. All of the WE JAC Financial Statements have been prepared
in a manner consistent with each other and the books and records of WE JAC and
its Subsidiaries, and fairly present in all material respects the financial
condition and results of operations of WE JAC and its Subsidiaries at the dates
and for the periods indicated therein. The regular books of account of WE JAC
and its Subsidiaries fairly and accurately reflect all material transactions
involving WE JAC and its Subsidiaries, are true, correct and complete and have
been prepared in accordance with GAAP and on a basis consistent with the
Financial Statements.
SECTION 6.8 DEBT.
The WE JAC Disclosure Letter contains a true, complete and accurate listing
as of the date hereof the original principal amount of all of the Debt of WE
JAC, the remaining principal balance thereof, the interest rate(s) payable by WE
JAC in
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respect thereof, if any, and the date(s) of maturity thereof. Except as
disclosed in the WE JAC Disclosure Letter, all of the Debt of WE JAC may be
prepaid at any time, without premium, prepayment penalties, termination fees or
other fees or charges.
SECTION 6.9 GUARANTEES.
The WE JAC Disclosure Letter contains a complete list of all Guarantees
provided by WE JAC or any of its Subsidiaries for the benefit of any other party
and of all Guarantees provided by any other party for the benefit of WE JAC or
any of its Subsidiaries or any party doing business with WE JAC or any of its
Subsidiaries.
SECTION 6.10 NO UNDISCLOSED LIABILITIES.
Neither WE JAC nor any of its Subsidiaries have any material liabilities or
obligations of any nature whatsoever (whether known or unknown, due or to become
due, absolute, accrued, contingent or otherwise, and whether or not determined
or determinable), except for (i) liabilities or obligations set forth in the WE
JAC Disclosure Letter, (ii) liabilities or obligations to the extent expressly
reflected on or reserved against in the June 30, 1997 balance sheet included
among the WE JAC Financial Statements or disclosed in the notes thereto, (iii)
liabilities or obligations of a type reflected on the June 30, 1997 balance
sheet and incurred in the ordinary course of business and consistent with past
practices since June 30, 1997, or (iv) liabilities or obligations arising under
the terms of the Material Contracts of WE JAC. Except as otherwise contemplated
or permitted by this Agreement, no dividends declared on any capital stock of WE
JAC are unpaid.
SECTION 6.11 LITIGATION.
There is no suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or, to the knowledge of the
management of WE JAC, threatened, by or before any court, any Governmental
Authority or arbitrator, against WE JAC or any of its Subsidiaries that
reasonably could be expected to prevent the consummation of any of the
transactions contemplated hereby. Except as disclosed in the WE JAC Disclosure
Letter, there is no material suit, claim, action at law or in equity, proceeding
or governmental investigation or audit pending, or to the knowledge of
management of WE JAC, threatened, by or before any arbitrator, court, or other
Governmental Authority, against WE JAC or any of its Subsidiaries or involving
any of the former or present employees, agents, businesses, properties, rights
or assets of WE JAC or any of its Subsidiaries, nor, to the knowledge of
management of WE JAC, is there any basis for the assertion of any of the
foregoing. Except as disclosed in the WE JAC Disclosure Letter, there are no
judgments, orders, injunctions, decrees, stipulations or awards rendered by any
court, Governmental Authority or arbitrator currently binding or effective
against WE JAC or any of its Subsidiaries or any of their respective former or
present Employees, agents, properties or assets.
SECTION 6.12 PROPERTIES; ABSENCE OF ENCUMBRANCES.
The WE JAC Disclosure Letter sets forth a complete list of all real
property owned by or leased to WE JAC or any of its Subsidiaries, and, with
respect to all properties leased by WE JAC, a description of the term of such
lease and the monthly rental thereunder. Neither WE JAC nor any of its
Subsidiaries is in default (and will not be in default with the passage of time
or the receipt of notice or both) and has not received notice of default, under
any lease of real property. All real property leased to WE JAC or any of its
Subsidiaries is available for immediate use in the operation of its business and
for the purpose for which such property currently is being utilized. Subject in
the case of leased property to the terms and conditions of the respective
leases, WE JAC or one or more of its Subsidiaries has full legal and practical
access to all such real property.
SECTION 6.13 INTELLECTUAL PROPERTY.
The WE JAC Disclosure Letter sets forth a complete list of (i) all
Intellectual Property owned, used or licensed by WE JAC or any of its
Subsidiaries, together with the identity of the owner thereof, and (ii) all
license agreements pursuant to which any Intellectual Property is licensed to or
by WE JAC or any of its Subsidiaries. WE JAC and its Subsidiaries own their
respective Intellectual Property free and clear of any and all Encumbrances, or,
in the case of licensed Intellectual Property, has valid, binding and
enforceable rights to use such Intellectual Property. WE JAC and each of its
Subsidiaries has duly and timely filed all renewals, continuations and other
filings necessary to maintain its Intellectual Property or registrations
thereof. Except as disclosed in the WE JAC Disclosure Letter, neither WE JAC nor
any of its Subsidiaries (i) has received any notice or claim to the effect that
the use of any Intellectual Property infringes upon, conflicts with or
misappropriates the rights of any other party or that any of the Intellectual
Property is not valid or enforceable, or (ii) has made any claim that any party
has violated or infringed upon its rights with respect to any Intellectual
Property.
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SECTION 6.14 MATERIAL CONTRACTS.
6.14.1 List of Material Contracts. The WE JAC Disclosure Letter sets forth
as of the date hereof a list of all material written, and a description of all
oral, commitments, agreements or contracts to which WE JAC or any of its
Subsidiaries is a party or by which WE JAC or any Subsidiary is obligated, other
than agreements pursuant to which Precision Tune or National 60 Minute Tune has
granted any franchise or similar rights with respect to the Precision Tune
System or any license or similar rights with respect to any of the Precision
Tune Marks, including, but not limited to, all commitments, agreements or
contracts embodying or evidencing the following transactions or arrangements:
(i) agreements for the employment of, or independent contractor arrangements
with, any officer or other individual employee of WE JAC or any of its
Subsidiaries; (ii) any consulting agreement, agency agreement and any other
service agreement that will continue in force after the Closing Date with
respect to the employment or retention by WE JAC or any of its Subsidiaries of
consultants, agents, legal counsel, accountants or anyone else who is not an
Employee; (iii) any single contract, purchase order or commitment providing for
expenditures by WE JAC or any of its Subsidiaries after the date hereof of more
than $25,000 or which has been entered into by WE JAC or any of its Subsidiaries
otherwise than in the ordinary course of business; (iv) agreements between WE
JAC or any of its Subsidiaries and suppliers to WE JAC or any of its
Subsidiaries pursuant to which either WE JAC or any of its Subsidiaries is
obligated to purchase or to sell or distribute the products of any other party
other than current purchase orders entered into in the ordinary course of
business consistent with past practices; (v) any contract containing covenants
limiting the freedom of WE JAC or any of its Subsidiaries or any officer,
director, or employee of WE JAC or any of its Subsidiaries to engage in any line
or type of business or with any person in any geographic area; (vi) any
commitment or arrangement by WE JAC or any of its Subsidiaries to participate in
a strategic alliance, partnership, joint venture, limited liability company or
other cooperative undertaking with any other Person; (vii) any commitments by WE
JAC or any of its Subsidiaries for capital expenditures involving more than
$25,000 individually or $50,000 in the aggregate; and (viii) any other contract,
commitment, agreement, understanding or arrangement that the management of WE
JAC deems to be material to the business of WE JAC or any of its Subsidiaries.
6.14.2 No Breaches or Defaults. Except as disclosed in the WE JAC
Disclosure Letter, WE JAC and each of its Subsidiaries is in full compliance
with each, and is not in default under any, Material Contract to which it is a
party, and no event has occurred that, with notice or lapse of time or both,
would constitute such a default thereunder. Neither WE JAC nor any of its
Subsidiaries has waived any rights under or with respect to any of the Material
Contracts to which it is a party. The management of WE JAC has no knowledge, has
not received any notice to the effect, that any party with whom WE JAC or any of
its Subsidiaries has contractual arrangements under the Material Contracts, is
in default under any such contractual arrangements or that any event has
occurred that, with notice or lapse of time or both, would constitute such a
default thereunder. Each of the Material Contracts constitutes a legal, valid
and binding obligation of each of the parties thereto and is enforceable against
each of the parties thereto in accordance with its respective terms; except as
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
exercise of judicial discretion in accordance with general principles of equity.
6.14.3 Franchise Agreements. The WE JAC Disclosure Letter contains a
complete list as of the date hereof of (i) all of the current franchisees of
Precision Tune to whom Precision Tune has granted any franchise or similar
rights with respect to the Precision Tune System or any license or similar
rights with respect to any of the Precision Tune Marks and (ii) all area
development, area franchise, area subfranchisor, master license or similar
agreements that cover the development or franchising of Precision Tune
franchises within any area or country or the delegation of duties by Precision
Tune with respect to its obligations as a franchisor or otherwise (collectively,
the "Precision Tune Franchise Agreements"). Each of the Precision Tune Franchise
Agreements is a legal, valid and binding obligation of Precision Tune and is
enforceable against Precision Tune in accordance with its respective terms.
Precision Tune is in full compliance with the terms of each of the Precision
Tune Franchise Agreements and no event has occurred that, with or without notice
or lapse of time or both, constitutes or will constitute a default by Precision
Tune thereunder or a breach by Precision Tune thereof. Except as disclosed in
the WE JAC Disclosure Letter, Precision Tune has not waived any rights under or
with respect to any of the Precision Tune Franchise Agreements. Except as
disclosed in the WE JAC Disclosure Letter, to the knowledge of management of WE
JAC, as of the date hereof none of the franchisees or licensees that are parties
to any of the Precision Tune Franchise Agreements is in default thereunder and
no event has occurred that, with or without notice or lapse of time or both,
constitutes or will constitute a default thereunder or a breach thereof by such
franchisees or licensees.
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SECTION 6.15 EMPLOYEE BENEFITS AND EMPLOYMENT MATTERS.
(a) Plans and Arrangements. The WE JAC Disclosure Letter sets forth a
true, complete and correct list of all Employee Benefit Plans and all Benefit
Arrangements to which WE JAC or any of its Subsidiaries or ERISA Affiliates is a
party or to which WE JAC or any of its Subsidiaries or ERISA Affiliates is
obligated to contribute. None of the Employee Benefit Plans to which WE JAC or
any ERISA Affiliate of WE JAC is a party, which WE JAC or any ERISA Affiliate of
WE JAC sponsors or maintains or to which WE JAC or any ERISA Affiliate of WE JAC
contributes is subject to the requirements of Section 302 of ERISA or Section
412 of the Code.
(b) Compliance with Laws and Terms of Plans. Except as disclosed in
the WE JAC Disclosure Letter, each Employee Benefit Plan and Benefit Arrangement
to which WE JAC or any of its Subsidiaries or ERISA Affiliates is a party or to
which WE JAC or any of its Subsidiaries or ERISA Affiliates is obligated to
contribute has been operated or maintained in compliance in all material
respects with all Applicable Laws, including, without limitation, ERISA and the
Code, and has been maintained in material compliance with its terms and in
material compliance with the terms of any applicable collective bargaining
agreement. Except as disclosed in the WE JAC Disclosure Letter, with respect to
any Employee Benefit Plan that is intended to qualify under Section 401 of the
Code, a favorable determination letter as to qualification under Section 401 of
the Code that considered the Tax Reform Act of 1986 has been issued and any
amendments required for continued qualification under Section 401 of the Code
have been timely adopted and nothing has occurred subsequent to the date of such
determination letter that could adversely affect the qualified status of any
such Plan.
(c) Contributions. All contributions required to be made to or benefit
liabilities arising under the terms of each Employee Benefit Plan or Benefit
Arrangement to which WE JAC or any of its Subsidiaries or ERISA Affiliates is a
party or to which WE JAC or any of its Subsidiaries or ERISA Affiliates is
obligated to contribute, under ERISA or the Code, for all periods of time prior
to the date hereof and that are attributable to Employees of WE JAC and its
Subsidiaries or ERISA Affiliates have been paid or otherwise adequately accrued
for or reserved against in the WE JAC Financial Statements, as the case may be.
(d) Arrearages and Employment Disputes. Except as disclosed in the WE
JAC Disclosure Letter, neither WE JAC nor any of its Subsidiaries is liable for
any arrearage of wages, any accrued or vested vacation pay or any tax or penalty
for failure to comply with any Applicable Law relating to employment or labor
above the level accrued for or reserved against on the June 30, 1997 balance
sheet included in the WE JAC Financial Statements, and there is no controversy
pending, threatened or in prospect between WE JAC or any of its Subsidiaries and
any of their respective Employees nor is the management of WE JAC aware of any
basis for any such controversy. There is no unfair labor practice charge or
complaint currently pending against WE JAC or any of its Subsidiaries with
respect to or relating to any of their respective Employees before the National
Labor Relations Board or any other agency having jurisdiction over such matters
and no charges or complaints are currently pending against WE JAC or any of its
Subsidiaries before the Equal Employment Opportunity Commission or any state or
local agency having responsibility for the prevention of unlawful employment
practices. There are no actions, suits or claims pending, including proceedings
before the IRS, the DOL or the PBGC, with respect to any Employee Benefit Plan,
Benefit Arrangement or any administrator or fiduciary thereof, other than
benefit claims arising in the normal course of operation of such Employee
Benefit Plans or Benefit Arrangements, and, to the knowledge of the management
of WE JAC, no Employee Benefit Plan or Benefit Arrangement is under audit or
investigation by any Governmental Authority.
(e) Severance Obligations. Except as disclosed in the WE JAC
Disclosure Letter, all current employees of WE JAC or any of its Subsidiaries
may be terminated at will, without notice and without incurring any severance or
other liability or obligation to the employee in connection with the
termination. Except to the extent provided by the terms of the Employee Benefit
Plans and Benefit Arrangements disclosed in the WE JAC Disclosure Letter,
neither the execution, delivery or performance of this Agreement nor the
consummation of the Closing will (i) increase any benefits otherwise payable
under any Employee Benefit Plan or Benefit Arrangement, (ii) result in the
acceleration of the time of payment or vesting of any such benefits, or (iii)
give rise to an obligation with respect to the payment of any severance pay. No
"parachute payment" (within the meaning of Section 280G of the Code), "change in
control" or severance payment has been made or will be required to be made by WE
JAC or any ERISA Affiliate of WE JAC to any Employee in connection with the
execution, delivery or performance of this Agreement or as a result of the
consummation of the Closing.
(f) Compliance with Laws on Employment Practices. WE JAC and each of
its Subsidiaries has complied in all material respects with all Applicable laws
relating to employment and employment practices, terms and conditions of
employment, wages and hours, and to the knowledge of the management of WE JAC,
is not engaged in any unfair labor practice with respect to any of the current
employees of WE JAC or any of its Subsidiaries; and to the knowledge of WE
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JAC, none of the persons performing services for WE JAC or any of its
Subsidiaries or ERISA Affiliates have been improperly classified as independent
contractors or as being exempt from payment of wages or overtime.
(g) Collective Bargaining Agreements. Except as disclosed in the WE
JAC Disclosure Letter, none of the employees of WE JAC or any of its
Subsidiaries are subject to any collective bargaining agreement nor is WE JAC or
any of its Subsidiaries required under any agreement to recognize or bargain
with any labor organization or union on behalf of its employees.
(h) No Multi-Employer Plans. Neither WE JAC nor any of its
Subsidiaries or ERISA Affiliates has contributed to, or had the obligation to
contribute to, any Multiemployer Plan within the five-year period ending on the
date of this Agreement.
(i) No Amendments to Plans. There has been no amendment to, written
interpretation or announcement (whether or not written) by WE JAC or any of its
Subsidiaries or ERISA Affiliates relating to, or change in employee
participation or coverage under, any Employee Benefit Plan or Benefit
Arrangement that would increase materially the expense of maintaining such
Employee Benefit Plan or Benefit Arrangement above the level of the expense
incurred in respect thereof for the fiscal year of WE JAC ended June 30, 1997.
(j) No Unfunded Liabilities. Neither WE JAC nor any ERISA Affiliate of
WE JAC has any current or projected liability for any unfunded post-retirement
medical or life insurance benefits in connection with any Employee of WE JAC or
ERISA Affiliate of WE JAC.
(k) No Prohibited Transactions. No event has occurred with respect to
any Employee Benefit Plan or any employee benefit plan previously sponsored,
maintained or contributed to by WE JAC or any ERISA Affiliate of WE JAC, which
could subject any such Employee Benefit Plan, WE JAC, any ERISA Affiliate of WE
JAC, or the Holding Company directly or indirectly (through an indemnification
agreement or otherwise), to any liability for or as a result of a breach of
fiduciary duty, a "prohibited transaction" within the meaning of Section 406 of
ERISA or Section 4975 of the Code, or a civil penalty under Section 502 of ERISA
or a Tax under Section 4971 of the Code. Neither WE JAC nor any of its ERISA
Affiliates have incurred a "withdrawal" or "partial withdrawal," as defined in
Sections 4203 and 4205 of ERISA, from, or failed to timely make contributions to
any Multiemployer Plan which has resulted in any unpaid liability of WE JAC or
any of its ERISA Affiliates.
(l) Welfare Benefit Plans. (i) Except as disclosed in the WE JAC
Disclosure Letter, none of the Employee Benefit Plans that are "employee welfare
benefit plans" as defined in ERISA Section 3(1) provides for continuing benefits
or coverage for any participant or beneficiary of a participant after such
participant's termination of employment, except to the extent required by law;
provided that any disclosure regarding this clause (i) shall set forth (A) the
number of individuals currently receiving such continuing benefits or coverage,
(B) the limit on liability with respect to such coverage, (C) the terms and
conditions of such coverage, and (D) the maximum number of current employees or
independent contractors who could become eligible for such continuing benefits
or coverage; (ii) there has been no violation of Code Section 4980B or ERISA
Sections 601-609 with respect to any such plan that could result in any material
liability; (iii) no such plans are "multiple employer welfare arrangements"
within the meaning of ERISA Section 3(40); (iv) with respect to any such plans
that are self-insured, no claims have been made pursuant to any such plan that
have not yet been paid (other than claims which have not yet been paid but are
in the normal course of processing) and no individual has incurred injury,
sickness or other medical condition with respect to which claims may be made
pursuant to any such plan where the liability to the employer could in the
aggregate with respect to each such individual exceed $50,000 per year; (v)
neither WE JAC nor any of its ERISA Affiliates maintains or has any obligation
to contribute to any "voluntary employees' beneficiary association" within the
meaning of Code Section 501(c)(9) or other welfare benefit fund as defined at
Section 419(e) of the Code (such disclosure to include the amount of any such
funding); (vi) no such plan is intended to satisfy Code Section 125; (vii) no
amounts are required in connection with any such plan to be included in income
under Code Section 105(h) (under official regulations thereof to date); and
(viii) neither WE JAC nor any of its ERISA Affiliates maintains a nonconforming
group health plan as defined at Section 5000(c) of the Code.
SECTION 6.16 TAX MATTERS.
(a) Tax Returns and Payment of Taxes. WE JAC and each of its
Subsidiaries has timely filed or will timely file all federal, state, local, and
other Tax Returns required to be filed by it under Applicable Laws, including
estimated Tax returns and reports and consolidated federal Income Tax Returns
and state, local or foreign Income Tax Returns filed on a consolidated or
combined basis, and WE JAC and each of its Subsidiaries has paid all required
Income Taxes and other Taxes
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(including any additions to taxes, penalties and interest related thereto) due
and payable on or before the date hereof (and will duly and timely pay all such
amounts required to be paid between the date hereof and the Closing Date). Each
of WE JAC and its Subsidiaries has paid, withheld, or will pay any and all Taxes
in respect of the conduct of its business or the ownership of its property and
in respect of any transaction for all periods (or portions thereof) through the
close of business on the Closing Date. WE JAC and each of its Subsidiaries have
collected all sales, use and value added Taxes required to be collected, and has
remitted, or will remit on a timely basis, such amounts to the appropriate
Government Authorities and have furnished properly completed exemption
certificates for all exempt transactions.
(b) Tax Reserves. The amount of the liability of WE JAC and of each of
its Subsidiaries for unpaid Taxes for all periods ending on or before the date
of this Agreement does not, in the aggregate, exceed the amount of the current
liability accruals for Taxes (excluding reserves for deferred Taxes) as of the
date of this Agreement, and the amount of the liability of WE JAC and of each of
its Subsidiaries for unpaid Taxes for all periods ending on or before the
Closing Date will not, in the aggregate, exceed the amount of the current
liability accruals for Taxes (excluding reserves for deferred Taxes) as such
accruals shall be reflected on the consolidated balance sheet of WE JAC and its
Subsidiaries as of the Closing Date.
(c) Audits; No Deficiencies Asserted. Except as set forth in the WE
JAC Disclosure Letter, none of the Tax Returns of WE JAC or of any of its
Subsidiaries have ever been audited by any Tax Authority, nor is any such audit
in process, pending or threatened (either in writing or verbally, formally or
informally), and all deficiencies asserted against WE JAC or any of its
Subsidiaries as a result of IRS examinations have been paid or finally settled
and no issue has been raised by any IRS examination that, by application of the
same principles, is likely to result in a proposed deficiency for any other
period not so examined. Except as set forth in the WE JAC Disclosure Letter, no
material deficiencies with respect to Taxes, additions to Tax, interest, or
penalties have been proposed or asserted against and communicated to WE JAC or
any of its Subsidiaries, except those that have been paid in full and for those
matters that would not result in liability being imposed against WE JAC or any
of its Subsidiaries.
(d) No Waivers of Limitations. Except as set forth in the WE JAC
Disclosure Letter, there are no agreements, waivers of statutes of limitations,
or other arrangements providing for extensions of time in respect of the
assessment or collection of any unpaid Tax against WE JAC or any of its
Subsidiaries. WE JAC and each of its Subsidiaries have disclosed on its federal
Income Tax Returns all positions taken therein that could, if not so disclosed,
give rise to a substantial understatement penalty within the meaning of Section
6662 of the Code.
(e) No Tax Liens. There are no Encumbrances on any of the assets,
rights or properties of WE JAC or of any of is Subsidiaries with respect to
Taxes, other than liens for Taxes not yet due and payable or for Taxes that WE
JAC or one or more of its Subsidiaries are contesting in good faith through
appropriate proceedings and for which appropriate reserves have been established
on the WE JAC Financial Statements.
(f) Special Tax Elections or Benefits. Neither WE JAC nor any of is
Subsidiaries is a party to any safe harbor lease within the meaning of Section
168(f)(8) of the Code. No election or consent under Section 341(f) of the Code
has been made or shall be made on or prior to the Closing Date by or on behalf
of any of WE JAC or any of its Subsidiaries.
(g) Disqualified Leasebacks. Neither WE JAC nor any of its
Subsidiaries is a party to a "disqualified leaseback or long-term agreement"
described in Section 467(b)(4) of the Code.
(h) Deferrals of Income. No income or gain of WE JAC or any of its
Subsidiaries has been deferred pursuant to Treasury Regulation (section mark)
1.1502-13 or 1.1502-14, or Temporary Treasury Regulation (section mark)
1.1502-13T or 1.1502-14T.
(i) Tax Sharing and Similar Agreements. Except as disclosed in the WE
JAC Disclosure Letter, neither WE JAC nor any of its Subsidiaries is a party to
or bound by any Tax sharing, Tax indemnity or Tax allocation agreement or other
similar arrangement with any Person other than a Constituent Company of the WE
JAC Group.
(j) No Non-Deductible Compensation Payments. Neither WE JAC nor any of
its Subsidiaries has made any payments, and are not obligated to make any
payments, that would not be deductible under Section 280G of the Code or is a
party to any agreement that under certain circumstances could obligate it to
make any such payments.
SECTION 6.17 ENVIRONMENTAL MATTERS.
(a) The facilities presently or formerly occupied or used by WE JAC or
any of its Subsidiaries and any other real property presently or formerly owned
by, used by or leased to or by WE JAC or any of its Subsidiaries (collectively,
the "WE JAC Property"), the existing and prior uses of such WE JAC Property and
all operations of the businesses of WE JAC and of each of its Subsidiaries
comply and have at all times complied with all Environmental Laws and neither WE
JAC nor any of
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its Subsidiaries is in violation or has violated, in connection with the
ownership, use, maintenance or operation of such property or the conduct of its
business, any Environmental Law.
(b) WE JAC and each of its Subsidiaries have all necessary permits,
registrations, approvals and licenses required by any Governmental Authority or
Environmental Law.
(c) There has been no spill, discharge, leak, emission, injection,
disposal, escape, dumping or release of any kind on, beneath or above such WE
JAC Property or into the environment surrounding such WE JAC Property of any
Hazardous Materials.
(d) There has been no past, and there is no current or anticipated
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any Hazardous Materials at, upon or from such WE JAC
Property. No asbestos-containing materials, underground improvements (including,
but not limited to the treatment or storage tanks, sumps, or water, gas or oil
wells) or polychlorinated biphenyls (PCBs) transformers, capacitors, ballasts,
or other equipment which contain dielectric fluid containing PCBs at levels in
excess of fifty parts per million (50 PPM) are or have ever been located on such
WE JAC Property.
(e) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or threatened by any
Governmental Authority or third party with respect to the business or any
Property of WE JAC (or any predecessor in interest) in connection with (i) any
actual or alleged failure to comply with any requirement of any Environmental
Law; (ii) the ownership, use, maintenance or operation of the Property by any
person; (iii).the alleged violation of any Environmental Law; or (iv) the
suspected presence of any Hazardous Material thereon.
(f) Neither WE JAC nor any of its Subsidiaries has ever had the
capacity to exercise control/manage and has never exercised control or
management over any matter relating to its franchisees' manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of any
Hazardous Material.
SECTION 6.18 COMPLIANCE WITH LAWS.
WE JAC and each of its Subsidiaries has at all times conducted its business
in material compliance with all (and has not received any notice of any claimed
violation of any) Applicable Laws. Precision Tune has complied in all material
respects with all of the rules and regulations of the Federal Trade Commission
of the United States relating to the offer and sale of franchises.
SECTION 6.19 LICENSES AND PERMITS.
WE JAC and each of its Subsidiaries possess all licenses, permits, and
other governmental consents, certificates, approvals, or other authorizations
(the "Permits") necessary for the operation of their respective businesses. WE
JAC and each of its Subsidiaries has complied with the terms and conditions of
all Permits in all material respects and all such Permits are in full force and
effect, and there has occurred no event nor is any event, action, investigation
or proceeding pending or, to the knowledge of management of WE JAC, threatened,
which could cause or permit revocation or suspension of or otherwise adversely
affect the maintenance of any Permits. The transactions contemplated by this
Agreement will not lead to the revocation, cancellation, termination or
suspension of any Permits.
SECTION 6.20 INSURANCE.
WE JAC and each of its Subsidiaries has regularly maintained all policies
of commercial liability, products liability, fire, casualty, worker's
compensation, life and other forms of insurance on an "occurrence" rather than a
"claims made" basis in amounts and types required by law and generally carried
by reasonably prudent, similarly situated businesses. Neither WE JAC nor any of
its Subsidiaries is in default with respect to any provision contained in any
insurance policy, nor has WE JAC or any of its Subsidiaries failed to give any
notice or present any claim thereunder in due and timely fashion and no
cancellation, non-renewal, reduction of coverage or arrearage in premiums has
been threatened or occurred with respect to any policy, nor is the management of
WE JAC aware of any grounds therefor.
SECTION 6.21 EXTRAORDINARY TRANSACTIONS.
Except as disclosed in the WE JAC Disclosure Letter or as otherwise
permitted by this Agreement, since June 30, 1997, neither WE JAC nor any of its
Subsidiaries has (i) mortgaged, pledged or subjected to any Encumbrance any of
its assets; (ii) canceled or compromised any claim of or debts owed to it; (iii)
sold, licensed, leased, exchanged or transferred any of its assets except in the
ordinary course of business; (iv) entered into any material transaction other
than in the ordinary course of
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business; (v) experienced any material change in the relationship or course of
dealing with any supplier, franchisee, customer or creditor; (vi) suffered any
material destruction, loss or damage to any of its assets; (vii) made any
management decisions involving any material change in its policies with regard
to pricing, sales, purchasing or other business, financial, accounting
(including reserves and the amounts thereof) or tax policies or practices;
(viii) declared, set aside or paid any dividends on or made any distributions in
respect of any outstanding shares of capital stock or made any other
distributions or payments to any of the shareholders of WE JAC; (ix) submitted
any bid, proposal, quote or commitment to any party in response to a request for
proposal or otherwise; (x) engaged in any merger or consolidation with, or
agreed to merge or consolidate with, or purchased or agreed to purchase, all or
substantially all of the assets of, or otherwise acquire, any other party; (xi)
entered into any strategic alliance, partnership, joint venture or similar
arrangement with any other party; (xii) incurred or agreed to incur any Debt or
prepaid or made any prepayments in respect of Debt; (xiii) issued or agreed to
issue to any party, any shares of stock or other securities; (xiv) redeemed,
purchased or agreed to redeem or purchase any of its outstanding shares of
capital stock or other securities; (xv) increased the rate of compensation
payable or to become payable to any of its officers, directors, employees or
agents over the rate being paid to them as of June 30, 1997 or agreed to do so
otherwise than in accordance with contractual agreements with such parties;
(xvi) made or agreed to make any charitable contributions or incurred or agreed
to incur any non-business expenses; or (xvii) charged off any bad debts or
increased its bad debt reserve except in the manner consistent with its past
practices.
SECTION 6.22 TITLE TO ASSETS.
Except as described in the WE JAC Disclosure Letter, WE JAC and each of its
Subsidiaries has good and marketable title to its assets and properties, free
and clear of restrictions on or conditions to transfer or assignment, and free
and clear of all Encumbrances.
SECTION 6.23 CORPORATE RECORDS.
The minute books of WE JAC and each of its Subsidiaries accurately reflect
all minutes of proceedings of and actions taken by the directors of WE JAC and
its Subsidiaries, respectively, and each committee of the Board of Directors of
WE JAC or any of its Subsidiaries and all records of meetings of and actions
taken by the stockholders of WE JAC, that are required by applicable laws to be
recorded in or reflected in the corporate records thereof.
SECTION 6.24 BROKER AND FINDER FEES.
WE JAC has not engaged any broker or finder in connection with the
transactions contemplated by this Agreement, and no action by any of the
foregoing will cause or support any claim to be asserted against the Holding
Company, WE JAC or any of its Subsidiaries by any broker, finder or intermediary
in connection with such transaction.
SECTION 6.25 ADEQUATE DISCLOSURE.
No representation or warranty made by WE JAC pursuant to this Agreement, or
any statement contained in any Exhibit or Schedule to this Agreement, or any
certificate or document furnished or to be furnished by WE JAC or any of its
Subsidiaries pursuant to the terms of this Agreement in connection with the
transactions contemplated hereby, contains any untrue or misleading statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained therein not misleading.
SECTION 6.26 NO ADVERSE CHANGE OR CONDITIONS.
Except as set forth in the WE JAC Disclosure Letter, and except as
expressly contemplated or permitted by this Agreement, since June 30, 1997, WE
JAC and each of its Subsidiaries has conducted its business in the ordinary
course and consistent with past practice, and neither WE JAC nor any of its
Subsidiaries has suffered any change that has had a Material Adverse Effect on
WE JAC and its Subsidiaries, taken as a whole. There are no conditions, facts,
developments or circumstances of an unusual or special nature that reasonably
could be expected to have a Material Adverse Effect upon WE JAC and its
Subsidiaries, taken as a whole, that have not been disclosed in writing by WE
JAC pursuant to the WE JAC Disclosure Letter.
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ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF LUBE VENTURE
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, subject to the delivery
and acceptance of a definitive Disclosure Letter, Lube Ventures hereby makes the
following representations and warranties to the other parties to this Agreement
and to the Holding Company:
SECTION 7.1 ORGANIZATION AND GOOD STANDING.
Lube Ventures is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has full corporate power
and authority to own, operate and lease its properties, and to conduct its
business as it is now being conducted, and is qualified to transact business as
a foreign corporation in each jurisdiction in which the operation of its
business or the ownership of its properties requires such qualification.
SECTION 7.2 CAPITALIZATION OF LUBE VENTURES.
The authorized capital stock of Lube Ventures consists solely of 3,000
shares of a single class of common stock, $-0- par value, of which 100 shares
have been issued and are outstanding as of the date of this Agreement. Each of
the shares of the capital stock of Lube Ventures issued and outstanding as of
the date hereof has been duly authorized and validly issued and is fully paid
and non-assessable. None of the shares of the issued and outstanding capital
stock of Lube Ventures has been issued in violation of shareholder preemptive
rights. Lube Ventures has no issued or outstanding equity securities, debt
securities or other instruments which are convertible into or exchangeable for
at any time into equity securities of Lube Ventures. Lube Ventures is not
subject to any commitment or obligation which would require the issuance or sale
of shares of its capital stock at any time under options, subscriptions,
warrants, rights, calls, preemptive rights, convertible obligations or any other
fixed or contingent obligations or which would provide the holder thereof with
the right to acquire any equity securities of Lube Ventures. Lube Ventures has
no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its equity securities or any interest therein or to pay any dividend or
make any other distribution in respect thereof.
SECTION 7.3 OWNERSHIP OF SHARES.
The Lube Ventures Disclosure Letter contains a true, complete and accurate
list of all of the record and beneficial owners of the shares of the capital
stock of Lube Ventures, together the name and address of each such holder.
Except as disclosed in the Lube Ventures Disclosure Letter, there are no
existing agreements, pledges, powers of attorney, assignments or similar
agreements or arrangements either (i) restricting the transferability of any of
the shares of the capital stock of Lube Ventures or (ii) which reasonably could
be expected to prohibit or delay the consummation of the transactions
contemplated hereby.
SECTION 7.4 SUBSIDIARIES; INVESTMENTS.
Lube Ventures does not own any shares of capital stock or equity securities
of, or any interest in any other Person or entity.
SECTION 7.5 EXECUTION AND EFFECT OF AGREEMENT.
Lube Ventures has the corporate power to enter into this Agreement and to
perform its obligations hereunder and, subject to the due authorization and
approval of its shareholders, to enter into and consummate the Lube Ventures
Merger. This Agreement has been duly executed and delivered by Lube Ventures and
constitutes a legal, valid and binding obligation of Lube Ventures, fully
enforceable against Lube Ventures in accordance with its terms; except as
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
exercise of judicial discretion in accordance with general principles of equity.
SECTION 7.6 RESTRICTIONS.
The execution and delivery of this Agreement by Lube Ventures, the
consummation of the transactions contemplated hereby by Lube Ventures, and,
subject to the due authorization and approval of its shareholders, the
performance of the obligations of Lube Ventures hereunder will not (a) violate
any of the provisions of the charter or by-laws of Lube Ventures, (b) violate or
conflict with the provisions of any Applicable Laws, (c) result in the creation
of any Encumbrance upon any of the assets, rights or properties of Lube
Ventures, or (d) except as disclosed in the Lube Ventures Disclosure Letter,
conflict with, violate any provisions of, result in a breach of or give rise to
a right of termination, modification or cancellation of,
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constitute a default of, or accelerate the performance required by, with or
without the passage of time or the giving of notice or both, the terms of any
material agreement, indenture, mortgage, deed of trust, security or pledge
agreement, lease, contract, note, bond, license, permit, authorization or other
instrument to which Lube Ventures is a party or to which any of any of the
assets of Lube Venture are subject.
SECTION 7.7 CONSENTS.
Except as disclosed in the Lube Ventures Disclosure Letter and as may be
required by Applicable Laws relating to franchising, no filing with, or consent,
waiver, approval or authorization of, or notice to, any governmental authority
or any third party is required to be made or obtained by Lube Ventures in
connection with the execution and delivery of this Agreement or any document or
instrument contemplated hereby, the consummation of any of the transactions
contemplated hereby or the performance of any of their respective obligations
hereunder or thereunder.
SECTION 7.8 FINANCIAL STATEMENTS.
Attached hereto as Exhibit E are true and correct copies of the audited
financial statements of Lube Ventures as at December 31, 1994, 1995 and 1996,
and for the year periods then ended and the unaudited financial statements of
Lube Venturess as at June 30, 1997 and for the six month period then ended
(collectively, the "Lube Ventures Financial Statements"). All of the Lube
Ventures Financial Statements have been prepared in accordance with GAAP. All of
the Lube Ventures Financial Statements have been prepared in a manner consistent
with each other and the books and records of Lube Ventures, and fairly present
in all material respects the financial condition and results of operations of
Lube Ventures at the dates and for the periods indicated therein. The regular
books of account of Lube Ventures fairly and accurately reflect all material
transactions involving Lube Ventures, are true, correct and complete and have
been prepared in accordance with GAAP and on a basis consistent with the
Financial Statements. All of the accounts receivable of Lube Ventures reflected
on the Lube Ventures Financial Statements arose from bona fide, arms-length
transactions in the ordinary course of business for services performed or goods
sold by Lube Ventures, and are not subject to any counterclaim, deduction, right
of set off, set off or recoupment, and will be collectible in the ordinary
course of business in the aggregate face amounts thereof, subject to the
reserves therefore set forth on the Lube Ventures Financial Statements. All
inventories reflected on the books and records of Lube Venture and on the Lube
Ventures Financial Statements are of a quality and quantity which are good and
marketable, and are saleable in the ordinary course of business which shall
result in Lube Ventures realizing gross profits on such sales consistent with
the gross profits of Lube Ventures reflected in the Lube Venture Financial
Statements. The costs of all inventories reflected thereon have been valued in
accordance with GAAP.
SECTION 7.9 DEBT.
The Lube Ventures Disclosure Letter contains a true, complete and accurate
listing of the original principal amount of all of the Debt of Lube Ventures,
the remaining principal balance thereof, the interest rate(s) payable by Lube
Ventures in respect thereof, if any, and the date(s) of maturity thereof. Except
as disclosed in the Lube Ventures Disclosure Letter, all of the Debt of Lube
Ventures may be prepaid at any time, without premium, prepayment penalties,
termination fees or other fees or charges.
SECTION 7.10 GUARANTEES.
The Lube Ventures Disclosure Letter contains a complete list of all
Guarantees provided by Lube Ventures for the benefit of any other party and of
all Guarantees provided by any other party for the benefit of Lube Ventures or
any party doing business with Lube Ventures.
SECTION 7.11 NO UNDISCLOSED LIABILITIES.
Lube Ventures does not have any material liabilities or obligations of any
nature whatsoever (whether known or unknown, due or to become due, absolute,
accrued, contingent or otherwise, and whether or not determined or
determinable), except for (i) liabilities or obligations set forth in the Lube
Ventures Disclosure Letter, (ii) liabilities or obligations to the extent
expressly reflected on or reserved against in the June 30, 1997 balance sheet
included among the Lube Ventures Financial Statements or disclosed in the notes
thereto, (iii) liabilities or obligations of a type reflected on the June 30,
1997 balance sheet and incurred in the ordinary course of business and
consistent with past practices since June 30, 1997, or (iv) liabilities or
obligations arising under the terms of the Material Contracts of Lube Ventures.
Except as otherwise contemplated or permitted by this Agreement no dividends
have been declared on any capital stock of Lube Ventures which are unpaid.
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SECTION 7.12 LITIGATION.
There is no suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or, to the knowledge of the
management of Lube Ventures, threatened, by or before any court, any
Governmental Authority or arbitrator, against Lube Ventures that reasonably
could be expected to prevent the consummation of any of the transactions
contemplated hereby. Except as disclosed in the Lube Ventures Disclosure Letter,
there is no material suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or to the knowledge of management
of Lube Ventures, threatened, by or before any arbitrator, court, or other
Governmental Authority, against Lube Ventures or involving any of the former or
present employees, agents, businesses, properties, rights or assets of Lube
Venture, nor, to the knowledge of management of Lube Ventures, is there any
basis for the assertion of any of the foregoing. Except as disclosed in the Lube
Ventures Disclosure Letter, there are no judgments, orders, injunctions,
decrees, stipulations or awards rendered by any court, Governmental Authority or
arbitrator against Lube Ventures or any of their respective former or present
Employees, agents, properties or assets.
SECTION 7.13 PROPERTIES; ABSENCE OF ENCUMBRANCES.
The Lube Ventures Disclosure Letter sets forth a complete list of all real
property owned by or leased to Lube Ventures, and, with respect to all
properties leased by Lube Venture, a description of the term of such lease and
the monthly rental thereunder. Lube Ventures is not in default (and will not be
in default with the passage of time or the receipt of notice or both) and has
not received notice of default, under any lease of real property. All real
property leased to Lube Venture is available for immediate use in the operation
of its business and for the purpose for which such property currently is being
utilized. Subject in the case of leased property to the terms and conditions of
the respective leases, Lube Ventures has full legal and practical access to all
such real property.
SECTION 7.14 INTELLECTUAL PROPERTY.
The Lube Ventures Disclosure Letter sets forth a complete list of (i) any
and all Intellectual Property owned, used or licensed by Lube Ventures, together
with the identity of the owner thereof, and (ii) all license agreements pursuant
to which any Intellectual Property is licensed to or by Lube Ventures. Lube
Ventures owns its Intellectual Property free and clear of any and all
Encumbrances, or, in the case of licensed Intellectual Property, has valid,
binding and enforceable rights to use such Intellectual Property. Lube Ventures
has duly and timely filed all renewals, continuations and other filings
necessary to maintain its Intellectual Property or registrations thereof. Except
as disclosed in the Lube Ventures Disclosure Letter, Lube Ventures (i) has not
received any notice or claim to the effect that the use of any Intellectual
Property infringes upon, conflicts with or misappropriates the rights of any
other party or that any of the Intellectual Property is not valid or
enforceable, and (ii) has not made any claim that any party has violated or
infringed upon its rights with respect to any Intellectual Property.
SECTION 7.15 MATERIAL CONTRACTS.
(a) List of Material Contracts. The Lube Venture Disclosure Letter
sets forth a list of all written, and a description of all oral, commitments,
agreements or contracts to which Lube Ventures is a party or by which Lube
Ventures is obligated, including, but not limited to, all commitments,
agreements or contracts embodying or evidencing the following transactions or
arrangements: (i) agreements for the employment of, or independent contractor
arrangements with, any officer or other individual Employee of Lube Ventures;
(ii) any consulting agreement, agency agreement and any other service agreement
that will continue in force after the Closing Date with respect to the
employment or retention by Lube Ventures of consultants, agents, legal counsel,
accountants or anyone else who is not an Employee; (iii) any single contract,
purchase order or commitment providing for expenditures by Lube Ventures after
the date hereof of more than $25,000 or which has been entered into by Lube
Ventures otherwise than in the ordinary course of business; (iv) agreements
between Lube Ventures and suppliers to Lube Ventures pursuant to which Lube
Ventures is obligated to purchase or to sell or distribute the products of any
other party other than current purchase orders entered into in the ordinary
course of business consistent with past practices; (v) any contract containing
covenants limiting the freedom of Lube Ventures or any officer, director, or
employee of Lube Venture to engage in any line or type of business or with any
person in any geographic area; (vi) any commitment or arrangement by Lube
Ventures to participate in a strategic alliance, partnership, joint venture,
limited liability company or other cooperative undertaking with any other
Person; (vii) any commitments by Lube Ventures for capital expenditures
involving more than $25,000 individually or $50,000 in the aggregate; and (viii)
any other contract, commitment, agreement, understanding or arrangement that the
management of Lube Venture deems to be material to the business of Lube
Ventures.
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(b) No Breaches or Defaults. Except as disclosed in the Lube Ventures
Disclosure Letter, Lube Ventures and is in full compliance with each, and is not
in default under any, Material Contract to which it is a party, and no event has
occurred that, with notice or lapse of time or both, would constitute such a
default thereunder. Neither Lube Ventures nor any of Subsidiaries has waived any
rights under or with respect to any of the Material Contracts to which it is a
party. The management of Lube Ventures has no knowledge, or received any notice
to the effect, that any party with whom Lube Ventures has contractual
arrangements under the Material Contracts, is in default under any such
contractual arrangements or that any event has occurred that, with notice or
lapse of time or both, would constitute such a default thereunder. Each of the
Material Contracts constitutes a legal, valid and binding obligation of each the
parties thereto and is enforceable against each of the parties thereto in
accordance with its respective terms; except as enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the exercise of judicial
discretion in accordance with general principles of equity.
(c) Franchise Agreements. The Lube Ventures Disclosure Letter contains
a complete list of all of the current franchisees of Lube Ventures to whom Lube
Ventures has granted to any franchise or similar rights with respect to the Lube
Depot System (collectively, the "Lube Depot Franchise Agreements"). Each of the
Lube Depot Franchise Agreements is a legal, valid and binding obligation of Lube
Ventures and is enforceable against Lube Ventures in accordance with its
respective terms. Lube Ventures is in full compliance with the terms of each of
the Lube Depot Franchise Agreements and no event has occurred that, with or
without notice or lapse of time or both, constitutes or will constitute a
default by Lube Ventures thereunder or a breach by Lube Ventures thereof. Except
as disclosed in the Lube Ventures Disclosure Letter, Lube Ventures has not
waived any rights under or with respect to any of the Lube Depot Franchise
Agreements. Except as disclosed in the Lube Ventures Disclosure Letter, to the
knowledge of management of Lube Ventures, none of the franchisees or licensees
that are parties to any of the Lube Depot Franchise Agreements is in default
thereunder and no event has occurred that, with or without notice or lapse of
time or both, constitutes or will constitute a default thereunder or a breach
thereof by such franchisees or licensees.
SECTION 7.16 EMPLOYEE BENEFITS AND EMPLOYMENT MATTERS.
(a) Plans and Arrangements. The Lube Ventures Disclosure Letter sets
forth a true, complete and correct list of all Employee Benefit Plans and all
Benefit Arrangements to which Lube Ventures or any of its ERISA Affiliates is a
party or to which Lube Ventures or any of its ERISA Affiliates is obligated to
contribute. None of the Employee Benefit Plans to which Lube Ventures or any
ERISA Affiliate of Lube Ventures is a party, which Lube Venture or any ERISA
Affiliate of Lube Ventures sponsors or maintains or to which Lube Ventures or
any ERISA Affiliate of Lube Ventures contributes is subject to the requirements
of Section 302 of ERISA or Section 412 of the Code and no liability under Title
IV of ERISA (whether to the PBGC or otherwise) has been incurred by Lube
Ventures or any of its ERISA Affiliates.
(b) Compliance with Laws and Terms of Plans. Except as disclosed in
the Lube Ventures Disclosure Letter, each Employee Benefit Plan and Benefit
Arrangement to which Lube Ventures or any of its ERISA Affiliates is a party or
to which Lube Ventures or any of its ERISA Affiliates is obligated to contribute
has been operated or maintained in compliance in all material respects with all
Applicable Laws, including, without limitation, ERISA and the Code, and has been
maintained in material compliance with its terms and in material compliance with
the terms of any applicable collective bargaining agreement. Except as disclosed
in the Lube Ventures Disclosure Letter, with respect to any Employee Benefit
Plan that is intended to qualify under Section 401 of the Code, a favorable
determination letter as to qualification under Section 401 of the Code that
considered the Tax Reform Act of 1986 has been issued and any amendments
required for continued qualification under Section 401 of the Code have been
timely adopted and nothing has occurred subsequent to the date of such
determination letter that could adversely affect the qualified status of any
such Plan.
(c) Contributions. All contributions required to be made to or benefit
liabilities arising under the terms of each Employee Benefit Plan or Benefit
Arrangement to which Lube Ventures or any of its ERISA Affiliates is a party or
to which Lube Ventures or any of its ERISA Affiliates is obligated to
contribute, under ERISA or the Code, for all periods of time prior to the date
hereof and that are attributable to Employees of Lube Ventures have been paid or
otherwise adequately accrued against in the Lube Ventures Financial Statements,
as the case may be.
(d) Arrearages and Employment Disputes. Except as disclosed in the
Lube Ventures Disclosure Letter, Lube Ventures is not liable for any arrearage
of wages, any accrued or vested vacation pay or any tax or penalty for failure
to comply with any Applicable Law relating to employment or labor above the
level accrued for or reserved against on the June 30, 1997 balance sheet
included in the Lube Ventures Financial Statements, and there is no controversy
pending, threatened or in
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prospect between Lube Ventures and any of their respective Employees nor is
there any basis for any such controversy. There is no unfair labor practice
charge or complaint currently pending against Lube Ventures with respect to or
relating to any of their respective Employees before the National Labor
Relations Board or any other agency having jurisdiction over such matters and no
charges or complaints are currently pending against Lube Ventures before the
Equal Employment Opportunity Commission or any state or local agency having
responsibility for the prevention of unlawful employment practices. There are no
actions, suits or claims pending, including proceedings before the IRS, the DOL
or the PBGC, with respect to any Employee Benefit Plan, Benefit Arrangement or
any administrator or fiduciary thereof, other than benefit claims arising in the
normal course of operation of such Employee Benefit Plans or Benefit
Arrangements, and, to the knowledge of the management of Lube Ventures, no
Employee Benefit Plan or Benefit Arrangement is under audit or investigation by
any Governmental Authority.
(e) Severance Obligations. Except as disclosed in the Lube Ventures
Disclosure Letter, all current employees of Lube Ventures may be terminated at
will, without notice and without incurring any severance or other liability or
obligation to the employee in connection with the termination. Except to the
extent provided by the terms of the Employee Benefit Plans and Benefit
Arrangements disclosed in the Lube Ventures Disclosure Letter, neither the
execution, delivery or performance of this Agreement nor the consummation of the
Closing will (i) increase any benefits otherwise payable under any Employee
Benefit Plan or Benefit Arrangement, (ii) result in the acceleration of the time
of payment or vesting of any such benefits, or (iii) give rise to an obligation
with respect to the payment of any severance pay. No "parachute payment" (within
the meaning of Section 280G of the Code), "change in control" or severance
payment has been made or will be required to be made by Lube Ventures or any
ERISA Affiliate of Lube Ventures to any of its Employees in connection with the
execution, delivery or performance of this Agreement or as a result of the
consummation of the Closing.
(f) Compliance with Laws on Employment Practices. Lube Ventures has
complied in all material respects with all Applicable laws relating to
employment and employment practices, terms and conditions of employment, wages
and hours, and to the knowledge of the management of Lube Ventures, is not
engaged in any unfair labor practice with respect to any of the current
employees of Lube Ventures; and to the best knowledge of Lube Ventures, none of
the persons performing services for Lube Venture or any of its ERISA Affiliates
has been improperly classified as independent contractors or as exempt from
payment of wages or overtime.
(g) Collective Bargaining Agreements. Except as disclosed in the Lube
Ventures Disclosure Letter), none of the employees of Lube Venture are subject
to any collective bargaining agreement nor is Lube Ventures required under any
agreement to recognize or bargain with any labor organization or union on behalf
of its employees.
(h) No Multi-Employer Plans. Neither Lube Venture nor any of its ERISA
Affiliates has contributed to, or had the obligation to contribute to, any
Multiemployer Plan within the five-year period ending on the date of this
Agreement.
(i) No Amendments to Plans. There has been no amendment to, written
interpretation or announcement (whether or not written) by Lube Ventures or any
of its ERISA Affiliates relating to, or change in employee participation or
coverage under, any Employee Benefit Plan or Benefit Arrangement that would
increase materially the expense of maintaining such Employee Benefit Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year of Lube Ventures ended December 31, 1996.
(j) No Unfunded Liabilities. Neither Lube Venture nor any ERISA
Affiliate of Lube Ventures has any current or projected liability for any
unfunded post-retirement medical or life insurance benefits in connection with
any Employee of Lube Ventures or ERISA Affiliate of Lube Ventures.
(k) No Prohibited Transactions. No event has occurred with respect to
any Employee Benefit Plan or any employee benefit plan previously sponsored,
maintained or contributed to by Lube Ventures or any ERISA Affiliate of Lube
Ventures, which could subject any such Employee Benefit Plan, Lube Ventures, any
ERISA Affiliate of Lube Ventures, or the Holding Company directly or indirectly
(through an indemnification agreement or otherwise), to any liability for or as
a result of a breach of fiduciary duty, a "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the Code, or a civil penalty
under Section 502 of ERISA or a Tax under Section 4971 of the Code. Neither Lube
Venture nor any of its ERISA Affiliates have incurred a "withdrawal" or "partial
withdrawal," as defined in Sections 4203 and 4205 of ERISA, from, or failed to
timely make contributions, to any Multiemployer Plan which has resulted in any
unpaid liability of Lube Ventures or any of its ERISA Affiliates.
(l) Welfare Benefit Plans. (i) Except as disclosed in the Lube
Ventures Disclosure Letter, none of the Employee Benefit Plans that are
"employee welfare benefit plans" as defined in ERISA Section 3(1) provides for
continuing benefits or coverage for any participant or beneficiary of a
participant after such participant's termination of employment, except to the
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extent required by law; provided that any disclosure regarding this clause (i)
shall set forth (A) the number of individuals currently receiving such
continuing benefits or coverage, (B) the limit on liability with respect to such
coverage, (C) the terms and conditions of such coverage, and (D) the maximum
number of current employees or independent contractors who could become eligible
for such continuing benefits or coverage; (ii) there has been no violation of
Code Section 4980B or ERISA Sections 601-609 with respect to any such plan that
could result in any material liability; (iii) no such plans are "multiple
employer welfare arrangements" within the meaning of ERISA Section 3(40); (iv)
with respect to any such plans that are self-insured, no claims have been made
pursuant to any such plan that have not yet been paid (other than claims which
have not yet been paid but are in the normal course of processing) and no
individual has incurred injury, sickness or other medical condition with respect
to which claims may be made pursuant to any such plan where the liability to the
employer could in the aggregate with respect to each such individual exceed
$50,000 per year; (v) Neither Lube Ventures nor any of its ERISA Affiliates
maintains or has any obligation to contribute to any "voluntary employees'
beneficiary association" within the meaning of Code Section 501(c)(9) or other
welfare benefit fund as defined at Section 419(e) of the Code (such disclosure
to include the amount of any such funding); (vi) no such plan is intended to
satisfy Code Section 125; (vii) no amounts are required in connection with any
such plan to be included in income under Code Section 105(h) (under official
regulations thereof to date); and (viii) neither Lube Ventures nor any of its
ERISA Affiliates maintains a nonconforming group health plan as defined at
Section 5000(c) of the Code.
SECTION 7.17 TAX MATTERS.
(a) Affiliated Groups. Lube Ventures is not a member of, and has never
been a member of, any "affiliated group" as that term is defined in Section
1054(a) of the Code.
(b) Tax Returns and Payment of Taxes. Lube Venture has timely filed or
will timely file all federal, state, local, and other Tax Returns required to be
filed by it under Applicable Laws with respect to all periods prior to the date
hereof, including estimated Tax Returns and reports, and has paid all required
Income Taxes and other Taxes (including any additions to taxes, penalties and
interest related thereto) due and payable on or before the date hereof. Lube
Ventures has paid, withheld, or accrued, or will accrue, on the Lube Ventures
Financial Statements in accordance with GAAP any and all Income Taxes and other
Taxes in respect of the conduct of its business or the ownership of its property
and in respect of any transactions for all periods (or portions thereof) through
the close of business on the Closing Date. Lube Ventures has withheld and paid
over all Taxes required to have been withheld and paid over, and complied with
all information reporting and backup withholding requirements, including the
maintenance of required records with respect thereto, in connection with amounts
paid or owing to any Employee, creditor, independent contractor or other third
party. Lube Ventures has collected all sales, use and value added Taxes required
to be collected, and has remitted, or will remit on a timely basis, such amounts
to the appropriate Government Authorities and have furnished properly completed
exemption certificates for all exempt transactions.
(c) Tax Reserves. The amount of Lube Ventures's liability for unpaid
Taxes for all periods ending on or before the date of this Agreement does not,
in the aggregate, exceed the amount of the current liability accruals for Taxes
(excluding reserves for deferred Taxes) as of the date of this Agreement, and
the amount of Lube Ventures 's liability for unpaid Taxes for all periods ending
on or before the Closing Date shall not, in the aggregate, exceed the amount of
the current liability accruals for Taxes (excluding reserves for deferred Taxes)
as such accruals shall be reflected on the balance sheet of Lube Ventures as of
the Closing Date.
(d) Audits; No Deficiencies Asserted Against Company. The Tax Returns
of Lube Ventures have never been audited by any Tax Authority, nor is any such
audit in process, pending or threatened (either in writing or verbally, formally
or informally). Except as disclosed in the Lube Venture Disclosure Letter, no
deficiencies have been asserted (or are expected to be asserted) against Lube
Ventures as a result of IRS (or state or local Tax Authority) examinations and
no issue has been raised by any IRS (or state or local Tax Authority)
examination that, by application of the same principles, might result in a
proposed deficiency for any other period not so examined.
(e) No Waivers of Limitations. Except as disclosed in the Lube
Ventures Disclosure Letter, there are no agreements, waivers of statutes of
limitations, or other arrangements providing for extensions of time in respect
of the assessment or collection of any unpaid Taxes against Lube Ventures. Lube
Ventures has disclosed on its federal Income Tax Returns all positions taken
therein that could, if not so disclosed, give rise to a substantial
understatement penalty within the meaning of Section 6662 of the Code.
(f) No Tax Liens. There are no Encumbrances on any of the assets,
rights or properties of Lube Ventures with respect to Taxes, other than liens
for Taxes not yet due and payable or for Taxes that Lube Venture is contesting
in good faith
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through appropriate proceedings and for which appropriate reserves have been
established on the Lube Ventures Financial Statements.
(g) Tax Elections and Special Tax Status. Lube Venture is not a party
to any safe harbor lease within the meaning of Section 168(f)(8) of the Code. No
election or consent under Section 341(f) of the Code has been made or shall be
made on or prior to the Closing Date by or on behalf of Lube Ventures. Lube
Ventures is a "small business corporation" which has elected to be subject to
federal income taxation under Subchapter S of the Code and has had such status
for purposes of federal income taxation and state income taxation in all states
in which its income is subject to taxation at all times since its formation.
(h) Disqualified Leasebacks. Lube Ventures is not a party to a
"disqualified leaseback or long-term agreement" described in Section 467(b)(4)
of the Code.
(i) Deferrals of Income. No income or gain of Lube Ventures has been
deferred pursuant to Treasury Regulation (section mark) 1.1502-13 or 1.1502-14,
or Temporary Treasury Regulation (section mark) 1.1502-13T or 1.1502-14T.
(j) Tax Sharing and Similar Arrangements. Lube Venture is not a party
to or bound by any Tax sharing, Tax indemnity, Tax allocation or other similar
arrangement.
(k) No Non-Deductible Compensation Payments. Lube Ventures has not
made any payments, nor is it obligated to make any payments, that would not be
deductible under Section 280G of the Code nor is it a party to any agreement
that under certain circumstances could obligate it to make any such payments.
SECTION 7.18 ENVIRONMENTAL MATTERS.
(a) The facilities presently or formerly occupied or used by Lube
Ventures and any other real property presently or formerly owned by, used by or
leased to or by Lube Ventures (collectively, the "Lube Ventures Property"), the
existing and prior uses of such Lube Ventures Property and all operations of the
businesses of Lube Ventures comply and have at all times complied with all
Environmental Laws and Lube Ventures is not in violation of nor has it violated,
in connection with the ownership, use, maintenance or operation of such property
or the conduct of its business, any Environmental Law.
(b) Lube Ventures has all necessary permits, registrations, approvals
and licenses required by any Governmental Authority or Environmental Law.
(c) There has been no spill, discharge, leak, emission, injection,
disposal, escape, dumping or release of any kind on, beneath or above such
Property or into the environment surrounding such Lube Ventures Property of any
Hazardous Materials.
(d) There has been no past, and there is no current or anticipated
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any Hazardous Materials at, upon or from such Lube
Ventures Property. No asbestos-containing materials, underground improvements
(including, but not limited to the treatment or storage tanks, sumps, or water,
gas or oil wells) or polychlorinated biphenyls (PCBs) transformers, capacitors,
ballasts, or other equipment which contain dielectric fluid containing PCBs at
levels in excess of fifty parts per million (50 PPM) are or have ever been
located on such Lube Ventures Property.
(e) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or threatened by any
Governmental Authority or third party with respect to the business or any
Property of Lube Ventures (or any predecessor in interest) in connection with
(i) any actual or alleged failure to comply with any requirement of any
Environmental Law; (ii) the ownership, use, maintenance or operation of the
Property by any person; (iii).the alleged violation of any Environmental Law; or
(iv) the suspected presence of any Hazardous Material thereon.
(f) Lube Ventures has never had the capacity to exercise
control/manage and has never exercised control or management over any matter
relating to its franchisees' manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of any Hazardous Material.
SECTION 7.19 COMPLIANCE WITH LAWS.
Lube Ventures has at all times conducted its business in material
compliance with all (and has not received any notice of any claimed violation of
any) Applicable Laws, and has registered each of the franchises granted under
the Lube Depot Franchise Agreements with each jurisdiction in which the sale of
such franchises requires such registration. Lube Ventures
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has complied in all material respects with all of the rules and regulations of
the Federal Trade Commission of the United States relating to the offer and sale
of franchises.
SECTION 7.20 LICENSES AND PERMITS.
Lube Ventures possess all licenses, permits, and other governmental
consents, certificates, approvals, or other authorizations (the "Permits")
necessary for the operation of the business of Lube Ventures. Lube Ventures has
complied with the terms and conditions of all Permits in all material respects
and all such Permits are in full force and effect, and there has occurred no
event nor is any event, action, investigation or proceeding pending or, to the
knowledge of management of Lube Ventures, threatened, which could cause or
permit revocation or suspension of or otherwise adversely affect the maintenance
of any Permits. The transactions contemplated by this Agreement will not lead to
the revocation, cancellation, termination or suspension of any Permits.
SECTION 7.21 INSURANCE.
Lube Ventures has regularly maintained all policies of commercial
liability, products liability, fire, casualty, worker's compensation, life and
other forms of insurance on an "occurrence" rather than a "claims made" basis in
amounts and types required by law and generally carried by reasonably prudent,
similarly situated businesses. Lube Ventures is not in default under any
provision contained in any insurance policy maintained by Lube Venture
currently, nor has Lube Ventures failed to give any notice or present any claim
thereunder in due and timely fashion and no cancellation, non-renewal, reduction
of coverage or arrearage in premiums has been threatened or occurred with
respect to any policy, nor is the management of Lube Ventures aware of any
grounds therefor.
SECTION 7.22 EXTRAORDINARY TRANSACTIONS.
Except as disclosed in the Lube Ventures Disclosure Letter or otherwise
permitted by this Agreement, since June 30, 1997, Lube Ventures has not (i)
mortgaged, pledged or subjected to any Encumbrance any of its assets; (ii)
canceled or compromised any claim of or debts owed to it; (iii) sold, licensed,
leased, exchanged or transferred any of its assets except in the ordinary course
of business; (iv) entered into any material transaction other than in the
ordinary course of business; (v) experienced any material change in the
relationship or course of dealing with any supplier, franchisee, customer or
creditor; (vi) suffered any material destruction, loss or damage to any of its
assets; (vii) made any management decisions involving any material change in its
policies with regard to pricing, sales, purchasing or other business, financial,
accounting (including reserves and the amounts thereof) or tax policies or
practices; (viii) declared, set aside or paid any dividends on or made any
distributions in respect of any outstanding shares of capital stock or made any
other distributions or payments to any of its shareholders; (ix) submitted any
bid, proposal, quote or commitment to any party in response to a request for
proposal or otherwise; (x) engaged in any merger or consolidation with, or
agreed to merge or consolidate with, or purchased or agreed to purchase, all or
substantially all of the assets of, or otherwise acquire, any other party; (xi)
entered into any strategic alliance, partnership, joint venture or similar
arrangement with any other party; (xii) incurred or agreed to incur any Debt or
prepaid or made any prepayments in respect of Debt; (xiii) issued or agreed to
issue to any party, any shares of stock or other securities; (xiv) redeemed,
purchased or agreed to redeem or purchase any of its outstanding shares of
capital stock or other securities; (xv) increased the rate of compensation
payable or to become payable to any of its officers, directors, employees or
agents over the rate being paid to them as of June 30, 1997 or agreed to do so
otherwise than in accordance with contractual agreements with such parties;
(xvi) made or agreed to make any charitable contributions or incurred or agreed
to incur any non-business expenses; or (xvii) charged off any bad debts or
increased its bad debt reserve except in the manner consistent with its past
practices.
SECTION 7.23 TITLE TO ASSETS.
Except as described in the Lube Ventures Disclosure Letter, Lube Ventures
has good and marketable title to its assets and properties, free and clear of
restrictions on or conditions to transfer or assignment, and free and clear of
all Encumbrances.
SECTION 7.24 CORPORATE RECORDS.
The minute books of Lube Ventures accurately reflect all minutes of
proceedings of and actions taken by the directors of Lube Ventures, and by each
committee of the Board of Directors of Lube Ventures and all records of meetings
of and actions taken by the stockholders of Lube Ventures, that are required by
applicable laws to be recorded in or reflected in the corporate records thereof.
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SECTION 7.25 BROKER AND FINDER FEES.
Lube Ventures has not engaged any broker or finder in connection with the
transactions contemplated by this Agreement, and no action by any of the
foregoing will cause or support any claim to be asserted against the Holding
Company or Lube Ventures by any broker, finder or intermediary in connection
with such transaction.
SECTION 7.26 ADEQUATE DISCLOSURE.
No representation or warranty made by Lube Ventures pursuant to this
Agreement, or any statement contained in any Exhibit or Schedule to this
Agreement, or any certificate or document furnished or to be furnished by Lube
Venture pursuant to the terms of this Agreement in connection with the
transactions contemplated hereby, contains any untrue or misleading statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained therein not misleading.
SECTION 7.27 NO ADVERSE CHANGE OR CONDITIONS.
Except as set forth in the Lube Ventures Disclosure Letter, and except as
expressly contemplated or permitted by this Agreement, since June 30, 1997, Lube
Ventures has conducted its business in the ordinary course and consistent with
past practice, and neither Lube Ventures has not suffered any change that has
had a Material Adverse Effect on Lube Ventures. There are no conditions, facts,
developments or circumstances of an unusual or special nature that reasonably
could be expected to have a Material Adverse Effect upon Lube Ventures that have
not been disclosed in writing by Lube Ventures pursuant to the Lube Ventures
Disclosure Letter.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF MIRACLE INDUSTRIES
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, subject to the delivery
and acceptance of a definitive Disclosure Letter, Miracle Industries hereby
makes the following representations and warranties to the other parties to this
Agreement:
SECTION 8.1 ORGANIZATION AND GOOD STANDING.
8.1.1 Miracle Industries. Miracle Industries is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Ohio, and has full corporate power and authority to own, operate and lease its
properties, and to conduct its business as it is now being conducted, and is
qualified to transact business as a foreign corporation in each jurisdiction in
which the operation of its business or the ownership of its properties requires
such qualification.
8.1.2 Hydro-Spray. Hydro-Spray is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Iowa, and has full corporate power and authority to own, operate and lease its
properties, and to conduct its business as it is now being conducted, and is
qualified to transact business as a foreign limited liability company in each
jurisdiction in which the operation of its business or the ownership of its
properties requires such qualification.
8.1.3 Indy Ventures. Indy Ventures is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Indiana, and has full corporate power and authority to own, operate and lease
its properties, and to conduct its business as it is now being conducted, and is
qualified to transact business as a foreign limited liability company in each
jurisdiction in which the operation of its business or the ownership of its
properties requires such qualification.
SECTION 8.2 CAPITALIZATION OF MIRACLE INDUSTRIES.
8.2.1 Authorized Capital Stock; Outstanding Shares. The authorized capital
stock of Miracle Industries consists solely of 100,000 shares of a single class
of common stock, $-0- par value, of which 34,943 shares have been issued and are
outstanding as of the date of this Agreement. Each of the shares of the capital
stock of Miracle Industries issued and outstanding as of the date hereof has
been duly authorized and validly issued and is fully paid and non-assessable.
None of the shares of the issued and outstanding capital stock of Miracle
Industries has been issued in violation of shareholder preemptive rights.
Miracle Industries has no issued or outstanding equity securities, debt
securities or other instruments which are convertible into or exchangeable for
at any time into equity securities of Miracle Industries.
8.2.2 No Obligations to Issue or Redeem Shares.
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(a) Miracle Industries is not subject to any commitment or obligation
which would require the issuance or sale by Miracle Industries of shares of its
capital stock at any time under options, subscriptions, warrants, rights, calls,
preemptive rights, convertible obligations or any other fixed or contingent
obligations or which would provide the holder thereof with the right to acquire
any equity securities of Miracle Industries. Miracle Industries has no
obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its equity securities or any interest therein or to pay any dividend or
make any other distribution in respect thereof.
(b) Hydro-Spray is not subject to any commitment or obligation which
would require the issuance or sale by Hydro-Spray of any equity interest at any
time under options, subscriptions, warrants, rights, calls, preemptive rights,
convertible obligations or any other fixed or contingent obligations or which
would provide the holder thereof with the right to acquire any equity securities
of Hydro-Spray. Hydro-Spray has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interest therein or to pay any dividend or make any other distribution in
respect thereof.
(c) Indy Ventures is not subject to any commitment or obligation which
would require the issuance or sale by Indy Ventures of any equity interest at
any time under options, subscriptions, warrants, rights, calls, preemptive
rights, convertible obligations or any other fixed or contingent obligations or
which would provide the holder thereof with the right to acquire any equity
securities of Hydro-Spray. Hydro-Spray has no obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire any of its equity securities
or any interest therein or to pay any dividend or make any other distribution in
respect thereof.
SECTION 8.3 OWNERSHIP OF SHARES.
The Miracle Industries Disclosure Letter contains a true, complete and
accurate list of all of the record and beneficial owners of the shares of the
capital stock of Miracle Industries, together the name and address of each such
holder. Except as disclosed in the Miracle Industries Disclosure Letter, there
are no existing agreements, pledges, powers of attorney, assignments or similar
agreements or arrangements either (i) restricting the transferability of any of
the shares of the capital stock of Miracle Industries or (ii) which reasonably
could be expected to prohibit or delay the consummation of the transactions
contemplated hereby.
SECTION 8.4 SUBSIDIARIES; INVESTMENTS.
Miracle Industries owns a 90% Membership Interest in Hydro-Spray and a 50%
Membership Interest in Indy Ventures. Donald Havens and Dale Hughson each own 5%
Membership Interests in Hydro-Spray. Gerald A. Zamensky and James Pauley each
own 25% Membership Interests in Indy Ventures. Except for the foregoing Persons,
no other Person owns any legal or beneficial Membership Interest in either
Hydro-Spray or Indy Ventures. Miracle Industries has good, valid and marketable
title, free and clear of all Encumbrances, to its Membership Interests in
Hydro-Spray and Indy Ventures. Except for its interests in Hydro-Spray and Indy
Ventures, Miracle Industries does not own any shares of capital stock or equity
securities of, or any interest in any other Person or entity. There are no
agreements, pledges, powers of attorney, assignments or similar agreement or
arrangements either (i) restricting the transferability of the membership
interests of Miracle Industries in Hydro-Spray or Indy Ventures or (ii) relating
to the membership interests of Miracle Industries in Hydro-Spray or Indy
Ventures which reasonably could be expected to prohibit or delay any of the
transactions contemplated hereby.
SECTION 8.5 EXECUTION AND EFFECT OF AGREEMENT.
Miracle Industries has the corporate power to enter into this Agreement and
to perform its obligations hereunder and, subject to the due authorization and
approval of its shareholders, to enter into and consummate the Miracle
Industries Merger. Subject only to the approval of its Board of Directors, this
Agreement has been duly executed and delivered by Miracle Industries and
constitutes a legal, valid and binding obligation of Miracle Industries, fully
enforceable against Miracle Industries in accordance with its terms; except as
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
exercise of judicial discretion in accordance with general principles of equity.
SECTION 8.6 RESTRICTIONS.
The execution and delivery of this Agreement by Miracle Industries, the
consummation of the transactions contemplated hereby by Miracle Industries, and,
subject to the due authorization and approval of its shareholders, the
performance of the obligations of Miracle Industries hereunder will not (a)
violate any of the provisions of the charter or by-laws of Miracle
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Industries, or the operating agreement of Hydro-Spray or Indy Ventures,
respectively, (b) violate or conflict with the provisions of any Applicable
Laws, (c) result in the creation of any Encumbrance upon any of the assets,
rights or properties of Miracle Industries or Hydro-Spray or Indy Ventures, or
(d) except as disclosed in the Miracle Industries Disclosure Letter, conflict
with, violate any provisions of, result in a breach of or give rise to a right
of termination, modification or cancellation of, constitute a default of, or
accelerate the performance required by, with or without the passage of time or
the giving of notice or both, the terms of any material agreement, indenture,
mortgage, deed of trust, security or pledge agreement, lease, contract, note,
bond, license, permit, authorization or other instrument to which Miracle
Industries or Hydro-Spray or Indy Ventures is a party or to which any of any of
the assets of Miracle Industries or Hydro-Spray or Indy Ventures are subject.
SECTION 8.7 CONSENTS.
Except as disclosed in the Miracle Industries Disclosure Letter, no filing
with, or consent, waiver, approval or authorization of, or notice to, any
governmental authority or any third party is required to be made or obtained by
Miracle Industries or Hydro-Spray or Indy Venture in connection with the
execution and delivery of this Agreement or any document or instrument
contemplated hereby, the consummation of any of the transactions contemplated
hereby or the performance of any of their respective obligations hereunder or
thereunder.
SECTION 8.8 FINANCIAL STATEMENTS.
Attached hereto as Exhibit E are true and correct copies of (i) the audited
consolidated balance sheets and related statements of income, cash flows and
changes in stockholders' equity of Miracle Industries and its Subsidiaries as at
December 31, 1994, 1995 and 1996 and for the year periods then ended and the
unaudited financial statements of such entities as at June 30, 1997 and for the
six month period then ended, and (ii) the unaudited balance sheets and related
statements of income, cash flows and changes in members' equity of each of
Hydro-Spray and Indy Ventures as at December 31, 1994, 1995 and 1996 and for the
year periods then-ended to the extent applicable (collectively, the "Miracle
Industries Financial Statements"). All of the Miracle Industries Financial
Statements have been prepared in accordance with GAAP in a manner consistent
with each other and the books and records of Miracle Industries and its
Subsidiaries, and fairly present in all material respects the financial
condition and results of operations of Miracle Industries and its Subsidiaries
at the dates and for the periods indicated therein. The regular books of account
of Miracle Industries and its Subsidiaries fairly and accurately reflect all
material transactions involving Miracle Industries and its Subsidiaries, are
true, correct and complete and have been prepared in accordance with GAAP and on
a basis consistent with the Financial Statements. All of the accounts receivable
of Hydro-Spray reflected on the books and records of Hydro-Spray arose from bona
fide, arms-length transactions in the ordinary course of business, goods sold by
Hydro-Spray and are not subject to any counterclaim, deduction, right of set
off, set off or recoupment, and will be collectible in the ordinary course of
business in the aggregate face amounts thereof subject to the reserves set forth
on the Miracle Industries Financial Statements. All of the inventories reflected
on the books and records of Hydro-Spray are of a quality and quantity which are
good and marketable, and are saleable in the ordinary course of business at
prices which will result in Hydro-Spray realizing gross profits on such sales
consistent with the gross profits of Hydro-Spray reflected in the Miracle
Industries Financial Statements. The cost of all inventories reflected on the
books and records of Hydro-Spray have been valued in accordance with GAAP.
SECTION 8.9 DEBT.
The Miracle Industries Disclosure Letter contains a true, complete and
accurate listing of the original principal amount of all of the Debt of Miracle
Industries, Hydro-Spray and Indy Ventures, the remaining principal balance
thereof, the interest rate(s) payable in respect thereof, if any, and the
date(s) of maturity thereof. Except as disclosed in the Miracle Industries
Disclosure Letter, all of the Debt of each of Miracle Industries, Hydro-Spray
and Indy Ventures may be prepaid at any time, without premium, prepayment
penalties, termination fees or other fees or charges.
SECTION 8.10 GUARANTEES.
The Miracle Industries Disclosure Letter contains a complete list of all
Guarantees provided by Miracle Industries or Hydro-Spray or Indy Ventures for
the benefit of any other party and of all Guarantees provided by any other party
for the benefit of Miracle Industries or Hydro-Spray or Indy Ventures or any
party doing business with Miracle Industries or Hydro-Spray or Indy Ventures.
SECTION 8.11 NO UNDISCLOSED LIABILITIES.
Neither Miracle Industries nor Hydro-Spray or Indy Ventures has any
material liabilities or obligations of any nature whatsoever (whether known or
unknown, due or to become due, absolute, accrued, contingent or otherwise, and
whether or
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not determined or determinable), except for (i) liabilities or obligations set
forth in the Miracle Industries Disclosure Letter, (ii) liabilities or
obligations to the extent expressly reflected on or reserved against in the June
30, 1997 balance sheet included among the Miracle Industries Financial
Statements or disclosed in the notes thereto, (iii) liabilities or obligations
of a type reflected on the June 30, 1997 balance sheet and incurred in the
ordinary course of business and consistent with past practices since June 30,
1997, or (iv) liabilities or obligations arising under the terms of the Material
Contracts of Miracle Industries. Except as otherwise contemplated or permitted
by this Agreement no dividends have been declared on any capital stock of
Miracle Industries which are unpaid.
SECTION 8.12 LITIGATION.
There is no suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or, to the knowledge of the
management of Miracle Industries, threatened, by or before any court, any
Governmental Authority or arbitrator, against Miracle Industries or Hydro-Spray
or Indy Ventures that reasonably could be expected to prevent the consummation
of any of the transactions contemplated hereby. Except as disclosed in the
Miracle Industries Disclosure Letter, there is no material suit, claim, action
at law or in equity, proceeding or governmental investigation or audit pending,
or to the knowledge of management of Miracle Industries, threatened, by or
before any arbitrator, court, or other Governmental Authority, against Miracle
Industries or Hydro-Spray or Indy Ventures or involving any of the former or
present employees, agents, businesses, properties, rights or assets of Miracle
Industries or Hydro-Spray or Indy Ventures, nor, to the knowledge of management
of Miracle Industries, is there any basis for the assertion of any of the
foregoing. Except as disclosed in the Miracle Industries Disclosure Letter,
there are no judgments, orders, injunctions, decrees, stipulations or awards
rendered by any court, Governmental Authority or arbitrator against Miracle
Industries or Hydro-Spray or Indy Ventures or any of their respective former or
present Employees, agents, properties or assets.
SECTION 8.13 PROPERTIES; ABSENCE OF ENCUMBRANCES.
The Miracle Industries Disclosure Letter sets forth a complete list of all
real property owned by or leased to Miracle Industries, and, with respect to all
properties leased by Miracle Industries, a description of the term of such lease
and the monthly rental thereunder. Neither Miracle Industries or Hydro-Spray or
Indy Ventures nor (any of its other Subsidiaries) is in default (and will not be
in default with the passage of time or the receipt of notice or both) and has
not received notice of default, under any lease of real property. All real
property leased to Miracle Industries or Hydro-Spray or Indy Ventures is
available for immediate use in the operation of its business and for the purpose
for which such property currently is being utilized. Subject in the case of
leased property to the terms and conditions of the respective leases, Miracle
Industries or Hydro-Spray or Indy Ventures has full legal and practical access
to all such real property.
SECTION 8.14 INTELLECTUAL PROPERTY.
The Miracle Industries Disclosure Letter sets forth a complete list of (i)
Intellectual Property owned, used or licensed by Miracle Industries or
Hydro-Spray or Indy Ventures, together with the identity of the owner thereof,
and (ii) all license agreements pursuant to which any Intellectual Property is
licensed to or by Miracle Industries or Hydro-Spray or Indy Ventures. Miracle
Industries and each of Hydro-Spray and Indy Ventures own their respective
Intellectual Property free and clear of any and all Encumbrances, or, in the
case of licensed Intellectual Property, has valid, binding and enforceable
rights to use such Intellectual Property. Miracle Industries and each of
Hydro-Spray and Indy Ventures have each duly and timely filed all renewals,
continuations and other filings necessary to maintain its Intellectual Property
or registrations thereof. Except as disclosed in the Miracle Industries
Disclosure Letter, neither Miracle Industries nor Hydro-Spray or Indy Ventures
(i) has received any notice or claim to the effect that the use of any
Intellectual Property infringes upon, conflicts with or misappropriates the
rights of any other party or that any of the Intellectual Property is not valid
or enforceable, or (ii) has made any claim that any party has violated or
infringed upon its rights with respect to any Intellectual Property.
SECTION 8.15 MATERIAL CONTRACTS.
(a) List of Material Contracts. The Miracle Industries Disclosure
Letter sets forth a list of all written, and a description of all oral,
commitments, agreements or contracts to which Miracle Industries or Hydro-Spray
or Indy Ventures is a party or by which Miracle Industries or Hydro-Spray or
Indy Ventures is obligated, including, but not limited to, all commitments,
agreements or contracts embodying or evidencing the following transactions or
arrangements: (i) agreements for the employment of, or independent contractor
arrangements with, any officer or other individual employee of Miracle
Industries or Hydro-Spray or Indy Ventures; (ii) any consulting agreement,
agency agreement and any other service agreement that will continue in force
after the Closing Date with respect to the employment or retention by Miracle
Industries or Hydro-Spray or Indy Ventures of consultants, agents, legal
counsel, accountants or anyone else who is not an Employee; (iii) any single
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contract, purchase order or commitment providing for expenditures by Miracle
Industries or Hydro-Spray or Indy Ventures after the date hereof of more than
$25,000 or which has been entered into by Miracle Industries or Hydro-Spray or
Indy Ventures otherwise than in the ordinary course of business; (iv) agreements
between Miracle Industries or Hydro-Spray or Indy Ventures and suppliers to
Miracle Industries or Hydro-Spray or Indy Ventures pursuant to which either
Miracle Industries or Hydro-Spray or Indy Ventures is obligated to purchase or
to sell or distribute the products of any other party other than current
purchase orders entered into in the ordinary course of business consistent with
past practices; (v) any contract containing covenants limiting the freedom of
Miracle Industries or Hydro-Spray or Indy Ventures or any officer, director, or
employee of Miracle Industries or Hydro-Spray or Indy Ventures to engage in any
line or type of business or with any person in any geographic area; (vi) any
commitment or arrangement by Miracle Industries or Hydro-Spray or Indy Ventures
to participate in a strategic alliance, partnership, joint venture, limited
liability company or other cooperative undertaking with any other Person; (vii)
any commitments by Miracle Industries or Hydro-Spray or Indy Ventures for
capital expenditures involving more than $25,000 individually or $50,000 in the
aggregate; and (viii) any other contract, commitment, agreement, understanding
or arrangement that the management of Miracle Industries deems to be material to
the business of Miracle Industries or Hydro-Spray or Indy Ventures.
(b) No Breaches or Defaults. Except as disclosed in the Miracle
Industries Disclosure Letter, Miracle Industries and each of Hydro-Spray and
Indy Ventures is in full compliance with each, and is not in default under any,
Material Contract to which it is a party, and no event has occurred that, with
notice or lapse of time or both, would constitute such a default thereunder.
Neither Miracle Industries nor Hydro-Spray or Indy Ventures has waived any
rights under or with respect to any of the Material Contracts to which it is a
party. The management of Miracle Industries has no knowledge, or received any
notice to the effect, that any party with whom Miracle Industries or Hydro-Spray
or Indy Ventures has contractual arrangements under the Material Contracts, is
in default under any such contractual arrangements or that any event has
occurred that, with notice or lapse of time or both, would constitute such a
default thereunder. Each of the Material Contracts constitutes a legal, valid
and binding obligation of each the parties thereto and is enforceable against
each of the parties thereto in accordance with its respective terms; except as
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
exercise of judicial discretion in accordance with general principles of equity.
SECTION 8.16 EMPLOYEE BENEFITS AND EMPLOYMENT MATTERS.
(a) Plans and Arrangements. The Miracle Industries Disclosure Letter
sets forth a true, complete and correct list of all Employee Benefit Plans and
all Benefit Arrangements to which Miracle Industries, Hydro-Spray, Indy Ventures
or any of their ERISA Affiliates is a party or to which Miracle Industries,
Hydro-Spray, Indy Ventures or any of their ERISA Affiliates is obligated to
contribute. None of the Employee Benefit Plans to which Miracle Industries,
Hydro- Spray, Indy Ventures or any of their ERISA Affiliates is a party, which
Miracle Industries, Hydro- Spray, Indy Ventures or any of their ERISA Affiliates
sponsors or maintains or to which Miracle Industries, Hydro-Spray, Indy Ventures
or any of their ERISA Affiliates contributes is subject to the requirements of
Section 302 of ERISA or Section 412 of the Code and no liability under Title IV
of ERISA (whether to the PBGC or otherwise) has been incurred by Miracle
Industries, Hydro-Spray, Indy Ventures or any of their ERISA Affiliates.
(b) Compliance with Laws and Terms of Plans. Except as disclosed in
the Miracle Industries Disclosure Letter, each Employee Benefit Plan and Benefit
Arrangement to which Miracle Industries, Hydro-Spray, Indy Ventures or any of
their ERISA Affiliates is a party or to which Miracle Industries, Hydro-Spray,
Indy Ventures or any of their ERISA Affiliates is obligated to contribute has
been operated or maintained in compliance in all material respects with all
Applicable Laws, including, without limitation, ERISA and the Code, and has been
maintained in material compliance with its terms and in material compliance with
the terms of any applicable collective bargaining agreement. Except as disclosed
in the Miracle Industries Disclosure Letter, with respect to any Employee
Benefit Plan that is intended to qualify under Section 401 of the Code, a
favorable determination letter as to qualification under Section 401 of the Code
that considered the Tax Reform Act of 1986 has been issued and any amendments
required for continued qualification under Section 401 of the Code have been
timely adopted and nothing has occurred subsequent to the date of such
determination letter that could adversely affect the qualified status of any
such Plan.
(c) Contributions. All contributions required to be made to or benefit
liabilities arising under the terms of each Employee Benefit Plan or Benefit
Arrangement to which Miracle Industries, Hydro-Spray, Indy Ventures or any of
their ERISA Affiliates is a party or to which Miracle Industries, Hydro-Spray,
Indy Ventures or any of their ERISA Affiliates is obligated to contribute, under
ERISA or the Code, for all periods of time prior to the date hereof and that are
attributable to
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Employees of Miracle Industries, Hydro-Spray, Indy Ventures or any of their
ERISA Affiliates have been paid or otherwise adequately accrued against in the
Miracle Industries Financial Statements, as the case may be.
(d) Arrearages and Employment Disputes. Except as disclosed in the
Miracle Industries Disclosure Letter, neither Miracle Industries nor Hydro-Spray
or Indy Ventures is liable for any arrearage of wages, any accrued or vested
vacation pay or any tax or penalty for failure to comply with any Applicable Law
relating to employment or labor above the level accrued for or reserved against
on the June 30, 1997 balance sheet included in the Miracle Industries Financial
Statements, and there is no controversy pending, threatened or in prospect
between Miracle Industries or Hydro-Spray or Indy Ventures and any of their
respective Employees nor is there any basis for any such controversy. There is
no unfair labor practice charge or complaint currently pending against Miracle
Industries or Hydro-Spray or Indy Ventures with respect to or relating to any of
their respective Employees before the National Labor Relations Board or any
other agency having jurisdiction over such matters and no charges or complaints
are currently pending against Miracle Industries or Hydro-Spray or Indy Ventures
before the Equal Employment Opportunity Commission or any state or local agency
having responsibility for the prevention of unlawful employment practices. There
are no actions, suits or claims pending, including proceedings before the IRS,
the DOL or the PBGC, with respect to any Employee Benefit Plan, Benefit
Arrangement or any administrator or fiduciary thereof, other than benefit claims
arising in the normal course of operation of such Employee Benefit Plans or
Benefit Arrangements, and, to the knowledge of the management of Miracle
Industries, no Employee Benefit Plan or Benefit Arrangement is under audit or
investigation by any Governmental Authority.
(e) Severance Obligations. Except as disclosed in the Miracle
Industries Disclosure Letter, all current employees of Miracle Industries and of
each of Hydro-Spray and Indy Ventures may be terminated at will, without notice
and without incurring any severance or other liability or obligation to the
employee in connection with the termination. Except to the extent provided by
the terms of the Employee Benefit Plans and Benefit Arrangements disclosed in
the Miracle Industries Disclosure Letter, neither the execution, delivery or
performance of this Agreement nor the consummation of the Closing will (i)
increase any benefits otherwise payable under any Employee Benefit Plan or
Benefit Arrangement, (ii) result in the acceleration of the time of payment or
vesting of any such benefits, or (iii) give rise to an obligation with respect
to the payment of any severance pay. No "parachute payment" (within the meaning
of Section 280G of the Code), "change in control" or severance payment has been
made or will be required to be made by Miracle Industries or any ERISA Affiliate
of Miracle Industries to any Employee in connection with the execution, delivery
or performance of this Agreement or as a result of the consummation of the
Closing.
(f) Compliance with Laws on Employment Practices. Miracle Industries
and each of Hydro-Spray and Indy Ventures has complied in all material respects
with all Applicable laws relating to employment and employment practices, terms
and conditions of employment, wages and hours, and to the knowledge of the
management of Miracle Industries, is not engaged in any unfair labor practice
with respect to any of the current employees of Miracle Industries or
Hydro-Spray or Indy Ventures and to the best knowledge of Miracle Industries,
none of the persons performing services for Miracle Industries, Hydro-Spray,
Indy Ventures or any of their ERISA Affiliates have been improperly classified
as independent contractors or as exempt from payment of wages or overtime.
(g) Collective Bargaining Agreements. Except as disclosed in the
Miracle Industries Disclosure Letter), none of the employees of Miracle
Industries or Hydro-Spray or Indy Ventures are subject to any collective
bargaining agreement nor is Miracle Industries or Hydro-Spray or Indy Ventures
required under any agreement to recognize or bargain with any labor organization
or union on behalf of its employees.
(h) No Multi-Employer Plans. Nether Miracle Industries nor Hydro-Spray
nor Indy Ventures nor any of their ERISA Affiliates has contributed to, or had
the obligation to contribute to, any Multiemployer Plan within the five-year
period ending on the date of this Agreement.
(i) No Amendments to Plans. There has been no amendment to, written
interpretation or announcement (whether or not written) by Miracle Industries,
Hydro-Spray, Indy Ventures or any of their ERISA Affiliates relating to, or
change in employee participation or coverage under, any Employee Benefit Plan or
Benefit Arrangement that would increase materially the expense of maintaining
such Employee Benefit Plan or Benefit Arrangement above the level of the expense
incurred in respect thereof for the fiscal year of Miracle Industries ended
December 31, 1996.
(j) No Unfunded Liabilities. Neither Miracle Industries nor
Hydro-Spray nor Indy Ventures nor any of their ERISA Affiliates have any current
or projected liability for any unfunded post-retirement medical or life
insurance benefits in connection with any Employee of Miracle Industries,
Hydro-Spray, Indy Ventures or any of their ERISA Affiliates.
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(k) No Prohibited Transactions. No event has occurred with respect to
any Employee Benefit Plan or any employee benefit plan previously sponsored,
maintained or contributed to by Miracle Industries, Hydro-Spray, Indy Ventures
or any of their ERISA Affiliates, which could subject any such Employee Benefit
Plan, Miracle Industries, Hydro-Spray, Indy Ventures or any of their ERISA
Affiliates, or the Holding Company directly or indirectly (through an
indemnification agreement or otherwise), to any liability for or as a result of
a breach of fiduciary duty, a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code, or a civil penalty under
Section 502 of ERISA or a Tax under Section 4971 of the Code. Neither Miracle
Industries nor any of its ERISA Affiliates have incurred a "withdrawal" or
"partial withdrawal," as defined in Sections 4203 and 4205 of ERISA, from, or
failed to timely make contributions to any Multiemployer Plan which has resulted
in any unpaid liability of Miracle Industries, Hydro-Spray, Indy Ventures or any
of their ERISA Affiliates.
(l) Welfare Benefit Plans. (i) Except as disclosed in the Miracle
Industries Disclosure Letter, none of the Employee Benefit Plans that are
"employee welfare benefit plans" as defined in ERISA Section 3(1) provides for
continuing benefits or coverage for any participant or beneficiary of a
participant after such participant's termination of employment, except to the
extent required by law; provided that any disclosure regarding this clause (i)
shall set forth (A) the number of individuals currently receiving such
continuing benefits or coverage, (B) the limit on liability with respect to such
coverage, (C) the terms and conditions of such coverage, and (D) the maximum
number of current employees or independent contractors who could become eligible
for such continuing benefits or coverage; (ii) there has been no violation of
Code Section 4980B or ERISA Sections 601-609 with respect to any such plan that
could result in any material liability; (iii) no such plans are "multiple
employer welfare arrangements" within the meaning of ERISA Section 3(40); (iv)
with respect to any such plans that are self-insured, no claims have been made
pursuant to any such plan that have not yet been paid (other than claims which
have not yet been paid but are in the normal course of processing) and no
individual has incurred injury, sickness or other medical condition with respect
to which claims may be made pursuant to any such plan where the liability to the
employer could in the aggregate with respect to each such individual exceed
$50,000 per year; (v) neither Miracle Industries nor Hydro-Spray nor Indy
Ventures nor any of their ERISA Affiliates maintains or has any obligation to
contribute to any "voluntary employees' beneficiary association" within the
meaning of Code Section 501(c)(9) or other welfare benefit fund as defined at
Section 419(e) of the Code (such disclosure to include the amount of any such
funding); (vi) no such plan is intended to satisfy Code Section 125; (vii) no
amounts are required in connection with any such plan to be included in income
under Code Section 105(h) (under official regulations thereof to date); and
(viii) neither Miracle Industries nor Hydro-Spray nor Indy Ventures nor any of
their ERISA Affiliates maintains a nonconforming group health plan as defined at
Section 5000(c) of the Code.
SECTION 8.17 TAX MATTERS.
(a) Tax Returns and Payment of Taxes. Miracle Industries and each of
Hydro-Spray and Indy Ventures has timely filed or will timely file all federal,
state, local, and other Tax Returns required to be filed by it under Applicable
Laws, including estimated Tax returns and reports and consolidated federal
Income Tax Returns and state, local or foreign Income Tax Returns filed on a
consolidated or combined basis, and Miracle Industries and each of Hydro-Spray
and Indy Ventures has paid all required Income Taxes and other Taxes (including
any additions to taxes, penalties and interest related thereto) due and payable
on or before the date hereof (and will duly and timely pay all such amounts
required to be paid between the date hereof and the Closing Date). Each of
Miracle Industries and Hydro-Spray and Indy Ventures has paid, withheld, or will
pay any and all Taxes in respect of the conduct of its business or the ownership
of its property and in respect of any transaction for all periods (or portions
thereof) through the close of business on the Closing Date. Each of Miracle
Industries, Hydro-Spray and Indy Ventures has (i) withheld and paid over all
Taxes required to have been withheld and paid over, and complied with all
information reporting and backup withholding requirements, including the
maintenance of required records with respect thereto, in connection with amounts
paid or owing to any Employee, creditor, independent contractor or other third
party, and (ii) collected all sales, use and value added Taxes required to be
collected, and has remitted, or will remit on a timely basis, such amounts to
the appropriate Government Authorities and have furnished properly completed
exemption certificates for all exempt transactions.
(b) Tax Reserves. The amount of the liability, if any, of Miracle
Industries and of Hydro-Spray and Indy Ventures, respectively, for unpaid Taxes
for all periods ending on or before the date of this Agreement does not, in the
aggregate, exceed the amount of the current liability accruals for Taxes
(excluding reserves for deferred Taxes) set forth on the Miracle Industries
Financial Statements as of the date of this Agreement, and the amount of their
respective liabilities Group's liability for unpaid Taxes for all periods ending
on or before the Closing Date shall not, in the aggregate, exceed the amount of
the
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current liability accruals for Taxes (excluding reserves for deferred Taxes) as
such accruals shall be reflected on the consolidated balance sheet of Miracle
Industries as of the Closing Date.
(c) Audits; No Deficiencies Asserted. Except as set forth in the
Miracle Industries Disclosure Letter, none of the Tax Returns of Miracle
Industries or of Hydro-Spray or Indy Ventures have ever been audited by any Tax
Authority, nor is any such audit in process, pending or threatened (either in
writing or verbally, formally or informally), and all deficiencies asserted
against Miracle Industries or Hydro-Spray or Indy Ventures or the Affiliated
Groups as a result of IRS examinations have been paid or finally settled and no
issue has been raised by any IRS examination that, by application of the same
principles, is likely to result in a proposed deficiency for any other period
not so examined. Except as set forth in the Miracle Industries Disclosure, no
material deficiencies with respect to Taxes, additions to Tax, interest, or
penalties have been proposed or asserted against and communicated to the
Affiliated Groups, any member of the Affiliated Groups, Miracle Industries or
Hydro-Spray or Indy Ventures, except those that have been paid in full and for
those matters that would not result in liability being imposed against Miracle
Industries or Hydro-Spray or Indy Ventures.
(d) No Waivers of Limitations. Except as set forth in the Miracle
Industries Disclosure Letter, there are no agreements, waivers of statutes of
limitations, or other arrangements providing for extensions of time in respect
of the assessment or collection of any unpaid Tax against the Affiliated Groups
or any member of the Affiliated Groups or Miracle Industries or Hydro-Spray or
Indy Ventures. Miracle Industries has disclosed on its federal Income Tax
Returns all positions taken therein that could, if not so disclosed, give rise
to a substantial understatement penalty within the meaning of Section 6662 of
the Code.
(e) No Tax Liens. There are no Encumbrances on any of the assets,
rights or properties of Miracle Industries or of either Hydro-Spray or Indy
Ventures with respect to Taxes, other than liens for Taxes not yet due and
payable or for Taxes that such party is contesting in good faith through
appropriate proceedings and for which appropriate reserves have been established
on the Miracle Industries Financial Statements.
(f) Tax Elections and Special Tax Status. Neither Miracle Industries
nor Hydro-Spray nor Indy Ventures is a party to any safe harbor lease within the
meaning of Section 168(f)(8) of the Code. No election or consent under Section
341(f) of the Code has been made or shall be made on or prior to the Closing
Date by or on behalf of Miracle Industries nor Hydro-Spray nor Indy Ventures.
(g) Special Tax Elections or Benefits. No election or consent under
Section 341(f) of the Code has been made or shall be made on or prior to the
Closing Date by or on behalf of any of Miracle Industries or Hydro-Spray or Indy
Ventures. No property of Miracle Industries or Hydro-Spray or Indy Ventures is
subject to a tax benefit transfer lease subject to the provisions of former
Section 168(f)(8) of the Internal Revenue Code of 1954. Miracle Industries is a
"small business corporation" which has elected to be subject to federal income
taxation under subchapter S of the Code and has such status for purposes of
federal income taxation and state income taxation in all states in which its
respective income is subject to taxation or has been subject to taxation at all
times since its formation. Each of Hydro-Spray and Indy Ventures is a
"partnership" for purposes of federal income taxation and state income taxation
in all states in which its respective income is subject to taxation and has had
the status of a "partnership" for purposes of federal income taxation and state
income taxation in all states in which its respective income is subject to
taxation or has been subject to taxation at all times since its formation.
(h) Disqualified Leasebacks. Neither Miracle Industries nor
Hydro-Spray or Indy Ventures is a party to a "disqualified leaseback or
long-term agreement" described in Section 467(b)(4) of the Code.
(i) Deferrals of Income. No income or gain of Miracle Industries or
Hydro-Spray or Indy Ventures has been deferred pursuant to Treasury Regulation
(section mark) 1.1502-13 or 1.1502-14, or Temporary Treasury Regulation
(section mark) 1.1502-13T or 1.1502-14T.
(j) Tax Sharing and Similar Agreements. Except as disclosed in the
Miracle Industries Disclosure Letter, neither Miracle Industries nor Hydro-Spray
or Indy Ventures is a party to or bound by any Tax sharing, Tax indemnity or Tax
allocation agreement or other similar arrangement.
(k) No Non-Deductible Compensation Payments. Neither Miracle
Industries nor Hydro-Spray or Indy Ventures has made any payments, nor is
obligated to make any payments, that would not be deductible under Section 280G
of the Code, or a party to any agreement that under certain circumstances could
obligate it to make any payments.
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SECTION 8.18 ENVIRONMENTAL MATTERS.
(a) The facilities presently or formerly occupied or used by each of
Miracle Industries, Hydro-Spray or Indy Ventures and any other real property
presently or formerly owned by, used by or leased to or by Miracle Industries,
Hydro-Spray or Indy Ventures (collectively, the "Miracle Industries Property"),
the existing and prior uses of such Property and all operations of the
businesses of Miracle Industries, Hydro-Spray or Indy Ventures comply and have
at all times complied with all Environmental Laws and neither Miracle
Industries, Hydro-Spray nor Indy Ventures is in violation of nor has it
violated, in connection with the ownership, use, maintenance or operation of
such property or the conduct of its business, any Environmental Law.
(b) Each of Miracle Industries, Hydro-Spray and Indy Ventures has all
necessary permits, registrations, approvals and licenses required by any
Governmental Authority or Environmental Law.
(c) There has been no spill, discharge, leak, emission, injection,
disposal, escape, dumping or release of any kind on, beneath or above such
Property or into the environment surrounding such Miracle Industries Property of
any Hazardous Materials.
(d) There has been no past, and there is no current or anticipated
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any Hazardous Materials at, upon or from such Miracle
Industries Property. No asbestos-containing materials, underground improvements
(including, but not limited to the treatment or storage tanks, sumps, or water,
gas or oil wells) or polychlorinated biphenyls (PCBs) transformers, capacitors,
ballasts, or other equipment which contain dielectric fluid containing PCBs at
levels in excess of fifty parts per million (50 PPM) are located on such Miracle
Industries Property.
(e) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or threatened by any
Governmental Authority or third party with respect to the business or any
Property of Miracle Industries, Hydro-Spray or Indy Ventures (or any predecessor
in interest) in connection with (i) any actual or alleged failure to comply with
any requirement of any Environmental Law; (ii) the ownership, use, maintenance
or operation of the Property by any person; (iii) the alleged violation of any
Environmental Law; or (iv) the suspected presence of any Hazardous Material
thereon.
SECTION 8.19 COMPLIANCE WITH LAWS.
Miracle Industries and each of Hydro-Spray and Indy Ventures has at all
times conducted its business in material compliance with all (and has not
received any notice of any claimed violation of any) Applicable Laws.
SECTION 8.20 LICENSES AND PERMITS.
Miracle Industries and each of Hydro-Spray and Indy Ventures possess all
licenses, permits, and other governmental consents, certificates, approvals, or
other authorizations (the "Permits") necessary for the operation of their
respective businesses. Miracle Industries and each of Hydro-Spray and Indy
Ventures has complied with the terms and conditions of all Permits in all
material respects and all such Permits are in full force and effect, and there
has occurred no event nor is any event, action, investigation or proceeding
pending or, to the knowledge of management of Miracle Industries, threatened,
which could cause or permit revocation or suspension of or otherwise adversely
affect the maintenance of any Permits. The transactions contemplated by this
Agreement will not lead to the revocation, cancellation, termination or
suspension of any Permits.
SECTION 8.21 INSURANCE.
Miracle Industries and each of Hydro-Spray and Indy Ventures has regularly
maintained all policies of commercial liability, products liability, fire,
casualty, worker's compensation, life and other forms of insurance on an
"occurrence" rather than a "claims made" basis in amounts and types required by
law and generally carried by reasonably prudent, similarly situated businesses.
Neither Miracle Industries nor Hydro-Spray or Indy Ventures is in default with
respect to any provision contained in any insurance policy, nor has Miracle
Industries or Hydro-Spray or Indy Ventures failed to give any notice or present
any claim thereunder in due and timely fashion and no cancellation, non-renewal,
reduction of coverage or arrearage in premiums has been threatened or occurred
with respect to any policy, nor is the management of Miracle Industries aware of
any grounds therefor.
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SECTION 8.22 EXTRAORDINARY TRANSACTIONS.
Except as disclosed in the Miracle Industries Disclosure Letter or
otherwise permitted by this Agreement, since June 30, 1997, neither Miracle
Industries nor Hydro-Spray or Indy Ventures has (i) mortgaged, pledged or
subjected to any Encumbrance any of its assets; (ii) canceled or compromised any
claim of or debts owed to it; (iii) sold, licensed, leased, exchanged or
transferred any of its assets except in the ordinary course of business; (iv)
entered into any material transaction other than in the ordinary course of
business; (v) experienced any material change in the relationship or course of
dealing with any supplier, customer or creditor; (vi) suffered any material
destruction, loss or damage to any of its assets; (vii) made any management
decisions involving any material change in its policies with regard to pricing,
sales, purchasing or other business, financial, accounting (including reserves
and the amounts thereof) or tax policies or practices; (viii) declared, set
aside or paid any dividends on or made any distributions in respect of any
outstanding shares of capital stock or made any other distributions or payments
to any of the Selling Stockholders; (ix) submitted any bid, proposal, quote or
commitment to any party in response to a request for proposal or otherwise; (x)
engaged in any merger or consolidation with, or agreed to merge or consolidate
with, or purchased or agreed to purchase, all or substantially all of the assets
of, or otherwise acquire, any other party; (xi) entered into any strategic
alliance, partnership, joint venture or similar arrangement with any other
party; (xii) incurred or agreed to incur any Debt or prepaid or made any
prepayments in respect of Debt; (xiii) issued or agreed to issue to any party,
any shares of stock or other securities; (xiv) redeemed, purchased or agreed to
redeem or purchase any of its outstanding shares of capital stock or other
securities; (xv) increased the rate of compensation payable or to become payable
to any of its officers, directors, employees or agents over the rate being paid
to them as of June 30, 1996 or agreed to do so otherwise than in accordance with
contractual agreements with such parties; (xvi) made or agreed to make any
charitable contributions or incurred or agreed to incur any non-business
expenses; or (xvii) charged off any bad debts or increased its bad debt reserve
except in the manner consistent with its past practices.
SECTION 8.23 TITLE TO ASSETS.
Except as described in the Miracle Industries Disclosure Letter, Miracle
Industries and each of Hydro-Spray and Indy Ventures has good and marketable
title to its respective assets and properties, free and clear of restrictions on
or conditions to transfer or assignment, and free and clear of all Encumbrances.
SECTION 8.24 CORPORATE RECORDS.
The minute books of Miracle Industries accurately reflect all minutes of
proceedings of and actions taken by the directors of Miracle Industries and each
committee of the Board of Directors of Miracle Industries, and all records of
meetings of and actions taken by the stockholders of Miracle Industries, that
are required by applicable laws to be recorded in or reflected in the corporate
records thereof.
SECTION 8.25 BROKER AND FINDER FEES.
Miracle Industries has not engaged any broker or finder in connection with
the transactions contemplated by this Agreement, and no action by Miracle
Industries will cause or support any claim to be asserted against the Holding
Company, Miracle Industries or any of its Subsidiaries by any broker, finder or
intermediary in connection with such transaction.
SECTION 8.26 ADEQUATE DISCLOSURE.
No representation or warranty made by Miracle Industries pursuant to this
Agreement, or any statement contained in any Exhibit or Schedule to this
Agreement, or any certificate or document furnished or to be furnished by
Miracle Industries or any of its Subsidiaries pursuant to the terms of this
Agreement in connection with the transactions contemplated hereby, contains any
untrue or misleading statement of a material fact or omits to state a material
fact necessary in order to make the statements contained therein not misleading.
SECTION 8.27 NO ADVERSE CHANGE OR CONDITIONS.
Except as set forth in the Miracle Industries Disclosure Letter, and except
as expressly permitted or contemplated by this Agreement, since June 30, 1997,
Miracle Industries and each of Hydro-Spray and Indy Ventures has conducted its
business in the ordinary course and consistent with past practice, and neither
Miracle Industries nor Hydro-Spray or Indy Ventures has suffered any change that
has had a Material Adverse Effect. There are no conditions, facts, developments
or circumstances of an unusual or special nature that reasonably could be
expected to have a Material Adverse Effect upon Miracle Industries or
Hydro-Spray or Indy Ventures that have not been disclosed in writing by Miracle
Industries pursuant to the Miracle Industries Disclosure Letter.
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ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF ROCKY MOUNTAIN I
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, subject to the delivery
and acceptance of a definitive Disclosure Letter, Rocky Mountain I hereby makes
the following representations and warranties to the other parties to this
Agreement and to the Holding Company:
SECTION 9.1 ORGANIZATION AND GOOD STANDING.
Rocky Mountain I is a corporation duly organized, validly existing and in
good standing under the laws of the State of Colorado, and has full corporate
power and authority to own, operate and lease its properties, and to conduct its
business as it is now being conducted, and is qualified to transact business as
a foreign corporation in each jurisdiction in which the operation of its
business or the ownership of its properties requires such qualification.
SECTION 9.2 CAPITALIZATION OF ROCKY MOUNTAIN I.
The authorized capital stock of Rocky Mountain I consists solely of 6,000
shares of a single class of common stock, $100.00 par value, of which 5,197.5
shares have been issued and are outstanding as of the date of this Agreement.
Each of the shares of the capital stock of Rocky Mountain I issued and
outstanding as of the date hereof has been duly authorized and validly issued
and is fully paid and non-assessable. None of the shares of the issued and
outstanding capital stock of Rocky Mountain I has been issued in violation of
shareholder preemptive rights. Rocky Mountain I has no issued or outstanding
equity securities, debt securities or other instruments which are convertible
into or exchangeable for at any time into equity securities of Rocky Mountain I.
Rocky Mountain I is not subject to any commitment or obligation which would
require the issuance or sale of shares of its capital stock at any time under
options, subscriptions, warrants, rights, calls, preemptive rights, convertible
obligations or any other fixed or contingent obligations or which would provide
the holder thereof with the right to acquire any equity securities of Rocky
Mountain I. Rocky Mountain I has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interest therein or to pay any dividend or make any other distribution in
respect thereof.
SECTION 9.3 OWNERSHIP OF SHARES.
The Rocky Mountain I Disclosure Letter contains a true, complete and
accurate list of each of the record and beneficial owners of the shares of the
capital stock of Rocky Mountain I, together with the name and address of each
such holder. There are no agreements, pledges, powers of attorney, assignments
or similar agreements or arrangements either (i) restricting the transferability
of any of the shares of the capital stock of Rocky Mountain I or (ii) which
reasonably could be expected to prohibit or delay the consummation of the
transactions contemplated hereby.
SECTION 9.4 SUBSIDIARIES; INVESTMENTS.
Rocky Mountain I does not own any shares of capital stock or equity
securities of, or any interest in any other entity.
SECTION 9.5 EXECUTION AND EFFECT OF AGREEMENT.
Rocky Mountain I has the corporate power to enter into this Agreement and
to perform its obligations hereunder and, subject to the due authorization and
approval of its shareholders, to enter into and consummate the Rocky Mountain I
Merger. Subject only to the approval of its Board of Directors, this Agreement
has been duly executed and delivered by Rocky Mountain I and constitutes a
legal, valid and binding obligation of Rocky Mountain I, fully enforceable
against Rocky Mountain I in accordance with its terms; except as enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other laws of general application relating
to or affecting enforcement of creditors' rights and the exercise of judicial
discretion in accordance with general principles of equity.
SECTION 9.6 RESTRICTIONS.
The execution and delivery of this Agreement by Rocky Mountain I, the
consummation of the transactions contemplated hereby by Rocky Mountain I, and,
subject to the due authorization and approval of its shareholders, the
performance of the obligations of Rocky Mountain I hereunder will not (a)
violate any of the provisions of the charter or by-laws of Rocky Mountain I, (b)
violate or conflict with the provisions of any Applicable Laws, (c) result in
the creation of any Encumbrance upon any of the assets, rights or properties of
Rocky Mountain I, or (d) except as disclosed in the Rocky Mountain I Disclosure
Letter, conflict with, violate any provisions of, result in a breach of or give
rise to a right of termination, modification or cancellation of, constitute a
default of, or accelerate the performance required by, with or without the
passage of time or the
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giving of notice or both, the terms of any material agreement, indenture,
mortgage, deed of trust, security or pledge agreement, lease, contract, note,
bond, license, permit, authorization or other instrument to which Rocky Mountain
I is a party or to which any of any of the assets of Rocky Mountain I are
subject.
SECTION 9.7 CONSENTS.
Except as disclosed in the Rocky Mountain I Disclosure Letter, no filing
with, or consent, waiver, approval or authorization of, or notice to, any
Governmental Authority or any third party is required to be made or obtained by
Rocky Mountain I in connection with the execution and delivery of this Agreement
or any document or instrument contemplated hereby, the consummation of any of
the transactions contemplated hereby or the performance of any of their
respective obligations hereunder or thereunder.
SECTION 9.8 FINANCIAL STATEMENTS.
Attached hereto as Exhibit E are true and correct copies of the audited
balance sheets and related statements of income, cash flows and changes in
stockholders' equity of Rocky Mountain I as at December 31, 1994, 1995 and 1996
and for the year periods then-ended and the unaudited financial statements of
Rocky Mountain I as at June 30, 1997 and for the six month period then ended
(collectively, the "Rocky Mountain I Financial Statements"). All of the Rocky
Mountain I Financial Statements have been prepared in accordance with an accrual
method of accounting consistently applied, in a manner consistent with each
other and the books and records of Rocky Mountain I, and fairly present in all
material respects the financial condition and results of operations of Rocky
Mountain I at the dates and for the periods indicated therein. The regular books
of account of Rocky Mountain I fairly and accurately reflect all material
transactions involving Rocky Mountain I, are true, correct and complete and have
been prepared in accordance with an actual method of accounting, consistently
applied, and on a basis consistent with the Financial Statements.
SECTION 9.9 DEBT.
The Rocky Mountain I Disclosure Letter contains a true, complete and
accurate listing of the original principal amount of all of the outstanding Debt
of Rocky Mountain I, the remaining principal balance thereof, the interest
rate(s) payable by Rocky Mountain I in respect thereof, if any, and the date(s)
of maturity thereof. Except as disclosed in the Rocky Mountain I Disclosure
Letter, all of the Debt of Rocky Mountain I may be prepaid at any time, without
premium, prepayment penalties, termination fees or other fees or charges.
SECTION 9.10 GUARANTEES.
The Rocky Mountain I Disclosure Letter contains a complete list of all
Guarantees provided by Rocky Mountain I for the benefit of any other party and
of all Guarantees provided by any other party for the benefit of Rocky Mountain
I or any party doing business with Rocky Mountain I.
SECTION 9.11 NO UNDISCLOSED LIABILITIES.
Rocky Mountain I does not have any material liabilities or obligations of
any nature whatsoever (whether known or unknown, due or to become due, absolute,
accrued, contingent or otherwise, and whether or not determined or
determinable), except for (i) liabilities or obligations set forth in the Rocky
Mountain I Disclosure Letter, (ii) liabilities or obligations to the extent
expressly reflected on or reserved against in the June 30, 1997 balance sheet
included among the Rocky Mountain I Financial Statements or disclosed in the
notes thereto, (iii) liabilities or obligations of a type reflected on the June
30, 1997 balance sheet and incurred in the ordinary course of business and
consistent with past practices since June 30, 1997, or (iv) liabilities or
obligations arising under the terms of the Material Contracts of Rocky Mountain
I. Except as otherwise contemplated or permitted by this Agreement no dividends
have been declared on any capital stock of Rocky Mountain I which are unpaid.
SECTION 9.12 LITIGATION.
There is no suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or, to the knowledge of the
management of Rocky Mountain I, threatened, by or before any court, any
Governmental Authority or arbitrator, against Rocky Mountain I that reasonably
could be expected to prevent the consummation of any of the transactions
contemplated hereby. Except as disclosed in the Rocky Mountain I Disclosure
Letter, there is no material suit, claim, action at law or in equity, proceeding
or governmental investigation or audit pending, or to the knowledge of
management of Rocky Mountain I, threatened, by or before any arbitrator, court,
or other Governmental Authority, against Rocky Mountain I or involving any of
the former or present employees, agents, businesses, properties, rights or
assets of Rocky Mountain I, nor,
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to the knowledge of management of Rocky Mountain I, is there any basis for the
assertion of any of the foregoing. Except as disclosed in the Rocky Mountain I
Disclosure Letter, there are no judgments, orders, injunctions, decrees,
stipulations or awards rendered by any court, Governmental Authority or
arbitrator against Rocky Mountain I or any of their respective former or present
Employees, agents, properties or assets.
SECTION 9.13 PROPERTIES; ABSENCE OF ENCUMBRANCES.
The Rocky Mountain I Disclosure Letter sets forth a complete list of all
real property owned by or leased to Rocky Mountain I, and, with respect to all
properties leased by Rocky Mountain I, a description of the term of such lease
and the monthly rental thereunder. Rocky Mountain I is not in default (and will
not be in default with the passage of time or the receipt of notice or both) and
has not received notice of default, under any lease of real property. All real
property leased to Rocky Mountain I is available for immediate use in the
operation of its business and for the purpose for which such property currently
is being utilized. Subject in the case of leased property to the terms and
conditions of the respective leases, Rocky Mountain I has full legal and
practical access to all such real property.
SECTION 9.14 INTELLECTUAL PROPERTY.
The Rocky Mountain I Disclosure Letter sets forth a complete list of (i)
all Intellectual Property owned, used or licensed by Rocky Mountain I, together
with the identity of the owner thereof, and (ii) all license agreements pursuant
to which any Intellectual Property is licensed to or by Rocky Mountain I. Rocky
Mountain I owns its Intellectual Property free and clear of any and all
Encumbrances, or, in the case of licensed Intellectual Property, has valid,
binding and enforceable rights to use such Intellectual Property. Rocky Mountain
I has duly and timely filed all renewals, continuations and other filings
necessary to maintain its Intellectual Property or registrations thereof. Except
as disclosed in the Rocky Mountain I Disclosure Letter, Rocky Mountain I (i) has
not received any notice or claim to the effect that the use of any Intellectual
Property infringes upon, conflicts with or misappropriates the rights of any
other party or that any of the Intellectual Property is not valid or
enforceable, and (ii) has not made any claim that any party has violated or
infringed upon its rights with respect to any Intellectual Property.
SECTION 9.15 MATERIAL CONTRACTS.
(a) List of Material Contracts. The Rocky Mountain I Disclosure Letter
sets forth a list of all material written, and a description of all oral,
commitments, agreements or contracts to which Rocky Mountain I is a party or by
which Rocky Mountain I is obligated, including, but not limited to, all
commitments, agreements or contracts embodying or evidencing the following
transactions or arrangements: (i) agreements for the employment of, or
independent contractor arrangements with, any officer or other individual
employee of Rocky Mountain I; (ii) any consulting agreement, agency agreement
and any other service agreement that will continue in force after the Closing
Date with respect to the employment or retention by Rocky Mountain I of
consultants, agents, legal counsel, accountants or anyone else who is not an
Employee; (iii) any single contract, purchase order or commitment providing for
expenditures by Rocky Mountain I after the date hereof of more than $25,000 or
which has been entered into by Rocky Mountain I otherwise than in the ordinary
course of business; (iv) agreements between Rocky Mountain I and suppliers to
Rocky Mountain I pursuant to which Rocky Mountain I is obligated to purchase or
to sell or distribute the products of any other party other than current
purchase orders entered into in the ordinary course of business consistent with
past practices; (v) any contract containing covenants limiting the freedom of
Rocky Mountain I or any officer, director, or employee of Rocky Mountain I to
engage in any line or type of business or with any person in any geographic
area; (vi) any commitment or arrangement by Rocky Mountain I to participate in a
strategic alliance, partnership, joint venture, limited liability company or
other cooperative undertaking with any other Person; (vii) any commitments by
Rocky Mountain I for capital expenditures involving more than $25,000
individually or $50,000 in the aggregate; and (viii) any other contract,
commitment, agreement, understanding or arrangement that the management of Rocky
Mountain I deems to be material to the business of Rocky Mountain I.
(b) No Breaches or Defaults. Except as disclosed in the Rocky Mountain
I Disclosure Letter, Rocky Mountain I is in full compliance with each, and is
not in default under any, Material Contract to which it is a party, and no event
has occurred that, with notice or lapse of time or both, would constitute such a
default thereunder. Rocky Mountain I has not waived any rights under or with
respect to any of the Material Contracts to which it is a party. The management
of Rocky Mountain I has no knowledge, or received any notice to the effect, that
any party with whom Rocky Mountain I has contractual arrangements under the
Material Contracts, is in default under any such contractual arrangements or
that any event has occurred that, with notice or lapse of time or both, would
constitute such a default thereunder. Each of the Material Contracts to which
Rocky Mountain I is a party constitutes a legal, valid and binding obligation of
each the parties thereto and is enforceable against each of the parties thereto
in accordance with its respective terms; except as enforceability thereof may be
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limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the exercise of judicial
discretion in accordance with general principles of equity.
SECTION 9.16 EMPLOYEE BENEFITS AND EMPLOYMENT MATTERS.
(a) Plans and Arrangements. The Rocky Mountain I Disclosure Letter
sets forth a true, complete and correct list of all Employee Benefit Plans and
all Benefit Arrangements to which Rocky Mountain I or any of its ERISA
Affiliates is a party or to which Rocky Mountain I or any of its ERISA
Affiliates is obligated to contribute. None of the Employee Benefit Plans to
which Rocky Mountain I or any ERISA Affiliate of Rocky Mountain I is a party,
which Rocky Mountain I or any ERISA Affiliate of Rocky Mountain I sponsors or
maintains or to which Rocky Mountain I or any ERISA Affiliate of Rocky Mountain
I contributes is subject to the requirements of Section 302 of ERISA or Section
412 of the Code and no liability under Title IV of ERISA (whether to the PBGC or
otherwise) has been incurred by Rocky Mountain I or any of its ERISA Affiliates.
(b) Compliance with Laws and Terms of Plans. Except as disclosed in
the Rocky Mountain I Disclosure Letter, each Employee Benefit Plan and Benefit
Arrangement to which Rocky Mountain I or any of its ERISA Affiliates is a party
or to which Rocky Mountain I or any of its ERISA Affiliates is obligated to
contribute has been operated or maintained in compliance in all material
respects with all Applicable Laws, including, without limitation, ERISA and the
Code, and has been maintained in material compliance with its terms and in
material compliance with the terms of any applicable collective bargaining
agreement. Except as disclosed in the Rocky Mountain I Disclosure Letter, with
respect to any Employee Benefit Plan that is intended to qualify under Section
401 of the Code, a favorable determination letter as to qualification under
Section 401 of the Code that considered the Tax Reform Act of 1986 has been
issued and any amendments required for continued qualification under Section 401
of the Code have been timely adopted and nothing has occurred subsequent to the
date of such determination letter that could adversely affect the qualified
status of any such Plan.
(c) Contributions. All contributions required to be made to or benefit
liabilities arising under the terms of each Employee Benefit Plan or Benefit
Arrangement to which Rocky Mountain I of any of its ERISA Affiliates is a party
or to which Rocky Mountain I or any of its ERISA Affiliates is obligated to
contribute, under ERISA or the Code, for all periods of time prior to the date
hereof and that are attributable to Employees of Rocky Mountain I have been paid
or otherwise adequately accrued against in the Rocky Mountain I Financial
Statements, as the case may be.
(d) Arrearages and Employment Disputes. Except as disclosed in the
Rocky Mountain I Disclosure Letter, Rocky Mountain I is not liable for any
arrearage of wages, any accrued or vested vacation pay or any tax or penalty for
failure to comply with any Applicable Law relating to employment or labor above
the level accrued for or reserved against on the June 30, 1997 balance sheet
included in the Rocky Mountain I Financial Statements, and there is no
controversy pending, threatened or in prospect between Rocky Mountain I and any
of its Employees nor is there any basis for any such controversy. There is no
unfair labor practice charge or complaint currently pending against Rocky
Mountain I with respect to or relating to any of its Employees before the
National Labor Relations Board or any other agency having jurisdiction over such
matters and no charges or complaints are currently pending against Rocky
Mountain I before the Equal Employment Opportunity Commission or any state or
local agency having responsibility for the prevention of unlawful employment
practices. There are no actions, suits or claims pending, including proceedings
before the IRS, the DOL or the PBGC, with respect to any Employee Benefit Plan,
Benefit Arrangement or any administrator or fiduciary thereof, other than
benefit claims arising in the normal course of operation of such Employee
Benefit Plans or Benefit Arrangements, and, to the knowledge of the management
of Rocky Mountain I, no Employee Benefit Plan or Benefit Arrangement is under
audit or investigation by any Governmental Authority.
(e) Severance Obligations. Except as disclosed in the Rocky Mountain I
Disclosure Letter, all current employees of Rocky Mountain I may be terminated
at will, without notice and without incurring any severance or other liability
or obligation to the employee in connection with the termination. Except to the
extent provided by the terms of the Employee Benefit Plans and Benefit
Arrangements disclosed in the Rocky Mountain I Disclosure Letter, neither the
execution, delivery or performance of this Agreement nor the consummation of the
Closing will (i) increase any benefits otherwise payable under any Employee
Benefit Plan or Benefit Arrangement, (ii) result in the acceleration of the time
of payment or vesting of any such benefits, or (iii) give rise to an obligation
with respect to the payment of any severance pay. No "parachute payment" (within
the meaning of Section 280G of the Code), "change in control" or severance
payment has been made or will be required to be made by Rocky Mountain I or any
ERISA Affiliate of Rocky Mountain I to any Employee in connection with the
execution, delivery or performance of this Agreement or as a result of the
consummation of the Closing.
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(f) Compliance with Laws on Employment Practices. Rocky Mountain I has
complied in all material respects with all Applicable laws relating to
employment and employment practices, terms and conditions of employment, wages
and hours, and to the knowledge of the management of Rocky Mountain I, is not
engaged in any unfair labor practice with respect to any of the current
employees of Rocky Mountain I and to the best knowledge of Rocky Mountain I,
none of the persons performing services for Rocky Mountain I or any of its ERISA
Affiliates have been improperly classified as independent contractors or as
being exempt from the payment of wages or overtime.
(g) Collective Bargaining Agreements. Except as disclosed in the Rocky
Mountain I Disclosure Letter), none of the employees of Rocky Mountain I are
subject to any collective bargaining agreement nor is Rocky Mountain I required
under any agreement to recognize or bargain with any labor organization or union
on behalf of its employees.
(h) No Multi-Employer Plans. Neither Rocky Mountain I nor any of its
ERISA Affiliates has contributed to, or had the obligation to contribute to, any
Multiemployer Plan within the five-year period ending on the date of this
Agreement.
(i) No Amendments to Plans. There has been no amendment to, written
interpretation or announcement (whether or not written) by Rocky Mountain I or
any of its ERISA Affiliates relating to, or change in employee participation or
coverage under, any Employee Benefit Plan or Benefit Arrangement that would
increase materially the expense of maintaining such Employee Benefit Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year of Rocky Mountain I ended December 31, 1996.
(j) No Unfunded Liabilities. Neither Rocky Mountain I nor any ERISA
Affiliate of Rocky Mountain I has any current or projected liability for any
unfunded post-retirement medical or life insurance benefits in connection with
any Employee of Rocky Mountain I or ERISA Affiliate of Rocky Mountain I.
(k) No Prohibited Transactions. No event has occurred with respect to
any Employee Benefit Plan or any employee benefit plan previously sponsored,
maintained or contributed to by Rocky Mountain I or any ERISA Affiliate of Rocky
Mountain I, which could subject any such Employee Benefit Plan, Rocky Mountain
I, any ERISA Affiliate of Rocky Mountain I, or the Holding Company directly or
indirectly (through an indemnification agreement or otherwise), to any liability
for or as a result of a breach of fiduciary duty, a "prohibited transaction"
within the meaning of Section 406 of ERISA or Section 4975 of the Code, or a
civil penalty under Section 502 of ERISA or a Tax under Section 4971 of the
Code. Neither Rocky Mountain I nor any of its ERISA Affiliates have incurred a
"withdrawal" or "partial withdrawal," as defined in Sections 4203 and 4205 of
ERISA, from, or failed to timely make contributions to any Multiemployer Plan
which has resulted in any unpaid liability of Rocky Mountain I or any of its
ERISA Affiliates.
(l) Welfare Benefit Plans. (i) Except as disclosed in the Rocky
Mountain I Disclosure Letter, none of the Employee Benefit Plans that are
"employee welfare benefit plans" as defined in ERISA Section 3(1) provides for
continuing benefits or coverage for any participant or beneficiary of a
participant after such participant's termination of employment, except to the
extent required by law; provided that any disclosure regarding this clause (i)
shall set forth (A) the number of individuals currently receiving such
continuing benefits or coverage, (B) the limit on liability with respect to such
coverage, (C) the terms and conditions of such coverage, and (D) the maximum
number of current employees or independent contractors who could become eligible
for such continuing benefits or coverage; (ii) there has been no violation of
Code Section 4980B or ERISA Sections 601-609 with respect to any such plan that
could result in any material liability; (iii) no such plans are "multiple
employer welfare arrangements" within the meaning of ERISA Section 3(40); (iv)
with respect to any such plans that are self-insured, no claims have been made
pursuant to any such plan that have not yet been paid (other than claims which
have not yet been paid but are in the normal course of processing) and no
individual has incurred injury, sickness or other medical condition with respect
to which claims may be made pursuant to any such plan where the liability to the
employer could in the aggregate with respect to each such individual exceed
$50,000 per year; (v) neither Rocky Mountain I nor any of its ERISA Affiliates
maintains or has any obligation to contribute to any "voluntary employees'
beneficiary association" within the meaning of Code Section 501(c)(9) or other
welfare benefit fund as defined at Section 419(e) of the Code (such disclosure
to include the amount of any such funding); (vi) no such plan is intended to
satisfy Code Section 125; (vii) no amounts are required in connection with any
such plan to be included in income under Code Section 105(h) (under official
regulations thereof to date); and (viii) neither Rocky Mountain I nor any of its
ERISA Affiliates maintains a nonconforming group health plan as defined at
Section 5000(c) of the Code.
SECTION 9.17 TAX MATTERS.
(a) Affiliated Groups. Rocky Mountain I is not a member of, and has
never been a member of, any "affiliated group" as that term is defined in
Section 1504(a) of the Code.
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(b) Tax Returns and Payment of Taxes. Rocky Mountain I has timely
filed or will timely file all federal, state, local, and other Tax Returns
required to be filed by it under Applicable Laws, including estimated Tax
Returns and reports, and has paid all required Income Taxes and other Taxes
(including any additions to taxes, penalties and interest related thereto) due
and payable on or before the date hereof. Rocky Mountain I has paid, withheld,
or accrued, or will accrue, on the Rocky Mountain I Financial Statements in
accordance with an accrual method of accounting consistently applied any and all
Income Taxes and other Taxes in respect of the conduct of its business or the
ownership of its property and in respect of any transactions for all periods (or
portions thereof) through the close of business on the Closing Date. Rocky
Mountain I has withheld and paid over all Taxes required to have been withheld
and paid over, and complied with all information reporting and backup
withholding requirements, including the maintenance of required records with
respect thereto, in connection with amounts paid or owing to any Employee,
creditor, independent contractor or other third party. Rocky Mountain I has
collected all sales, use and value added Taxes required to be collected, and has
remitted, or will remit on a timely basis, such amounts to the appropriate
Government Authorities and have furnished properly completed exemption
certificates for all exempt transactions.
(c) Tax Reserves. The amount of Rocky Mountain I's liability for
unpaid Taxes for all periods ending on or before the date of this Agreement does
not, in the aggregate, exceed the amount of the current liability accruals for
Taxes (excluding reserves for deferred Taxes) as of the date of this Agreement,
and the amount of Rocky Mountain I's liability for unpaid Taxes for all periods
ending on or before the Closing Date shall not, in the aggregate, exceed the
amount of the current liability accruals for Taxes (excluding reserves for
deferred Taxes) as such accruals shall be reflected on the balance sheet of
Rocky Mountain I as of the Closing Date.
(d) Audits; No Deficiencies Asserted Against Company. The Tax Returns
of Rocky Mountain I have never been audited by any Tax Authority, nor is any
such audit in process, pending or threatened (either in writing or verbally,
formally or informally). Except as disclosed in the Rocky Mountain I Disclosure
Letter, no deficiencies have been asserted (or are expected to be asserted)
against Rocky Mountain I as a result of IRS (or state or local Tax Authority)
examinations and no issue has been raised by any IRS (or state or local Tax
Authority) examination that, by application of the same principles, might result
in a proposed deficiency for any other period not so examined.
(e) No Waivers of Limitations. Except as disclosed in the Rocky
Mountain I Disclosure Letter, there are no agreements, waivers of statutes of
limitations, or other arrangements providing for extensions of time in respect
of the assessment or collection of any unpaid Taxes against Rocky Mountain I.
Rocky Mountain I has disclosed on its federal Income Tax Returns all positions
taken therein that could, if not so disclosed, give rise to a substantial
understatement penalty within the meaning of Section 6662 of the Code.
(f) No Tax Liens. There are no Encumbrances on any of the assets,
rights or properties of Rocky Mountain I with respect to Taxes, other than liens
for Taxes not yet due and payable or for Taxes that Rocky Mountain I is
contesting in good faith through appropriate proceedings and for which
appropriate reserves have been established on the Rocky Mountain I Financial
Statements.
(g) Tax Elections and Special Tax Status. Rocky Mountain I is not a
party to any safe harbor lease within the meaning of Section 168(f)(8) of the
Code. No election or consent under Section 341(f) of the Code has been made or
shall be made on or prior to the Closing Date by or on behalf of Rocky Mountain
I. Rocky Mountain I is a "small business corporation" which has elected to be
subject to federal income taxation under subchapter S of the Code and has such
status for purposes of federal income taxation and state income taxation in all
states in which its respective income is subject to taxation or has been subject
to taxation at all times since its formation.
(h) Disqualified Leasebacks. Rocky Mountain I is not a party to a
"disqualified leaseback or long-term agreement" described in Section 467(b)(4)
of the Code.
(i) Deferrals of Income. No income or gain of Rocky Mountain I has
been deferred pursuant to Treasury Regulation (section mark) 1.1502-13 or
1.1502-14, or Temporary Treasury Regulation (section mark) 1.1502-13T or
1.1502-14T.
(j) Tax Sharing and Similar Arrangements. Rocky Mountain II is not a
party to or bound by any Tax sharing, Tax indemnity, Tax allocation or other
similar arrangement.
(k) No Non-Deductible Compensation Payments. Rocky Mountain I has not
made any payments, nor is it obligated to make any payments, that would not be
deductible under Section 280G of the Code, nor is it a party to any agreement
that under certain circumstances could obligate it to make any such payments.
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SECTION 9.18 ENVIRONMENTAL MATTERS.
(a) The facilities presently or formerly occupied or used by Rocky
Mountain I and any other real property presently or formerly owned by, used by
or leased to or by Rocky Mountain I (collectively, the "Rocky Mountain I
Property"), the existing and prior uses of such Property and all operations of
the businesses of Rocky Mountain I comply and have at all times complied with
all Environmental Laws and Rocky Mountain I is not in violation of nor has it
violated, in connection with the ownership, use, maintenance or operation of
such property or the conduct of its business, any Environmental Law.
(b) Rocky Mountain I has all necessary permits, registrations,
approvals and licenses required by any Governmental Authority or Environmental
Law.
(c) Except as disclosed in the Rocky Mountain I Disclosure Letter,
there has been no spill, discharge, leak, emission, injection, disposal, escape,
dumping or release of any kind on, beneath or above such Property or into the
environment surrounding such Rocky Mountain I Property of any Hazardous
Materials.
(d) There has been no past, and there is no current or anticipated
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any Hazardous Materials at, upon or from such Rocky
Mountain I Property. No asbestos-containing materials, underground improvements
(including, but not limited to the treatment or storage tanks, sumps, or water,
gas or oil wells) or polychlorinated biphenyls (PCBs) transformers, capacitors,
ballasts, or other equipment which contain dielectric fluid containing PCBs at
levels in excess of fifty parts per million (50 PPM) are located on such Rocky
Mountain I Property.
(e) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or threatened by any
Governmental Authority or third party with respect to the business or any
Property of Rocky Mountain I (or any predecessor in interest) in connection with
(i) any actual or alleged failure to comply with any requirement of any
Environmental Law; (ii) the ownership, use, maintenance or operation of the
Property by any person; (iii) the alleged violation of any Environmental Law; or
(iv) the suspected presence of any Hazardous Material thereon.
SECTION 9.19 COMPLIANCE WITH LAWS.
Rocky Mountain I has at all times conducted its business in material
compliance with all (and has not received any notice of any claimed violation of
any) Applicable Laws.
SECTION 9.20 LICENSES AND PERMITS.
Rocky Mountain I possess all licenses, permits, and other governmental
consents, certificates, approvals, or other authorizations (the "Permits")
necessary for the operation of the business of Rocky Mountain I. Rocky Mountain
I has complied with the terms and conditions of all Permits in all material
respects and all such Permits are in full force and effect, and there has
occurred no event nor is any event, action, investigation or proceeding pending
or, to the knowledge of management of Rocky Mountain I, threatened, which could
cause or permit revocation or suspension of or otherwise adversely affect the
maintenance of any Permits. The transactions contemplated by this Agreement will
not lead to the revocation, cancellation, termination or suspension of any
Permits.
SECTION 9.21 INSURANCE.
Rocky Mountain I has regularly maintained all policies of commercial
liability, products liability, fire, casualty, worker's compensation, life and
other forms of insurance on an "occurrence" rather than a "claims made" basis in
amounts and types required by law and generally carried by reasonably prudent,
similarly situated businesses. Rocky Mountain I is not in default under any
provision contained in any insurance policy maintained by Rocky Mountain I
currently, nor has Rocky Mountain I failed to give any notice or present any
claim thereunder in due and timely fashion and no cancellation, non-renewal,
reduction of coverage or arrearage in premiums has been threatened or occurred
with respect to any policy, nor is the management of Rocky Mountain I aware of
any grounds therefor.
SECTION 9.22 EXTRAORDINARY TRANSACTIONS.
Except as disclosed in the Rocky Mountain I Disclosure Letter or otherwise
permitted by this Agreement, since June 30, 1997, Rocky Mountain I has not (I)
mortgaged, pledged or subjected to any Encumbrance any of its assets; (ii)
canceled or compromised any claim of or debts owed to it; (iii) sold, licensed,
leased, exchanged or transferred any of its assets except in the ordinary course
of business; (iv) entered into any material transaction other than in the
ordinary course of business; (v) experienced any material change in the
relationship or course of dealing with any supplier, customer or creditor; (vi)
suffered any material destruction, loss or damage to any of its assets; (vii)
made any management decisions involving any
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material change in its policies with regard to pricing, sales, purchasing or
other business, financial, accounting (including reserves and the amounts
thereof) or tax policies or practices; (viii) declared, set aside or paid any
dividends on or made any distributions in respect of any outstanding shares of
capital stock or made any other distributions or payments to any of its
shareholders; (ix) submitted any bid, proposal, quote or commitment to any party
in response to a request for proposal or otherwise; (x) engaged in any merger or
consolidation with, or agreed to merge or consolidate with, or purchased or
agreed to purchase, all or substantially all of the assets of, or otherwise
acquire, any other party; (xi) entered into any strategic alliance, partnership,
joint venture or similar arrangement with any other party; (xii) incurred or
agreed to incur any Debt or prepaid or made any prepayments in respect of Debt;
(xiii) issued or agreed to issue to any party, any shares of stock or other
securities; (xiv) redeemed, purchased or agreed to redeem or purchase any of its
outstanding shares of capital stock or other securities; (xv) increased the rate
of compensation payable or to become payable to any of its officers, directors,
employees or agents over the rate being paid to them as of June 30, 1996 or
agreed to do so otherwise than in accordance with contractual agreements with
such parties; (xvi) made or agreed to make any charitable contributions or
incurred or agreed to incur any non-business expenses; or (xvii) charged off any
bad debts or increased its bad debt reserve except in the manner consistent with
its past practices.
SECTION 9.23 TITLE TO ASSETS.
Except as described in the Rocky Mountain I Disclosure Letter, Rocky
Mountain I has good and marketable title to its assets and properties, free and
clear of restrictions on or conditions to transfer or assignment, and free and
clear of all Encumbrances.
SECTION 9.24 CORPORATE RECORDS.
The minute books of Rocky Mountain I accurately reflect all minutes of
proceedings of and actions taken by the directors of Rocky Mountain I, and by
each committee of the Board of Directors of Rocky Mountain I, and all records of
meetings of and actions taken by the stockholders of Rocky Mountain I, that are
required by applicable laws to be recorded in or reflected in the corporate
records thereof.
SECTION 9.25 BROKER AND FINDER FEES.
Rocky Mountain I has not engaged any broker or finder in connection with
the transactions contemplated by this Agreement, and no action by any of the
foregoing will cause or support any claim to be asserted against the Holding
Company or Rocky Mountain I by any broker, finder or intermediary in connection
with such transaction.
SECTION 9.26 ADEQUATE DISCLOSURE.
No representation or warranty made by Rocky Mountain I pursuant to this
Agreement, or any statement contained in any Exhibit or Schedule to this
Agreement, or any certificate or document furnished or to be furnished by Rocky
Mountain I pursuant to the terms of this Agreement in connection with the
transactions contemplated hereby, contains any untrue or misleading statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained therein not misleading.
SECTION 9.27 NO ADVERSE CHANGE OR CONDITIONS.
Except as set forth in the Rocky Mountain I Disclosure Letter, and except
as expressly contemplated or permitted by this Agreement, since June 30, 1997,
Rocky Mountain I and has conducted its business in the ordinary course and
consistent with past practice, and Rocky Mountain I has not suffered any change
that has had a Material Adverse Effect on Rocky Mountain I. There are no
conditions, facts, developments or circumstances of an unusual or special nature
that reasonably could be expected to have a Material Adverse Effect upon Rocky
Mountain I that have not been disclosed in writing by Rocky Mountain I pursuant
to the Rocky Mountain I Disclosure Letter.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF ROCKY MOUNTAIN II
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, subject to the delivery
and acceptance of a definitive Disclosure Letter, Rocky Mountain II hereby makes
the following representations and warranties to the other parties to this
Agreement and to the Holding Company.
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SECTION 10.1 ORGANIZATION AND GOOD STANDING.
Rocky Mountain II is a corporation duly organized, validly existing and in
good standing under the laws of the State of Colorado, has full corporate power
and authority to own, operate and lease its properties, and to conduct its
business as it is now being conducted, and is qualified to transact business as
a foreign corporation in each jurisdiction in which the operation of its
business or the ownership of its properties requires such qualification.
SECTION 10.2 CAPITALIZATION OF ROCKY MOUNTAIN II.
The authorized capital stock of Rocky Mountain II consists solely of
500,000 shares of a single class of common stock, $1.00 par value, of which
14,538.88 shares have been issued and are outstanding as of the date of this
Agreement. Each of the shares of the capital stock of Rocky Mountain II issued
and outstanding as of the date hereof has been duly authorized and validly
issued and is fully paid and non-assessable. None of the shares of the issued
and outstanding capital stock of Rocky Mountain II has been issued in violation
of shareholder preemptive rights. Rocky Mountain II has no issued or outstanding
equity securities, debt securities or other instruments which are convertible
into or exchangeable for at any time into equity securities of Rocky Mountain
II. Rocky Mountain II is not subject to any commitment or obligation which would
require the issuance or sale of shares of its capital stock at any time under
options, subscriptions, warrants, rights, calls, preemptive rights, convertible
obligations or any other fixed or contingent obligations or which would provide
the holder thereof with the right to acquire any equity securities of Rocky
Mountain II except as provided in the Disclosure Letter dated of even date with
this Agreement submitted by Rocky Mountain II to each of the parties. Rocky
Mountain II has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interest therein or to pay
any dividend or make any other distribution in respect thereof.
SECTION 10.3 OWNERSHIP OF SHARES.
The Rocky Mountain II Disclosure Letter contains a true, complete and
accurate list of each of the record and beneficial owners of the shares of the
capital stock of Rocky Mountain II, together with the name and address of each
such holder. There are no agreements, pledges, powers of attorney, assignments
or similar agreements or arrangements either (I) restricting the transferability
of any of the shares of the capital stock of Rocky Mountain II or (ii) which
reasonably could be expected to prohibit or delay the consummation of the
transactions contemplated hereby.
SECTION 10.4 SUBSIDIARIES; INVESTMENTS.
Rocky Mountain II does not own any shares of capital stock or equity
securities of, or any interest in any other entity.
SECTION 10.5 EXECUTION AND EFFECT OF AGREEMENT.
Rocky Mountain II has the corporate power to enter into this Agreement and
to perform its obligations hereunder and, subject to the due authorization and
approval of its shareholders, to enter into and consummate the Rocky Mountain II
Merger. Subject only to the approval of its Board of Directors, this Agreement
has been duly executed and delivered by Rocky Mountain II and constitutes a
legal, valid and binding obligation of Rocky Mountain II, fully enforceable
against Rocky Mountain II in accordance with its terms; except as enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other laws of general application relating
to or affecting enforcement of creditors' rights and the exercise of judicial
discretion in accordance with general principles of equity.
SECTION 10.6 RESTRICTIONS.
The execution and delivery of this Agreement by Rocky Mountain II, the
consummation of the transactions contemplated hereby by Rocky Mountain II, and,
subject to the due authorization and approval of its shareholders, the
performance of the obligations of Rocky Mountain II hereunder will not (a)
violate any of the provisions of the charter or by-laws of Rocky Mountain II,
(b) violate or conflict with the provisions of any Applicable Laws, (c) result
in the creation of any Encumbrance upon any of the assets, rights or properties
of Rocky Mountain II, or (d) except as disclosed in the Rocky Mountain II
Disclosure Letter, conflict with, violate any provisions of, result in a breach
of or give rise to a right of termination, modification or cancellation of,
constitute a default of, or accelerate the performance required by, with or
without the passage of time or the giving of notice or both, the terms of any
material agreement, indenture, mortgage, deed of trust, security or pledge
agreement, lease, contract, note, bond, license, permit, authorization or other
instrument to which Rocky Mountain II is a party or to which any of any of the
assets of Rocky Mountain II are subject.
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SECTION 10.7 CONSENTS.
Except as disclosed in the Rocky Mountain II Disclosure Letter, no filing
with, or consent, waiver, approval or authorization of, or notice to, any
governmental authority or any third party is required to be made or obtained by
Rocky Mountain II in connection with the execution and delivery of this
Agreement or any document or instrument contemplated hereby, the consummation of
any of the transactions contemplated hereby or the performance of any of their
respective obligations hereunder or thereunder.
SECTION 10.8 FINANCIAL STATEMENTS.
Attached hereto as Exhibit E are true and correct copies of the audited
balance sheets and related statements of income, cash flows and changes in
stockholders' equity of Rocky Mountain II as at December 31, 1994, 1995 and 1996
and for the year periods then ended and the unaudited financial statements of
Rocky Mountain II as at June 30, 1997 and for the six month period then ended
(collectively, the "Rocky Mountain II Financial Statements"). All of the Rocky
Mountain II Financial Statements have been prepared in accordance with an
accrual method of accounting, consistently applied, in a manner consistent with
each other and the books and records of Rocky Mountain II, and fairly present in
all material respects the financial condition and results of operations of Rocky
Mountain II at the dates and for the periods indicated therein. The regular
books of account of Rocky Mountain II fairly and accurately reflect all material
transactions involving Rocky Mountain II, are true, correct and complete and
have been prepared in accordance with an accrual method of accounting,
consistently applied, and on a basis consistent with the Financial Statements.
SECTION 10.9 DEBT.
The Rocky Mountain II Disclosure Letter contains a true, complete and
accurate listing of the original principal amount of all of the outstanding Debt
of Rocky Mountain II, the remaining principal balance thereof, the interest
rate(s) payable by Rocky Mountain II in respect thereof, if any, and the date(s)
of maturity thereof. Except as disclosed in the Rocky Mountain II Disclosure
Letter, all of the Debt of Rocky Mountain II may be prepaid at any time, without
premium, prepayment penalties, termination fees or other fees or charges.
SECTION 10.10 GUARANTEES.
The Rocky Mountain II Disclosure Letter contains a complete list of all
Guarantees provided by Rocky Mountain II for the benefit of any other party and
of all Guarantees provided by any other party for the benefit of Rocky Mountain
II or any party doing business with Rocky Mountain II.
SECTION 10.11 NO UNDISCLOSED LIABILITIES.
Rocky Mountain II does not have any material liabilities or obligations of
any nature whatsoever (whether known or unknown, due or to become due, absolute,
accrued, contingent or otherwise, and whether or not determined or
determinable), except for (I) liabilities or obligations set forth in the Rocky
Mountain II Disclosure Letter, (ii) liabilities or obligations to the extent
expressly reflected on or reserved against in the June 30, 1997 balance sheet
included among the Rocky Mountain II Financial Statements or disclosed in the
notes thereto, (iii) liabilities or obligations of a type reflected on the June
30, 1997 balance sheet and incurred in the ordinary course of business and
consistent with past practices since June 30, 1997, or (iv) liabilities or
obligations arising under the terms of the Material Contracts of Rocky Mountain
II. Except as otherwise contemplated or permitted by this Agreement no dividends
have been declared on any capital stock of Rocky Mountain II which are unpaid.
SECTION 10.12 LITIGATION.
There is no suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or, to the knowledge of the
management of Rocky Mountain II, threatened, by or before any court, any
Governmental Authority or arbitrator, against Rocky Mountain II that reasonably
could be expected to prevent the consummation of any of the transactions
contemplated hereby. Except as disclosed in the Rocky Mountain II Disclosure
Letter, there is no material suit, claim, action at law or in equity, proceeding
or governmental investigation or audit pending, or to the knowledge of
management of Rocky Mountain II, threatened, by or before any arbitrator, court,
or other Governmental Authority, against Rocky Mountain II or involving any of
the former or present employees, agents, businesses, properties, rights or
assets of Rocky Mountain II, nor, to the knowledge of management of Rocky
Mountain II, is there any basis for the assertion of any of the foregoing.
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Except as disclosed in the Rocky Mountain II Disclosure Letter, there are no
judgments, orders, injunctions, decrees, stipulations or awards rendered by any
court, Governmental Authority or arbitrator against Rocky Mountain II or any of
their respective former or present Employees, agents, properties or assets.
SECTION 10.13 PROPERTIES; ABSENCE OF ENCUMBRANCES.
The Rocky Mountain II Disclosure Letter sets forth a complete list of all
real property owned by or leased to Rocky Mountain II, and, with respect to all
properties leased by Rocky Mountain II, a description of the term of such lease
and the monthly rental thereunder. Rocky Mountain II is not in default (and will
not be in default with the passage of time or the receipt of notice or both) and
has not received notice of default, under any lease of real property. All real
property leased to Rocky Mountain II is available for immediate use in the
operation of its business and for the purpose for which such property currently
is being utilized. Subject in the case of leased property to the terms and
conditions of the respective leases, Rocky Mountain II has full legal and
practical access to all such real property.
SECTION 10.14 INTELLECTUAL PROPERTY.
The Rocky Mountain II Disclosure Letter sets forth a complete list of (I)
all Intellectual Property owned, used or licensed by Rocky Mountain II, together
with the identity of the owner thereof, and (ii) all license agreements pursuant
to which any Intellectual Property is licensed to or by Rocky Mountain II. Rocky
Mountain II owns its Intellectual Property free and clear of any and all
Encumbrances, or, in the case of licensed Intellectual Property, has valid,
binding and enforceable rights to use such Intellectual Property. Rocky Mountain
II has duly and timely filed all renewals, continuations and other filings
necessary to maintain its Intellectual Property or registrations thereof. Except
as disclosed in the Rocky Mountain II Disclosure Letter, Rocky Mountain II (I)
has not received any notice or claim to the effect that the use of any
Intellectual Property infringes upon, conflicts with or misappropriates the
rights of any other party or that any of the Intellectual Property is not valid
or enforceable, and (ii) has not made any claim that any party has violated or
infringed upon its rights with respect to any Intellectual Property.
SECTION 10.15 MATERIAL CONTRACTS.
(a) List of Material Contracts. The Rocky Mountain II Disclosure
Letter sets forth a list of all material written, and a description of all oral,
commitments, agreements or contracts to which Rocky Mountain II is a party or by
which Rocky Mountain II is obligated, including, but not limited to, all
commitments, agreements or contracts embodying or evidencing the following
transactions or arrangements: (i) agreements for the employment of, or
independent contractor arrangements with, any officer or other individual
employee of Rocky Mountain II; (ii) any consulting agreement, agency agreement
and any other service agreement that will continue in force after the Closing
Date with respect to the employment or retention by Rocky Mountain II of
consultants, agents, legal counsel, accountants or anyone else who is not an
Employee; (iii) any single contract, purchase order or commitment providing for
expenditures by Rocky Mountain II after the date hereof of more than $25,000 or
which has been entered into by Rocky Mountain II otherwise than in the ordinary
course of business; (iv) agreements between Rocky Mountain II and suppliers to
Rocky Mountain II pursuant to which Rocky Mountain II is obligated to purchase
or to sell or distribute the products of any other party other than current
purchase orders entered into in the ordinary course of business consistent with
past practices; (v) any contract containing covenants limiting the freedom of
Rocky Mountain II or any officer, director, or employee of Rocky Mountain II to
engage in any line or type of business or with any person in any geographic
area; (vi) any commitment or arrangement by Rocky Mountain II to participate in
a strategic alliance, partnership, joint venture, limited liability company or
other cooperative undertaking with any other Person; (vii) any commitments by
Rocky Mountain II for capital expenditures involving more than $25,000
individually or $50,000 in the aggregate; and (viii) any other contract,
commitment, agreement, understanding or arrangement that the management of Rocky
Mountain II deems to be material to the business of Rocky Mountain II.
(b) No Breaches or Defaults. Except as disclosed in the Rocky Mountain
II Disclosure Letter, Rocky Mountain II and is in full compliance with each, and
is not in default under any, Material Contract to which it is a party, and no
event has occurred that, with notice or lapse of time or both, would constitute
such a default thereunder. Rocky Mountain II has not waived any rights under or
with respect to any of the Material Contracts to which it is a party. The
management of Rocky Mountain II has no knowledge, or received any notice to the
effect, that any party with whom Rocky Mountain II has contractual arrangements
under its Material Contracts, is in default under any such contractual
arrangements or that any event has occurred that, with notice or lapse of time
or both, would constitute such a default thereunder. Each of the Material
Contracts to which Rocky Mountain II is a party constitutes a legal, valid and
binding obligation of each the parties thereto and is enforceable against each
of the parties thereto in accordance with its respective terms; except as
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws of
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general application relating to or affecting enforcement of creditors' rights
and the exercise of judicial discretion in accordance with general principles of
equity.
SECTION 10.16 EMPLOYEE BENEFITS AND EMPLOYMENT MATTERS.
(a) Plans and Arrangements. The Rocky Mountain II Disclosure Letter
sets forth a true, complete and correct list of all Employee Benefit Plans and
all Benefit Arrangements to which Rocky Mountain II or any of its ERISA
Affiliates is a party or to which Rocky Mountain II or any of its ERISA
Affiliates is obligated to contribute. None of the Employee Benefit Plans to
which Rocky Mountain II or any ERISA Affiliate of Rocky Mountain II is a party,
which Rocky Mountain II or any ERISA Affiliate of Rocky Mountain II sponsors or
maintains or to which Rocky Mountain II or any ERISA Affiliate of Rocky Mountain
II contributes is subject to the requirements of Section 302 of ERISA or Section
412 of the Code and no liability under Title IV of ERISA (whether to the PBGC or
otherwise) has been incurred by Rocky Mountain II or any of its ERISA
Affiliates.
(b) Compliance with Laws and Terms of Plans. Except as disclosed in
the Rocky Mountain II Disclosure Letter, each Employee Benefit Plan and Benefit
Arrangement to which Rocky Mountain II or any of its ERISA Affiliates is a party
or to which Rocky Mountain II or any of its ERISA Affiliates is obligated to
contribute has been operated or maintained in compliance in all material
respects with all Applicable Laws, including, without limitation, ERISA and the
Code, and has been maintained in material compliance with its terms and in
material compliance with the terms of any applicable collective bargaining
agreement. Except as disclosed in the Rocky Mountain II Disclosure Letter, with
respect to any Employee Benefit Plan that is intended to qualify under Section
401 of the Code, a favorable determination letter as to qualification under
Section 401 of the Code that considered the Tax Reform Act of 1986 has been
issued and any amendments required for continued qualification under Section 401
of the Code have been timely adopted and nothing has occurred subsequent to the
date of such determination letter that could adversely affect the qualified
status of any such Plan.
(c) Contributions. All contributions required to be made to or benefit
liabilities arising under the terms of each Employee Benefit Plan or Benefit
Arrangement to which Rocky Mountain II or any of its ERISA Affiliates is a party
or to which Rocky Mountain II or any of its ERISA Affiliates is obligated to
contribute, under ERISA or the Code, for all periods of time prior to the date
hereof and that are attributable to Employees of Rocky Mountain II have been
paid or otherwise adequately accrued against in the Rocky Mountain II Financial
Statements, as the case may be.
(d) Arrearages and Employment Disputes. Except as disclosed in the
Rocky Mountain II Disclosure Letter, Rocky Mountain II is not liable for any
arrearage of wages, any accrued or vested vacation pay or any tax or penalty for
failure to comply with any Applicable Law relating to employment or labor above
the level accrued for or reserved against on the June 30, 1997 balance sheet
included in the Rocky Mountain II Financial Statements, and there is no
controversy pending, threatened or in prospect between Rocky Mountain II and any
of its Employees nor is there any basis for any such controversy. There is no
unfair labor practice charge or complaint currently pending against Rocky
Mountain II with respect to or relating to any of its Employees before the
National Labor Relations Board or any other agency having jurisdiction over such
matters and no charges or complaints are currently pending against Rocky
Mountain II before the Equal Employment Opportunity Commission or any state or
local agency having responsibility for the prevention of unlawful employment
practices. There are no actions, suits or claims pending, including proceedings
before the IRS, the DOL or the PBGC, with respect to any Employee Benefit Plan,
Benefit Arrangement or any administrator or fiduciary thereof, other than
benefit claims arising in the normal course of operation of such Employee
Benefit Plans or Benefit Arrangements, and, to the knowledge of the management
of Rocky Mountain II, no Employee Benefit Plan or Benefit Arrangement is under
audit or investigation by any Governmental Authority.
(e) Severance Obligations. Except as disclosed in the Rocky Mountain
II Disclosure Letter, all current employees of Rocky Mountain II may be
terminated at will, without notice and without incurring any severance or other
liability or obligation to the employee in connection with the termination.
Except to the extent provided by the terms of the Employee Benefit Plans and
Benefit Arrangements disclosed in the Rocky Mountain II Disclosure Letter,
neither the execution, delivery or performance of this Agreement nor the
consummation of the Closing will (I) increase any benefits otherwise payable
under any Employee Benefit Plan or Benefit Arrangement, (ii) result in the
acceleration of the time of payment or vesting of any such benefits, or (iii)
give rise to an obligation with respect to the payment of any severance pay. No
"parachute payment" (within the meaning of Section 280G of the Code), "change in
control" or severance payment has been made or will be required to be made by
Rocky Mountain II or any ERISA Affiliate of Rocky Mountain II to any Employee in
connection with the execution, delivery or performance of this Agreement or as a
result of the consummation of the Closing.
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(f) Compliance with Laws on Employment Practices. Rocky Mountain II
has complied in all material respects with all Applicable laws relating to
employment and employment practices, terms and conditions of employment, wages
and hours, and to the knowledge of the management of Rocky Mountain II, is not
engaged in any unfair labor practice with respect to any of the current
employees of Rocky Mountain II and to the best knowledge of Rocky Mountain II,
none of the persons performing services for Rocky Mountain II or any of its
ERISA Affiliates have been improperly classified as independent contractors or
as being exempt from the payment of wages or overtime.
(g) Collective Bargaining Agreements. Except as disclosed in the Rocky
Mountain II Disclosure Letter), none of the employees of Rocky Mountain II are
subject to any collective bargaining agreement nor is Rocky Mountain II required
under any agreement to recognize or bargain with any labor organization or union
on behalf of its employees.
(h) No Multi-Employer Plans. Neither Rocky Mountain II nor any of its
ERISA Affiliates has contributed to, or had the obligation to contribute to, any
Multiemployer Plan within the five-year period ending on the date of this
Agreement.
(i) No Amendments to Plans. There has been no amendment to, written
interpretation or announcement (whether or not written) by Rocky Mountain II or
any of its ERISA Affiliates relating to, or change in employee participation or
coverage under, any Employee Benefit Plan or Benefit Arrangement that would
increase materially the expense of maintaining such Employee Benefit Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year of Rocky Mountain II ended June 30, 1996.
(j) No Unfunded Liabilities. Neither Rocky Mountain II nor any ERISA
Affiliate of Rocky Mountain II has any current or projected liability for any
unfunded post-retirement medical or life insurance benefits in connection with
any Employee of Rocky Mountain II or ERISA Affiliate of Rocky Mountain II.
(k) No Prohibited Transactions. No event has occurred with respect to
any Employee Benefit Plan or any employee benefit plan previously sponsored,
maintained or contributed to by Rocky Mountain II or any ERISA Affiliate of
Rocky Mountain II, which could subject any such Employee Benefit Plan, Rocky
Mountain II, any ERISA Affiliate of Rocky Mountain II, or the Holding Company
directly or indirectly (through an indemnification agreement or otherwise), to
any liability for or as a result of a breach of fiduciary duty, a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code, or a civil penalty under Section 502 of ERISA or a Tax under Section 4971
of the Code. Neither Rocky Mountain II nor any of its ERISA Affiliates have
incurred a "withdrawal" or "partial withdrawal," as defined in Sections 4203 and
4205 of ERISA, from, or failed to timely make contributions to any Multiemployer
Plan which has resulted in any unpaid liability of Rocky Mountain II or any of
its ERISA Affiliates.
(l) Welfare Benefit Plans. (i) Except as disclosed in the Rocky
Mountain II Disclosure Letter, none of the Employee Benefit Plans that are
"employee welfare benefit plans" as defined in ERISA Section 3(1) provides for
continuing benefits or coverage for any participant or beneficiary of a
participant after such participant's termination of employment, except to the
extent required by law; provided that any disclosure regarding this clause (I)
shall set forth (A) the number of individuals currently receiving such
continuing benefits or coverage, (B) the limit on liability with respect to such
coverage, (C) the terms and conditions of such coverage, and (D) the maximum
number of current employees or independent contractors who could become eligible
for such continuing benefits or coverage; (ii) there has been no violation of
Code Section 4980B or ERISA Sections 601-609 with respect to any such plan that
could result in any material liability; (iii) no such plans are "multiple
employer welfare arrangements" within the meaning of ERISA Section 3(40); (iv)
with respect to any such plans that are self-insured, no claims have been made
pursuant to any such plan that have not yet been paid (other than claims which
have not yet been paid but are in the normal course of processing) and no
individual has incurred injury, sickness or other medical condition with respect
to which claims may be made pursuant to any such plan where the liability to the
employer could in the aggregate with respect to each such individual exceed
$50,000 per year; (v) neither Rocky Mountain II nor any of its ERISA Affiliates
maintains or has any obligation to contribute to any "voluntary employees'
beneficiary association" within the meaning of Code Section 501(c)(9) or other
welfare benefit fund as defined at Section 419(e) of the Code (such disclosure
to include the amount of any such funding); (vi) no such plan is intended to
satisfy Code Section 125; (vii) no amounts are required in connection with any
such plan to be included in income under Code Section 105(h) (under official
regulations thereof to date); and (viii) neither Rocky Mountain II nor any of
its Affiliates maintains a nonconforming group health plan as defined at Section
5000(c) of the Code.
SECTION 10.17 TAX MATTERS.
(a) Affiliated Groups. Rocky Mountain II is not a member of, and has
never been a member of, any "affiliated group" as that term is defined in
Section 1504(a) of the Code.
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(b) Tax Returns and Payment of Taxes. Rocky Mountain II has timely
filed or will timely file all federal, state, local, and other Tax Returns
required to be filed by it under Applicable Laws, including estimated Tax
Returns and reports, and has paid all required Income Taxes and other Taxes
(including any additions to taxes, penalties and interest related thereto) due
and payable on or before the date hereof. Rocky Mountain II has paid, withheld,
or accrued, or will accrue, on the Rocky Mountain II Financial Statements in
accordance with an accrual method of accounting consistently applied any and all
Income Taxes and other Taxes in respect of the conduct of its business or the
ownership of its property and in respect of any transactions for all periods (or
portions thereof) through the close of business on the Closing Date. Rocky
Mountain II has withheld and paid over all Taxes required to have been withheld
and paid over, and complied with all information reporting and backup
withholding requirements, including the maintenance of required records with
respect thereto, in connection with amounts paid or owing to any Employee,
creditor, independent contractor or other third party. Rocky Mountain II has
collected all sales, use and value added Taxes required to be collected, and has
remitted, or will remit on a timely basis, such amounts to the appropriate
Government Authorities and have furnished properly completed exemption
certificates for all exempt transactions.
(c) Tax Reserves. The amount of Rocky Mountain II's liability for
unpaid Taxes for all periods ending on or before the date of this Agreement does
not, in the aggregate, exceed the amount of the current liability accruals for
Taxes (excluding reserves for deferred Taxes) as of the date of this Agreement,
and the amount of Rocky Mountain II 's liability for unpaid Taxes for all
periods ending on or before the Closing Date shall not, in the aggregate, exceed
the amount of the current liability accruals for Taxes (excluding reserves for
deferred Taxes) as such accruals shall be reflected on the balance sheet of
Rocky Mountain II as of the Closing Date.
(d) Audits; No Deficiencies Asserted Against Company. The Tax Returns
of Rocky Mountain II have never been audited by any Tax Authority, nor is any
such audit in process, pending or threatened (either in writing or verbally,
formally or informally). Except as disclosed in the Rocky Mountain II Disclosure
Letter, no deficiencies have been asserted (or are expected to be asserted)
against Rocky Mountain II as a result of IRS (or state or local Tax Authority)
examinations and no issue has been raised by any IRS (or state or local Tax
Authority) examination that, by application of the same principles, might result
in a proposed deficiency for any other period not so examined.
(e) No Waivers of Limitations. Except as disclosed in the Rocky
Mountain II Disclosure Letter, there are no agreements, waivers of statutes of
limitations, or other arrangements providing for extensions of time in respect
of the assessment or collection of any unpaid Taxes against Rocky Mountain II.
Rocky Mountain II has disclosed on its federal Income Tax Returns all positions
taken therein that could, if not so disclosed, give rise to a substantial
understatement penalty within the meaning of Section 6662 of the Code.
(f) No Tax Liens. There are no Encumbrances on any of the assets,
rights or properties of Rocky Mountain II with respect to Taxes, other than
liens for Taxes not yet due and payable or for Taxes that Rocky Mountain II is
contesting in good faith through appropriate proceedings and for which
appropriate reserves have been established on the Rocky Mountain II Financial
Statements.
(g) Tax Elections and Special Tax Status. Rocky Mountain II is not a
party to any safe harbor lease within the meaning of Section 168(f)(8) of the
Code. No election or consent under Section 341(f) of the Code has been made or
shall be made on or prior to the Closing Date by or on behalf of Rocky Mountain
II. Rocky Mountain II is a "small business corporation" which has elected to be
subject to federal income taxation under subchapter S of the Code and has such
status for purposes of federal income taxation and state income taxation in all
states in which its respective income is subject to taxation or has been subject
to taxation at all times since its formation.
(h) Disqualified Leasebacks. Rocky Mountain II is not a party to a
"disqualified leaseback or long-term agreement" described in Section 467(b)(4)
of the Code.
(i) Deferrals of Income. No income or gain of Rocky Mountain II has
been deferred pursuant to Treasury Regulation (section mark) 1.1502-13 or
1.1502-14, or Temporary Treasury Regulation (section mark) 1.1502-13T or
1.1502-14T.
(j) Tax Sharing and Similar Arrangements. Rocky Mountain II is not a
party to or bound by any Tax sharing, Tax indemnity, Tax allocation or other
similar arrangement.
(k) No Non-Deductible Compensation Payments. Rocky Mountain I has not
made any payments, nor is it obligated to make any payments, that would not be
deductible under Section 280G of the Code, nor is it a party to any agreement
that under certain circumstances could obligate it to make any such payments.
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SECTION 10.18 ENVIRONMENTAL MATTERS.
(a) The facilities presently or formerly occupied or used by Rocky
Mountain II and any other real property presently or formerly owned by, used by
or leased to or by Rocky Mountain II (collectively, the "Rocky Mountain II
Property"), the existing and prior uses of such Property and all operations of
the businesses of Rocky Mountain II comply and have at all times complied with
all Environmental Laws and Rocky Mountain II is not in violation of nor has it
violated, in connection with the ownership, use, maintenance or operation of
such property or the conduct of its business, any Environmental Law.
(b) Rocky Mountain II has all necessary permits, registrations,
approvals and licenses required by any Governmental Authority or Environmental
Law.
(c) Except as disclosed in the Rocky Mountain II Disclosure Letter,
there has been no spill, discharge, leak, emission, injection, disposal, escape,
dumping or release of any kind on, beneath or above such Property or into the
environment surrounding such Rocky Mountain II Property of any Hazardous
Materials.
(d) There has been no past, and there is no current or anticipated
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any Hazardous Materials at, upon or from such Rocky
Mountain II Ventures Property. No asbestos-containing materials, underground
improvements (including, but not limited to the treatment or storage tanks,
sumps, or water, gas or oil wells) or polychlorinated biphenyls (PCBs)
transformers, capacitors, ballasts, or other equipment which contain dielectric
fluid containing PCBs at levels in excess of fifty parts per million (50 PPM)
are located on such Rocky Mountain II Property.
(e) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or threatened by any
Governmental Authority or third party with respect to the business or any
Property of Rocky Mountain II (or any predecessor in interest) in connection
with (I) any actual or alleged failure to comply with any requirement of any
Environmental Law; (ii) the ownership, use, maintenance or operation of the
Property by any person; (iii) the alleged violation of any Environmental Law; or
(iv) the suspected presence of any Hazardous Material thereon.
SECTION 10.19 COMPLIANCE WITH LAWS.
Rocky Mountain II has at all times conducted its business in material
compliance with all (and has not received any notice of any claimed violation of
any) Applicable Laws.
SECTION 10.20 LICENSES AND PERMITS.
Rocky Mountain II possess all licenses, permits, and other governmental
consents, certificates, approvals, or other authorizations (the "Permits")
necessary for the operation of the business of Rocky Mountain II. Rocky Mountain
II has complied with the terms and conditions of all Permits in all material
respects and all such Permits are in full force and effect, and there has
occurred no event nor is any event, action, investigation or proceeding pending
or, to the knowledge of management of Rocky Mountain II, threatened, which could
cause or permit revocation or suspension of or otherwise adversely affect the
maintenance of any Permits. The transactions contemplated by this Agreement will
not lead to the revocation, cancellation, termination or suspension of any
Permits.
SECTION 10.21 INSURANCE.
Rocky Mountain II has regularly maintained all policies of commercial
liability, products liability, fire, casualty, worker's compensation, life and
other forms of insurance on an "occurrence" rather than a "claims made" basis in
amounts and types required by law and generally carried by reasonably prudent,
similarly situated businesses. Rocky Mountain II is not in default under any
provision contained in any insurance policy maintained by Rocky Mountain II
currently, nor has Rocky Mountain II failed to give any notice or present any
claim thereunder in due and timely fashion and no cancellation, non-renewal,
reduction of coverage or arrearage in premiums has been threatened or occurred
with respect to any policy, nor is the management of Rocky Mountain II aware of
any grounds therefor.
SECTION 10.22 EXTRAORDINARY TRANSACTIONS.
Except as disclosed in the Rocky Mountain II Disclosure Letter or otherwise
permitted by this Agreement, since June 30, 1997, Rocky Mountain II has not (i)
mortgaged, pledged or subjected to any Encumbrance any of its assets; (ii)
canceled or compromised any claim of or debts owed to it; (iii) sold, licensed,
leased, exchanged or transferred any of its assets except in the ordinary course
of business; (iv) entered into any material transaction other than in the
ordinary course of business; (v) experienced any material change in the
relationship or course of dealing with any supplier, customer or creditor; (vi)
suffered any material destruction, loss or damage to any of its assets; (vii)
made any management decisions involving any
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material change in its policies with regard to pricing, sales, purchasing or
other business, financial, accounting (including reserves and the amounts
thereof) or tax policies or practices; (viii) declared, set aside or paid any
dividends on or made any distributions in respect of any outstanding shares of
capital stock or made any other distributions or payments to any of its
shareholders; (ix) submitted any bid, proposal, quote or commitment to any party
in response to a request for proposal or otherwise; (x) engaged in any merger or
consolidation with, or agreed to merge or consolidate with, or purchased or
agreed to purchase, all or substantially all of the assets of, or otherwise
acquire, any other party; (xi) entered into any strategic alliance, partnership,
joint venture or similar arrangement with any other party; (xii) incurred or
agreed to incur any Debt or prepaid or made any prepayments in respect of Debt;
(xiii) issued or agreed to issue to any party, any shares of stock or other
securities; (xiv) redeemed, purchased or agreed to redeem or purchase any of its
outstanding shares of capital stock or other securities; (xv) increased the rate
of compensation payable or to become payable to any of its officers, directors,
employees or agents over the rate being paid to them as of June 30, 1996 or
agreed to do so otherwise than in accordance with contractual agreements with
such parties; (xvi) made or agreed to make any charitable contributions or
incurred or agreed to incur any non-business expenses; or (xvii) charged off any
bad debts or increased its bad debt reserve except in the manner consistent with
its past practices.
SECTION 10.23 TITLE TO ASSETS.
Except as described in the Rocky Mountain II Disclosure Letter, Rocky
Mountain II has good and marketable title to its assets and properties, free and
clear of restrictions on or conditions to transfer or assignment, and free and
clear of all Encumbrances.
SECTION 10.24 CORPORATE RECORDS.
The minute books of Rocky Mountain II accurately reflect all minutes of
proceedings of and actions taken by the directors of Rocky Mountain II, and by
each committee of the Board of Directors of Rocky Mountain II, and all records
of meetings of and actions taken by the stockholders of Rocky Mountain II, that
are required by applicable laws to be recorded in or reflected in the corporate
records thereof.
SECTION 10.25 BROKER AND FINDER FEES.
Rocky Mountain II has not engaged any broker or finder in connection with
the transactions contemplated by this Agreement, and no action by any of the
foregoing will cause or support any claim to be asserted against the Holding
Company or Rocky Mountain II by any broker, finder or intermediary in connection
with such transaction.
SECTION 10.26 ADEQUATE DISCLOSURE.
No representation or warranty made by Rocky Mountain II pursuant to this
Agreement, or any statement contained in any Exhibit or Schedule to this
Agreement, or any certificate or document furnished or to be furnished by Rocky
Mountain II pursuant to the terms of this Agreement in connection with the
transactions contemplated hereby, contains any untrue or misleading statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained therein not misleading.
SECTION 10.27 NO ADVERSE CHANGE OR CONDITIONS.
Except as set forth in the Rocky Mountain II Disclosure Letter, and except
as expressly contemplated or permitted by this Agreement, since June 30, 1997,
Rocky Mountain II has conducted its business in the ordinary course and
consistent with past practice, and Rocky Mountain II has not suffered any change
that has had a Material Adverse Effect on Rocky Mountain II. There are no
conditions, facts, developments or circumstances of an unusual or special nature
that reasonably could be expected to have a Material Adverse Effect upon Rocky
Mountain II that have not been disclosed in writing by Rocky Mountain II
pursuant to the Rocky Mountain II Disclosure Letter.
ARTICLE XI
REPRESENTATIONS AND WARRANTIES OF PREMA PROPERTIES
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, subject to the delivery
and acceptance of a definitive Disclosure Letter, Prema Properties hereby makes
the following representations and warranties to the other parties to this
Agreement and to the Holding Company:
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SECTION 11.1 ORGANIZATION AND GOOD STANDING.
Prema Properties is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Ohio, and has full
corporate power and authority to own, operate and lease its properties, and to
conduct its business as it is now being conducted, and is qualified to transact
business as a foreign limited liability company in each jurisdiction in which
the operation of its business or the ownership of its properties requires such
qualification.
SECTION 11.2 CAPITALIZATION OF PREMA PROPERTIES.
The Prema Properties Members hold, in the aggregate, all of the membership
or equity interests in Prema Properties. Prema Properties has no issued or
outstanding equity securities, debt securities or other instruments which are
convertible into or exchangeable for at any time into equity securities of Prema
Properties. Prema Properties is not subject to any commitment or obligation
which would require the issuance or sale of any equity interest at any time
under options, subscriptions, warrants, rights, calls, preemptive rights,
convertible obligations or any other fixed or contingent obligations or which
would provide the holder thereof with the right to acquire any equity securities
of Prema Properties. Prema Properties has no obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire any of its equity securities
or any interest therein or to pay any dividend or make any other distribution in
respect thereof. There are no agreements, pledges, powers of attorney, consents,
assignments or other similar agreements or arrangements either (I) restricting
the transferability of the Membership Interests of Prema Properties or (ii)
relating to the Membership Interests of Prema Properties which reasonably may be
likely to prevent or delay the consummation of the transactions contemplated
hereby.
SECTION 11.3 SUBSIDIARIES; INVESTMENTS.
Prema Properties does not own any shares of capital stock or equity
securities of, or any interest in any other entity.
SECTION 11.4 EXECUTION AND EFFECT OF AGREEMENT.
Prema Properties has the power to enter into this Agreement and to perform
its obligations hereunder. This Agreement has been duly executed and delivered
by Prema Properties and constitutes a legal, valid and binding obligation of
Prema Properties, fully enforceable against Prema Properties and each of the
Prema Properties Members in accordance with its terms; except as enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other laws of general application relating
to or affecting enforcement of creditors' rights and the exercise of judicial
discretion in accordance with general principles of equity.
SECTION 11.5 RESTRICTIONS.
The execution and delivery of this Agreement by Prema Properties, the
consummation of the transactions contemplated hereby by Prema Properties and the
Prema Properties Members, and the performance of their respective obligations
hereunder will not (a) violate any of the provisions of the operating agreement
or articles of organization of Prema Properties, (b) violate or conflict with
the provisions of any Applicable Laws, (c) result in the creation of any
Encumbrance upon any of the assets, rights or properties of Prema Properties, or
(d) except as disclosed in the Prema Properties Disclosure Letter, conflict
with, violate any provisions of, result in a breach of or give rise to a right
of termination, modification or cancellation of, constitute a default of, or
accelerate the performance required by, with or without the passage of time or
the giving of notice or both, the terms of any material agreement, indenture,
mortgage, deed of trust, security or pledge agreement, lease, contract, note,
bond, license, permit, authorization or other instrument to which Prema
Properties or any of the Prema Properties Members is a party or to which Prema
Properties or any of the Prema Properties Members or any of their respective
assets or properties are subject.
SECTION 11.6 CONSENTS.
Except as disclosed in the Prema Properties Disclosure Letter, no filing
with, or consent, waiver, approval or authorization of, or notice to, any
governmental authority or any third party is required to be made or obtained by
Prema Properties or the Prema Properties Members in connection with the
execution and delivery of this Agreement or any document or instrument
contemplated hereby, the consummation of any of the transactions contemplated
hereby or the performance of any of their respective obligations hereunder or
thereunder.
SECTION 11.7 FINANCIAL STATEMENTS.
Attached hereto as Exhibit E are true and correct copies of the audited
balance sheets and related statements of income, cash flows and changes in
Member equity of Prema Properties as at December 31, 1994, 1995 and 1996 and for
the year
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periods then ended and the unaudited financial statements of Prema Properties as
at June 30, 1997 and for the six month period then ended (collectively, the
"Prema Properties Financial Statements"). All of the Prema Properties Financial
Statements have been prepared in accordance with GAAP in a manner consistent
with each other and the books and records of Prema Properties, and fairly
present in all material respects the financial condition and results of
operations of Prema Properties at the dates and for the periods indicated
therein. The regular books of account of Prema Properties fairly and accurately
reflect all material transactions involving Prema Properties, are true, correct
and complete and have been prepared in accordance with GAAP and on a basis
consistent with the Financial Statements.
SECTION 11.8 DEBT.
The Prema Properties Disclosure Letter contains a true, complete and
accurate listing of the original principal amount of all of the Debt of Prema
Properties, the remaining principal balance thereof, the interest rate(s)
payable by Prema Properties in respect thereof, if any, and the date(s) of
maturity thereof. Except as disclosed in the Prema Properties Disclosure Letter,
all of the Debt of Prema Properties may be prepaid at any time, without premium,
prepayment penalties, termination fees or other fees or charges.
SECTION 11.9 GUARANTEES.
The Prema Properties Disclosure Letter contains a complete list of all
Guarantees provided by Prema Properties for the benefit of any other party and
of all Guarantees provided by any other party for the benefit of Prema
Properties or any party doing business with Prema Properties.
SECTION 11.10 NO UNDISCLOSED LIABILITIES.
Prema Properties does not have any material liabilities or obligations of
any nature whatsoever (whether known or unknown, due or to become due, absolute,
accrued, contingent or otherwise, and whether or not determined or
determinable), except for (I) liabilities or obligations set forth in the Prema
Properties Disclosure Letter, (ii) liabilities or obligations to the extent
expressly reflected on or reserved against in the June 30, 1997 balance sheet
included among the Prema Properties Financial Statements or disclosed in the
notes thereto, (iii) liabilities or obligations of a type reflected on the June
30, 1997 balance sheet and incurred in the ordinary course of business and
consistent with past practices since June 30, 1997, or (iv) liabilities or
obligations arising under the terms of the Material Contracts of Prema
Properties. Except as otherwise contemplated or permitted by this Agreement no
dividends or distributions have been declared on any Membership Interests of
Prema Properties which are unpaid.
SECTION 11.11 LITIGATION.
There is no suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or, to the knowledge of the Prema
Properties Members, threatened, by or before any court, any Governmental
Authority or arbitrator, against Prema Properties or any of the Prema Properties
Members that reasonably could be expected to prevent or delay the consummation
of any of the transactions contemplated hereby. Except as disclosed in the Prema
Properties Disclosure Letter, there is no material suit, claim, action at law or
in equity, proceeding or governmental investigation or audit pending, or to the
knowledge of Prema Properties Members, threatened, by or before any arbitrator,
court, or other Governmental Authority, against Prema Properties or involving
any of the former or present employees, agents, businesses, properties, rights
or assets of Prema Properties, nor, to the knowledge of Prema Properties
Members, is there any basis for the assertion of any of the foregoing. Except as
disclosed in the Prema Properties Disclosure Letter, there are no judgments,
orders, injunctions, decrees, stipulations or awards rendered by any court,
Governmental Authority or arbitrator against Prema Properties or any of their
respective former or present Employees, agents, properties or assets.
SECTION 11.12 PROPERTIES; ABSENCE OF ENCUMBRANCES.
The Prema Properties Disclosure Letter sets forth a complete list of all
real property owned by or leased to Prema Properties, and, with respect to all
properties leased by Prema Properties, a description of the term of such lease
and the monthly rental thereunder. Prema Properties is not in default (and will
not be in default with the passage of time or the receipt of notice or both) and
has not received notice of default, under any lease of real property. All real
property leased to Prema Properties is available for immediate use in the
operation of its business and for the purpose for which such property currently
is being utilized. Subject in the case of leased property to the terms and
conditions of the respective leases, Prema Properties has full legal and
practical access to all such real property.
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SECTION 11.13 INTELLECTUAL PROPERTY.
The Prema Properties Disclosure Letter sets forth a complete list of (I)
all Intellectual Property owned, used or licensed by Prema Properties, together
with the identity of the owner thereof, and (ii) all license agreements pursuant
to which any Intellectual Property is licensed to or by Prema Properties. Prema
Properties owns its Intellectual Property free and clear of any and all
Encumbrances, or, in the case of licensed Intellectual Property, has valid,
binding and enforceable rights to use such Intellectual Property. Prema
Properties has duly and timely filed all renewals, continuations and other
filings necessary to maintain its Intellectual Property or registrations
thereof. Except as disclosed in the Prema Properties Disclosure Letter, Prema
Properties (I) has not received any notice or claim to the effect that the use
of any Intellectual Property infringes upon, conflicts with or misappropriates
the rights of any other party or that any of the Intellectual Property is not
valid or enforceable, and (ii) has not made any claim that any party has
violated or infringed upon its rights with respect to any Intellectual Property.
SECTION 11.14 MATERIAL CONTRACTS.
(a) List of Material Contracts. The Prema Properties Disclosure Letter
sets forth a list of all material written, and a description of all oral,
commitments, agreements or contracts to which Prema Properties is a party or by
which Prema Properties is obligated, including, but not limited to, all
commitments, agreements or contracts embodying or evidencing the following
transactions or arrangements: (I) agreements for the employment of, or
independent contractor arrangements with, any officer or other individual
employee of Prema Properties ; (ii) any consulting agreement, agency agreement
and any other service agreement that will continue in force after the Closing
Date with respect to the employment or retention by Prema Properties of
consultants, agents, legal counsel, accountants or anyone else who is not an
Employee; (iii) any single contract, purchase order or commitment providing for
expenditures by Prema Properties after the date hereof of more than $25,000 or
which has been entered into by Prema Properties otherwise than in the ordinary
course of business; (iv) agreements between Prema Properties and suppliers to
Prema Properties pursuant to which Prema Properties is obligated to purchase or
to sell or distribute the products of any other party other than current
purchase orders entered into in the ordinary course of business consistent with
past practices; (v) any contract containing covenants limiting the freedom of
Prema Properties or any officer, director, or employee of Prema Properties to
engage in any line or type of business or with any person in any geographic
area; (vi) any commitment or arrangement by Prema Properties to participate in a
strategic alliance, partnership, joint venture, limited liability company or
other cooperative undertaking with any other Person; (vii) any commitments by
Prema Properties for capital expenditures involving more than $25,000
individually or $50,000 in the aggregate; and (viii) any other contract,
commitment, agreement, understanding or arrangement that the Prema Properties
Members deems to be material to the business of Prema Properties.
(b) No Breaches or Defaults. Except as disclosed in the Prema
Properties Disclosure Letter, Prema Properties and is in full compliance with
each, and is not in default under any, Material Contract to which it is a party,
and no event has occurred that, with notice or lapse of time or both, would
constitute such a default thereunder. Prema Properties has not waived any rights
under or with respect to any of the Material Contracts to which it is a party.
The Prema Properties Members have no knowledge, and have not received any notice
to the effect, that any party with whom Prema Properties has contractual
arrangements under the Material Contracts to which it is a party, is in default
under any such contractual arrangements or that any event has occurred that,
with notice or lapse of time or both, would constitute such a default
thereunder. Each of the Material Contracts to which it is a party constitutes a
legal, valid and binding obligation of each the parties thereto and is
enforceable against each of the parties thereto in accordance with its
respective terms; except as enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the exercise of judicial discretion in accordance with
general principles of equity.
SECTION 11.15 EMPLOYEE BENEFITS AND EMPLOYMENT MATTERS.
(a) Plans and Arrangements. The Prema Properties Disclosure Letter
sets forth a true, complete and correct list of all Employee Benefit Plans and
all Benefit Arrangements to which Prema Properties is a party or to which Prema
Properties is obligated to contribute. None of the Employee Benefit Plans to
which Prema Properties or any ERISA Affiliate of Prema Properties is a party,
which Prema Properties or any ERISA Affiliate of Prema Properties sponsors or
maintains or to which Prema Properties or any ERISA Affiliate of Prema
Properties contributes is subject to the requirements of Section 302 of ERISA or
Section 412 of the Code.
(b) Compliance with Laws and Terms of Plans. Except as disclosed in
the Prema Properties Disclosure Letter, each Employee Benefit Plan and Benefit
Arrangement to which Prema Properties is a party or to which Prema Properties is
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obligated to contribute has been operated or maintained in compliance in all
material respects with all Applicable Laws, including, without limitation, ERISA
and the Code, and has been maintained in material compliance with its terms.
Except as disclosed in the Prema Properties Disclosure Letter, with respect to
any Plan that is intended to qualify under Section 401 of the Code, a favorable
determination letter as to qualification under Section 401 of the Code has been
issued and any amendments required for continued qualification under Section 401
of the Code have been timely adopted and nothing has occurred subsequent to the
date of such determination letter that could adversely affect the qualified
status of any such Plan.
(c) Contributions. All contributions required to be made to or benefit
liabilities arising under the terms of each Employee Benefit Plan or Benefit
Arrangement to which Prema Properties is a party or to which Prema Properties is
obligated to contribute, under ERISA or the Code, for all periods of time prior
to the date hereof and that are attributable to Employees of Prema Properties
have been paid or otherwise adequately accrued against in the Prema Properties
Financial Statements, as the case may be.
(d) Arrearages and Employment Disputes. Except as disclosed in the
Prema Properties Disclosure Letter, Prema Properties is not liable for any
arrearage of wages, any accrued or vested vacation pay or any tax or penalty for
failure to comply with any Applicable Law relating to employment or labor above
the level accrued for or reserved against on the June 30, 1997 balance sheet
included in the Prema Properties Financial Statements, and there is no
controversy pending, threatened or in prospect between Prema Properties and any
of its Employees nor is there any basis for any such controversy. There is no
unfair labor practice charge or complaint currently pending against Prema
Properties with respect to or relating to any of its Employees before the
National Labor Relations Board or any other agency having jurisdiction over such
matters and no charges or complaints are currently pending against Prema
Properties before the Equal Employment Opportunity Commission or any state or
local agency having responsibility for the prevention of unlawful employment
practices. There are no actions, suits or claims pending, including proceedings
before the IRS, the DOL or the PBGC, with respect to any Employee Benefit Plan,
Benefit Arrangement or any administrator or fiduciary thereof, other than
benefit claims arising in the normal course of operation of such Employee
Benefit Plans or Benefit Arrangements, and, to the knowledge of the management
of Prema Properties, no Employee Benefit Plan or Benefit Arrangement is under
audit or investigation by any Governmental Authority.
(e) Severance Obligations. Except as disclosed in the Prema Properties
Disclosure Letter, all current employees of Prema Properties may be terminated
at will, without notice and without incurring any severance or other liability
or obligation to the employee in connection with the termination. Except to the
extent provided by the terms of the Employee Benefit Plans and Benefit
Arrangements disclosed in the Prema Properties Disclosure Letter, neither the
execution, delivery or performance of this Agreement nor the consummation of the
Closing will (i) increase any benefits otherwise payable under any Employee
Benefit Plan or Benefit Arrangement, (ii) result in the acceleration of the time
of payment or vesting of any such benefits, or (iii) give rise to an obligation
with respect to the payment of any severance pay. No "parachute payment" (within
the meaning of Section 280G of the Code), "change in control" or severance
payment has been made or will be required to be made by Prema Properties or any
ERISA Affiliate of Prema Properties to any Employee in connection with the
execution, delivery or performance of this Agreement or as a result of the
consummation of the Closing.
(f) Compliance with Laws on Employment Practices. Prema Properties has
complied in all material respects with all Applicable laws relating to
employment and employment practices, terms and conditions of employment, wages
and hours, and to the knowledge of the Prema Properties Members, is not engaged
in any unfair labor practice with respect to any of the current employees of
Prema Properties.
(g) Collective Bargaining Agreements. Except as disclosed in the Prema
Properties Disclosure Letter, none of the employees of Prema Properties are
subject to any collective bargaining agreement nor is Prema Properties required
under any agreement to recognize or bargain with any labor organization or union
on behalf of its employees.
(h) No Multi-Employer Plans. Prema Properties has not contributed to,
nor had the obligation to contribute to, any Multiemployer Plan within the
five-year period ending on the date of this Agreement.
(i) No Amendments to Plans. There has been no amendment to, written
interpretation or announcement (whether or not written) by Prema Properties
relating to, or change in employee participation or coverage under, any Employee
Benefit Plan or Benefit Arrangement that would increase materially the expense
of maintaining such Employee Benefit Plan or Benefit Arrangement above the level
of the expense incurred in respect thereof for the fiscal year of Prema
Properties ended December 31, 1996.
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(j) No Unfunded Liabilities. Prema Properties nor any ERISA Affiliate
of Prema Properties has any current or projected liability for any unfunded
post-retirement medical or life insurance benefits in connection with any
Employee of Prema Properties or ERISA Affiliate of Prema Properties.
(k) No Prohibited Transactions. No event has occurred with respect to
any Employee Benefit Plan or any employee benefit plan previously sponsored,
maintained or contributed to by Prema Properties or any ERISA Affiliate of Prema
Properties, which could subject any such Employee Benefit Plan, Prema
Properties, any ERISA Affiliate of Prema Properties, or the Holding Company
directly or indirectly (through an indemnification agreement or otherwise), to
any liability for or as a result of a breach of fiduciary duty, a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code, or a civil penalty under Section 502 of ERISA or a Tax under Section 4971
of the Code. Neither Prema Properties nor any of its ERISA Affiliates have
incurred a "withdrawal" or "partial withdrawal," as defined in Sections 4203 and
4205 of ERISA, from, or failed to timely make contributions to any Multiemployer
Plan which has resulted in any unpaid liability of any of the Companies.
(l) Welfare Benefit Plans. (I) Except as disclosed in the Prema
Properties Disclosure Letter, none of the Employee Benefit Plans that are
"welfare benefit plans" as defined in ERISA contributions to Section 3(1)
provides for continuing benefits or coverage for any participant or beneficiary
of a participant after such participant's termination of employment, except to
the extent required by law; provided that any disclosure regarding this clause
(i) shall set forth (A) the number of individuals currently receiving such
continuing benefits or coverage, (B) the limit on liability with respect to such
coverage, (C) the terms and conditions of such coverage, and (D) the maximum
number of current employees or independent contractors who could become eligible
for such continuing benefits or coverage; (ii) there has been no violation of
Code Section 4980B or ERISA Sections 601-609 with respect to any such Plan that
could result in any material liability; (iii) no such Plans are "multiple
employer welfare arrangements" within the meaning of ERISA Section 3(40); (iv)
with respect to any such Plans that are self-insured, no claims have been made
pursuant to any such Plan that have not yet been paid (other than claims which
have not yet been paid but are in the normal course of processing) and no
individual has incurred injury, sickness or other medical condition with respect
to which claims may be made pursuant to any such plan where the liability to the
employer could in the aggregate with respect to each such individual exceed
$50,000 per year; (v) Prema Properties does not maintain and does not have any
obligation to contribute to any "voluntary employees' beneficiary association"
within the meaning of Code Section 501(c)(9) or other funding arrangement for
the provision of welfare benefits (such disclosure to include the amount of any
such funding); (vi) no such plan is intended to satisfy Code Section 125; and
(vii) no amounts are required in connection with any such Plan to be included in
income under Code Section 105(h) (under official regulations thereof to date);.
SECTION 11.17 TAX MATTERS.
(a) Affiliated Groups. Prema Properties is not a member of, and has
never been a member of, any "affiliated group" as that term is defined in
Section 1054(a) of the Code.
(b) Tax Returns and Payment of Taxes. Prema Properties has timely
filed or will timely file all federal, state, local, and other Tax Returns
required to be filed by it under Applicable Laws, including estimated Tax
Returns and reports, and has paid all required Income Taxes and other Taxes
(including any additions to taxes, penalties and interest related thereto) due
and payable on or before the date hereof. Prema Properties has paid, withheld,
or accrued, or will accrue, on the Prema Properties Financial Statements in
accordance with GAAP any and all Income Taxes and other Taxes in respect of the
conduct of its business or the ownership of its property and in respect of any
transactions for all periods (or portions thereof) through the close of business
on the Closing Date. Prema Properties has withheld and paid over all Taxes
required to have been withheld and paid over, and complied with all information
reporting and backup withholding requirements, including the maintenance of
required records with respect thereto, in connection with amounts paid or owing
to any Employee, creditor, independent contractor or other third party. Prema
Properties has collected all sales, use and value added Taxes required to be
collected, and has remitted, or will remit on a timely basis, such amounts to
the appropriate Government Authorities and have furnished properly completed
exemption certificates for all exempt transactions.
(c) Tax Reserves. The amount of Prema Properties's liability for
unpaid Taxes for all periods ending on or before the date of this Agreement does
not, in the aggregate, exceed the amount of the current liability accruals for
Taxes (excluding reserves for deferred Taxes) as of the date of this Agreement,
and the amount of Prema Properties 's liability for unpaid Taxes for all periods
ending on or before the Closing Date shall not, in the aggregate, exceed the
amount of the current liability accruals for Taxes (excluding reserves for
deferred Taxes) as such accruals shall be reflected on the balance sheet of
Prema Properties as of the Closing Date.
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(d) Audits; No Deficiencies Asserted Against Company. The Tax Returns
of Prema Properties have never been audited by any Tax Authority, nor is any
such audit in process, pending or threatened (either in writing or verbally,
formally or informally). Except as disclosed in the Prema Properties Disclosure
Letter, no deficiencies have been asserted (or are expected to be asserted)
against Prema Properties as a result of IRS (or state or local Tax Authority)
examinations and no issue has been raised by any IRS (or state or local Tax
Authority) examination that, by application of the same principles, might result
in a proposed deficiency for any other period not so examined.
(e) No Waivers of Limitations. Except as disclosed in the Prema
Properties Disclosure Letter, there are no agreements, waivers of statutes of
limitations, or other arrangements providing for extensions of time in respect
of the assessment or collection of any unpaid Taxes against Prema Properties.
Prema Properties has disclosed on its federal Income Tax Returns all positions
taken therein that could, if not so disclosed, give rise to a substantial
understatement penalty within the meaning of Section 6662 of the Code.
(f) No Tax Liens. There are no Encumbrances on any of the assets,
rights or properties of Prema Properties with respect to Taxes, other than liens
for Taxes not yet due and payable or for Taxes that Prema Properties is
contesting in good faith through appropriate proceedings and for which
appropriate reserves have been established on the Prema Properties Financial
Statements.
(g) Tax Elections and Special Tax Status. Prema Properties is not a
party to any safe harbor lease within the meaning of Section 168(f)(8) of the
Code. Prema Properties is a "partnership" for purposes of federal income
taxation and state income taxation in all states in which its income is subject
to taxation and has had the status of a "partnership" for purposes of federal
income taxation and state income taxation in all states in which its income is
subject to taxation or has been subject to taxation at all times since its
formation.
(h) Disqualified Leasebacks. Prema Properties is not a party to a
"disqualified leaseback or long-term agreement" described in Section 467(b)(4)
of the Code.
(i) Deferrals of Income. No income or gain of Prema Properties has
been deferred pursuant to Treasury Regulation (section mark)1.1502-13 or
1.1502-14, or Temporary Treasury Regulation (section mark) 1.1502-13T or
1.1502-14T.
(j) Tax Sharing and Similar Arrangements. Prema Properties is not a
party to or bound by any Tax sharing, Tax indemnity, Tax allocation or other
similar arrangement.
(k) No Non-Deductible Compensation Payments. Prema Properties has not
made any payments, nor is it obligated to make any payments, that would not be
deductible under Section 280G of the Code nor is it a party to any agreement
that under certain circumstances could obligate it to make any such payments.
SECTION 11.18 ENVIRONMENTAL MATTERS.
(a) The facilities presently or formerly occupied or used by Prema
Properties and any other real property presently or formerly owned by, used by
or leased to or by Prema Properties (collectively, the "Prema Properties
Property"), the existing and prior uses of such Prema Properties Property and
all operations of the businesses of Prema Properties comply and have at all
times complied with all Environmental Laws and Prema Properties is not in
violation of nor has it violated, in connection with the ownership, use,
maintenance or operation of such property or the conduct of its business, any
Environmental Law.
(b) Prema Properties has all necessary permits, registrations,
approvals and licenses required by any Governmental Authority or Environmental
Law.
(c) There has been no spill, discharge, leak, emission, injection,
disposal, escape, dumping or release of any kind on, beneath or above such Prema
Properties Property or into the environment surrounding such Prema Properties
Property of any Hazardous Materials.
(d) There has been no past, and there is no current or anticipated
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any Hazardous Materials at, upon or from such Prema
Properties Property. No asbestos-containing materials, underground improvements
(including, but not limited to treatment or storage tanks, sumps, or hydraulic
tanks or water, gas or oil wells) or polychlorinated biphenyls (PCBs)
transformers, capacitors, ballasts, or other equipment which contain dielectric
fluid containing PCBs at levels in excess of fifty parts per million (50 PPM)
are or have ever been located on such Prema Properties Property.
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(e) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or threatened by any
Governmental Authority or third party with respect to the business or any
Property of Prema Properties (or any predecessor in interest) in connection with
(i) any actual or alleged failure to comply with any requirement of any
Environmental Law; (ii) the ownership, use, maintenance or operation of the
Property by any person; (iii) the alleged violation of any Environmental Law; or
(iv) the suspected presence of any Hazardous Material thereon.
SECTION 11.19 COMPLIANCE WITH LAWS.
Prema Properties has at all times conducted its business in material
compliance with all (and has not received any notice of any claimed violation of
any) Applicable Laws.
SECTION 11.20 LICENSES AND PERMITS.
Prema Properties possess all licenses, permits, and other governmental
consents, certificates, approvals, or other authorizations (the "Permits")
necessary for the operation of the business of Prema Properties. Prema
Properties has complied with the terms and conditions of all Permits in all
material respects and all such Permits are in full force and effect, and there
has occurred no event nor is any event, action, investigation or proceeding
pending or, to the knowledge of Prema Properties Members, threatened, which
could cause or permit revocation or suspension of or otherwise adversely affect
the maintenance of any Permits. The transactions contemplated by this Agreement
will not lead to the revocation, cancellation, termina tion or suspension of any
Permits.
SECTION 11.21 INSURANCE.
Prema Properties has regularly maintained all policies of commercial
liability, products liability, fire, casualty, worker's compensation, life and
other forms of insurance on an "occurrence" rather than a "claims made" basis in
amounts and types required by law and generally carried by reasonably prudent,
similarly situated businesses. Prema Properties is not in default under any
provision contained in any insurance policy maintained by Prema Properties
currently, nor has Prema Properties failed to give any notice or present any
claim thereunder in due and timely fashion and no cancellation, non-renewal,
reduction of coverage or arrearage in premiums has been threatened or occurred
with respect to any policy, nor is the Prema Properties Members aware of any
grounds therefor.
SECTION 11.22 EXTRAORDINARY TRANSACTIONS.
Except as disclosed in the Prema Properties Disclosure Letter or otherwise
permitted by this Agreement, since June 30, 1997, Prema Properties has not (i)
mortgaged, pledged or subjected to any Encumbrance any of its assets; (ii)
canceled or compromised any claim of or debts owed to it; (iii) sold, licensed,
leased, exchanged or transferred any of its assets except in the ordinary course
of business; (iv) entered into any material transaction other than in the
ordinary course of business; (v) experienced any material change in the
relationship or course of dealing with any supplier, customer or creditor; (vi)
suffered any material destruction, loss or damage to any of its assets; (vii)
made any management decisions involving any material change in its policies with
regard to pricing, sales, purchasing or other business, financial, accounting
(including reserves and the amounts thereof) or tax policies or practices;
(viii) declared, set aside or paid any dividends on or made any distributions in
respect of any outstanding shares of capital stock or made any other
distributions or payments to any of its shareholders; (ix) submitted any bid,
proposal, quote or commitment to any party in response to a request for proposal
or otherwise; (x) engaged in any merger or consolidation with, or agreed to
merge or consolidate with, or purchased or agreed to purchase, all or
substantially all of the assets of, or otherwise acquire, any other party; (xi)
entered into any strategic alliance, partnership, joint venture or similar
arrangement with any other party; (xii) incurred or agreed to incur any Debt or
prepaid or made any prepayments in respect of Debt; (xiii) issued or agreed to
issue to any party, any shares of stock or other securities; (xiv) redeemed,
purchased or agreed to redeem or purchase any of its outstanding shares of
capital stock or other securities; (xv) increased the rate of compensation
payable or to become payable to any of its officers, directors, employees or
agents over the rate being paid to them as of June 30, 1996 or agreed to do so
otherwise than in accordance with contractual agreements with such parties;
(xvi) made or agreed to make any charitable contributions or incurred or agreed
to incur any non-business expenses; or (xvii) charged off any bad debts or
increased its bad debt reserve except in the manner consistent with its past
practices.
SECTION 11.23 TITLE TO ASSETS.
Except as described in the Prema Properties Disclosure Letter, Prema
Properties has good and marketable title to its assets and properties, free and
clear of restrictions on or conditions to transfer or assignment, and free and
clear of all Encumbrances.
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SECTION 11.24 CORPORATE RECORDS.
The books and records of Prema Properties accurately reflect all minutes of
proceedings of and actions taken by the members of Prema Properties.
SECTION 11.25 BROKER AND FINDER FEES.
Prema Properties has not engaged any broker or finder in connection with
the transactions contemplated by this Agreement, and no action by any of the
foregoing will cause or support any claim to be asserted against the Holding
Company or Prema Properties by any broker, finder or intermediary in connection
with such transaction.
SECTION 11.26 ADEQUATE DISCLOSURE.
No representation or warranty made by Prema Properties pursuant to this
Agreement, or any statement contained in any Exhibit or Schedule to this
Agreement, or any certificate or document furnished or to be furnished by Prema
Properties pursuant to the terms of this Agreement in connection with the
transactions contemplated hereby, contains any untrue or misleading statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained therein not misleading.
SECTION 11.27 NO ADVERSE CHANGE OR CONDITIONS.
Except as set forth in the Prema Properties Disclosure Letter, and except
as expressly contemplated or permitted by this Agreement, since June 30, 1997,
Prema Properties has conducted its business in the ordinary course and
consistent with past practice, and Prema Properties has not suffered any change
that has had a Material Adverse Effect on Prema Properties. There are no
conditions, facts, developments or circumstances of an unusual or special nature
that reasonably could be expected to have a Material Adverse Effect upon the
financial condition, business or prospects of Prema Properties that have not
been disclosed in writing by Prema Properties pursuant to the Prema Properties
Disclosure Letter.
ARTICLE XII
REPRESENTATIONS AND WARRANTIES OF RALSTON CAR WASH
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, subject to the delivery
and acceptance of a definitive Disclosure Letter, Ralston Car Wash hereby makes
the following representations and warranties to the other parties to this
Agreement and the Holding Company:
SECTION 12.1 ORGANIZATION AND GOOD STANDING.
Ralston Car Wash is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Colorado, and has
full corporate power and authority to own, operate and lease its properties, and
to conduct its business as it is now being conducted, and is qualified to
transact business as a foreign limited liability company in each jurisdiction in
which the operation of its business or the ownership of its properties requires
such qualification.
SECTION 12.2 CAPITALIZATION OF RALSTON CAR WASH.
The Ralston Car Wash Members hold, in the aggregate, all of the membership
or equity interests in Ralston Car Wash. Ralston Car Wash has no issued or
outstanding equity securities, debt securities or other instruments which are
convertible into or exchangeable for at any time into equity securities of
Ralston Car Wash. Ralston Car Wash is not subject to any commitment or
obligation which would require the issuance or sale of any equity interest at
any time under options, subscriptions, warrants, rights, calls, preemptive
rights, convertible obligations or any other fixed or contingent obligations or
which would provide the holder thereof with the right to acquire any equity
securities of Ralston Car Wash. Ralston Car Wash has no obligation (contingent
or otherwise) to purchase, redeem or otherwise acquire any of its equity
securities or any interest therein or to pay any dividend or make any other
distribution in respect thereof. There are no agreements, pledges, powers of
attorney, consents, assignments or other similar agreements or arrangements
either (I) restricting the transferability of the Membership interests of
Ralston Car Wash or (ii) relating to the Ralston Car Wash Membership Interests
which reasonably may be likely to prevent or delay the consummation of the
transactions contemplated hereby.
SECTION 12.3 SUBSIDIARIES; INVESTMENTS.
Ralston Car Wash does not own any shares of capital stock or equity
securities of, or any interest in any other entity.
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SECTION 12.4 EXECUTION AND EFFECT OF AGREEMENT.
Ralston Car Wash has the power to enter into this Agreement and to perform
its obligations hereunder. This Agreement has been duly executed and delivered
by Ralston Car Wash and constitutes a legal, valid and binding obligation of
Ralston Car Wash, fully enforceable against Ralston Car Wash in accordance with
its terms; except as enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the exercise of judicial discretion in accordance with
general principles of equity.
SECTION 12.5 RESTRICTIONS.
The execution and delivery of this Agreement by Ralston Car Wash, the
consummation of the transactions contemplated hereby by Ralston Car Wash and by
each of the Ralston Car Wash Members, and the performance of their respective
obligations hereunder will not (a) violate any of the provisions of the
operating agreement or articles of organization of Ralston Car Wash, (b) violate
or conflict with the provisions of any Applicable Laws, (c) result in the
creation of any Encumbrance upon any of the assets, rights or properties of
Ralston Car Wash, or (d) except as disclosed in the Ralston Car Wash Disclosure
Letter, conflict with, violate any provisions of, result in a breach of or give
rise to a right of termination, modification or cancellation of, constitute a
default of, or accelerate the performance required by, with or without the
passage of time or the giving of notice or both, the terms of any material
agreement, indenture, mortgage, deed of trust, security or pledge agreement,
lease, contract, note, bond, license, permit, authorization or other instrument
to which Ralston Car Wash or any of the Ralston Car Wash Members is a party or
to which Ralston Car Wash or any of the Ralston Car Wash Members or any of their
respective assets or properties are subject.
SECTION 12.6 CONSENTS.
Except as disclosed in the Ralston Car Wash Disclosure Letter, no filing
with, or consent, waiver, approval or authorization of, or notice to, any
governmental authority or any third party is required to be made or obtained by
Ralston Car Wash or any of the Ralston Car Wash Members in connection with the
execution and delivery of this Agreement or any document or instrument
contemplated hereby, the consummation of any of the transactions contemplated
hereby or the performance of any of their respective obligations hereunder or
thereunder.
SECTION 12.7 FINANCIAL STATEMENTS.
Attached hereto as Exhibit E are true and correct copies of the audited
balance sheets and related statements of income, cash flows and changes in
member equity of Ralston Car Wash as at December 31, 1994, 1995 and 1996 and for
the year periods then ended and the unaudited financial statements of Ralston
Car Wash as at June 30, 1997 and for the six month period then ended
(collectively, the "Ralston Car Wash Financial Statements"). All of the Ralston
Car Wash Financial Statements have been prepared in accordance with an accrual
method of accounting, consistently applied, in a manner consistent with each
other and the books and records of Ralston Car Wash, and fairly present in all
material respects the financial condition and results of operations of Ralston
Car Wash at the dates and for the periods indicated therein. The regular books
of account of Ralston Car Wash fairly and accurately reflect all material
transactions involving Ralston Car Wash, are true, correct and complete and have
been prepared in accordance with an accrual method of accounting, consistently
applied, and on a basis consistent with the Financial Statements.
SECTION 12.8 DEBT.
The Ralston Car Wash Disclosure Letter contains a true, complete and
accurate listing of the original principal amount of all of the Debt of Ralston
Car Wash, the remaining principal balance thereof, the interest rate(s) payable
by Ralston Car Wash in respect thereof, if any, and the date(s) of maturity
thereof. Except as disclosed in the Ralston Car Wash Disclosure Letter, all of
the Debt of Ralston Car Wash may be prepaid at any time, without premium,
prepayment penalties, termination fees or other fees or charges.
SECTION 12.9 GUARANTEES.
The Ralston Car Wash Disclosure Letter contains a complete list of all
Guarantees provided by Ralston Car Wash for the benefit of any other party and
of all Guarantees provided by any other party for the benefit of Ralston Car
Wash or any party doing business with Ralston Car Wash.
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SECTION 12.10 NO UNDISCLOSED LIABILITIES.
Ralston Car Wash does not have any material liabilities or obligations of
any nature whatsoever (whether known or unknown, due or to become due, absolute,
accrued, contingent or otherwise, and whether or not determined or
determinable), except for (i) liabilities or obligations set forth in the
Ralston Car Wash Disclosure Letter, (ii) liabilities or obligations to the
extent expressly reflected on or reserved against in the June 30, 1997 balance
sheet included among the Ralston Car Wash Financial Statements or disclosed in
the notes thereto, (iii) liabilities or obligations of a type reflected on the
June 30, 1997 balance sheet and incurred in the ordinary course of business and
consistent with past practices since June 30, 1997, or (iv) liabilities or
obligations arising under the terms of the Material Contracts of Ralston Car
Wash. Except as otherwise contemplated or permitted by this Agreement, no
dividends or distributions have been declared on any Membership Interests of
Ralston Car Wash which are unpaid.
SECTION 12.11 LITIGATION.
There is no suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or, to the knowledge of the Ralston
Car Wash Members, threatened, by or before any court, any Governmental Authority
or arbitrator, against Ralston Car Wash or any of the Ralston Car Wash Members
that reasonably could be expected to prevent or delay the consummation of any of
the transactions contemplated hereby. Except as disclosed in the Ralston Car
Wash Disclosure Letter, there is no material suit, claim, action at law or in
equity, proceeding or governmental investigation or audit pending, or to the
knowledge of Ralston Car Wash Members, threatened, by or before any arbitrator,
court, or other Governmental Authority, against Ralston Car Wash or involving
any of former or present employees, agents, businesses, properties, rights or
assets of Ralston Car Wash, nor, to the knowledge of Ralston Car Wash Members,
is there any basis for the assertion of any of the foregoing. Except as
disclosed in the Ralston Car Wash Disclosure Letter, there are no judgments,
orders, injunctions, decrees, stipulations or awards rendered by any court,
Governmental Authority or arbitrator against Ralston Car Wash or any of their
respective former or present Employees, agents, properties or assets.
SECTION 12.12 PROPERTIES; ABSENCE OF ENCUMBRANCES.
The Ralston Car Wash Disclosure Letter sets forth a complete list of all
real property owned by or leased to Ralston Car Wash, and, with respect to all
properties leased by Ralston Car Wash, a description of the term of such lease
and the monthly rental thereunder. Ralston Car Wash is not in default (and will
not be in default with the passage of time or the receipt of notice or both) and
has not received notice of default, under any lease of real property. All real
property leased to Ralston Car Wash is available for immediate use in the
operation of its business and for the purpose for which such property currently
is being utilized. Subject in the case of leased property to the terms and
conditions of the respective leases, Ralston Car Wash has full legal and
practical access to all such real property.
SECTION 12.13 INTELLECTUAL PROPERTY.
The Ralston Car Wash Disclosure Letter sets forth a complete list of all
Intellectual Property owned, used or licensed by Ralston Car Wash, together with
the identity of the owner thereof, and (ii) all license agreements pursuant to
which any Intellectual Property is licensed to or by Ralston Car Wash. Ralston
Car Wash owns its Intellectual Property free and clear of any and all
Encumbrances, or, in the case of licensed Intellectual Property, has valid,
binding and enforceable rights to use such Intellectual Property. Ralston Car
Wash has duly and timely filed all renewals, continuations and other filings
necessary to maintain its Intellectual Property or registrations thereof. Except
as disclosed in the Ralston Car Wash Disclosure Letter, Ralston Car Wash (I) has
not received any notice or claim to the effect that the use of any Intellectual
Property infringes upon, conflicts with or misappropriates the rights of any
other party or that any of the Intellectual Property is not valid or
enforceable, and (ii) has not made any claim that any party has violated or
infringed upon its rights with respect to any Intellectual Property.
SECTION 12.14 MATERIAL CONTRACTS.
(a) List of Material Contracts. The Ralston Car Wash Disclosure Letter
sets forth a list of all material written, and a description of all oral,
commitments, agreements or contracts to which Ralston Car Wash is a party or by
which Ralston Car Wash is obligated, including, but not limited to, all
commitments, agreements or contracts embodying or evidencing the following
transactions or arrangements: (i) agreements for the employment of, or
independent contractor arrangements with, any officer or other individual
employee of Ralston Car Wash; (ii) any consulting agreement, agency agreement
and any other service agreement that will continue in force after the Closing
Date with respect to the employment or retention by Ralston Car Wash of
consultants, agents, legal counsel, accountants or anyone else who is not an
Employee; (iii) any single contract, purchase order or commitment providing for
expenditures by Ralston Car Wash after the date hereof of more than
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$25,000 or which has been entered into by Ralston Car Wash otherwise than in the
ordinary course of business; (iv) agreements between Ralston Car Wash and
suppliers to Ralston Car Wash pursuant to which Ralston Car Wash is obligated to
purchase or to sell or distribute the products of any other party other than
current purchase orders entered into in the ordinary course of business
consistent with past practices; (v) any contract containing covenants limiting
the freedom of Ralston Car Wash or any officer, director, or employee of Ralston
Car Wash to engage in any line or type of business or with any person in any
geographic area; (vi) any commitment or arrangement by Ralston Car Wash to
participate in a strategic alliance, partnership, joint venture, limited
liability company or other cooperative undertaking with any other Person; (vii)
any commitments by Ralston Car Wash for capital expenditures involving more than
$25,000 individually or $50,000 in the aggregate; and (viii) any other contract,
commitment, agreement, understanding or arrangement that the Ralston Car Wash
Members deems to be material to the business of Ralston Car Wash.
(b) No Breaches or Defaults. Except as disclosed in the Ralston Car
Wash Disclosure Letter, Ralston Car Wash and is in full compliance with each,
and is not in default under any, Material Contract to which it is a party, and
no event has occurred that, with notice or lapse of time or both, would
constitute such a default thereunder. Ralston Car Wash has not waived any rights
under or with respect to any of the Material Contracts to which it is a party.
The Ralston Car Wash Members have no knowledge, and have not received any notice
to the effect, that any party with whom Ralston Car Wash has contractual
arrangements under the Material Contracts to which it is a party, is in default
under any such contractual arrangements or that any event has occurred that,
with notice or lapse of time or both, would constitute such a default
thereunder. Each of the Material Contracts to which it is a party constitutes a
legal, valid and binding obligation of each the parties thereto and is
enforceable against each of the parties thereto in accordance with its
respective terms; except as enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the exercise of judicial discretion in accordance with
general principles of equity.
SECTION 12.15 EMPLOYEE BENEFITS AND EMPLOYMENT MATTERS.
(a) Plans and Arrangements. The Ralston Car Wash Disclosure Letter
sets forth a true, complete and correct list of all Employee Benefit Plans and
all Benefit Arrangements to which Ralston Car Wash or any of its ERISA
Affiliates is a party or to which Ralston Car Wash or any of its ERISA
Affiliates is obligated to contribute. None of the Employee Benefit Plans to
which Ralston Car Wash or any ERISA Affiliate of Ralston Car Wash is a party,
which Ralston Car Wash or any ERISA Affiliate of Ralston Car Wash sponsors or
maintains or to which Ralston Car Wash or any ERISA Affiliate of Ralston Car
Wash contributes is subject to the requirements of Section 302 of ERISA or
Section 412 of the Code and no liability under Title IV of ERISA (whether to the
PBGC or otherwise) has been incurred by Ralston Car Wash or any of its ERISA
Affiliates.
(b) Compliance with Laws and Terms of Plans. Except as disclosed in
the Ralston Car Wash Disclosure Letter, each Employee Benefit Plan and Benefit
Arrangement to which Ralston Car Wash is a party or to which Ralston Car Wash is
obligated to contribute has been operated or maintained in compliance in all
material respects with all Applicable Laws, including, without limitation, ERISA
and the Code, and has been maintained in material compliance with its terms and
in material compliance with the terms of any applicable collective bargaining
agreement. Except as disclosed in the Ralston Car Wash Disclosure Letter, with
respect to any Employee Benefit Plan that is intended to qualify under Section
401 of the Code, a favorable determination letter as to qualification under
Section 401 of the Code that considered the Tax Reform Act of 1986 has been
issued and any amendments required for continued qualification under Section 401
of the Code have been timely adopted and nothing has occurred subsequent to the
date of such determination letter that could adversely affect the qualified
status of any such Plan.
(c) Contributions. All contributions required to be made to or benefit
liabilities arising under the terms of each Employee Benefit Plan or Benefit
Arrangement to which Ralston Car Wash or any of its ERISA Affiliates is a party
or to which Ralston Car Wash or any of its ERISA Affiliates is obligated to
contribute, under ERISA or the Code, for all periods of time prior to the date
hereof and that are attributable to Employees of Ralston Car Wash have been paid
or otherwise adequately accrued against in the Ralston Car Wash Financial
Statements, as the case may be.
(d) Arrearages and Employment Disputes. Except as disclosed in the
Ralston Car Wash Disclosure Letter, Ralston Car Wash is not liable for any
arrearage of wages, any accrued or vested vacation pay or any tax or penalty for
failure to comply with any Applicable Law relating to employment or labor above
the level accrued for or reserved against on the June 30, 1997 balance sheet
included in the Ralston Car Wash Financial Statements, and there is no
controversy pending, threatened or in prospect between Ralston Car Wash and any
of their respective Employees nor is there any basis for any such
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controversy. There is no unfair labor practice charge or complaint currently
pending against Ralston Car Wash with respect to or relating to any of their
respective Employees before the National Labor Relations Board or any other
agency having jurisdiction over such matters and no charges or complaints are
currently pending against Ralston Car Wash before the Equal Employment
Opportunity Commission or any state or local agency having responsibility for
the prevention of unlawful employment practices. There are no actions, suits or
claims pending, including proceedings before the IRS, the DOL or the PBGC, with
respect to any Employee Benefit Plan, Benefit Arrangement or any administrator
or fiduciary thereof, other than benefit claims arising in the normal course of
operation of such Employee Benefit Plans or Benefit Arrangements, and, to the
knowledge of the management of Ralston Car Wash, no Employee Benefit Plan or
Benefit Arrangement is under audit or investigation by any Governmental
Authority.
(e) Severance Obligations. Except as disclosed in the Ralston Car Wash
Disclosure Letter, all current employees of Ralston Car Wash may be terminated
at will, without notice and without incurring any severance or other liability
or obligation to the employee in connection with the termination. Except to the
extent provided by the terms of the Employee Benefit Plans and Benefit
Arrangements disclosed in the Ralston Car Wash Disclosure Letter, neither the
execution, delivery or performance of this Agreement nor the consummation of the
Closing will (i) increase any benefits otherwise payable under any Employee
Benefit Plan or Benefit Arrangement, (ii) result in the acceleration of the time
of payment or vesting of any such benefits, or (iii) give rise to an obligation
with respect to the payment of any severance pay. No "parachute payment" (within
the meaning of Section 280G of the Code), "change in control" or severance
payment has been made or will be required to be made by Ralston Car Wash or any
ERISA Affiliate of Ralston Car Wash to any Employee in connection with the
execution, delivery or performance of this Agreement or as a result of the
consummation of the Closing.
(f) Compliance with Laws on Employment Practices. Ralston Car Wash has
complied in all material respects with all Applicable Laws relating to
employment and employment practices, terms and conditions of employment, wages
and hours, and to the knowledge of the Ralston Car Wash Members, is not engaged
in any unfair labor practice with respect to any of the current employees of
Ralston Car Wash; and to the best knowledge of Ralston Car Wash, none of the
persons performing services for Ralston Car Wash or any of its ERISA Affiliates
have been improperly classified as independent contractors or as being exempt
from payment of wages or overtime.
(g) Collective Bargaining Agreements. Except as disclosed in the
Ralston Car Wash Disclosure Letter), none of the employees of Ralston Car Wash
are subject to any collective bargaining agreement nor is Ralston Car Wash
required under any agreement to recognize or bargain with any labor organization
or union on behalf of its employees.
(h) No Multi-Employer Plans. Neither Ralston Car Wash nor any of its
ERISA Affiliates has contributed to, or had the obligation to contribute to, any
Multiemployer Plan within the five-year period ending on the date of this
Agreement.
(i) No Amendments to Plans. There has been no amendment to, written
interpretation or announcement (whether or not written) by Ralston Car Wash or
any of its ERISA Affiliates relating to, or change in employee participation or
coverage under, any Employee Benefit Plan or Benefit Arrangement that would
increase materially the expense of maintaining such Employee Benefit Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year of Ralston Car Wash ended December 31, 1996.
(j) No Unfunded Liabilities. Neither Ralston Car Wash nor any ERISA
Affiliate of Ralston Car Wash has any current or projected liability for any
unfunded post-retirement medical or life insurance benefits in connection with
any Employee of Ralston Car Wash or ERISA Affiliate of Ralston Car Wash.
(k) No Prohibited Transactions. No event has occurred with respect to
any Employee Benefit Plan or any employee benefit plan previously sponsored,
maintained or contributed to by Ralston Car Wash or any ERISA Affiliate of
Ralston Car Wash, which could subject any such Employee Benefit Plan, Ralston
Car Wash, any ERISA Affiliate of Ralston Car Wash, or the Holding Company
directly or indirectly (through an indemnification agreement or otherwise), to
any liability for or as a result of a breach of fiduciary duty, a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code, or a civil penalty under Section 502 of ERISA or a Tax under Section 4971
of the Code. Neither Ralston Car Wash nor any of its ERISA Affiliates have
incurred a "withdrawal" or "partial withdrawal," as defined in Sections 4203 and
4205 of ERISA, from, or failed to timely make contributions to any Multiemployer
Plan which has resulted in any unpaid liability of any of the Companies.
(l) Welfare Benefit Plans. (i) Except as disclosed in the Ralston Car
Wash Disclosure Letter, none of the Employee Benefit Plans that are "employee
welfare benefit plans" as defined in ERISA Section 3(1) provides for continuing
benefits or coverage for any participant or beneficiary of a participant after
such participant's termination of employment, except to the extent required by
law; provided that any disclosure regarding this clause (i) shall set forth (A)
the number of individuals
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currently receiving such continuing benefits or coverage, (B) the limit on
liability with respect to such coverage, (C) the terms and conditions of such
coverage, and (D) the maximum number of current employees or independent
contractors who could become eligible for such continuing benefits or coverage;
(ii) there has been no violation of Code Section 4980B or ERISA Sections 601-609
with respect to any such plan that could result in any material liability; (iii)
no such plans are "multiple employer welfare arrangements" within the meaning of
ERISA Section 3(40); (iv) with respect to any such plans that are self-insured,
no claims have been made pursuant to any such plan that have not yet been paid
(other than claims which have not yet been paid but are in the normal course of
processing) and no individual has incurred injury, sickness or other medical
condition with respect to which claims may be made pursuant to any such plan
where the liability to the employer could in the aggregate with respect to each
such individual exceed $50,000 per year; (v) neither Ralston Car Wash nor any of
its ERISA Affiliates maintains or has any obligation to contribute to any
"voluntary employees' beneficiary association" within the meaning of Code
Section 501(c)(9) or other welfare benefit fund as defined at Section 419(e) of
the Code (such disclosure to include the amount of any such funding); (vi) no
such plan is intended to satisfy Code Section 125; (vii) no amounts are required
in connection with any such Plan to be included in income under Code Section
105(h) (under official regulations thereof to date); and (viii) neither Ralston
Car Wash nor any of its ERISA Affiliates maintains a nonconforming group health
plan as defined at Section 5000(c) of the Code.
SECTION 12.17 TAX MATTERS.
(a) Affiliated Groups. Ralston Car Wash is not a member of, and has
never been a member of, any "affiliated group" as that term is defined in
Section 1054(a) of the Code.
(b) Tax Returns and Payment of Taxes. Ralston Car Wash has timely
filed or will timely file all federal, state, local, and other Tax Returns
required to be filed by it under Applicable Laws, including estimated Tax
Returns and reports, and has paid all required Taxes (including any additions to
taxes, penalties and interest related thereto) due and payable on or before the
date hereof. Ralston Car Wash has paid, withheld, or accrued, or will accrue, on
the Ralston Car Wash Financial Statements in accordance with an accrual method
of accounting, consistently applied, any and all Taxes in respect of the conduct
of its business or the ownership of its property and in respect of any
transactions for all periods (or portions thereof) through the close of business
on the Closing Date. Ralston Car Wash has withheld and paid over all Taxes
required to have been withheld and paid over, and complied with all information
reporting and backup withholding requirements, including the maintenance of
required records with respect thereto, in connection with amounts paid or owing
to any Employee, creditor, independent contractor or other third party. Ralston
Car Wash has collected all sales, use and value added Taxes required to be
collected, and has remitted, or will remit on a timely basis, such amounts to
the appropriate Government Authorities and have furnished properly completed
exemption certificates for all exempt transactions.
(c) Tax Reserves. The amount of Ralston Car Wash's liability for
unpaid Taxes for all periods ending on or before the date of this Agreement does
not, in the aggregate, exceed the amount of the current liability accruals for
Taxes (excluding reserves for deferred Taxes) as of the date of this Agreement,
and the amount of Ralston Car Wash's liability for unpaid Taxes for all periods
ending on or before the Closing Date shall not, in the aggregate, exceed the
amount of the current liability accruals for Taxes (excluding reserves for
deferred Taxes) as such accruals shall be reflected on the balance sheet of
Ralston Car Wash as of the Closing Date.
(d) Audits; No Deficiencies Asserted Against Company. Except as
disclosed in the Ralston Car Wash Disclosure Letter, the Tax Returns of Ralston
Car Wash have never been audited by any Tax Authority, nor is any such audit in
process, pending or threatened (either in writing or verbally, formally or
informally). Except as disclosed in the Ralston Car Wash Disclosure Letter, no
deficiencies have been asserted (or are expected to be asserted) against Ralston
Car Wash as a result of IRS (or state or local Tax Authority) examinations and
no issue has been raised by any IRS (or state or local Tax Authority)
examination that, by application of the same principles, might result in a
proposed deficiency for any other period not so examined.
(e) No Waivers of Limitations. Except as disclosed in the Ralston Car
Wash Disclosure Letter, there are no agreements, waivers of statutes of
limitations, or other arrange ments providing for extensions of time in respect
of the assessment or collection of any unpaid Taxes against Ralston Car Wash.
Ralston Car Wash has disclosed on its federal Income Tax Returns all positions
taken therein that could, if not so disclosed, give rise to a substantial
understatement penalty within the meaning of Section 6662 of the Code.
(f) No Tax Liens. There are no Encumbrances on any of the assets,
rights or properties of Ralston Car Wash with respect to Taxes, other than liens
for Taxes not yet due and payable or for Taxes that Ralston Car Wash is
contesting in good
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faith through appropriate proceedings and for which appropriate reserves have
been established on the Ralston Car Wash Financial Statements.
(g) Tax Elections and Special Tax Status. Ralston Car Wash is not a
party to any safe harbor lease within the meaning of Section 168(f)(8) of the
Code. Ralston Car Wash is a "partnership" for purposes of federal income
taxation and state income taxation in all states in which its income is subject
to taxation and has had the status of a "partnership" for purposes of federal
income taxation and state income taxation in all states in which its income is
subject to taxation or has been subject to taxation at all times since its
formation.
(h) Disqualified Leasebacks. Ralston Car Wash is not a party to a
"disqualified leaseback or long-term agreement" described in Section 467(b)(4)
of the Code.
(i) Deferrals of Income. No income or gain of Ralston Car Wash has
been deferred pursuant to Treasury Regulation (section mark) 1.1502-13 or
1.1502-14, or Temporary Treasury Regulation (section mark) 1.1502-13T or
1.1502-14T.
(j) Tax Sharing and Similar Arrangements. Ralston Car Wash is not a
party to or bound by any Tax sharing, Tax indemnity, Tax allocation or other
similar arrangement.
(k) No Non-Deductible Compensation Payments. Ralston Car Wash has not
made any payments, nor is it obligated to make any payments, that would not be
deductible under Section 280G of the Code, nor is it a party to any agreement
that under certain circumstances could obligate it to make any such payments.
SECTION 12.18 ENVIRONMENTAL MATTERS.
(a) The facilities presently or formerly occupied or used by Ralston
Car Wash and any other real property presently or formerly owned by, used by or
leased to or by Ralston Car Wash (collectively, the "Ralston Car Wash
Property"), the existing and prior uses of such Ralston Car Wash Property and
all operations of the businesses of Ralston Car Wash comply and have at all
times complied with all Environmental Laws and Ralston Car Wash is not in
violation of nor has it violated, in connection with the ownership, use,
maintenance or operation of such property or the conduct of its business, any
Environmental Law.
(b) Ralston Car Wash has all necessary permits, registrations,
approvals and licenses required by any Governmental Authority or Environmental
Law.
(c) Except as disclosed in the Ralston Car Wash Disclosure letter,
there has been no spill, discharge, leak, emission, injection, disposal, escape,
dumping or release of any kind on, beneath or above such Ralston Car Wash
Property or into the environment surrounding such Ralston Car Wash Property of
any Hazardous Materials.
(d) There has been no past, and there is no current or anticipated
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any Hazardous Materials at, upon or from such Ralston
Car Wash Property. No asbestos-containing materials, underground improvements
(including, but not limited to treatment or storage tanks, sumps, or hydraulic
tanks or water, gas or oil wells) or polychlorinated biphenyls (PCBs)
transformers, capacitors, ballasts, or other equipment which contain dielectric
fluid containing PCBs at levels in excess of fifty parts per million (50 PPM)
are or have ever been located on such Ralston Car Wash Property.
(e) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or threatened by any
Governmental Authority or third party with respect to the business or any
Property of Ralston Car Wash (or any predecessor in interest) in connection with
(i) any actual or alleged failure to comply with any requirement of any
Environmental Law; (ii) the ownership, use, maintenance or operation of the
Property by any person; (iii) the alleged violation of any Environmental Law; or
(iv) the suspected presence of any Hazardous Material thereon.
SECTION 12.19 COMPLIANCE WITH LAWS.
Ralston Car Wash has at all times conducted its business in material
compliance with all (and has not received any notice of any claimed violation of
any) Applicable Laws.
SECTION 12.20 LICENSES AND PERMITS.
Ralston Car Wash possess all licenses, permits, and other governmental
consents, certificates, approvals, or other authorizations (the "Permits")
necessary for the operation of the business of Ralston Car Wash. Ralston Car
Wash has complied with the terms and conditions of all Permits in all material
respects and all such Permits are in full force and effect, and there has
occurred no event nor is any event, action, investigation or proceeding pending
or, to the knowledge of Ralston Car Wash
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Members, threatened, which could cause or permit revocation or suspension of or
otherwise adversely affect the maintenance of any Permits. The transactions
contemplated by this Agreement will not lead to the revocation, cancellation,
termination or suspension of any Permits.
SECTION 12.21 INSURANCE.
Ralston Car Wash has regularly maintained all policies of commercial
liability, products liability, fire, casualty, worker's compensation, life and
other forms of insurance on an "occurrence" rather than a "claims made" basis in
amounts and types required by law and generally carried by reasonably prudent,
similarly situated businesses. Ralston Car Wash is not in default under any
provision contained in any insurance policy maintained by Ralston Car Wash
currently, nor has Ralston Car Wash failed to give any notice or present any
claim thereunder in due and timely fashion and no cancellation, non-renewal,
reduction of coverage or arrearage in premiums has been threatened or occurred
with respect to any policy, nor is the Ralston Car Wash Members aware of any
grounds therefor.
SECTION 12.22 EXTRAORDINARY TRANSACTIONS.
Except as disclosed in the Ralston Car Wash Disclosure Letter or otherwise
permitted by this Agreement, since June 30, 1997, Ralston Car Wash has not (i)
mortgaged, pledged or subjected to any Encumbrance any of its assets; (ii)
canceled or compromised any claim of or debts owed to it; (iii) sold, licensed,
leased, exchanged or transferred any of its assets except in the ordinary course
of business; (iv) entered into any material transaction other than in the
ordinary course of business; (v) experienced any material change in the
relationship or course of dealing with any supplier, customer or creditor; (vi)
suffered any material destruction, loss or damage to any of its assets; (vii)
made any management decisions involving any material change in its policies with
regard to pricing, sales, purchasing or other business, financial, accounting
(including reserves and the amounts thereof) or tax policies or practices;
(viii) declared, set aside or paid any dividends on or made any distributions in
respect of any outstanding shares of capital stock or made any other
distributions or payments to any of its shareholders; (ix) submitted any bid,
proposal, quote or commitment to any party in response to a request for proposal
or otherwise; (x) engaged in any merger or consolidation with, or agreed to
merge or consolidate with, or purchased or agreed to purchase, all or
substantially all of the assets of, or otherwise acquire, any other party; (xi)
entered into any strategic alliance, partnership, joint venture or similar
arrangement with any other party; (xii) incurred or agreed to incur any Debt or
prepaid or made any prepayments in respect of Debt; (xiii) issued or agreed to
issue to any party, any shares of stock or other securities; (xiv) redeemed,
purchased or agreed to redeem or purchase any of its outstanding shares of
capital stock or other securities; (xv) increased the rate of compensation
payable or to become payable to any of its officers, directors, employees or
agents over the rate being paid to them as of June 30, 1996 or agreed to do so
otherwise than in accordance with contractual agreements with such parties;
(xvi) made or agreed to make any charitable contributions or incurred or agreed
to incur any non-business expenses; or (xvii) charged off any bad debts or
increased its bad debt reserve except in the manner consistent with its past
practices.
SECTION 12.23 TITLE TO ASSETS.
Except as described in the Ralston Car Wash Disclosure Letter, Ralston Car
Wash has good and marketable title to its assets and properties, free and clear
of restrictions on or conditions to transfer or assignment, and free and clear
of all Encumbrances.
SECTION 12.24 CORPORATE RECORDS.
The books and records of Ralston Car Wash accurately reflect all minutes of
proceedings of and actions taken by the members of Ralston Car Wash.
SECTION 12.25 BROKER AND FINDER FEES.
Ralston Car Wash has not engaged any broker or finder in connection with
the transactions contemplated by this Agreement, and no action by any of the
foregoing will cause or support any claim to be asserted against the Holding
Company or Ralston Car Wash by any broker, finder or intermediary in connection
with such transaction.
SECTION 12.26 ADEQUATE DISCLOSURE.
No representation or warranty made by Ralston Car Wash pursuant to this
Agreement, or any statement contained in any Exhibit or Schedule to this
Agreement, or any certificate or document furnished or to be furnished by
Ralston Car Wash pursuant to the terms of this Agreement in connection with the
transactions contemplated hereby, contains any untrue or
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misleading statement of a material fact or omits to state a material fact
necessary in order to make the statements contained therein not misleading.
SECTION 12.27 NO ADVERSE CHANGE OR CONDITIONS.
Except as set forth in the Ralston Car Wash Disclosure Letter, and except
as expressly contemplated or permitted by this Agreement, since June 30, 1997,
Ralston Car Wash has conducted its business in the ordinary course and
consistent with past practice, and Ralston Car Wash has not suffered any change
that has had a Material Adverse Effect on Ralston Car Wash. There are no
conditions, facts, developments or circumstances of an unusual or special nature
that reasonably could be expected to have a Material Adverse Effect upon Ralston
Car Wash that have not been disclosed in writing by Ralston Car Wash pursuant to
the Ralston Car Wash Disclosure Letter.
ARTICLE XIII
REPRESENTATIONS AND WARRANTIES OF KBG
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, KBG hereby makes the
following representations and warranties to the other parties to this Agreement:
SECTION 13.1 ORGANIZATION AND GOOD STANDING.
KBG is a corporation duly organized, validly existing and in good standing
under the laws of the State of Colorado, and has full corporate power and
authority to own, operate and lease its properties, and to conduct its business
as it is now being conducted, and is qualified to transact business as a foreign
corporation in each jurisdiction in which the operation of its business or the
ownership of its properties requires such qualification.
SECTION 13.2 EXECUTION AND EFFECT OF AGREEMENT.
KBG has the corporate power to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery by KBG of this Agreement, the
consummation by KBG of the transactions contemplated hereby, and the performance
by KBG of its obligations hereunder, have been duly and effectively authorized
by all necessary corporate action on the part of KBG. This Agreement has been
duly executed and delivered by KBG and constitutes a legal, valid and binding
obligation of KBG, fully enforceable against KBG in accordance with its terms;
except as enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the exercise of judicial discretion in accordance with general principles of
equity.
SECTION 13.3 RESTRICTIONS.
The execution and delivery of this Agreement by KBG, the consummation of
the transactions contemplated hereby by KBG, and, subject to the due
authorization and approval of its shareholders, the performance of the
obligations of KBG hereunder will not (a) violate any of the provisions of the
charter or by-laws of KBG, (b) violate or conflict with the provisions of any
Applicable Laws, (c) result in the creation of any Encumbrance upon any of the
assets, rights or properties of KBG, or (d) except as disclosed in the KBG
Disclosure Letter, conflict with, violate any provisions of, result in a breach
of or give rise to a right of termination, modification or cancellation of,
constitute a default of, or accelerate the performance required by, with or
without the passage of time or the giving of notice or both, the terms of any
material agreement, indenture, mortgage, deed of trust, security or pledge
agreement, lease, contract, note, bond, license, permit, authorization or other
instrument to which KBG is a party or to which any of any of the assets of KBG
are subject.
SECTION 13.4 CONSENTS.
No filing with, or consent, waiver, approval or authorization of, or notice
to, any governmental authority or any third party is required to be made or
obtained by KBG in connection with the execution and delivery of this Agreement
or any document or instrument contemplated hereby, the consummation of any of
the transactions contemplated hereby or the performance of its obligations
hereunder or thereunder which have not been obtained by KBG.
SECTION 13.5 OWNERSHIP OF PROPRIETARY CAR WASH COMPUTER SYSTEM.
KBG is the sole and exclusive owner of all of the copyright interests in,
patents of, and patent rights in, the Propriety Car Wash Computer Software and
has the sole and exclusive right to sell, assign and transfer the Proprietary
Computer
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Software and the intellectual property rights embodied therein to the Holding
Company. Except as disclosed on Schedule 13.5 to this Agreement, KBG has not
sold, transferred, assigned, conveyed, licensed or otherwise encumbered the
Proprietary Car Wash Computer Software or any of the intellectual property
rights embodied therein and has not granted any right, license or privilege with
respect thereto to any other Person. The Proprietary Car Wash Computer Software
does not infringe upon, conflict with or misappropriate the rights of any other
Person and KBG has not received any claim or notice from any other Person
whether oral or written, which states, in essence, that the use thereof
infringes upon or misappropriates the rights of any Person. KBG has not made any
claim which states, in essence, that any Person has violated or infringed upon
or misappropriated its rights in the Proprietary Car Wash Computer Software,
and, to the knowledge of the management of KBG, no person is infringing upon,
misappropriating, engaging in any unauthorized use thereof.
SECTION 13.6 BROKER AND FINDER FEES.
KBG has not engaged any broker or finder in connection with the
transactions contemplated by this Agreement, and no action by any of the
foregoing will cause or support any claim to be asserted against the Holding
Company or KBG by any broker, finder or intermediary in connection with such
transaction.
SECTION 13.7 ADEQUATE DISCLOSURE.
No representation or warranty made by KBG pursuant to this Agreement, or
any statement contained in any Exhibit or Schedule to this Agreement, or any
certificate or document furnished or to be furnished by KBG pursuant to the
terms of this Agreement in connection with the transactions contemplated hereby,
contains any untrue or misleading statement of a material fact or omits to state
a material fact necessary in order to make the statements contained therein not
misleading.
ARTICLE XIV
REPRESENTATIONS AND WARRANTIES OF MIRACLE PARTNERS
In order to induce each of the other parties to enter into this Agreement
and to consummate the transactions contemplated hereby, subject to the delivery
and acceptance of a definitive Disclosure Letter, Miracle Partners hereby makes
the following representations and warranties to the other parties to this
Agreement and to the Holding Company.
SECTION 14.1 ORGANIZATION AND GOOD STANDING.
Miracle Partners is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, has full corporate power
and authority to own, operate and lease its properties, and to conduct its
business as it is now being conducted, and is qualified to transact business as
a foreign corporation in each jurisdiction in which the operation of its
business or the ownership of its properties requires such qualification.
SECTION 14.2 CAPITALIZATION OF MIRACLE PARTNERS.
The authorized capital stock of Miracle Partners consists solely of 500
shares of a single class of common stock, $-0-par value, of which 500 shares
have been issued and are outstanding as of the date of this Agreement. Each of
the shares of the capital stock of Miracle Partners issued and outstanding as of
the date hereof has been duly authorized and validly issued and is fully paid
and non-assessable. None of the shares of the issued and outstanding capital
stock of Miracle Partners has been issued in violation of shareholder preemptive
rights. Miracle Partners has no issued or outstanding equity securities, debt
securities or other instruments which are convertible into or exchangeable for
at any time into equity securities of Miracle Partners. Miracle Partners is not
subject to any commitment or obligation which would require the issuance or sale
of shares of its capital stock at any time under options, subscriptions,
warrants, rights, calls, preemptive rights, convertible obligations or any other
fixed or contingent obligations or which would provide the holder thereof with
the right to acquire any equity securities of Miracle Partners. Miracle Partners
has no obligation (contingent or otherwise) to purchase, redeem or otherwise
acquire any of its equity securities or any interest therein or to pay any
dividend or make any other distribution in respect thereof.
SECTION 14.3 OWNERSHIP OF SHARES.
All of the issued and outstanding shares of the capital stock of Miracle
Partners are held of record and beneficially by C. Eugene Deal. There are no
agreements, pledges, powers of attorney, assignments or similar agreements or
arrangements either (i) restricting the transferability of any of the shares of
the capital stock of Miracle Partners or (ii) which reasonably could be expected
to prohibit or delay the consummation of the transactions contemplated hereby.
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SECTION 14.4 SUBSIDIARIES; INVESTMENTS.
Miracle Partners does not own any shares of capital stock or equity
securities of, or any interest in any other entity.
SECTION 14.5 EXECUTION AND EFFECT OF AGREEMENT.
Miracle Partners has the corporate power to enter into this Agreement and
to perform its obligations hereunder. This Agreement has been duly executed and
delivered by Miracle Partners and constitutes a legal, valid and binding
obligation of Miracle Partners, fully enforceable against Miracle Partners in
accordance with its terms; except as enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other laws of general application relating to or affecting
enforcement of creditors' rights and the exercise of judicial discretion in
accordance with general principles of equity.
SECTION 14.6 RESTRICTIONS.
The execution and delivery of this Agreement by Miracle Partners, the
consummation of the transactions contemplated hereby by Miracle Partners, and,
subject to the due authorization and approval of its shareholders, the
performance of the obligations of Miracle Partners hereunder will not (a)
violate any of the provisions of the charter or by-laws of Miracle Partners, (b)
violate or conflict with the provisions of any Applicable Laws, (c) result in
the creation of any Encumbrance upon any of the assets, rights or properties of
Miracle Partners, or (d) except as disclosed in the Miracle Partners Disclosure
Letter, conflict with, violate any provisions of, result in a breach of or give
rise to a right of termination, modification or cancellation of, constitute a
default of, or accelerate the performance required by, with or without the
passage of time or the giving of notice or both, the terms of any material
agreement, indenture, mortgage, deed of trust, security or pledge agreement,
lease, contract, note, bond, license, permit, authorization or other instrument
to which Miracle Partners is a party or to which any of any of the assets of
Miracle Partners are subject.
SECTION 14.7 CONSENTS.
Except as disclosed in the Miracle Partners Disclosure Letter, no filing
with, or consent, waiver, approval or authorization of, or notice to, any
governmental authority or any third party is required to be made or obtained by
Miracle Partners in connection with the execution and delivery of this Agreement
or any document or instrument contemplated hereby, the consummation of any of
the transactions contemplated hereby or the performance of any of their
respective obligations hereunder or thereunder.
SECTION 14.8 FINANCIAL STATEMENTS.
Attached hereto as Exhibit E are true and correct copies of the audited
balance sheets and related statements of income, cash flows and changes in
stockholders' equity of Miracle Partners as at December 31, 1994, 1995 and 1996
and for the year periods then ended and the financial statements of Miracle
Partners as at June 30, 1997 and for the six month period then ended
(collectively, the "Miracle Partners Financial Statements"). All of the Miracle
Partners Financial Statements have been prepared in accordance with GAAP in a
manner consistent with each other and the books and records of Miracle Partners,
and fairly present in all material respects the financial condition and results
of operations of Miracle Partners at the dates and for the periods indicated
therein. The regular books of account of Miracle Partners fairly and accurately
reflect all material transactions involving Miracle Partners, are true, correct
and complete and have been prepared in accordance with GAAP and on a basis
consistent with the Financial Statements.
SECTION 14.9 DEBT.
The Miracle Partners Disclosure Letter contains a true, complete and
accurate listing of the original principal amount of all of the Debt of Miracle
Partners, the remaining principal balance thereof, the interest rate(s) payable
by Miracle Partners in respect thereof, if any, and the date(s) of maturity
thereof. Except as disclosed in the Miracle Partners Disclosure Letter, all of
the Debt of Miracle Partners may be prepaid at any time, without premium,
prepayment penalties, termination fees or other fees or charges.
SECTION 14.10 GUARANTEES.
The Miracle Partners Disclosure Letter contains a complete list of all
Guarantees provided by Miracle Partners for the benefit of any other party and
of all Guarantees provided by any other party for the benefit of Miracle
Partners or any party doing business with Miracle Partners.
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SECTION 14.11 NO UNDISCLOSED LIABILITIES.
Miracle Partners does not have any material liabilities or obligations of
any nature whatsoever (whether known or unknown, due or to become due, absolute,
accrued, contingent or otherwise, and whether or not determined or
determinable), except for (i) liabilities or obligations set forth in the
Miracle Partners Disclosure Letter, (ii) liabilities or obligations to the
extent expressly reflected on or reserved against in the June 30, 1997 balance
sheet included among the Miracle Partners Financial Statements or disclosed in
the notes thereto, (iii) liabilities or obligations of a type reflected on the
June 30, 1997 balance sheet and incurred in the ordinary course of business and
consistent with past practices since June 30, 1997, or (iv) liabilities or
obligations arising under the terms of the Material Contracts of Miracle
Partners. Except as otherwise contemplated or permitted by this Agreement no
dividends have been declared on any capital stock of Miracle Partners which are
unpaid.
SECTION 14.12 LITIGATION.
There is no suit, claim, action at law or in equity, proceeding or
governmental investigation or audit pending, or, to the knowledge of the
management of Miracle Partners, threatened, by or before any court, any
Governmental Authority or arbitrator, against Miracle Partners that reasonably
could be expected to prevent the consummation of any of the trans actions
contemplated hereby. Except as disclosed in the Miracle Partners Disclosure
Letter, there is no material suit, claim, action at law or in equity, proceeding
or governmental investigation or audit pending, or to the knowledge of
management of Miracle Partners, threatened, by or before any arbitrator, court,
or other Governmental Authority, against Miracle Partners or involving any of
the former or present employees, agents, businesses, properties, rights or
assets of Miracle Partners, nor, to the knowledge of management of Miracle
Partners, is there any basis for the assertion of any of the foregoing. Except
as disclosed in the Miracle Partners Disclosure Letter, there are no judgments,
orders, injunctions, decrees, stipulations or awards rendered by any court,
Governmental Authority or arbitrator against Miracle Partners or any of their
respective former or present Employees, agents, properties or assets.
SECTION 14.13 PROPERTIES; ABSENCE OF ENCUMBRANCES.
The Miracle Partners Disclosure Letter sets forth a complete list of all
real property owned by or leased to Miracle Partners, and, with respect to all
properties leased by Miracle Partners, a description of the term of such lease
and the monthly rental thereunder. Miracle Partners is not in default (and will
not be in default with the passage of time or the receipt of notice or both) and
has not received notice of default, under any lease of real property. All real
property leased to Miracle Partners is available for immediate use in the
operation of its business and for the purpose for which such property currently
is being utilized. Subject in the case of leased property to the terms and
conditions of the respective leases, Miracle Partners has full legal and
practical access to all such real property.
SECTION 14.14 INTELLECTUAL PROPERTY.
The Miracle Partners Disclosure Letter sets forth a complete list of (I)
all Intellectual Property owned, used or licensed by Miracle Partners, together
with the identity of the owner thereof, and (ii) all license agreements pursuant
to which any Intellectual Property is licensed to or by Miracle Partners.
Miracle Partners owns its Intellectual Property free and clear of any and all
Encumbrances, or, in the case of licensed Intellectual Property, has valid,
binding and enforceable rights to use such Intellectual Property. Miracle
Partners has duly and timely filed all renewals, continuations and other filings
necessary to maintain its Intellectual Property or registrations thereof. Except
as disclosed in the Miracle Partners Disclosure Letter, Miracle Partners (I) has
not received any notice or claim to the effect that the use of any Intellectual
Property infringes upon, conflicts with or misappropriates the rights of any
other party or that any of the Intellectual Property is not valid or
enforceable, and (ii) has not made any claim that any party has violated or
infringed upon its rights with respect to any Intellectual Property.
SECTION 14.15 MATERIAL CONTRACTS.
(a) List of Material Contracts. The Miracle Partners Disclosure Letter
sets forth a list of all material written, and a description of all oral,
commitments, agreements or contracts to which Miracle Partners is a party or by
which Miracle Partners is obligated, including, but not limited to, all
commitments, agreements or contracts embodying or evidencing the following
transactions or arrangements: (i) agreements for the employment of, or
independent contractor arrangements with, any officer or other individual
employee of Miracle Partners; (ii) any consulting agreement, agency agreement
and any other service agreement that will continue in force after the Closing
Date with respect to the employment or retention by Miracle Partners of
consultants, agents, legal counsel, accountants or anyone else who is not an
Employee; (iii) any single contract, purchase order or commitment providing for
expenditures by Miracle Partners after the date hereof of more than $25,000 or
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which has been entered into by Miracle Partners otherwise than in the ordinary
course of business; (iv) agreements between Miracle Partners and suppliers to
Miracle Partners pursuant to which Miracle Partners is obligated to purchase or
to sell or distribute the products of any other party other than current
purchase orders entered into in the ordinary course of business consistent with
past practices; (v) any contract containing covenants limiting the freedom of
Miracle Partners or any officer, director, or employee of Miracle Partners to
engage in any line or type of business or with any person in any geographic
area; (vi) any commitment or arrangement by Miracle Partners to participate in a
strategic alliance, partnership, joint venture, limited liability company or
other cooperative undertaking with any other Person; (vii) any commitments by
Miracle Partners for capital expenditures involving more than $25,000
individually or $50,000 in the aggregate; and (viii) any other contract,
commitment, agreement, understanding or arrangement that the management of
Miracle Partners deems to be material to the business of Miracle Partners.
(b) No Breaches or Defaults. Except as disclosed in the Miracle
Partners Disclosure Letter, Miracle Partners and is in full compliance with
each, and is not in default under any, Material Contract to which it is a party,
and no event has occurred that, with notice or lapse of time or both, would
constitute such a default thereunder. Miracle Partners has not waived any rights
under or with respect to any of the Material Contracts to which it is a party.
The management of Miracle Partners has no knowledge, or received any notice to
the effect, that any party with whom Miracle Partners has contractual
arrangements under its Material Contracts, is in default under any such
contractual arrangements or that any event has occurred that, with notice or
lapse of time or both, would constitute such a default thereunder. Each of the
Material Contracts to which Miracle Partners is a party constitutes a legal,
valid and binding obligation of each the parties thereto and is enforceable
against each of the parties thereto in accordance with its respective terms;
except as enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the exercise of judicial discretion in accordance with general principles of
equity.
SECTION 14.16 EMPLOYEE BENEFITS AND EMPLOYMENT MATTERS.
(a) Plans and Arrangements. The Miracle Partners Disclosure Letter
sets forth a true, complete and correct list of all Employee Benefit Plans and
all Benefit Arrangements to which Miracle Partners or any of its ERISA
Affiliates is a party or to which Miracle Partners or any of its ERISA
Affiliates is obligated to contribute. None of the Employee Benefit Plans to
which Miracle Partners or any ERISA Affiliate of Miracle Partners is a party,
which Miracle Partners or any ERISA Affiliate of Miracle Partners sponsors or
maintains or to which Miracle Partners or any ERISA Affiliate of Miracle
Partners contributes is subject to the requirements of Section 302 of ERISA or
Section 412 of the Code and no liability under Title IV of ERISA (whether to the
PBGC or otherwise) has been incurred by Miracle Partners or any of its ERISA
Affiliates.
(b) Compliance with Laws and Terms of Plans. Except as disclosed in
the Miracle Partners Disclosure Letter, each Employee Benefit Plan and Benefit
Arrangement to which Miracle Partners or any of its ERISA Affiliates is a party
or to which Miracle Partners or any of its ERISA Affiliates is obligated to
contribute has been operated or maintained in compliance in all material
respects with all Applicable Laws, including, without limitation, ERISA and the
Code, and has been maintained in material compliance with its terms and in
material compliance with the terms of any applicable collective bargaining
agreement. Except as disclosed in the Miracle Partners Disclosure Letter, with
respect to any Employee Benefit Plan that is intended to qualify under Section
401 of the Code, a favorable determination letter as to qualification under
Section 401 of the Code that considered the Tax Reform Act of 1986 has been
issued and any amendments required for continued qualification under Section 401
of the Code have been timely adopted and nothing has occurred subsequent to the
date of such determination letter that could adversely affect the qualified
status of any such Plan.
(c) Contributions. All contributions required to be made to or benefit
liabilities arising under the terms of each Employee Benefit Plan or Benefit
Arrangement to which Miracle Partners or any of its ERISA Affiliates is a party
or to which Miracle Partners or any of its ERISA Affiliates is obligated to
contribute, under ERISA or the Code, for all periods of time prior to the date
hereof and that are attributable to Employees of Miracle Partners or any of its
ERISA Affiliates have been paid or otherwise adequately accrued against in the
Miracle Partners Financial Statements, as the case may be.
(d) Arrearages and Employment Disputes. Except as disclosed in the
Miracle Partners Disclosure Letter, Miracle Partners is not liable for any
arrearage of wages, any accrued or vested vacation pay or any tax or penalty for
failure to comply with any Applicable Law relating to employment or labor above
the level accrued for or reserved against on the June 30, 1997 balance sheet
included in the Miracle Partners Financial Statements, and there is no
controversy pending, threatened or in prospect between Miracle Partners and any
of its Employees nor is there any basis for any such controversy. There is no
unfair labor practice charge or complaint currently pending against Miracle
Partners with respect to or relating to any of its
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Employees before the National Labor Relations Board or any other agency having
jurisdiction over such matters and no charges or complaints are currently
pending against Miracle Partners before the Equal Employment Opportunity
Commission or any state or local agency having responsibility for the prevention
of unlawful employment practices. There are no actions, suits or claims pending,
including proceedings before the IRS, the DOL or the PBGC, with respect to any
Employee Benefit Plan, Benefit Arrangement or any administrator or fiduciary
thereof, other than benefit claims arising in the normal course of operation of
such Employee Benefit Plans or Benefit Arrangements, and, to the knowledge of
the management of Miracle Partners, no Employee Benefit Plan or Benefit
Arrangement is under audit or investigation by any Governmental Authority.
(e) Severance Obligations. Except as disclosed in the Miracle Partners
Disclosure Letter, all current employees of Miracle Partners may be terminated
at will, without notice and without incurring any severance or other liability
or obligation to the employee in connection with the termination. Except to the
extent provided by the terms of the Employee Benefit Plans and Benefit
Arrangements disclosed in the Miracle Partners Disclosure Letter, neither the
execution, delivery or performance of this Agreement nor the consummation of the
Closing will (i) increase any benefits otherwise payable under any Employee
Benefit Plan or Benefit Arrangement, (ii) result in the acceleration of the time
of payment or vesting of any such benefits, or (iii) give rise to an obligation
with respect to the payment of any severance pay. No "parachute payment" (within
the meaning of Section 280G of the Code), "change in control" or severance
payment has been made or will be required to be made by Miracle Partners or any
ERISA Affiliate of Miracle Partners to any Employee in connection with the
execution, delivery or performance of this Agreement or as a result of the
consummation of the Closing.
(f) Compliance with Laws on Employment Practices. Miracle Partners has
complied in all material respects with all Applicable laws relating to
employment and employment practices, terms and conditions of employment, wages
and hours, and to the knowledge of the management of Miracle Partners, is not
engaged in any unfair labor practice with respect to any of the current
employees of Miracle Partners; and to the best knowledge of Miracle Partners,
none of the persons performing services for Miracle Partners or any of its ERISA
Affiliates have been improperly classified as independent contractors or as
being exempt from the payment of wages or overtime.
(g) Collective Bargaining Agreements. Except as disclosed in the
Miracle Partners Disclosure Letter, none of the employees of Miracle Partners
are subject to any collective bargaining agreement nor is Miracle Partners
required under any agreement to recognize or bargain with any labor organization
or union on behalf of its employees.
(h) No Multi-Employer Plans. Neither Miracle Partners nor any of its
ERISA Affiliates has contributed to, or had the obligation to contribute to, any
Multiemployer Plan within the five-year period ending on the date of this
Agreement.
(i) No Amendments to Plans. There has been no amendment to, written
interpretation or announcement (whether or not written) by Miracle Partners or
any of its ERISA Affiliates relating to, or change in employee participation or
coverage under, any Employee Benefit Plan or Benefit Arrangement that would
increase materially the expense of maintaining such Employee Benefit Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year of Miracle Partners ended December 31, 1996.
(j) No Unfunded Liabilities. Neither Miracle Partners nor any ERISA
Affiliate of Miracle Partners has any current or projected liability for any
unfunded post-retirement medical or life insurance benefits in connection with
any Employee of Miracle Partners or ERISA Affiliate of Miracle Partners.
(k) No Prohibited Transactions. No event has occurred with respect to
any Employee Benefit Plan or any employee benefit plan previously sponsored,
maintained or contributed to by Miracle Partners or any ERISA Affiliate of
Miracle Partners, which could subject any such Employee Benefit Plan, Miracle
Partners, any ERISA Affiliate of Miracle Partners, or the Holding Company
directly or indirectly (through an indemnification agreement or otherwise), to
any liability for or as a result of a breach of fiduciary duty, a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code, or a civil penalty under Section 502 of ERISA or a Tax under Section 4971
of the Code. Neither Miracle Partners nor any of its ERISA Affiliates have
incurred a "withdrawal" or "partial withdrawal," as defined in Sections 4203 and
4205 of ERISA, from, or failed to timely make contributions to any Multiemployer
Plan which has resulted in any unpaid liability of Miracle Partners or any of
its ERISA Affiliates.
(l) Welfare Benefit Plans. (i) Except as disclosed in the Miracle
Partners Disclosure Letter, none of the Employee Benefit Plans that are
"employee welfare benefit plans" as defined in ERISA Section 3(1) provides for
continuing benefits or coverage for any participant or beneficiary of a
participant after such participant's termination of employment, except to the
extent required by law; provided that any disclosure regarding this clause (I)
shall set forth (A) the number of individuals currently receiving such
continuing benefits or coverage, (B) the limit on liability with respect to such
coverage, (C) the terms and conditions of such coverage, and (D) the maximum
number of current employees or independent contractors who
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could become eligible for such continuing benefits or coverage; (ii) there has
been no violation of Code Section 4980B or ERISA Sections 601-609 with respect
to any such plan that could result in any material liability; (iii) no such
plans are "multiple employer welfare arrangements" within the meaning of ERISA
Section 3(40); (iv) with respect to any such plans that are self-insured, no
claims have been made pursuant to any such plan that have not yet been paid
(other than claims which have not yet been paid but are in the normal course of
processing) and no individual has incurred injury, sickness or other medical
condition with respect to which claims may be made pursuant to any such plan
where the liability to the employer could in the aggregate with respect to each
such individual exceed $50,000 per year; (v) neither Miracle Partners nor any of
its ERISA Affiliates maintains or has any obligation to contribute to any
"voluntary employees' beneficiary association" within the meaning of Code
Section 501(c)(9) or other funding arrangement for the provision of welfare
benefits (such disclosure to include the amount of any such funding); (vi) no
such plan is intended to satisfy Code Section 125; (vii) no amounts are required
in connection with any such plan to be included in income under Code Section
105(h) (under official regulations thereof to date); and (viii) neither Miracle
Partners nor any of its ERISA Affiliates maintains a nonconforming group health
plan as defined at Section 5000(c) of the Code.
SECTION 14.17 TAX MATTERS.
(a) Affiliated Groups. Miracle Partners is not a member of, and has
never been a member of, any "affiliated group" as that term is defined in
Section 1454(a) of the Code.
(b) Tax Returns and Payment of Taxes. Miracle Partners has timely
filed or will timely file all federal, state, local, and other Tax Returns
required to be filed by it under Applicable Laws, including estimated Tax
Returns and reports, and has paid all required Income Taxes and other Taxes
(including any additions to taxes, penalties and interest related thereto) due
and payable on or before the date hereof. Miracle Partners has paid, withheld,
or accrued, or will accrue, on the Miracle Partners Financial Statements in
accordance with GAAP any and all Income Taxes and other Taxes in respect of the
conduct of its business or the ownership of its property and in respect of any
transactions for all periods (or portions thereof) through the close of business
on the Closing Date. Miracle Partners has withheld and paid over all Taxes
required to have been withheld and paid over, and complied with all information
reporting and backup withholding requirements, including the maintenance of
required records with respect thereto, in connection with amounts paid or owing
to any Employee, creditor, independent contractor or other third party. Miracle
Partners has collected all sales, use and value added Taxes required to be
collected, and has remitted, or will remit on a timely basis, such amounts to
the appropriate Government Authorities and have furnished properly completed
exemption certificates for all exempt transactions.
(c) Tax Reserves. The amount of Miracle Partners's liability for
unpaid Taxes for all periods ending on or before the date of this Agreement does
not, in the aggregate, exceed the amount of the current liability accruals for
Taxes (excluding reserves for deferred Taxes) as of the date of this Agreement,
and the amount of Miracle Partners 's liability for unpaid Taxes for all periods
ending on or before the Closing Date shall not, in the aggregate, exceed the
amount of the current liability accruals for Taxes (excluding reserves for
deferred Taxes) as such accruals shall be reflected on the balance sheet of
Miracle Partners as of the Closing Date.
(d) Audits; No Deficiencies Asserted Against Company. The Tax Returns
of Miracle Partners have never been audited by any Tax Authority, nor is any
such audit in process, pending or threatened (either in writing or verbally,
formally or informally). Except as disclosed in the Miracle Partners Disclosure
Letter, no deficiencies have been asserted (or are expected to be asserted)
against Miracle Partners as a result of IRS (or state or local Tax Authority)
examinations and no issue has been raised by any IRS (or state or local Tax
Authority) examination that, by application of the same principles, might result
in a proposed deficiency for any other period not so examined.
(e) No Waivers of Limitations. Except as disclosed in the Miracle
Partners Disclosure Letter, there are no agreements, waivers of statutes of
limitations, or other arrangements providing for extensions of time in respect
of the assessment or collection of any unpaid Taxes against Miracle Partners.
Miracle Partners has disclosed on its federal Income Tax Returns all positions
taken therein that could, if not so disclosed, give rise to a substantial
understatement penalty within the meaning of Section 6662 of the Code.
(f) No Tax Liens. There are no Encumbrances on any of the assets,
rights or properties of Miracle Partners with respect to Taxes, other than liens
for Taxes not yet due and payable or for Taxes that Miracle Partners is
contesting in good faith through appropriate proceedings and for which
appropriate reserves have been established on the Miracle Partners Financial
Statements.
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(g) Tax Elections and Special Tax Status. Miracle Partners is not a
party to any safe harbor lease within the meaning of Section 168(f)(8) of the
Code. Miracle Partners is a "small business corporation" which has elected to be
subject to federal income taxation under subchapter S of the Code and has such
status for purposes of federal income taxation and state income taxation in all
states in which its respective income is subject to taxation or has been subject
to taxation at all times since its formation.
(h) Disqualified Leasebacks. Miracle Partners is not a party to a
"disqualified leaseback or long-term agreement" described in Section 467(b)(4)
of the Code.
(i) Deferrals of Income. No income or gain of Miracle Partners has
been deferred pursuant to Treasury Regulation (section mark) 1.1502-13 or
1.1502-14, or Temporary Treasury Regulation (section mark) 1.1502-13T or
1.1502-14T.
(j) Tax Sharing and Similar Arrangements. Miracle Partners is not a
party to or bound by any Tax sharing, Tax indemnity, Tax allocation or other
similar arrangement.
(k) No Non-Deductible Compensation Payments. Miracle Partners has not
made any payments, nor is it obligated to make any payments, that would not be
deductible under Section 280G of the Code, nor is it a party to any agreement
that under certain circumstances could obligate it to make any such payments.
SECTION 14.18 ENVIRONMENTAL MATTERS.
(a) The facilities presently or formerly occupied or used by Miracle
Partners and any other real property presently or formerly owned by, used by or
leased to or by Miracle Partners (collectively, the "Miracle Partners
Property"), the existing and prior uses of such Property and all operations of
the businesses of Miracle Partners comply and have at all times complied with
all Environmental Laws and Miracle Partners is not in violation of nor has it
violated, in connection with the ownership, use, maintenance or operation of
such property or the conduct of its business, any Environmental Law.
(b) Miracle Partners has all necessary permits, registrations,
approvals and licenses required by any Governmental Authority or Environmental
Law.
(c) There has been no spill, discharge, leak, emission, injection,
disposal, escape, dumping or release of any kind on, beneath or above such
Property or into the environment surrounding such Miracle Partners Property of
any Hazardous Materials.
(d) There has been no past, and there is no current or anticipated
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any Hazardous Materials at, upon or from such Miracle
Partners Ventures Property. No asbestos-containing materials, underground
improvements (including, but not limited to the treatment or storage tanks,
sumps, or water, gas or oil wells) or polychlorinated biphenyls (PCBs)
transformers, capacitors, ballasts, or other equipment which contain dielectric
fluid containing PCBs at levels in excess of fifty parts per million (50 PPM)
are located on such Miracle Partners Property.
(e) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or threatened by any
Governmental Authority or third party with respect to the business or any
Property of Miracle Partners (or any predecessor in interest) in connection with
(i) any actual or alleged failure to comply with any requirement of any
Environmental Law; (ii) the ownership, use, maintenance or operation of the
Property by any person; (iii) the alleged violation of any Environmental Law; or
(iv) the suspected presence of any Hazardous Material thereon.
SECTION 14.19 COMPLIANCE WITH LAWS.
Miracle Partners has at all times conducted its business in material
compliance with all (and has not received any notice of any claimed violation of
any) Applicable Laws.
SECTION 14.20 LICENSES AND PERMITS.
Miracle Partners possess all licenses, permits, and other governmental
consents, certificates, approvals, or other authorizations (the "Permits")
necessary for the operation of the business of Miracle Partners. Miracle
Partners has complied with the terms and conditions of all Permits in all
material respects and all such Permits are in full force and effect, and there
has occurred no event nor is any event, action, investigation or proceeding
pending or, to the knowledge of management of Miracle Partners, threatened,
which could cause or permit revocation or suspension of or otherwise adversely
affect the maintenance of any Permits. The transactions contemplated by this
Agreement will not lead to the revocation, cancellation, termination or
suspension of any Permits.
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SECTION 14.21 INSURANCE.
Miracle Partners has regularly maintained all policies of commercial
liability, products liability, fire, casualty, worker's compensation, life and
other forms of insurance on an "occurrence" rather than a "claims made" basis in
amounts and types required by law and generally carried by reasonably prudent,
similarly situated businesses. Miracle Partners is not in default under any
provision contained in any insurance policy maintained by Miracle Partners
currently, nor has Miracle Partners failed to give any notice or present any
claim thereunder in due and timely fashion and no cancellation, non-renewal,
reduction of coverage or arrearage in premiums has been threatened or occurred
with respect to any policy, nor is the management of Miracle Partners aware of
any grounds therefor.
SECTION 14.22 EXTRAORDINARY TRANSACTIONS.
Except as disclosed in the Miracle Partners Disclosure Letter or otherwise
permitted by this Agreement, since June 30, 1997, Miracle Partners has not (I)
mortgaged, pledged or subjected to any Encumbrance any of its assets; (ii)
canceled or compromised any claim of or debts owed to it; (iii) sold, licensed,
leased, exchanged or transferred any of its assets except in the ordinary course
of business; (iv) entered into any material transaction other than in the
ordinary course of business; (v) experienced any material change in the
relationship or course of dealing with any supplier, customer or creditor; (vi)
suffered any material destruction, loss or damage to any of its assets; (vii)
made any management decisions involving any material change in its policies with
regard to pricing, sales, purchasing or other business, financial, accounting
(including reserves and the amounts thereof) or tax policies or practices;
(viii) declared, set aside or paid any dividends on or made any distributions in
respect of any outstanding shares of capital stock or made any other
distributions or payments to any of its shareholders; (ix) submitted any bid,
proposal, quote or commitment to any party in response to a request for proposal
or otherwise; (x) engaged in any merger or consolidation with, or agreed to
merge or consolidate with, or purchased or agreed to purchase, all or
substantially all of the assets of, or otherwise acquire, any other party; (xi)
entered into any strategic alliance, partnership, joint venture or similar
arrangement with any other party; (xii) incurred or agreed to incur any Debt or
prepaid or made any prepayments in respect of Debt; (xiii) issued or agreed to
issue to any party, any shares of stock or other securities; (xiv) redeemed,
purchased or agreed to redeem or purchase any of its outstanding shares of
capital stock or other securities; (xv) increased the rate of compensation
payable or to become payable to any of its officers, directors, employees or
agents over the rate being paid to them as of June 30, 1996 or agreed to do so
otherwise than in accordance with contractual agreements with such parties;
(xvi) made or agreed to make any charitable contributions or incurred or agreed
to incur any non-business expenses; or (xvii) charged off any bad debts or
increased its bad debt reserve except in the manner consistent with its past
practices.
SECTION 14.23 TITLE TO ASSETS.
Except as described in the Miracle Partners Disclosure Letter, Miracle
Partners has good and marketable title to its assets and properties, free and
clear of restrictions on or conditions to transfer or assignment, and free and
clear of all Encumbrances.
SECTION 14.24 CORPORATE RECORDS.
The minute books of Miracle Partners accurately reflect all minutes of
proceedings of and actions taken by the directors of Miracle Partners, and by
each committee of the Board of Directors of Miracle Partners, and all records of
meetings of and actions taken by the stockholders of Miracle Partners, that are
required by applicable laws to be recorded in or reflected in the corporate
records thereof.
SECTION 14.25 BROKER AND FINDER FEES.
Miracle Partners has not engaged any broker or finder in connection with
the transactions contemplated by this Agreement, and no action by any of the
foregoing will cause or support any claim to be asserted against the Holding
Company or Miracle Partners by any broker, finder or intermediary in connection
with such transaction.
SECTION 14.26 ADEQUATE DISCLOSURE.
No representation or warranty made by Miracle Partners pursuant to this
Agreement, or any statement contained in any Exhibit or Schedule to this
Agreement, or any certificate or document furnished or to be furnished by
Miracle Partners pursuant to the terms of this Agreement in connection with the
transactions contemplated hereby, contains any untrue or misleading statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained therein not misleading.
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SECTION 14.27 NO ADVERSE CHANGE OR CONDITIONS.
Except as set forth in the Miracle Partners Disclosure Letter, and except
as expressly contemplated or permitted by this Agreement, since June 30, 1997,
Miracle Partners has conducted its business in the ordinary course and
consistent with past practice, and Miracle Partners has not suffered any change
that has had a Material Adverse Effect on Miracle Partners. There are no
conditions, facts, developments or circumstances of an unusual or special nature
that reasonably could be expected to have a Material Adverse Effect upon Miracle
Partners that have not been disclosed in writing by Miracle Partners pursuant to
the Miracle Partners Disclosure Letter.
ARTICLE XV
REPRESENTATIONS AND WARRANTIES OF THE HOLDING COMPANY
To induce each of the Predecessor Companies to enter into this Agreement
and to consummate the transactions contemplated hereby, the Holding Company
represents and warrants to each of the Predecessor Companies as follows:
SECTION 15.1 ORGANIZATION AND GOOD STANDING.
The Holding Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Virginia. The Holding Company
has the requisite corporate power to own and hold its properties, to conduct its
business as it is now being conducted, to enter into, execute and deliver this
Agreement, to issue, sell and deliver the shares of Common Stock of the Holding
Company to be issued in the proposed IPO and pursuant to the transactions
contemplated by Article III of this Agreement.
SECTION 15.2 EXECUTION AND EFFECT OF AGREEMENT.
The execution and delivery by the Holding Company of this Agreement, the
performance by the Holding Company of its obligations hereunder, other than the
issuance, sale and delivery of the shares of Common Stock of the Holding Company
to be issued in the proposed IPO have been duly authorized by all necessary
corporate action on the part of the Holding Company. This Agreement has been
duly executed and delivered by the Holding Company and constitutes the legal,
valid and binding obligation of the Holding Company, enforceable against the
Holding Company in accordance with its terms, except as enforceability thereof
may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights including fraudulent conveyance laws
and the exercise of judicial discretion in accordance with general principles of
equity.
SECTION 15.3 AUTHORIZED CAPITAL STOCK.
The authorized capital stock of the Holding Company consists of 20,000,000
shares, of which (i) 19,000,000 are classified as shares of Common Stock, $.01
par value per share, and (ii) 1,000,000 are classified as shares of Preferred
Stock, $1.00 par value per share. As of the date hereof, none of the shares of
the Common Stock of the Holding Company have been issued by the Holding Company
[other than organizational shares subject to cancellation]. Except as
contemplated by this Agreement and for options which may be issued to officers,
directors, employees and agents of the Holding Company and its subsidiaries
pursuant to stock option plans or arrangements or other equity incentive, bonus
or similar plans or arrangements which are expected to be approved by the Board
of Directors of the Holding Company to purchase or subscribe for not more than
250,000 shares of the Common Stock of the Holding Company in the aggregate (the
"Management Option Shares"), as of the date hereof, the Holding Company is under
no obligation to issue any of its shares of Common Stock or other equity
securities pursuant to subscriptions, warrants, options, convertible securities
or other rights (contingent or otherwise) to purchase or otherwise acquire
equity securities of the Holding Company. As of the date hereof, except for the
Management Option Shares and shares to be issued pursuant to this Agreement, no
shares of Common Stock or other capital stock of the Holding Company are
reserved for possible future issuance. The Holding Company has no obligation
(contingent or other) to purchase, redeem or otherwise acquire any of its equity
securities or any interest therein or to pay any dividend or make any other
distribution in respect thereof. There are no voting trusts or agreements,
stockholders' agreements, pledge agreements, buy-sell agreements, rights of
first refusal, preemptive rights or proxies relating to any securities of the
Holding Company (whether or not the Holding Company is a party thereto). The
shares of Common Stock of the Holding Company to be issued in the proposed IPO
and pursuant to the transactions contemplated by Article III of this Agreement,
when issued in accordance with the terms of this Agreement and the terms of the
Underwriting Agreement, will be validly issued, fully paid and nonassessable and
will be free and clear of all Encumbrances imposed by or through the Holding
Company (other than restrictions imposed by Federal and state securities laws).
Neither the issuance of the shares of Common Stock of the Holding
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Company in the IPO nor the issuance of shares of the Holding Company pursuant to
the transactions contemplated by Article III of this Agreement will be subject
to any preemptive or similar right of the stockholders of the Holding Company.
The holders of shares of the Common Stock of the Holding Company following the
issuance thereof in the IPO and pursuant to the transactions contemplated by
Article III of this Agreement will not be subject to personal liability for the
debts and obligations of the Holding Company solely by reason of being the
holders thereof.
SECTION 15.4 SUBSIDIARIES; INVESTMENTS.
As of the date hereof, the Holding Company has no Subsidiaries, and does
not own of record or beneficially, directly or indirectly, (I) any shares of
capital stock or securities convertible into capital stock of any other
corporation or (ii) any interest in any partnership, joint venture, limited
liability company or other non-corporate business enterprise, and does not
control, directly or indirectly, any other Person or entity.
SECTION 15.5 NO RESTRICTIONS.
The execution and delivery of this Agreement by the Holding Company, the
consummation by the Holding Company of the transactions contemplated hereby and
the performance of the obligations of the Holding Company hereunder do not and
will not (a) violate any of the provisions of the Certificate of Incorporation
or By-Laws of the Holding Company, (b) violate or conflict with the provisions
of the Virginia General Corporation Law or any award, judgment or decree of any
court or any agency, authority, bureau, commission, department or other
government instrumentality applicable to the Holding Company or (c) conflict
with, violate the provisions of, result in a breach of, give rise to a right of
termination, modification or cancellation of, constitute a default under, or
accelerate the performance required by, with or without the passage of time or
the giving of notice or both, the terms of any agreement, indenture, mortgage,
deed of trust, lease, agreement, note, bond, license, permit, authorization or
other instrument to which the Holding Company is a party or to which the Holding
Company is bound or subject.
SECTION 15.6 LITIGATION.
There is no action, suit, claim, proceeding, investigation or audit pending
or, to the best of the Holding Company's knowledge, threatened against or
affecting the Holding Company, at law or in equity, before or by any
Governmental Authority.
SECTION 15.7 LOANS.
The Holding Company has no outstanding loans or advances to any Person and
is not obligated to make any such loans or advances. Except as set forth in this
Agreement, the Holding Company has not incurred any obligation or liability to
any Person for borrowed money.
SECTION 15.8 CONSENTS.
No registration or filing with, notice to, consent or approval of, or other
action by, any Governmental Authority or any other party is or will be necessary
for the valid execution and delivery by the Holding Company of this Agreement or
the performance of its obligations hereunder, including the issuance, sale and
delivery of the Common Stock in the proposed IPO or pursuant to the transactions
contemplated by Article III of this Agreement, other than (i) filings and
registrations required pursuant to Federal and state securities laws (all of
which filings are expected to be made by or on behalf of the Holding Company
prior to the Closing) in connection with the issuance and sale of the Common
Stock of the Holding Company and the registration of the Common Stock of the
Holding Company with the Commission in connection with the IPO and the
transactions contemplated by Article III of this Agreement, and (ii) as required
by Applicable Laws relating to franchising.
SECTION 15.9 ADEQUATE DISCLOSURE.
No representation or warranty made by the Holding Company in this Agreement
contains any untrue or misleading statement of a material fact or omits to state
a material fact necessary to make the statements contained therein not
misleading. There is no fact that the Holding Company has not disclosed to the
Predecessor Companies and the Prema Properties Members or the Ralston Car Wash
Members of which the Holding Company is aware that materially and adversely
affects or could reasonably be expected to affect materially and adversely the
business, financial condition, operations, property or affairs of the Holding
Company.
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SECTION 15.10 BUSINESS OF THE HOLDING COMPANY.
The Holding Company was incorporated under the laws of the Commonwealth of
Virginia on April 17, 1997. Except for the rights, obligations and liabilities
of the Holding Company arising under this Agreement and its initial
capitalization, and except for the rights and obligations of the Holding Company
arising out of the engagements of legal counsel, underwriters and the certified
public accountants referred to in Article II of this Agreement, as of the date
of this Agreement, the Holding Company has no assets or liabilities or
obligations, whether mature or unmatured, due or to become due, fixed or
contingent.
ARTICLE XVI
CLOSING
SECTION 16.1 CLOSING.
The closing of the transactions contemplated by this Agreement shall take
place at the offices of Miles & Stockbridge, a Professional Corporation, located
at 10 Light Street, Baltimore, Maryland, beginning at 10:00 a.m., Eastern
Standard Time, on the date of closing of the IPO.
SECTION 16.2 DOCUMENTS TO BE DELIVERED BY THE HOLDING COMPANY.
At the Closing, the Holding Company shall deliver, or shall cause to be
delivered, to each of the parties to this Agreement the following:
(a) A Certificate of the Secretary or an Assistant Secretary of the
Holding Company, dated the Closing Date, certifying that attached thereto are
true and complete copies of (i) the resolutions of the Board of Directors of the
Holding Company and each of the Merger Subsidiaries, which authorize (a) the
execution and delivery of the Agreement and (b) the consummation of the
transactions contemplated hereby by the Holding Company and each of the Merger
Subsidiaries, and certifying that such resolutions have not been amended or
rescinded and are in full force and effect; and (ii) the charter and by-laws of
the Holding Company as in effect as of the date of such certification, and
certifying the identity and incumbency of the officers and directors of the
Holding Company;
(b) A good standing certificate and certified charter documents, dated
as of a date reasonably close to the Closing Date, of the Holding Company and
each of the Merger Subsidiaries;
(c) An opinion letter from counsel to the Holding Company in form and
content reasonably satisfactory to each of the Predecessor Companies and their
counsel;
(d) A certificate of a duly authorized officer of the Holding Company
dated as of the Closing Date, certifying that (I) the Holding Company has
performed or complied with in all material respects all the covenants and
agreements made by the Holding Company herein which are to be performed or
complied with prior to the Closing Date or at the Closing pursuant to the terms
of this Agreement, and (ii) each of the representations and warranties made by
the Holding Company pursuant to the terms of this Agreement are true and correct
in all material respects as of the Closing Date (except with respect to those
representations and warranties made with respect to a certain date other than
the date of this Agreement or the Closing Date which representations and
warranties need be true and correct only as of such certain date);
(e) The tax opinions of Ernst & Young referred to in Article III of
this Agreement; and
(f) Such other documents, instruments or agreements as may be
reasonably necessary to effectuate the transactions contemplated by this
Agreement.
SECTION 16.3 DOCUMENTS TO BE DELIVERED BY THE CORPORATE PREDECESSOR COMPANIES.
At the Closing, each of the Corporate Predecessor Companies shall execute
and deliver, or cause to be delivered to the Holding Company and each of the
other parties to this Agreement the following:
(a) A certificate of the Secretary or an Assistant Secretary of such
Predecessor Company, dated the Closing Date, certifying that attached thereto
are true and complete copies of (I) the resolutions of the Board of Directors
and stockholders of such Corporate Predecessor Company which authorize (a) the
execution and delivery of this Agreement and (b) the consummation of the
transactions contemplated hereby, and certifying that such resolutions have not
been amended or rescinded
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and are in full force and effect; and (ii) the charter and by-laws of such
Corporate Predecessor Company as in effect as of the date of such certification;
and certifying the identity and incumbency of the officers of such Corporate
Predecessor Company;
(b) A good standing certificate and certified charter documents, dated
as of a date reasonably close to the Closing Date, of such Corporate Predecessor
Company;
(c) An opinion letter of legal counsel to such Corporate Predecessor
Company addressed to the Holding Company in form and content reasonably
satisfactory to the Holding Company and its counsel;
(d) A certificate of a duly authorized officer of such Corporate
Predecessor Company, dated as of the Closing Date, certifying that (i) such
Corporate Predecessor Company has performed or complied with in all material
respects all of the covenants and agreements made by such Corporate Predecessor
Company herein which are to be performed or complied with prior to the Closing
Date or at the Closing pursuant to the terms of this Agreement, and (ii) each of
the representations and warranties made by such Corporate Predecessor Company
pursuant to the terms of this Agreement are true and correct in all material
respects as of the Closing Date (except with respect to those representations
and warranties made with respect to a certain date other than the date of this
Agreement or the Closing Date, which representations and warranties need be true
and correct only as of such certain date); and
(e) Such other documents, instruments or agreements as may be
reasonably necessary to effectuate the transactions contemplated by this
Agreement.
SECTION 16.4 DELIVERIES BY THE PREMA PROPERTIES AND RALSTON CAR WASH.
At the Closing, each of Prema Properties and Ralston Car Wash shall execute
and deliver to the Holding Company and the other parties to this Agreement the
following:
(a) A certificate of its duly authorized manager, dated as of the
Closing Date, certifying that (i) attached thereto as an exhibit is a true,
correct and complete copy of the Articles of Organization and operating
agreement of such limited liability company, (ii) such limited liability company
has performed or complied with in all material respects all of the covenants and
agreements made by such company herein which are to be performed or complied
with prior to the Closing Date or at the Closing pursuant to the terms of this
Agreement, and (iii) each of the representations and warranties made by such
limited liability company pursuant to the terms of this Agreement are true and
correct in all material respects as of the Closing Date (except with respect to
those representations and warranties made with respect to a certain date other
than the date of this Agreement or the Closing Date, which representations and
warranties need be true and correct only as of such certain date);
(b) An opinion letter of legal counsel to Prema Properties and Ralston
Car Wash, respectively, addressed to the Holding Company, in form and content
reasonably satisfactory to the Holding Company and its counsel; and
(c) Such other documents, instruments or agreements as may be
reasonably necessary to effectuate the transactions contemplated by this
Agreement.
SECTION 16.5 CLOSING DELIVERIES OF KBG.
At the Closing, KBG shall execute and deliver to the Holding Company the
following:
(a) a certified copy of an Assignment of Intellectual Property Rights
with respect to the Proprietary Car Wash Software System between KBG, as
assignor, and KBG, LLC, as assignee, duly executed with signatures guaranteed,
together with a complete copy, in electronic form, of the Source Code and the
object code for the Proprietary Car Wash Software System;
(b) a certificate, dated as of the Closing Date, certifying that (I)
such KBG has performed or complied with in all material respects all of the
covenants and agreements made by such company herein which are to be performed
or complied with prior to the Closing Date or at the Closing pursuant to the
terms of this Agreement, and (ii) each of the representations and warranties
made by KBG pursuant to the terms of this Agreement are true and correct in all
material respects as of the Closing Date (except with respect to those
representations and warranties made with respect to a certain date other than
the date of this Agreement or the Closing Date, which representations and
warranties need be true and correct only as of such certain date);
(c) an opinion letter of legal counsel to KBG, addressed to the
Holding Company, in form and content reasonably satisfactory to the Holding
Company and its counsel; and
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(d) such other documents, instruments, certificates or agreements as
may be reasonably necessary to consummate the transaction contemplated by this
Agreement.
ARTICLE XVII
WITHDRAWAL AND EXCLUSION
FROM PARTICIPATION IN THE TRANSACTION
SECTION 17.1 WITHDRAWAL FROM TRANSACTION.
Notwithstanding anything contained herein which may be inconsistent or to
the contrary, each Predecessor Company shall have the right, upon written notice
delivered to the Holding Company and to each of the other Participant Groups in
which such Predecessor Company is not a Constituent Company, to withdraw from
further participation in the transactions contemplated by this Agreement,
without liability to the other parties to this Agreement (except as hereinafter
provided with respect to Transaction Expenses and in Section 21.1.1), if, and
only if:
(a) a Material Adverse Effect shall have occurred after the date of
this Agreement with respect to any Material Participant (other than such
Predecessor Company); or
(b) each of the conditions precedent to the obligations of the
Predecessor Company shall not have been or fulfilled or waived in writing by
such Predecessor Company on or before November 14, 1997.
(c) the Closing shall not have occurred before the close of business
on November 14, 1997.
SECTION 17.2 EFFECT OF WITHDRAWAL.
Upon the withdrawal of a Predecessor Company, such Predecessor Company
shall no longer be obligated to consummate the any of the transactions
contemplated hereby and this Agreement shall be terminated, unless the remaining
Predecessor Companies elect within 5 business days of their receipt of notice of
withdrawal (or deemed withdrawal in the case of the failure of a Corporate
Predecessor Company to obtain Board approval) from another Predecessor Company
proceed with the transactions contemplated hereby notwithstanding the withdrawal
of a Predecessor Company; provided, however, that no such withdrawal shall
operate to relieve any withdrawing Predecessor Company from its obligation to
contribute its proportionate share of its Participant Group's Transaction
Expense Share to the Transaction Expenses which have been incurred through the
date of the withdrawal of such Predecessor Company. For purposes hereof, a party
shall be considered to have withdrawn from participation on the date on which
notice of such withdrawal shall have been received by the Holding Company.
SECTION 17.3 EXCLUSION FROM TRANSACTION.
17.3.1 Right to Exclude Parties. Notwithstanding anything contained
herein which may be inconsistent or to the contrary, upon the affirmative vote
of 2/3 or more of the entire Board of Directors of the Holding Company, the
Holding Company shall have the right to exclude Ralston Car Wash and\or Rocky
Mountain I (an "Excluded Participant") from further participation in the
transactions contemplated hereby if, and only if, the Excluded Participant shall
suffer a Material Adverse Effect after the date of this Agreement and prior to
the Closing Date.
17.3.2 Effect of Exclusion. Upon the exclusion of an Excluded
Participant pursuant to the foregoing provisions, the Excluded Participant shall
thereafter be released from further liability to the other parties to this
Agreement, except (i) as provided in Section 21.1 and (ii) that the Excluded
Participant shall, nevertheless, remain liable for its agreed upon contribution
to Rocky Mountain Group's Transaction Expense Share with respect to Transaction
Expenses which have been incurred through the date of the exclusion of the
Excluded Participant from further participation in the transactions contemplated
hereby.
ARTICLE XVIII
TERMINATION OF AGREEMENT
SECTION 18.1 AGREEMENT OF TERMINATION.
This Agreement may be terminated and the transactions contemplated hereby
abandoned at any time prior to the Closing Date by the written consent and
agreement of each of the parties to this Agreement.
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SECTION 18.2 EVENTS OF AUTOMATIC TERMINATION.
Notwithstanding anything contained herein to the contrary, this Agreement
shall terminate, and the transactions contemplated hereby shall be deemed to
have been abandoned, if the Closing shall not occur before the close of business
on November 17, 1997, unless the remaining parties to this Agreement shall agree
on or before such date to extend the term of this Agreement.
SECTION 18.3 TERMINATION BY THE HOLDING COMPANY.
If the lead underwriter engaged by the Holding Company to underwrite the
IPO shall at any time prior to the Closing advise the Board of Directors of the
Holding Company that the per share offering price in the IPO for the Holding
Company Common Stock reasonably can be expected to be less than $10.00, the
Board of Directors of the Holding Company shall promptly convene a meeting of
the Finance Committee of the Board of Directors to consider the advisability of
consummating the IPO and the other transactions contemplated by this Agreement.
If the Finance Committee shall determine that it is not advisable to proceed
with the IPO and the other transactions contemplated by this Agreement, then the
Finance Committee shall so notify the full Board of Directors of the Holding
Company and the Holding Company shall then terminate this Agreement by
delivering written notice to that effect to each of the parties to this
Agreement. The determination of the Finance Committee with respect to this
matter shall be made by a majority vote of all of the members of the Finance
Committee. If the Finance Committee shall become deadlocked as to its
determination with respect to the advisability of continuing with the
transactions contemplated hereby, the Finance Committee shall so notify the full
Board of Directors of the Holding Company, which shall then promptly convene a
special meeting of the full Board of Directors for purposes of considering such
matter. If the full Board of Directors determines at such meeting that it is not
advisable to proceed with the IPO and the other transactions contemplated by
this Agreement, then the Holding Company shall then terminate this Agreement,
effective immediately upon delivery of written notice to that effect delivered
to each of the parties to this Agreement.
SECTION 18.4 EFFECTS OF TERMINATION OF AGREEMENT.
In the event that this Agreement shall terminate pursuant to the foregoing
provisions of this Article, this Agreement shall become null and void and of no
further force and effect, and thereafter, none of the parties hereto shall have
any further obligation or liability hereunder, except that each of the
Contributing Companies shall, nevertheless, remain liable for their respective
agreed upon contribution to their proportionate share of their Participant
Group's Transaction Expense Share with respect to all Transaction Expenses which
have been incurred through the date of the termination of this Agreement and the
provision of Section 23.3 hereof relating to confidentiality shall remain
binding upon the parties hereto for a period of 5 years following the date of
the termination of this Agreement.
ARTICLE XIX
DEBT LEVEL GUARANTEES AND RELATED ESCROW ARRANGEMENT
SECTION 19.1 DEBT LEVEL GUARANTEES OF THE CONTRIBUTING COMPANIES.
The allocation of the number and related value of the shares to be issued
by the Holding Company to the Selling Stockholders and the Selling Members of
each of the Contributing Companies pursuant to the transactions contemplated by
Article III of this Agreement were determined by the parties based upon agreed
upon projected "enterprise values" of each of the Contributing Companies as of
the projected Closing Date, assuming that the aggregate Debt level of each of
the Contributing Companies would not exceed a specified level as of such date.
Therefore, each of the Contributing Companies hereby represents and warrants and
covenants and guarantees to the Holding Company, that its aggregate Debt will
not exceed the amount set forth in Schedule 19.1 opposite the name of such
Contributing Company under the heading entitled "Guaranteed Closing Date Debt
Level" (the "Guaranteed Closing Date Debt Level"); provided, however, that, if,
and to the extent that the incurrence by such Contributing Company of any
indebtedness or other obligations is permitted in accordance with the provisions
of Section 5.5 (f) of this Agreement, no portion of the amount of such
indebtedness or other obligation shall be considered to be part of the Debt of
Contributing Company, whether or not required by GAAP to be reflected as such on
the balance sheet of such Contributing Company as of the Closing Date.
SECTION 19.2 DEFINITION OF DEBT.
For purposes of this Agreement, "Debt" shall mean without duplication (in
each case whether such obligation is with full or limited recourse), (i) any and
all obligations of a Contributing Company for borrowed money, (ii) any and all
obligations of a Contributing Company in respect of the deferred purchase price
for any real or personal property or services,
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(iii) any and all obligations a Contributing Company in respect of any capital
lease, (iv) any and all amounts in respect of which a Contributing Company may
be liable, contingently or otherwise, under any guarantees of Debt of another
Person, and (v) any other items required to be reported as short-term or
long-term debt on the balance sheets of a Contributing Company in accordance
with GAAP.
SECTION 19.3 ESCROW OF SHARES.
At the Closing, the Holding Company shall deposit with the Escrow Agent, on
behalf of, and solely as an accommodation to, the Selling Stockholders and
Selling Members of each of the Contributing Companies, stock certificates issued
in the name of each Selling Stockholder and Selling Member of each Contributing
Company evidencing 10% of the aggregate number of shares of the Common Stock of
the Holding Company that each such Selling Stockholder or Selling Member would
otherwise be entitled to receive at the Closing pursuant to the transactions
contemplated by Article III of this Agreement (the "Debt Level Escrow Shares")
in order to secure to the Holding Company the guarantee of the Debt level made
by each Contributing Company pursuant to Section 19.1 of this Agreement. The
Escrow Agent shall hold and administer such certificates and the Debt Level
Escrow Shares in accordance with the terms of an escrow agreement in form and
content satisfactory to the parties (the "Debt Level Escrow Agreement").
Notwithstanding the deposit by the Holding Company of the Debt Level Escrow
Shares at the Closing, each of the Debt Level Escrow Shares shall be considered
to have been issued by the Holding Company at the Closing to the Person who
otherwise would have been entitled to receive the same and shall be reported by
the parties as having been so issued.
SECTION 19.4 DETERMINATION OF CLOSING DATE DEBT LEVEL.
Promptly following the Closing Date, the Holding Company shall review the
books and records of each of the Contributing Companies, and prepare (i) a
balance sheet, in accordance with GAAP, consistently applied, of each of the
Contributing Companies as at the Closing Date and (ii) a statement of the
aggregate Debt of each of the Contributing Companies as at the Closing Date as
shown on each such balance sheet (the "Closing Date Debt Level"), but with the
adjustments thereto contemplated by Section 19.2 of this Agreement, all of which
shall be delivered to each designated Representative of the Selling Stockholders
and the Selling Members of each Contributing Company not later than 45 days
following the Closing Date.
SECTION 19.5 DISPUTE RESOLUTION.
If any Representative of the Selling Stockholders or Selling Members of any
Contributing Company shall dispute the amount of the Closing Date Debt Level of
such Contributing Company set forth on the statement of the Closing Date Debt
Level described in Section 19.4, the Representative shall so notify the Holding
Company in writing of his objections within 15 days after delivery to him of
such statement and shall describe, in reasonable detail, the reasons for his
objections and his proposed calculation of the Closing Date Debt Level of such
Contributing Company. If the Representative of an applicable group of Selling
Stockholders or Selling Members of a Contributing Company fails to deliver a
notice of objection to the Holding Company within such 15-day period, the amount
of the Closing Date Debt Level of such Contributing Company set forth in the
statement thereof described in Section 19.4 shall be deemed to have been
accepted by such Selling Stockholders or Selling Members. If, however, the
Representative of an applicable group of Selling Stockholders or Selling Members
of a Contributing Company delivers a notice of objection to the Holding Company
within such 15-day period, the Holding Company and such Representative shall
endeavor in good faith to resolve any disputed items within 10 business days
after the date of the Holding Company's receipt of the applicable notice of
objection. In the event that the Holding Company and the Representative shall be
unable to resolve any items in dispute relating to the statement of the Closing
Date Debt Level described in Section 19.4, the Holding Company and such
Representative shall engage Ernst & Young to resolve all items remaining in
dispute, and the determination of Ernst & Young in respect of such items shall
be conclusive and binding on the parties. Ernst & Young shall be instructed by
the Holding Company and such Representative to prepare and deliver to the
Holding Company and to such Representative, after resolving any items in
dispute, a balance sheet of the applicable Contributing Company as of the
Closing Date reflecting its resolution of all issues in dispute and a statement
of the Closing Date Debt Level shown thereon. The Closing Date Debt Level of
each Contributing Company, as finally determined (whether by failure of the
Representative of the Selling Stockholders or Selling Members thereof to deliver
a notice of objection to the Holding Company, by the agreement of the parties or
by the final determination of Ernst & Young), shall be deemed to be, and shall
be referred to herein, as the "Final Closing Date Debt Level" of such
Contributing Company.
SECTION 19.6 SET-OFF AGAINST DEBT LEVEL ESCROW SHARES.
If the Final Closing Date Debt Level of any Contributing Company shall be
more than the Guaranteed Closing Date Debt Level of such Contributing Company,
the Holding Company shall have the right to set-off only against the Debt Level
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Escrow Shares so deposited with the Escrow Agent on behalf of the Selling
Stockholders or Selling Members of such Contributing Company Debt Level Escrow
Shares having a value equal to the full amount of the difference between the
Guaranteed Closing Date Debt Level of such Contributing Company and the Final
Closing Date Debt Level of such Contributing Company and any costs and expenses
to be reimbursed to the Holding Company pursuant to Section 19.8, and the Escrow
Agent shall be instructed by the Holding Company and the Representative of the
Selling Stockholders or Selling Members of such Contributing Company to disburse
to the Holding Company share certificates evidencing such number of Debt Level
Escrow Shares and to disburse the remaining balance of such Debt Level Escrow
Shares, if any, to the applicable group of Selling Stockholders or Selling
Members. If, on the other hand, the Final Closing Date Debt Level of the
Contributing Company shall be equal to or less than the Guaranteed Debt Level of
such Contributing Company, the Escrow Agent shall be instructed to disburse to
the Selling Stockholders or Selling Members of such Contributing Company share
certificates evidencing the full number of Debt Level Escrow Shares so deposited
on behalf of such former stockholders or members.
SECTION 19.7 TERM OF THE ESCROW.
The Escrow Agent shall hold all of the Debt Level Escrow Shares in escrow
in accordance with the terms of this Agreement and of the Debt Level Escrow
Agreement for a period of 60 days following the Closing Date, and shall not
disburse any of the Debt Level Escrow Shares from escrow prior to the date which
is 60 days after the Closing Date. On the date which is 60 days after the
Closing Date, the Escrow Agent shall deliver to each of the Selling Stockholders
and Selling Members of each Contributing Company, stock certificates evidencing
his or her pro rata portion of the aggregate number of shares of the Debt Level
Escrow Shares then on deposit with the Escrow Agent with respect to the Selling
Stockholders or Selling Members of such Contributing Company; provided, however,
that if the Final Debt Level of any Contributing Company shall not have been
determined as of such date due to an unresolved dispute as to the Closing Date
Debt Level of such Contributing Company, the Holding Company shall have the
right to set-off on such date against the Debt Level Escrow Shares attributable
to the Selling Stockholders or Selling Members of such Contributing Company Debt
Level Escrow Shares having a value equal to the undisputed amount of the
difference between the Guaranteed Closing Date Debt Level and the Closing Date
Debt Level shown on the statement thereof described in Section 19.4 or prepared
by Ernst & Young, as the case may be, if any, and Debt Level Escrow Shares
having a value equal to the disputed amount of the difference between the
Guaranteed Closing Date Debt Level and the Closing Date Debt Level shown on the
statement thereof described in Section 19.4 or prepared by Ernst & Young, as the
case may be shall remain on deposit with the Escrow Agent until the Final
Closing Date Debt Level of such Contributing Company shall have been determined,
and then disbursed either to the Holding Company or to the applicable group of
Selling Stockholders or Selling Members, as appropriate.
SECTION 19.8 EXPENSES RELATING TO DETERMINATION OF CLOSING DATE DEBT LEVEL.
The Holding Company shall bear all of the costs and expenses incurred by it
in reviewing the books and records of the Contributing Companies and preparing
the statements of Closing Date Debt Level described in Section 19.4. Each
Representative of the Selling Stockholders and Selling Members may incur the
costs and expenses (including the fees and expenses of their respective
accounting firms) in connection with their review of such statements of Closing
Date Net Debt Level which costs and expenses shall be paid by the Holding
Company and fully reimbursed by the Selling Stockholders or Selling Members of
such Contributing Company from the Debt Level Escrow Shares attributable to such
Selling Stockholders or Selling Members. If Ernst & Young is engaged with
respect to a dispute between the Holding Company and the Representative(s) of
any Selling Stockholders or Selling Members over the actual amount of the
Closing Date Net Debt Level of a Contributing Company, and the amount of the
Final Closing Date Debt Level as determined by Ernst & Young is greater than or
equal to the Holding Company's initial statement of the Closing Date Debt Level,
the fees and expenses of Ernst & Young shall be paid by the Holding Company and
fully reimbursed by the Selling Stockholders or Selling Members of the
Contributing Company from the Debt Level Escrow Shares attributable to the
Selling Stockholders or Selling Members of such Contributing Company; if Ernst &
Young is engaged, and the amount of the Final Closing Date Debt Level as
determined by the Independent Accountants is less than the Holding Company's
initial statement of the Closing Date Debt Level, the fees and expenses of Ernst
& Young shall be paid solely by the Holding Company.
SECTION 19.9 VALUE OF ESCROW SHARES.
For purposes of determining the actual amount of Debt Level Escrow Shares
against which the Holding Company shall be entitled to exercise its rights of
set-off or reimbursement under this Article XIX, each of the Debt Level Escrow
Shares shall be valued at the price per share at which the shares of the Common
Stock of the Holding Company shall be offered to the public in the IPO. Except
with respect to Debt Level Escrow Shares as to which the Holding Company shall
have exercised its rights of set off or reimbursement, all of the Debt Level
Escrow Shares shall nevertheless be deemed to be
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owned by the Selling Stockholders and Selling Members that otherwise would have
been entitled to receive such shares at the closing of the transactions
contemplated by Article III of this Agreement, and, subject to the provisions of
Article III of this Agreement, shall be entitled to vote the same and to receive
all dividends declared thereon; provided, however, that, notwithstanding the
foregoing, all shares issuable pursuant to any stock dividend or stock split
declared by the Holding Company with respect to the shares of the Common Stock
of the Holding Company which are applicable to any of the Debt Level Escrow
Shares shall also be deposited with the Escrow Agent and remain subject to the
provisions of this Article.
ARTICLE XX
INDEMNIFICATION ESCROW ARRANGEMENTS
SECTION 20.1 ESCROW OF INDEMNITY ESCROW SHARES.
At the Closing, the Holding Company shall deposit with the Escrow Agent, on
behalf of, and solely as an accommodation to, each of the Selling Stockholders
and Selling Members and KBG, stock certificates issued in the name of each
Selling Stockholder and Selling Member of each Contributing Company and KBG
evidencing 10% of the aggregate number of shares of the Holding Company Common
Stock that each of the Selling Stockholders and Selling Members and KBG,
respectively, would each otherwise be entitled to receive at the Closing
pursuant to the transactions contemplated by Article III of this Agreement
(collectively, the "Indemnity Escrow Shares"). The Escrow Agent shall hold and
administer such certificates and the Indemnity Escrow Shares in accordance with
the terms of an escrow agreement (the "Indemnity Escrow Agreement").
Notwithstanding the deposit by the Holding Company of the Indemnity Escrow
Shares at the Closing, each of the Indemnity Escrow Shares shall be considered
to have been issued by the Holding Company at the Closing to the Person who
otherwise would have been entitled to receive the same and shall be reported by
the parties as having been so issued.
SECTION 20.2 PURPOSE OF ESCROW; INDEMNIFICATION.
From and after the Closing, the Selling Stockholders or Selling Members of
each Contributing Company and KBG shall each, severally and not jointly, and not
jointly and severally with each other, indemnify and hold harmless the Holding
Company in respect of all Holding Company Indemnified Claims and Losses arising
out or, relating to or caused or incurred as a result of acts, omissions,
misstatements, misrepresentations, failures to act or breaches only by the
Predecessor Company of which such group of Selling Stockholders or Selling
Members were shareholders or members prior to the Closing or, in the case of
KBG, only by KBG in an amount equal to the value of Indemnity Escrow Shares
deposited with the Escrow Agent at the Closing on behalf of such Selling
Stockholders or Selling Members or KBG, as the case may be. The Holding Company
shall have the right to seek indemnification from such persons only by
exercising its rights of set off in the manner provided by Section 20.4 of this
Agreement and shall not have the right to seek indemnification from any Selling
Stockholder or Selling Member personally or against KBG, except to the extent of
the Indemnity Escrow Shares deposited with respect to KBG or the Selling
Stockholders or Selling Members of a Contributing Company. Although the
liability of the Selling Stockholders and Selling Members of each Contributing
Company and of KBG for indemnification of the Holding Company shall not be joint
or joint and several with each other, as amongst the Selling Stockholders and
Selling Members of each Contributing Company, the liability of each such Selling
Stockholder and Selling Member of each Contributing Company shall be joint and
several with every other Selling Stockholder or Selling Member of such
Contributing Company. For example, the liability of the Selling Stockholders of
WE JAC shall be joint and several with every other WE JAC Shareholder, but shall
not be joint or joint and several with the Selling Stockholders or Selling
Members of any other Contributing Company or with KBG.
SECTION 20.3 TERM OF THE ESCROW.
The Escrow Agent shall hold all of the Indemnity Escrow Shares in escrow in
accordance with the terms of the Indemnity Escrow Agreement for a period of one
year following the Closing Date, and shall not disburse any of the Indemnity
Escrow Shares, unless, and only to the extent that, the Holding Company shall
exercise its rights of setoff pursuant to Section 20.4 of this Agreement, prior
to the date which is one year after the Closing Date. On the date which is one
year after the Closing Date, the Escrow Agent shall deliver to each of the
Selling Stockholders and Selling Members of each of the Contributing Companies
and KBG, stock certificates evidencing his or her prorata portion of the
aggregate number of Indemnity Escrow Shares then on deposit with the Escrow
Agent with respect to the Selling Stockholders or Selling Members of such
Contributing Company or KBG, except to the extent that there then remains any
unresolved claim for indemnification by the Holding Company; in which event, the
Indemnity Escrow Shares attributable to the applicable Responsible Group or KBG,
as the case may be, having a value equal to such unresolved claims shall remain
on deposit with the Escrow Agent until such
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claim shall have been resolved, and then disbursed either to the Holding Company
or to the applicable group of Selling Stockholders or Selling Members or KBG, as
appropriate.
SECTION 20.4 SET-OFF RIGHTS OF THE HOLDING COMPANY.
20.4.1 WE JAC Indemnity Escrow Shares. Subject to the provisions of
Section 20.5 hereof, the Holding Company shall have the right to set-off from
time to time, in accordance with the terms of Section 20.5 hereof and of the
Indemnity Escrow Agreement, against the escrow deposit of the Indemnity Escrow
Shares made by the Holding Company with respect to the WE JAC Selling
Stockholders (the "WE JAC Indemnity Escrow Shares"), WE JAC Indemnity Escrow
Shares having a value equal to the full amount of any and all Holding Company
Indemnified Claims and Losses imposed upon, asserted against, suffered or
incurred by the Holding Company, directly or indirectly, based upon, arising out
of, resulting from (i) the inaccuracy or untruth of any of the representations
made by WE JAC pursuant to any certificate, document or instrument executed and
delivered by WE JAC or any of its Subsidiaries pursuant to or in connection with
this Agreement, (ii) the breach by WE JAC of any of the warranties or covenants
made by WE JAC pursuant to this Agreement or pursuant to any certificate,
document or instrument executed and delivered by WE JAC pursuant to or in
connection with this Agreement or the failure of WE JAC to perform, observe or
comply with, any of the covenants or agreements made by WE JAC pursuant to this
Agreement or pursuant to any certificate, document or instrument executed and
delivered by WE JAC pursuant to or in connection with this Agreement or (iii)
any untrue or allegedly untrue statement of any material fact contained in any
registration statement, summary prospectus, final prospectus, or amendment or
supplement thereto, or the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or allegedly untrue statement or omission or alleged
omission was made in such registration statement, summary prospectus, final
prospectus, or amendment or supplement thereto, in reliance upon and in
conformity with written information furnished by WE JAC or any of its
Subsidiaries or any former WE JAC Shareholder.
20.4.2 Lube Ventures Indemnity Escrow Shares. Subject to the
provisions of Section 20.5 hereof, the Holding Company shall have the right to
set-off from time to time, in accordance with the terms of Section 20.5 hereof
and of the Indemnity Escrow Agreement, against the escrow deposit of the
Indemnity Escrow Shares made by the Holding Company with respect to the Lube
Ventures Selling Stockholders (the "Lube Ventures Indemnity Escrow Shares"),
Lube Ventures Indemnity Escrow Shares having a value equal to the full amount of
any and all Holding Company Indemnified Claims and Losses imposed upon, asserted
against, suffered or incurred by the Holding Company, directly or indirectly,
based upon, arising out of, resulting from (i) the inaccuracy or untruth of any
of the representations made by Lube Ventures or any of the Lube Ventures
Shareholders pursuant to this Agreement or pursuant to any certificate, document
or instrument executed and delivered by Lube Ventures pursuant to or in
connection with this Agreement, (ii) the breach by Lube Ventures of any of the
warranties or covenant or covenants made by Lube Ventures pursuant to this
Agreement or pursuant to any certificate, document or instrument executed and
delivered by Lube Ventures pursuant to or in connection with this Agreement or
the failure of Lube Ventures to perform, observe or comply with, any of the
covenants or agreements made by Lube Ventures pursuant to this Agreement or
pursuant to any certificate, document or instrument executed and delivered by
Lube Ventures or the Lube Ventures Shareholders pursuant to or in connection
with this Agreement or (iii) any untrue or allegedly untrue statement of any
material fact contained in any registration statement, summary prospectus, final
prospectus, or amendment or supplement thereto, or the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or allegedly untrue
statement or omission or alleged omission was made in such registration
statement, summary prospectus, final prospectus, or amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
by Lube Ventures or any former Lube Ventures Shareholder.
20.4.3 Miracle Industries Indemnity Escrow Shares. Subject to the
provisions of Section 20.5 hereof, the Holding Company shall have the right to
set-off from time to time, in accordance with the terms of Section 20.5 hereof
and of the Indemnity Escrow Agreement, against the escrow deposit of the
Indemnity Escrow Shares made by the Holding Company with respect to the Miracle
Industries Selling Stockholders (the "Miracle Industries Indemnity Escrow
Shares"), Miracle Industries Indemnity Escrow Shares having a value equal to the
full amount of any and all Holding Company Indemnified Claims and Losses imposed
upon, asserted against, suffered or incurred by the Holding Company, directly or
indirectly, based upon, arising out of, resulting from (i) the inaccuracy or
untruth of any of the representations made by Miracle Industries pursuant to
this Agreement or pursuant to any certificate, document or instrument executed
and delivered by Miracle Industries pursuant to or in connection with this
Agreement, (ii) the breach by Miracle Industries of any of the warranties or
covenants made by Miracle Industries pursuant to this Agreement or pursuant to
any certificate, document or instrument
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executed and delivered by Miracle Industries pursuant to or in connection with
this Agreement or the failure of Miracle Industries or any of the Miracle
Industries Shareholders to perform, observe or comply with, any of the covenants
or agreements made by Miracle Industries pursuant to this Agreement or pursuant
to any certificate, document or instrument executed and delivered by Miracle
Industries pursuant to or in connection with this Agreement or (iii) any untrue
or allegedly untrue statement of any material fact contained in any registration
statement, summary prospectus, final prospectus, or amendment or supplement
thereto, or the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or allegedly untrue statement or omission or alleged omission
was made in such registration statement, summary prospectus, final prospectus,
or amendment or supplement thereto, in reliance upon and in conformity with
written information furnished by Miracle Industries or any former Miracle
Industries Shareholder.
20.4.4 Rocky Mountain I Indemnity Escrow Shares. Subject to the
provisions of Section 20.5 hereof, the Holding Company shall have the right to
set-off from time to time, in accordance with the terms of Section 20.5 hereof
and of the Indemnity Escrow Agreement, against the escrow deposit of the
Indemnity Escrow Shares made by the Holding Company with respect to the Rocky
Mountain I Selling Stockholders (the "Rocky Mountain I Indemnity Escrow
Shares"), Rocky Mountain I Indemnity Escrow Shares having a value equal to the
full amount of any and all Holding Company Indemnified Claims and Losses imposed
upon, asserted against, suffered or incurred by the Holding Company, directly or
indirectly, based upon, arising out of, resulting from (i) the inaccuracy or
untruth of any of the representations made by Rocky Mountain I pursuant to this
Agreement or pursuant to any certificate, document or instrument executed and
delivered by Rocky Mountain I pursuant to or in connection with this Agreement,
(ii) the breach of the Rocky Mountain I of any of the warranties or covenants
made by Rocky Mountain I pursuant to this Agreement or pursuant to any
certificate, document or instrument executed and delivered by Rocky Mountain I
pursuant to or in connection with this Agreement or the failure of Rocky
Mountain I to perform, observe or comply with, any of the covenants or
agreements made by Rocky Mountain I pursuant to this Agreement or pursuant to
any certificate, document or instrument executed and delivered by Rocky Mountain
I pursuant to or in connection with this Agreement or (iii) any untrue or
allegedly untrue statement of any material fact contained in any registration
statement, summary prospectus, final prospectus, or amendment or supplement
thereto, or the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or allegedly untrue statement or omission or alleged omission
was made in such registration statement, summary prospectus, final prospectus,
or amendment or supplement thereto, in reliance upon and in conformity with
written information furnished by Rocky Mountain I or any former Rocky Mountain I
Shareholder.
20.4.5 Rocky Mountain II Indemnity Escrow Shares. Subject to the
provisions of Section 20.5 hereof, the Holding Company shall have the right to
set-off from time to time, in accordance with the terms of Section 20.5 hereof
and of the Indemnity Escrow Agreement, against the escrow deposit of the
Indemnity Escrow Shares made by the Holding Company with respect to the Rocky
Mountain II Selling Stockholders (the "Rocky Mountain II Indemnity Escrow
Shares"), Rocky Mountain II Indemnity Escrow Shares having a value equal to the
full amount of any and all Holding Company Indemnified Claims and Losses imposed
upon, asserted against, suffered or incurred by the Holding Company, directly or
indirectly, based upon, arising out of, resulting from (i) the inaccuracy or
untruth of any of the representations made by Rocky Mountain II pursuant to this
Agreement or pursuant to any certificate, document or instrument executed and
delivered by Rocky Mountain II pursuant to or in connection with this Agreement,
(ii) the breach by Rocky Mountain II of any of the warranties or covenants made
by Rocky Mountain II pursuant to this Agreement or pursuant to any certificate,
document or instrument executed and delivered by Rocky Mountain II pursuant to
or in connection with this Agreement or the failure of the Rocky Mountain II to
perform, observe or comply with, any of the covenants or agreements made by
Rocky Mountain II pursuant to this Agreement or pursuant to any certificate,
document or instrument executed and delivered by Rocky Mountain II pursuant to
or in connection with this Agreement or (iii) any untrue or allegedly untrue
statement of any material fact contained in any registration statement, summary
prospectus, final prospectus, or amendment or supplement thereto, or the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
allegedly untrue statement or omission or alleged omission was made in such
registration statement, summary prospectus, final prospectus, or amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished by Rocky Mountain II or any former Rocky Mountain II Shareholder.
20.4.6 KBG Indemnity Escrow Shares. Subject to the provisions of
Section 20.5 hereof, the Holding Company shall have the right to set-off from
time to time, in accordance with the terms of Section 20.5 hereof and of the
Indemnity Escrow Agreement, against the escrow deposit of the Indemnity Escrow
Shares made by the Holding Company with respect
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to KBG (the "KBG Indemnity Escrow Shares"), KBG Indemnity Escrow Shares having a
value equal to the full amount of any and all Holding Company Indemnified Claims
and Losses imposed upon, asserted against, suffered or incurred by the Holding
Company, directly or indirectly, based upon, arising out of, resulting from (i)
the inaccuracy or untruth of any of the representations made by KBG pursuant to
this Agreement or pursuant to any certificate, document or instrument executed
and delivered by KBG pursuant to or in connection with this Agreement, (ii) the
breach by KBG of any of the warranties or covenants made by KBG pursuant to this
Agreement or pursuant to any certificate, document or instrument executed and
delivered by KBG pursuant to or in connection with this Agreement or the failure
of KBG to perform, observe or comply with, any of the covenants or agreements
made by KBG pursuant to this Agreement or pursuant to any certificate, document
or instrument executed and delivered by KBG pursuant to or in connection with
this Agreement or (iii) any untrue or allegedly untrue statement of any material
fact contained in any registration statement, summary prospectus, final
prospectus, or amendment or supplement thereto, or the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or allegedly untrue
statement or omission or alleged omission was made in such registration
statement, summary prospectus, final prospectus, or amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
by KBG or any KBG Shareholder.
20.4.7 Prema Properties Indemnity Escrow Shares. Subject to the
provisions of Section 20.5 hereof, the Holding Company shall have the right to
set-off from time to time, in accordance with the terms of Section 20.5 hereof
and of the Indemnity Escrow Agreement, against the escrow deposit of the
Indemnity Escrow Shares made by the Holding Company with respect to the Prema
Properties Selling Members (the "Prema Properties Indemnity Escrow Shares"),
Prema Properties Indemnity Escrow Shares having a value equal to the full amount
of any and all Holding Company Indemnified Claims and Losses imposed upon,
asserted against, suffered or incurred by the Holding Company, directly or
indirectly, based upon, arising out of, resulting from (i) the inaccuracy or
untruth of any of the representations made by Prema Properties or any of the
Prema Properties Members pursuant to this Agreement or pursuant to any
certificate, document or instrument executed and delivered by Prema Properties
or the Prema Properties Members pursuant to or in connection with this
Agreement, (ii) the breach by Prema Properties or any of the Prema Properties
Members of any of the warranties or covenants made by Prema Properties or any of
the Prema Properties Members pursuant to this Agreement or pursuant to any
certificate, document or instrument executed and delivered by Prema Properties
or the Prema Properties Members pursuant to or in connection with this Agreement
or the failure of Prema Properties or any of the Prema Properties Members to
perform, observe or comply with, any of the covenants or agreements made by
Prema Properties or any of the Prema Properties Members pursuant to this
Agreement or pursuant to any certificate, document or instrument executed and
delivered by Prema Properties or the Prema Properties Members pursuant to or in
connection with this Agreement or (iii) any untrue or allegedly untrue statement
of any material fact contained in any registration statement, summary
prospectus, final prospectus, or amendment or supplement thereto, or the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
allegedly untrue statement or omission or alleged omission was made in such
registration statement, summary prospectus, final prospectus, or amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished by Prema Properties or any former Prema Properties Member.
20.4.8 Ralston Car Wash Indemnity Escrow Shares. Subject to the
provisions of Section 20.5 hereof, the Holding Company shall have the right to
set-off from time to time, in accordance with the terms of Section 20.5 hereof
and of the Indemnity Escrow Agreement, against the escrow deposit of the
Indemnity Escrow Shares made by the Holding Company with respect to the Ralston
Car Wash Selling Members (the "Ralston Car Wash Indemnity Escrow Shares"),
Ralston Car Wash Indemnity Escrow Shares having a value equal to the full amount
of any and all Holding Company Indemnified Claims and Losses imposed upon,
asserted against, suffered or incurred by the Holding Company, directly or
indirectly, based upon, arising out of, resulting from (i) the inaccuracy or
untruth of any of the representations made by Ralston Car Wash or any of the
Ralston Car Wash Members pursuant to this Agreement or pursuant to any
certificate, document or instrument executed and delivered by Ralston Car Wash
or the Ralston Car Wash Members pursuant to or in connection with this
Agreement, (ii) the breach by Ralston Car Wash or any of the Ralston Car Wash
Members of any of the warranties or covenants made by Ralston Car Wash or any of
the Ralston Car Wash Members pursuant to this Agreement or pursuant to any
certificate, document or instrument executed and delivered by Ralston Car Wash
or the Ralston Car Wash Members pursuant to or in connection with this Agreement
or the failure of Ralston Car Wash or any of the Ralston Car Wash Members to
perform, observe or comply with, any of the covenants or agreements made by
Ralston Car Wash or any of the Ralston Car Wash Members pursuant to this
Agreement or pursuant to any certificate, document or instrument executed and
delivered by Ralston Car Wash or the Ralston Car Wash Members pursuant to or in
connection with this Agreement or (iii) any untrue or allegedly untrue statement
of any material fact contained in any registration statement, summary
prospectus, final prospectus,
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or amendment or supplement thereto, or the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or allegedly untrue statement or omission
or alleged omission was made in such registration statement, summary prospectus,
final prospectus, or amendment or supplement thereto, in reliance upon and in
conformity with written information furnished by Ralston Car Wash or any former
Ralston Car Wash Member.
20.4.9 Miracle Partners Indemnity Escrow Shares. Subject to the
provisions of Section 20.5 hereof, the Holding Company shall have the right to
set-off from time to time, in accordance with the terms of Section 20.5 hereof
and of the Indemnity Escrow Agreement, against the escrow deposit of the
Indemnity Escrow Shares made by the Holding Company with respect to the Miracle
Partners Selling Stockholders (the "Miracle Partners Indemnity Escrow Shares"),
Miracle Partners Indemnity Escrow Shares having a value equal to the full amount
of any and all Holding Company Indemnified Claims and Losses imposed upon,
asserted against, suffered or incurred by the Holding Company, directly or
indirectly, based upon, arising out of, resulting from (i) the inaccuracy or
untruth of any of the representations made by Miracle Partners pursuant to this
Agreement or pursuant to any certificate, document or instrument executed and
delivered by Miracle Partners pursuant to or in connection with this Agreement,
(ii) the breach by Miracle Partners of any of the warranties or covenants made
by Miracle Partners pursuant to this Agreement or pursuant to any certificate,
document or instrument executed and delivered by Miracle Partners pursuant to or
in connection with this Agreement or the failure of Miracle Partners to perform,
observe or comply with, any of the covenants or agreements made by Miracle
Partners pursuant to this Agreement or pursuant to any certificate, document or
instrument executed and delivered by Miracle Partners pursuant to or in
connection with this Agreement or (iii) any untrue or allegedly untrue statement
of any material fact contained in any registration statement, summary
prospectus, final prospectus, or amendment or supplement thereto, or the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
allegedly untrue statement or omission or alleged omission was made in such
registration statement, summary prospectus, final prospectus, or amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished by Miracle Partners or any former Miracle Partners Shareholder.
SECTION 20.5 EXERCISE OF SET-OFF RIGHTS.
The rights of the Holding Company to set-off against the Indemnity Escrow
Shares described in Section 20.4 above shall be exercised by the Holding Company
only as follows:
20.5.1 Notice to Representative. The Holding Company shall deliver
written notice to the Representative of the Responsible Group of each claim for
indemnification of Holding Company Indemnified Losses and Claims for which the
Holding Company desires to exercise its right to set-off against the Indemnity
Escrow Shares attributable to such Responsible Group, which notice shall
describe in reasonable detail the basis for such set-off and the dollar amount
of such set-off.
20.5.2 Right to Dispute Claim. The Representative of the Responsible
Group (acting on behalf of its Responsible Group) shall then have fifteen days
(which period may be extended by mutual consent in writing) following receipt of
such notice in which to accept or dispute each such claim, in whole or in part.
To the extent that any such claim is not disputed in writing by the
Representative of the Responsible Group within such fifteen day period, such
claim shall be deemed to have been accepted by such Responsible Group, and the
Holding Company shall be entitled to set-off the entire amount of its claim
against the Indemnity Escrow Shares attributable to such Responsible Group.
20.5.3 Disputed Claims. In the event that the Representative of the
Responsible Group shall dispute any claim of the Holding Company, in whole or in
part or the claim relates to a third party claim described in Section 20.6 (each
a "Contested Claim"), the Indemnity Escrow Shares of the Responsible Group
representing the amount of the Contested Claim shall be retained by the Escrow
Agent until the Contested Claim has been resolved by agreement of the Holding
Company and the Representative of such Responsible Group, pursuant to the
arbitration proceeding hereinafter described or until otherwise ordered by a
court of competent jurisdiction. The Holding Company and the Representative of
the Responsible Group shall endeavor in good faith to resolve any Contested
Claim within forty-five days of (i) the date upon which the Holding Company gave
the Representative notice of the Contested Claim or, (ii) if the Contested Claim
is a third party claim described in Section 20.6, the date upon which such third
party claim is finally resolved. If the Holding Company and the Representative
of the Responsible Group are unable to reach an agreement within such forty-five
day period, the dispute or disagreement shall be referred to arbitration and
arbitrated by a single arbiter, who shall be selected in accordance with the
then current Commercial Arbitration Rules of the American Arbitration
Association. The arbiter so selected shall be instructed that, in addition to
making a decision on the merits of such dispute or disagreement, that he or she
also shall make a determination that, on balance, one of the parties is the
"prevailing party." The "prevailing party" as part of any such
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arbitration proceeding shall be entitled to reimbursement from the other party
for all costs and expenses incurred by it in connection with such arbitration,
including without limitation, reasonable attorneys' fees and disbursements and
consultants' fees and disbursements. Such reimbursement shall be included in the
order of the arbiter and, if the Holding Company is the "prevailing party," the
amount of such reimbursement shall be part of the Contested Claim. Any such
arbitration shall take place in Washington, D.C. Judgment may be entered upon
any award granted in any such arbitration in any court of competent
jurisdiction.
20.5.4 Disbursement of Contested Claim. The Escrow Agent shall be
instructed to promptly disburse the amount of the Contested Claim to the party
entitled thereto (as determined by agreement of the Holding Company and the
Representative of the Responsible Group or by arbitration) upon receipt of
joint, written instructions from the Holding Company and the Representative of
the Responsible Group to that effect or upon presentation of a certified copy of
an order of an arbiter selected in accordance with the foregoing provisions.
SECTION 20.6 THIRD PARTY CLAIMS AGAINST THE HOLDING COMPANY.
20.6.1 Claims. In the event that during the one-year period following
the Closing Date, any claim is asserted, any event occurs or any proceeding
(including governmental investigations or audits) is instituted relating to any
matter as to which the Holding Company may be or is entitled to indemnification
or reimbursement by means of set-off against any of the Indemnity Escrow Shares,
as soon as practicable after such the Holding Company receives any notice or
otherwise becomes aware of any such claim, proceeding or event, the Holding
Company shall so notify in writing the Representative of the Responsible Group.
Such notice shall also contain the information required of and shall constitute
a notice described in Section 20.5.1.
20.6.2 Defense of Claims. If any action is brought against the Holding
Company in respect of any such claim, event or proceeding, the Representative of
the Responsible Group shall be entitled to participate in the defense of such
action, and, to the extent that the Representative of the Responsible Group may
wish, to assume sole control over the defense and settlement of such action by
so notifying the Holding Company of its election to assume control of the
defense of any such action within 15 days after receipt of written notice
thereof from the Holding Company; provided, however, that: (i) the Holding
Company shall nevertheless be entitled to participate in the defense of such
action and to employ counsel at its own expense to assist in the handling of
such action; and (ii) the Representative of the Responsible Group shall obtain
the prior written approval of the Holding Company before entering into any
settlement of such action or ceasing to defend against such action.
Notwithstanding the foregoing, however, the Representative of the Responsible
Group shall not be entitled to assume sole control over the defense and
settlement of any claim, proceeding or action relating to any matter as to which
the Holding Company may be entitled to indemnification or reimbursement pursuant
to this Agreement if: (i) the claim, proceeding or action relates to, could
result in, or arises in connection with any criminal proceeding, action,
indictment, allegation or investigation of any officer or employee of the
Holding Company; (ii) the claim, proceeding or action could result in or cause a
Material Adverse Effect on the Holding Company in the reasonable judgment of the
Holding Company; (iii) the claim, proceeding or action is one which seeks
principally injunctive or equitable relief against the Holding Company or to the
extent that the claim, proceeding or action seeks injunctive or equitable
relief; or (iv) a court, Governmental Authority or other arbiter of the claim,
proceeding or action rules that the Representative of the Responsible Group
failed or is failing to adequately protect the Holding Company's interests,
rights or remedies. If the Representative of the Responsible Group does not
elect to assume control over the defense or settlement of an action as provided
in this Section 20.6.2, the Holding Company shall have the right to defend the
action and related claims in any reasonable manner as it may deem appropriate.
20.6.3 Legal Expenses. After written notice by the Representative of
the Responsible Group to the Holding Company of its election to assume control
of the defense of any such action in accordance with the foregoing, (i) the
Responsible Group shall not be liable to the Holding Company or any other
Selling Stockholders or Selling Members (or KBG), as the case may be, for any
legal or other expenses (other than expenses of investigation) subsequently
incurred by any of such persons in connection therewith unless the Holding
Company shall be advised in writing by reputable legal counsel that it may have
defenses available to it which are inconsistent with or contrary to the defenses
available to the Responsible Group in connection with such action, claim or
proceeding (in which case, the Responsible Group shall be liable and responsible
for the reasonable fees and disbursements of legal counsel to the Holding
Company), and (ii) as long as the Representative of the Responsible Group is
reasonably contesting such action in good faith, the Holding Company shall not
admit any liability with respect to, or settle, compromise or discharge the
claim underlying such action, claim or proceeding without the prior written
consent of the Representative of the Responsible Group of Selling Stockholders
or Selling Members, which consent shall not be unreasonably withheld or delayed.
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SECTION 20.7 VALUE OF INDEMNITY ESCROW SHARES.
For purposes of determining the actual amount of Indemnity Escrow Shares
against which the Holding Company shall be entitled to set-off its claims for
indemnification, the shares of Holding Company Common Stock deposited into
escrow by the Holding Company shall be valued at the price per share at which
the shares of the Common Stock of the Holding Company shall be offered to the
public in the IPO. Except with respect to Indemnity Escrow Shares as to which
the Holding Company shall have exercised its right to setoff, all of the
Indemnity Escrow Shares shall nevertheless be deemed to be owned by the Selling
Stockholders and Selling Members and KBG that otherwise would have been entitled
to receive such shares at the closing of the transactions contemplated by
Article III of this Agreement, and, subject to the provisions of Article III of
this Agreement, shall be entitled to vote the same and to receive all dividends
declared thereon; provided, however, that, notwithstanding the foregoing, all
shares issuable pursuant to any stock dividend or stock split declared by the
Holding Company with respect to the shares of the Common Stock of the Holding
Company which are applicable to any of the Indemnity Escrow Shares shall also be
deposited with the Escrow Agent and remain subject to the provisions of this
Article.
SECTION 20.8 GENERAL.
It is the intent of the parties that the Holding Company shall treat all
Selling Stockholders or Selling Members who are members of a Responsible Group
equally with respect to the exercise by the Holding Company of its right of
setoff against the Indemnity Escrow Shares attributable to such Responsible
Group. To this end, Holding Company agrees that all decisions to exercise the
right of set off against Indemnity Escrow Shares attributable to any Responsible
Group shall be made by the Board of Directors of Holding Company. In making any
such decision with respect to the right of set off against Indemnity Escrow
Shares attributable to the Selling Stockholders or Selling Members of a
Predecessor Company (the "Affected Predecessor Company") the directors who were
designated by the Participant Group to which the Affected Predecessor Company
belongs shall not participate in the deliberations or voting on such decision.
SECTION 20.9. INDEMNIFICATION BY THE HOLDING COMPANY.
From and after the Closing Date, the Holding Company shall indemnify and
hold harmless the Selling Stockholders and Selling Members and KBG for, from and
against all Selling Stockholder Indemnified Claims and Losses.
ARTICLE XXI
ADDITIONAL LIMITED REMEDIES
In addition to the other rights and remedies of the parties hereto as
provided herein consequent upon a breach of this Agreement by another party
hereto, the parties shall have the following additional remedies:
SECTION 21.1 ADDITIONAL REMEDIES.
21.1.1 Willful Breach. Notwithstanding anything contained herein which
may be inconsistent or to the contrary, if any of the Predecessor Companies
shall willfully and knowingly fail to disclose to the other parties hereto and
to the Holding Company any material matter required to be disclosed by such
Predecessor Company in connection with the representations and warranties made
by such Predecessor Company herein or willfully and knowingly misrepresent any
matter to the other parties to this Agreement pursuant to the representations
and warranties made by such Predecessor Company herein (it being understood and
agreed that WE JAC shall not be deemed to have willfully or knowingly failed to
disclose any matter or misrepresented any matter unless the facts and
circumstances relating to such matter or actually known by John F. Ripley, Peter
Kendrick or Arnold Janofsky; Lube Ventures shall not be deemed to have willingly
or knowingly failed to disclose any matter or misrepresented any matter unless
the facts and circumstances relating to such matter or actually known to or by
C. Eugene Deal or Ernest S. Malas; Miracle Partners shall not be deemed to have
willingly or knowingly failed to disclose any matter or misrepresented any
matter unless the facts and circumstances relating to such matter or actually
known to or by C. Eugene Deal; Miracle Industries and Prema Properties shall not
be deemed to have willingly or knowingly failed to disclose any matter or
misrepresented any matter unless the facts and circumstances relating to such
matter or actually known to or by Ernest S. Malas; Rocky Mountain I shall not be
deemed to have willingly or knowingly failed to disclose any matter or
misrepresented any matter unless the facts and circumstances relating to such
matter or actually known to or by William R. Klumb; Rocky Mountain II shall not
be deemed to have willingly or knowingly failed to disclose any matter or
misrepresented any matter unless the facts and circumstances relating to such
matter or actually known to or by William R. Klumb) or if any of the Predecessor
Companies shall, prior to the Closing, willfully fail to perform, comply with or
observe any of the
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covenants or agreements made by such Predecessor Company herein which are to be
performed, complied with or observed prior to the Closing, or, at the Closing,
default in the performance of its obligations hereunder, without prejudice to
any other rights or remedies to which any of the other parties to this Agreement
may be entitled, each of the other parties shall be entitled to recover from
such Predecessor Company (i) any and all actual damages that such Predecessor
Company may have incurred in connection with or as a result of any such failure,
misrepresentation, breach, nonperformance or noncompliance by such Predecessor
Company, together with reimbursement of its out-of-pocket costs and expenses and
its reasonable attorneys' fees incurred in connection with seeking such relief,
(ii) Termination Damages, and (iii) its ratable share of the Transaction
Expenses payable by such Predecessor Company based on the maximum number of
shares of Holding Company Common Stock that the shareholders or members of such
other party could have received in the Mergers and Exchange Offers described in
Article III compared to the maximum number of shares of Holding Company Common
Stock that the shareholders and members of all such other parties could have
received in the Mergers and Exchange Offers described in Article III.
21.1.2 Failure to Obtain Approvals. In the event that (A)(i) WE JAC
fails to obtain the approval of its shareholders described in Section 4.2.3;
(ii) Lube Venturess fails to obtain the approval of its shareholders described
in Section 4.3.2; (iii) Miracle Industries fails to obtain the approval of its
shareholders described in Section 4.4.2; (iv) Rocky Mountain I fails to obtain
the approval of its shareholders described in Section 4.5.3; (v) Rocky Mountain
II fails to obtain the approval of its shareholders described in Section 4.6.3;
(vi) stockholders of Miracle Partners shall have tendered to the Holding Company
for exchange in accordance with the terms of the Miracle Partners Exchange Offer
less than all of the issued and outstanding shares of the capital stock of
Miracle Partners; (vii) the members of Prema Properties (or other holders of
interests in Prema Properties) shall have tendered to the Holding Company for
exchange in accordance with the terms of the Prema Properties Exchange Offer
Membership Interests in Prema Properties representing less than 75% of all of
the Membership Interests in Prema Properties; (viii) the members of Ralston Car
Wash (or other holders of interests in Ralston Car Wash) shall have tendered to
the Holding Company for exchange in accordance with the terms of the Ralston Car
Wash Exchange Offer Membership Interests in Ralston Car Wash representing less
than 95% of all of the Membership Interests in Ralston Car Wash; or (ix) KBG
shall have tendered to the Holding Company for exchange in accordance with the
terms of the KBG Exchange Offer less than all of the Membership Interests in
KBG, LLC, and (B) within one year of the date hereof, such Predecessor Company
engages in a sale of substantially all of its assets or a merger or holders of
its common stock or membership interests transfer in the aggregate shares or
membership interests representing a majority of the outstanding shares or
membership interests of such Predecessor Company, such Predecessor Company shall
be liable for Termination Damages to the other Predecessor Companies which
Termination Damages shall be issued ratably to such other Predecessor Companies
based on the maximum number of shares of Holding Company Stock that the
shareholders or members of such other Predecessor Companies could have received
in the Mergers and Exchange Offers described in Article III compared to the
maximum number of shares of Holding Company Common Stock that the shareholders
and members of all such other Predecessor Companies could have received in the
Mergers and Exchange Offers described in Article III.
21.1.3 Termination Damages. "Termination Damages" shall mean the
obligation of a Predecessor Company to issue to the other parties hereto shares
of capital stock or Membership Interests in such Predecessor Company which,
following such issuance, shall represent 20% of the issued and outstanding
shares of capital stock or Membership Interests in such Predecessor Company
calculated on a fully diluted basis.
SECTION 21.2 EQUITABLE REMEDIES.
Each of the Predecessor Company hereby acknowledges and agrees that damages
that may result to the other Predecessor Companies from any breach or threatened
breach of any of the covenants or agreements contained in this Agreement which
are to be complied with or performed by each of the Predecessor Companies may be
intangible, in whole or in part, and incapable of being assessed of monetary
value and likely will result in irreparable harm to, and have a Material Adverse
Effect on, each of the other Predecessor Companies. Therefore, each of the
Predecessor Companies hereby agrees that, in the event of any breach or
threatened breach by them of any of the covenants or agreements contained in
this Agreement which are to be complied with or performed by them, without
prejudice to and in addition to any other remedies available to them at law or
in equity, each of the other Predecessor Companies shall be entitled to a decree
of specific performance and/or injunctive relief to prevent any such breach or a
continuation thereof and other equitable remedies, together with an award of
reasonable attorneys fees, expenses and disbursements incurred in connection
with seeking such relief.
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ARTICLE XXII
EMPLOYEE BENEFIT ARRANGEMENTS POST-CLOSING
SECTION 22.1 WE JAC OPTION PLANS.
The parties agree that, upon consummation of the WE JAC Merger, the Holding
Company shall succeed to, and assume, all of the obligations and liabilities of
WE JAC to issue capital stock pursuant to outstanding options and warrants to
purchase WE JAC common stock, including, without limitation, options outstanding
(i) under the 1996 Precision Tune Employee Stock Purchase Plan (ii) under the
Precision Tune Stock Option Plan, (iii) under the terms of the Stock Option
Agreements dated July 1, 1995 and October 3, 1996 by and between WE JAC and John
F. Ripley and (iv) under warrants granted to Capitol Tune, Inc., Signet Bank and
Summit Bank. Schedule 22.1 sets forth a list of all such options and the number
of shares of Holding Company Common Stock and exercise price per share they will
be converted into at Closing.
SECTION 22.2 RESERVATION OF MANAGEMENT OPTION SHARES.
The Holding Company shall have the right to reserve at the Closing, for
issuance following the Closing to officers, directors, employees and agents of
the Holding Company and its subsidiaries pursuant to stock option plans or
arrangements or other equity incentive, bonus or similar plans or arrangements
approved by the Board of Directors thereunder, such number of shares of the
Common Stock of the Holding Company, which, if and when issued following the
consummation of the IPO, will represent not more than 5% of the issued and
outstanding shares of the Common Stock of the Holding Company.
ARTICLE XXIII
OTHER COVENANTS AND AGREEMENTS OF THE PARTIES
SECTION 23.1 DISCHARGE OF INDEBTEDNESS OF PREDECESSOR COMPANIES.
At the Closing, immediately following the consummation of the sale of the
Common Stock of the Holding Company to the underwriters in anticipation of the
IPO, the Holding Company shall discharge from the cash proceeds received in such
sale all of the indebtedness of the Predecessor Companies set forth in Schedule
23.1.
SECTION 23.2 RELEASE FROM GUARANTEES OF CORPORATE OBLIGATIONS.
From and after the Closing, to the extent that any obligation or
indebtedness of any Predecessor Company shall not be discharged at the Closing
as provided above, the Holding Company shall use its reasonable best efforts to
obtain the release of each Selling Stockholder and Selling Member (and his or
her spouse, if applicable) and of the officers of WE JAC from any and all
Guarantees of the obligations of any of the Predecessor Companies executed or
given prior to the Closing Date by such Selling Stockholder or Selling Member
(and his or her spouse) or by the officers of WE JAC; provided, however, that
the Holding Company shall not be obligated to expend any funds or post any bonds
in order to obtain such release(s). If the Holding Company shall be unable to
obtain such release(s) on behalf of any Selling Stockholder or Selling Member
(or his or her spouse), or any officer of WE JAC, or if the Holding Company
shall be unwilling to agree to any terms or conditions imposed by the party
granting such release(s) in order to obtain any such release(s), the Holding
Company shall indemnify such Selling Stockholder or Selling Member, or officer
of WE JAC, not so released from any such Guarantees from and against any and all
liabilities arising from any such Guarantee.
SECTION 23.3 CONFIDENTIALITY.
Each of the parties hereto for themselves and their respective officers,
directors, employees, stockholders and representatives, shall hold in confidence
all information, books, records and documents acquired from any other party
hereto prior to, on, or after the date hereof in the course of negotiation of
the transactions contemplated hereby or pursuant to the provisions hereof and
will not disclose the same to any third party except as required by law, and
except to the extent necessary to (a) respond to a subpoena, court order or
other legal process, (b) comply with Applicable Laws, (c) establish a lawful
claim or defense, or (d) obtain reasonably necessary advice of counsel. Should
the transactions contemplated hereby not be consummated for any reason, each
party shall promptly return to the other all originals and copies of such
documents and other written information obtained from the other in the course of
such negotiations or pursuant hereto and shall promptly destroy all evaluations
and studies prepared by it or by any of its representatives on the basis of such
information, books, records or documents.
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SECTION 23.4 MAINTENANCE OF INDEMNITY PROVISIONS IN CHARTERS AND OPERATING
AGREEMENTS.
From and after the Closing, the Holding Company shall maintain in effect
the indemnification provisions contained in the charters and operating
agreements of each of the Predecessor Companies as of the date hereof for a
period of three (3) years following the Closing, and will not seek to amend or
modify such provisions without first obtaining the written consent of a majority
of the last acting directors or the Selling Members of such Predecessor
Companies, it being understood and agreed, however, that, prior to the
expiration of such three (3) year period, the Holding Company may merge or
dissolve all or any of the Predecessor Companies in any such manner as the Board
of Directors of the Holding Company shall determine to be advisable, but, if it
should do so, the Holding Company shall ensure that the charter or other
organizational documentation pertaining to any successor to any Predecessor
Company shall contain provisions providing for the indemnification of the
officers and directors of such Predecessor Company substantially equivalent to
the indemnification provisions contained in the charters and operating
agreements of each of the Predecessor Companies as of the date hereof.
SECTION 23.5 OFFICERS AND DIRECTORS LIABILITY INSURANCE.
From and after the Closing, the Holding Company shall maintain in full
force and effect, with a reputable insurer, officer's and director's liability
insurance in such amounts and on such terms and conditions as the Board of
Directors shall determine to be reasonable or advisable.
SECTION 23.6 LOCK-UPS OF SHARES.
Each of the parties hereto acknowledges that, in order to accommodate the
underwriters for the proposed IPO, the sale, transfer, assignment, pledge, gift
or other disposition by any direct or indirect holder of 3,000 or more of the
Combination Shares to be received by the Selling Stockholders and the Selling
Members pursuant to the transactions contemplated by this Agreement shall be
prohibited for a period of 180 days following the Closing Date, unless the
Holding Company shall provide its written consent thereto in advance thereof,
and agrees that the Articles of Incorporation of the Holding Company may reflect
such restriction. In addition, each certificate evidencing the Combination
Shares to be issued by the Holding Company pursuant to the transactions
contemplated by this Agreement shall bear a conspicuous legend thereon which
shall read substantially as follows:
"THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, GIFT OR OTHER
DISPOSITION BY ANY RECORD OR BENEFICIAL HOLDER OF 3,000 OR
MORE SHARES OF PRECISION AUTO CARE, INC. WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMPANY IS PROHIBITED UNTIL
, 1998."
SECTION 23.7 REGISTRATION RIGHTS.
23.7.1 Right to Include Shares in the IPO. Subject to the further
provisions of this Section 23.7, each of the Selling Stockholders or Selling
Members shall have the right to elect, following their receipt of the notices
given by the Predecessor Companies in accordance with applicable securities
laws, (but not later than 10 days after the effective date of the Form S-4
Registration Statement referred to in Section 4.1.1(b)) to include in the Form
S-1 Registration Statement and the IPO all or a portion of the Combination
Shares to be received by them pursuant to the Closing of the transactions
contemplated by this Agreement for offer and sale to the underwriters on the
same terms as may be offered to the Holding Company by the underwriters for the
IPO (except as otherwise provided for herein), which election shall be made by
written notice to the Holding Company within such 10-day period and shall
specify the number of shares of the Common Stock of the Holding Company Common
Stock that the Selling Stockholder or Selling Member desires to so include in
such registration statement, and which shall be accompanied by an executed
Selling Shareholder Questionnaire/Power of Attorney in the form that accompanies
the Notice or the Joint Proxy Statement\Prospectus included in the Form S-4
Registration Statement of the Holding Company; PROVIDED, HOWEVER, that the
Holding Company shall have no obligation to include in the Form S-1 Registration
Statement or the IPO any Combination Shares on behalf of any Selling Stockholder
or Selling Member who desires to include less than 3,000 Combination Shares in
the IPO; PROVIDED FURTHER, that each of the Selling Stockholders or Selling
Members who shall be required by federal or any applicable state income tax law
to recognize income in the year in which the Closing Date shall occur as a
result of the consummation of any of the transactions contemplated by Article V
of this Agreement otherwise than as a result of the receipt of a cash payment
from the Holding Company in lieu of fractional shares (each such Selling
Stockholder or Selling Member being referred to hereinafter as a "Tax Preference
Selling Shareholder") shall have the right, in preference to all other Selling
Stockholders or Selling Members, to include in the IPO such number of
Combination Shares, which, when sold in the IPO, will yield to the Selling
Stockholder or the Selling Member sufficient net cash proceeds to satisfy his or
her respective combined federal and state income tax liability which
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will arise from such transactions; and PROVIDED FURTHER, that the Holding
Company shall have no obligation to include in the Form S-1 Registration
Statement or the IPO more than 19% of the aggregate number of Combination Shares
to be issued pursuant to the transactions contemplated by Article III of this
Agreement (the "Selling Shareholder Share Limitation"). Notwithstanding the
foregoing, no election by a Selling Stockholder or Selling Member to include
Combination Shares in the IPO shall be valid or effective unless and until such
notice, together with the other materials referred to herein, have been
submitted to the Holding Company duly executed. Each election to include
Combination Shares in the IPO made by a Selling Shareholder or Selling Member
shall be irrevocable and may not be withdrawn except to the extent provided in
Section 23.7.2.
23.7.2 Reduction of Number of Combination Shares to be Included in the
IPO. If Selling Stockholders or Selling Members shall elect to include in the
IPO an aggregate number of Combination Shares which exceeds the Selling
Shareholder Share Limitation, or if the lead underwriter for the IPO advises the
Holding Company in good faith that inclusion of some or all of the Combination
Shares which the Selling Stockholders or Selling Members shall have requested be
included in such registration statement would adversely affect the marketing of
the entire offering of securities, then the Holding Company shall be obligated
to include in the registration statement and the IPO only such aggregate number
of Combination Shares which is equal to the Selling Shareholder Share Limitation
(or such lesser number of Combination Shares as the managing underwriter shall
in good faith advise the Holding Company may be included therein without, in the
opinion of the managing underwriter, adversely affecting the marketing of the
entire offering of shares of the Holding Company Common Stock in the IPO) (such
number of shares being referred to as the "Permissible Number of Shares"). If
the aggregate number of Combination Shares that the Selling Stockholders and
Selling Members shall have requested be included in such registration statement
exceeds the number of Permissible Number of Shares, the number of Combination
Shares that each Selling Stockholder or Selling Member shall be entitled to
include therein shall be reduced as follows: first, all of the Combination
Shares that Tax Preference Selling Shareholders elect to include shall be
included unless the amount of such shares exceeds the Permissible Number of
Shares. If the Permissible Number of Shares is so exceeded, the number of
Combination Shares that the Tax Preference Selling Shareholders may include
shall be reduced pro rata, based on the number of Combination Shares that each
Tax Preference Selling Shareholder initially requested be included in the
registration statement; second if, all of the Combination Shares that the Tax
Preference Selling Shareholders elect to include in the registration statement
is less than the Permissible Number of Shares, the Selling Stockholders and the
Selling Members (other than the Tax Preference Selling Shareholders) shall be
entitled to include their pro rata portion of the difference between the
Permissible Number of Shares and the number of Combination Shares that the Tax
Preference Selling Shareholders have elected to include in the registration
statement based upon the number of Combination Shares initially requested to be
included by the Selling Shareholders and Selling Members (other than the Tax
Preference Selling Shareholders).
SECTION 23.8 OBLIGATIONS OF SHAREHOLDERS SELLING IN THE IPO.
In addition to the obligations to be set forth in the Underwriting
Agreement, each Selling Stockholder or Selling Member who desires to include
Combination Shares in the IPO shall be required to (i) cooperate with the
Holding Company in preparing the Form S-1 Registration Statement to reflect the
inclusion of their Combination Shares therein, and execute such ordinary and
customary agreements as may be reasonably necessary in favor of the underwriters
for the IPO; (ii) promptly supply the Holding Company with all information,
documents, representations and agreements as the Holding Company or the
underwriter may reasonably deem necessary in connection with the registration of
such Combination Shares.
SECTION 23.9 EXPENSES OF REGISTRATION.
The costs and expenses of all registrations and qualifications under the
Securities Act and applicable state securities or blue sky laws, and of all
other actions, that the Holding Company is required to take or effect in order
to register the IPO Shares and any Combination Shares for offer and sale to the
public (including, without limitation, all registration and filing fees,
printing expenses, costs of special audits incidental to or required by any such
registration, and fees and disbursements of counsel and independent public
accountants for the Holding Company) shall be borne and paid for by the Holding
Company and the Contributing Companies as provided for in this Agreement. In
addition, all Selling Stockholders and Selling Members (other than Tax
Preference Selling Shareholders) shall bear their prorata portion of
underwriting discounts or commissions. The Holding Company shall pay
underwriting discounts or commissions attributable to Combination Shares that
Tax Preference Selling Shareholders include in the IPO.
SECTION 23.10 INCLUSION OF CERTAIN SHARES.
Notwithstanding the provisions of Section 23.7.2, the Holding Company shall
not permit the lead underwriter of the IPO to set the Permissible Number of
Shares below a number that permits William R. Klumb to include in the Form S-1
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Registration Statement and the IPO such number of Combination Shares to be
received by him pursuant to the transactions contemplated by Article III, which,
when sold in the IPO, will yield to him sufficient net cash proceeds to satisfy
his combined federal and state income tax liability which will arise as a result
of the discharge by the Holding Company of the indebtedness described in
Schedule 19.1.
ARTICLE XXIV
SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS
SECTION 24.1 SURVIVAL IN GENERAL.
Except as otherwise provided in this Agreement, all of the representations,
warranties, covenants and agreements of the parties contained in this Agreement
shall survive the Closing. The representations and warranties made by the
parties to this Agreement to each of the other parties to this Agreement shall
terminate and expire effective as of the Closing, except with respect to the
representations and warranties made by each party to the Holding Company
pursuant to the terms of this Agreement. From and after the Closing, the Holding
Company shall have the sole and exclusive right to exercise all remedies against
the parties hereto with respect to any inaccuracy or untruth of any of the
representations made by any of the parties to this Agreement pursuant to the
terms of this Agreement or pursuant to any certificate, document or instrument
executed and delivered by any of the parties pursuant to or in connection with
this Agreement or the breach by any party of any of the warranties or covenants
made by any such party pursuant to this Agreement or the failure of any such
party to perform, observe or comply with, any of the covenants or agreements
made by such party pursuant to this Agreement or in connection with this
Agreement. Furthermore, except as provided in the next sentence, from and after
the Closing the Holding Company's sole and exclusive remedy against parties who
proceed to Closing hereunder with respect to the foregoing shall be limited to
its right to exercise its right of setoff against the Indemnity Escrow Shares as
provided in Article XX of this Agreement. The Holding Company shall not, except
in the cases of fraud, have the right to seek to impose personal liability upon
any of the Selling Stockholders or the Selling Members in the capacity as former
stockholders or former members, as the case may be, of any of the Predecessor
Companies.
SECTION 24.2 SURVIVAL OF INDEMNITY OBLIGATIONS.
The obligations of the Selling Shareholders and the Selling Members and of
KBG to indemnify the Holding Company shall, except with respect to any
unresolved claims made by the Holding Company for indemnification, expire and
terminate at 5:00 Eastern Daylight Time on the date which is one year after the
Closing Date.
SECTION 24.3 SURVIVAL OF COVENANTS AND AGREEMENTS.
Each of the covenants of the parties contained in or made by the parties
pursuant to the terms of this Agreement which are to be performed by the parties
at and after the Closing, other than the indemnity obligations of the parties
with respect to representations and warranties (which shall survive the Closing
as provided for in the foregoing provisions of this Section), shall survive the
Closing until the same shall have been performed or discharged in full.
SECTION 24.4 EFFECT OF DUE DILIGENCE.
Notwithstanding any investigation or audit conducted by any of the parties
to this Agreement prior to the Closing, each of the parties to this Agreement
shall be entitled to rely upon the representations and warranties made by the
other parties pursuant to this Agreement, and such representations and
warranties shall not be deemed to have been waived or otherwise affected by any
such investigation or audit or any knowledge attributable to any party.
ARTICLE XXV
MISCELLANEOUS
SECTION 25.1 ENTIRE AGREEMENT.
This Agreement, together with the Collateral Agreements, constitutes the
entire agreement and understanding between the parties hereto in respect of the
matters set forth herein, and, except as otherwise specifically provided for
herein with respect to certain provisions of the Memorandum of Understanding
relating to Transaction Expenses, which provisions are incorporated herein by
reference, all prior negotiations, writings and understandings relating to the
subject matter of this
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Agreement (including, without limitation, all other provisions of the Memorandum
of Understanding and all supplements thereto or amendments thereof) are merged
herein and are superseded and canceled by this Agreement.
SECTION 25.2 AMENDMENT AND WAIVER.
This Agreement may be amended, modified, supplemented or changed in whole
or in part only by an agreement in writing making specific reference to this
Agreement and executed by each of the parties hereto. Any of the terms and
conditions of this Agreement may be waived in whole or in part, but only by an
agreement in writing making specific reference to this Agreement and executed by
the party that is entitled to the benefit thereof. The failure of any party
hereto to insist upon strict performance of or compliance with the provisions of
this Agreement shall not constitute a waiver of any right of any such party
hereunder or prohibit or limit the right of such party to insist upon strict
performance or compliance at any other time.
SECTION 25.3 BINDING AGREEMENT AND SUCCESSORS.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
SECTION 25.4 ASSIGNMENT.
This Agreement and the rights of the parties hereunder may not be assigned,
and the obligations of the parties hereunder may not be delegated, in whole or
in part, by any party without the prior written consent of the other parties
hereto.
SECTION 25.5 NO THIRD PARTY BENEFICIARIES.
Nothing in this Agreement is intended to confer any rights or remedies upon
any Person other than (i) the parties hereto, (ii) the indemnified Persons under
Article XX and (iii) M&S with respect to the provisions of Section 1.2.1.
SECTION 25.6 NOTICES.
Any notice, request, instruction or other document or communication
required or permitted to be given under this Agreement shall be in writing and
shall be deemed given (i) three days after being deposited in the mail, postage
prepaid, certified or registered mail, (ii) on the next business day after
delivery to a reputable overnight delivery service such as Federal Express, or
(iii) upon personal delivery if delivered or addressed to the addresses set
forth below or to such other address as any party may hereafter specify by
written notice to the other parties hereto:
(a) If to WE JAC prior to the Closing, delivered or mailed to WE JAC
Corporation, 748 Miller Drive, SE, Leesburg, Virginia 20175, Attention: Board of
Directors, with a copy delivered or mailed to John B. Frisch, Esquire, Miles &
Stockbridge, a Professional Corporation, 10 Light Street, Baltimore, Maryland
21202;
(b) If to Miracle Industries prior to the Closing, delivered or mailed
to Miracle Industries, Inc., c/o Miracle Car Wash, 1458 Park Avenue West,
Mansfield, Ohio 44906, Attention: President;
(c) If to Lube Venturess prior to the Closing, delivered or mailed to
Lube Venturess, Inc., 1237 West Fourth Street, Mansfield, Ohio 44906, Attention:
President;
(d) If to Miracle Partners prior to the Closing, delivered or mailed
to Miracle Partners, Inc., c/o Lube Venturess, Inc., 1237 West Fourth Street,
Mansfield, Ohio 44906, Attention: President;
(e) If to Prema Properties prior to the Closing, delivered or mailed
to Prema Properties, Ltd., 52 East 15th Avenue, Columbus, Ohio 43201, Attention:
Managing Member;
(f) If to Rocky Mountain I, Rocky Mountain II or Ralston Car Wash
prior to the Closing, delivered or mailed c/o Rocky Mountain Ventures, Inc.,
15200 East Girard Avenue, Suite 2700, Aurora, Colorado 80014-5039, Attention:
President;
(g) If to KBG prior to the Closing, delivered or mailed to The Karl
Byrer Group, Inc., 2171 S. Trenton Way #215, Denver, Colorado 80231, Attention:
President.
SECTION 25.7 FURTHER ASSURANCES.
The parties hereto each agree to execute, make, acknowledge, and deliver
such instruments, agreements and other documents as may be reasonably required
to effectuate the purposes of this Agreement and to consummate the transactions
contemplated hereby.
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SECTION 25.8 ARTICLE AND SECTION HEADINGS.
The Article and Section headings contained in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning or interpretation of this Agreement or any of its terms and conditions.
SECTION 25.9 GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with and shall
be governed by the laws of the Commonwealth of Virginia, without regard to its
principles of conflict of laws.
SECTION 25.10 CERTAIN DEFINITIONS.
The following terms, whenever used in capitalized form in this Agreement,
shall have the following meanings:
"Affiliate" shall mean any Person that directly or indirectly controls,
is controlled by, or is under common control with the Person in question. For
purposes of determining whether a Person is an Affiliate, the term "control"
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of securities, contract or otherwise.
"Agreements Not to Compete" shall mean the Agreements Not to Compete in
the forms attached hereto as Exhibits which will be entered into by and between
the Holding Company and the Person listed on Schedule 4.1.7 at the Closing.
"Applicable Laws" shall mean any law, statute, ordinance, code, rule,
regulation, standard, ruling, decree, judgment, award, order or other
requirement of any Government Authority that is applicable to a Predecessor
Company.
"Benefit Arrangements" shall mean all life and health benefits,
hospitalization, savings, bonus, deferred compensation, incentive compensation,
severance pay, disability, sick pay, vacation pay, stock option, award or
similar plans, and fringe benefit plans, individual employment and severance
contracts and other policies and practices, whether written or oral, providing
employee or executive compensation or benefits to Employees of a Predecessor
Company or their dependents, other than Employee Benefit Plans.
"Byrer Group" shall mean and refer to KBG and its shareholders and
Subsidiaries.
"Closing" shall mean the consummation of the transactions contemplated
by Article III of this Agreement.
"Closing Date" shall mean the date on which the Closing actually shall
occur pursuant to this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Collateral Agreements" shall mean the Agreements Not to Compete, the
Employment Agreements and the Underwriting Agreement which are expected to be
executed by the Holding Company at the Closing.
"Combination Shares" shall mean the shares of the Common Stock of the
Holding Company to be issued pursuant to the transactions contemplated by
Article III hereof.
"Commission" shall mean the Securities and Exchange Commission of the
United States of America.
"Constituent Company" of a Participant Group shall mean and refer to
each of the corporations and limited liability companies (and the shareholders
and members thereof) of such Participant Group.
"Contest" shall mean any administrative or judicial Tax audit,
examination, proceeding or litigation involving any Tax Authority.
"Contributing Companies" or "Contributing Company" shall refer only to
the WE JAC Group, Miracle Industries, Prema Properties, Lube Venturess, Miracle
Partners, Rocky Mountain I, Rocky Mountain II and Ralston Car Wash, but shall
not include or refer to KBG.
"Corporate Predecessor Companies" and "Corporate Predecessor Company"
shall mean and refer to WE JAC, Miracle Industries, Lube Ventures, KBG, Miracle
Partners, Rocky Mountain I and Rocky Mountain II.
"Debt Level Escrow Shares" shall mean the share of Common Stock of the
Holding Company to be deposited into escrow at the Closing by the Holding
Company pursuant to Section 19.1.
"DOL" shall mean the United States Department of Labor.
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"Employee Benefit Plan" shall mean each "employee benefit plan," as
defined in Section 3(3) of ERISA, maintained or contributed to by any of the
Predecessor Companies or any of its Subsidiaries or any of its ERISA Affiliates,
but excluding Multiemployer Plans.
"Employees" or "Employee" shall mean and refer to the current employees,
former employees and retired employees of a Predecessor Company.
"Encumbrance" shall mean any interest of any Person, including, without
limitation, any right to acquire, option, right of preemption, or any mortgage,
lease, charge, pledge, lien, encumbrance, assignment, hypothecation, security
interest, title retention, claim, covenant, condition, easement or any other
security agreement or arrangement or any restriction of any kind or character.
"Environmental Laws" shall mean any law, statute, regulation, rule,
order, consent, decree, or governmental requirement that relates to or otherwise
imposes liability or standards of conduct concerning Hazardous Materials or
discharges or releases of any Hazardous Materials into air, water or land,
including (but not limited to) the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended; the Resource Conservation
and Recovery Act of 1978, as amended; the Clean Water Act, the Clean Air Act, or
any other similar federal, state or local statutes.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" shall mean any Person that is treated as a single
employer with the Person in question under Section 414(b), (c), (m) or (o) of
the Code.
"Exchange Agent" shall mean such bank or trust company as the exchange
agent for the Subsidiary Mergers.
"Exchange Offers" shall mean the Prema Properties Exchange Offer, the
Miracle Partners Exchange Offer, the Ralston Car Wash Exchange Offer and the KBG
Exchange Offer.
"GAAP" shall mean generally accepted accounting principles in effect in
the United States as of the date hereof.
"Governmental Authority" shall mean any government or state (or any
subdivision thereof), whether domestic, foreign or multinational, or any agency,
authority, bureau, commission, department or similar body or instrumentality
thereof, or any governmental court or tribunal.
"Guarantees" shall mean any obligations, contingent or otherwise, of a
Person in respect of any indebtedness, obligation or liability of another
Person, including but not limited to direct or indirect guarantees, endorsements
(except for collection or deposit in the ordinary course of business), notes
co-made or discounted, recourse agreements, take-or-pay agreements, keep-well
agreements, agreements to purchase or repurchase such indebtedness, obligation
or liability or any security therefor or to provide funds for the payment or
discharge thereof, agreements to maintain solvency, assets, level of income, or
other financial condition, and agreements to make payment other than for value
received.
"Hazardous Materials" shall mean (a) any "hazardous waste" as defined by
the Resource Conservation and Recovery Act of 1976, as amended from time to
time, and regulations promulgated thereunder; and (b) any "hazardous substance"
as defined by the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended from time to time, and regulations promulgated
thereunder; and (c) any "hazardous material" as defined by the Hazardous
Materials Transportation Act, as amended from time to time, and regulations
promulgated thereunder; and shall include without limitation, asbestos, PCBs,
petroleum products, and urea-formaldehyde (in situations where considered
hazardous or toxic).
"Indemnity Escrow Shares" shall mean the shares of the Common Stock of
the Holding Company deposited into escrow by the Holding Company at the Closing
pursuant to Section 20.1 of this Agreement.
"Income Taxes" shall mean any income, gross receipts, gains, net worth,
surplus, franchise or withholding taxes (including interest, penalties or other
additions to Tax) imposed by a Tax Authority.
"Holding Company Indemnified Claims and Losses" shall mean demands,
suits, claims, actions or causes of action, assessments, losses, damages,
liabilities, costs, judgments and expenses, including, without limitation,
interest, penalties, reasonable attorneys' fees, disbursements and expenses, and
reasonable consultants' fees, disbursements and expenses.
"Intellectual Property" shall mean all patents, patent applications,
trademarks, trademark registrations and applications therefor, service marks,
service mark registrations and applications therefor, copyrights, copyright
registrations and applications therefor, trade names, trade secrets, software
and computer programs, know-how, inventions, processes and procedures.
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"IPO" shall mean the proposed public offering by the Holding Company of
shares of its Common Stock following the Closing.
"IPO Shares" shall mean and refer to such number of shares of the
authorized shares of the Common Stock of the Holding Company which shall be
issued by the Holding Company in the IPO.
"IRS" shall mean the Internal Revenue Service of the United States of
America.
"Lease Agreements" shall mean the Lease Agreements described in Sections
5.14, 5.15 and 5.16.
"Lube Ventures Disclosure Letter" shall mean the Disclosure Letter dated
of even date with this Agreement submitted by Lube Ventures to each of the other
parties hereto in connection with the representations and warranties made by
Lube Ventures herein.
"Lube Ventures Dissenting Shares" shall mean each of the shares of the
Common Stock of Lube Ventures with respect which the holder thereof shall have
exercised and perfected Dissenter' Rights under the laws of the State of Ohio.
"Lube Ventures System" shall mean Lube Ventures's proprietary system for
the operation of retail service centers which are devoted to providing
lubrication services for automobiles and light trucks.
"Management Option Shares" shall mean the shares of the Common Stock of
the Holding Company to be reserved for issuance by the Holding Company pursuant
to Section 22.2.
"Material Adverse Effect" shall mean a material adverse change in the
business, assets, rights, properties, liabilities, financial condition or
prospects of a Person.
"Material Contracts" shall mean those contracts, agreements, commitments
or understanding required to be disclosed by a Predecessor Company in its
Disclosure Letter pursuant to this Agreement.
"Material Participant" shall mean WE JAC, Miracle Industries, Miracle
Partners, Prema Properties, Lube Venturess and Rocky Mountain II.
"Membership Interest" shall mean, with respect to the Prema Properties
Members, all of the rights of each of the Prema Property Members as a member of
Prema Properties and all of their respective right, title and interest in, to
and under the Amended Operating Agreement dated March , 1996 by and among the
Prema Properties Members, and, with respect to the Ralston Car Wash Members, all
of the rights of each of the Ralston Car Wash Members as a member of Ralston Car
Wash and all of their respective right, title and interest in, to and under the
Operating Agreement dated September 5, 1991, by and among the Ralston Car Wash
Members.
"Memorandum of Understanding" shall mean and refer to that certain
Memorandum of Understanding dated as of October 18, 1996 by and among WE JAC,
Precision Tune, Ernie Malas, William Klumb, Karl Byrer, Lube Venturess, Prema
Properties, Miracle Industries, Rocky Mountain I, Rocky Mountain II and Ralston
Car Wash, as supplemented by the Supplemental Memorandum of Understanding dated
as of February 28, 1997 by and among WE JAC, Precision Tune, Ernie Malas,
William Klumb, Karl Byrer, Lube Ventures, Prema Properties, Miracle Industries,
Rocky Mountain I, Rocky Mountain II and Ralston Car Wash, as amended by that
certain Joinder and Amendment No. 1 to Supplemental Memorandum of Understanding
dated as of March 17, 1997 by and among and among WE JAC, Precision Tune, Ernie
Malas, William Klumb, Karl Byrer, Lube Venturess, Prema Properties, Miracle
Industries, Rocky Mountain I, Rocky Mountain II, Ralston Car Wash, Miracle
Partners and C. Eugene Deal.
"Miracle Industries Disclosure Letter" shall mean the Disclosure Letter
dated of even date with this Agreement submitted by Miracle Industries to each
of the other parties hereto in connection with the representations and
warranties made by Miracle Industries herein.
"Miracle Industries Dissenting Shares" shall mean each of the shares of
the Common Stock of Miracle Industries with respect which the holder thereof
shall have exercised and perfected Dissenter' Rights under the laws of the State
of Ohio.
"Miracle Industries Subsidiaries" shall mean Hydro-Spray and Indy
Ventures.
"Multiemployer Plan" shall mean a plan described in Sections 3(37) and
4001(a)(3) of ERISA to which any of of the Predecessor Companies or any of its
Subsidiaries has an obligation to contribute.
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"National 60 Minute Tune" shall mean and refer to National 60 Minute
Tune, Inc., a Washington corporation and a wholly-owned subsidiary corporation
of WE JAC.
"Ohio Group" shall mean and refer to Lube Venturess and Miracle
Industries and their respective shareholders and Subsidiaries and the Prema
Properties Group.
"Operating Committee" shall mean a committee comprised of two
Representatives of the WE JAC Group, one Representative of the Ohio Group and
one Representative of the Rocky Mountain Group which Representatives shall be
the following individuals until changed in accordance with Section 24.14: John
R. Ripley and Peter Kendrick as the Representatives of the WE JAC Group; Ernst
S. Malas as the Representative of the Ohio Group; and William R. Klumb as the
Representative of the Rocky Mountain Group.
"Option Agreements" shall mean the Option Agreements described in
Sections 5.14, 5.15 and 5.16.
"Participant Group" shall mean and refer to the Rocky Mountain Group,
the Ohio Group, the WE JAC Group and the Byrer Group, respectively.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Pension Plan" shall mean any Employee Benefit Plan that is an "employee
pension benefit plan" as defined in Section 3(2) of ERISA.
"Person" shall mean any individual, corporation, unincorporated
association, business trust, estate, partnership, limited liability company,
limited liability partnership, trust, government or any agency or political
subdivision thereof, or any other entity.
"Precision Tune" shall mean and refer to Precision Tune Auto Care, Inc.,
a Virginia corporation and a wholly-owned subsidiary corporation of WE JAC.
"Precision Tune System" shall mean Precision Tune's proprietary system
for the operation of retail service centers which are devoted to providing brake
repairs, engine tune-ups, lubrication services, oil and filter changes, engine
diagnostics, emissions systems installation and certification, preventative
maintenance services, minor air conditioning and engine cooling system services
and minor repairs to the distributor, carburetor, fuel and ignition systems for
automobiles and light trucks.
"Predecessor Companies" shall mean and refer to WE JAC, Precision Tune,
Lube Ventures, Miracle Industries, Hydro-Spray, Indy Ventures, KBG, Rocky
Mountain I, Rocky Mountain II, Miracle Partners, Prema Properties and Ralston
Car Wash.
"Prema Properties Disclosure Letter" shall mean the Disclosure Letter
dated of even date with this Agreement submitted by the Prema Properties Members
to each of the other parties hereto in connection with the representations and
warranties made by the Prema Properties Members herein.
"Prema Properties Group" shall mean and refer to Prema Properties and
the Prema Properties Members.
"Proprietary Car Wash Software System" shall mean the Proprietary Car
Wash Computer Software System designed for the operation of car wash centers
which has been developed by The Karl Byrer Group and Karl Byrer.
"PTW" shall mean and refer to PTW, Inc., a Washington corporation and a
wholly-owned subsidiary corporation of Precision Tune.
"Ralston Car Wash Disclosure Letter" shall mean the Disclosure Letter
dated of even date with this Agreement submitted by the Ralston Car Wash Members
to each of the other parties hereto in connection with the representations and
warranties made by the Ralston Car Wash Members herein.
"Real Estate Partnerships" shall mean and refer to each partnership
described in Sections 5.14, 5.15 and 5.16.
"Responsible Group" shall mean the Selling Stockholders or the Selling
Members of any Contributing Company or KBG with respect to whom the Holding
Company exercises its rights of reimbursement and indemnification pursuant to
the terms of this Agreement following the Closing (whether pursuant to the
exercise of its rights to set-off against the Indemnity Escrow Shares or
otherwise).
"Rocky Mountain Group" shall mean and refer to Rocky Mountain I and
Rocky Mountain II and their respective shareholders, and Ralston Car Wash and
the Ralston Car Wash Members.
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"Rocky Mountain I Disclosure Letter" shall mean the Disclosure Letter
dated of even date with this Agreement submitted by Rocky Mountain I to each of
the other parties hereto in connection with the representations and warranties
made by Rocky Mountain I herein.
"Rocky Mountain II Disclosure Letter" shall mean the Disclosure Letter
dated of even date with this Agreement submitted by Rocky Mountain II to each of
the other parties hereto in connection with the representations and warranties
made by Rocky Mountain II herein.
"Rocky Mountain I Dissenting Shares" shall mean each of the shares of
the Common Stock of Rocky Mountain I with respect which the holder thereof shall
have exercised and perfected Dissenter' Rights under the laws of the State of
Colorado.
"Rocky Mountain II Dissenting Shares" shall mean each of the shares of
the Common Stock of Rocky Mountain II with respect which the holder thereof
shall have exercised and perfected Dissenter' Rights under the laws of the State
of Colorado.
"Securities Act" shall mean The Securities Act of 1933, as amended and
in effect from time to time, and the rules and regulations of the Commission
adopted or promulgated thereunder.
"Selling Stockholders or Members" shall mean and refer to only to those
Persons who are shareholders or members of the Predecessor Companies as of the
time of the Closing whose shares therein shall be converted to Holding Company
Common Stock at the Closing pursuant to the Subsidiary Mergers or who actually
exchange shares with or contribute interests to the Holding Company at the
Closing.
"Selling Stockholder Indemnified Claims and Losses" shall mean demands,
suits, claims, actions or causes of action, assessments, losses, damages,
liabilities, costs, judgments and expenses, including, without limitation,
interest, penalties, reasonable attorneys' fees, disbursements and expenses, and
reasonable consultants' fees, disbursements and expenses, based upon, arising
out of, asserted against, resulting to, imposed on, or incurred by the Selling
Stockholders, directly or indirectly, from the breach by the Holding Company of
any covenant or agreement to be performed or complied with by the Holding
Company from and after the Closing.
"Source Code" shall mean all computer codes, programmer documentation,
flow charts and schematics that a computer programmer reasonably skilled in the
programming language in which the Proprietary Car Wash Software is written would
need to support, enhance, modify and make derivatives of such software.
"Subsidiary" as it relates to any Person, shall mean a corporation,
limited liability company, partnership, joint venture or other Person 50% or
more of whose outstanding securities or equity interests the Person has the
right, other than as affected by events of default, directly or indirectly, to
vote for the election of directors.
"Subsidiary Mergers" shall mean and refer to the WE JAC Merger, the Lube
Ventures Merger, the Miracle Industries Merger, the Rocky Mountain I Merger and
the Rocky Mountain II Merger.
"Tax Authority" shall mean a foreign or United States federal, state, or
local Governmental Authority having jurisdiction over the assessment,
determination, collection or imposition of any Tax, as the context requires.
"Tax Returns" shall mean all returns (including information returns and
amended returns), declarations, reports, claims for refunds, estimates and
statements regarding Taxes, required to be filed under Applicable Laws.
"Taxes" shall mean all taxes, charges, fees, levies or other
assessments, including without limitation, all net income, gross income, gross
receipts, sales, use, value added, ad valorem, transfer, franchise, profits,
license, withholding, payroll, employment, windfall profit, alternative or add
on minimum, excise, estimated, severance, stamp, occupation, property or other
taxes, customs, duties, fees, assessments, or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any Tax Authority.
"Termination Damages" shall have the meaning provided in Section 21.3.
"WE JAC Disclosure Letter" shall mean the Disclosure Letter dated of
even date with this Agreement submitted by WE JAC to each of the other parties
hereto in connection with the representations and warranties made by WE JAC
herein.
"WE JAC Dissenting Shares" shall mean each of the shares of the Common
Stock of WE JAC with respect which the holder thereof shall have exercised and
perfected Dissenter' Rights under the laws of the State of Delaware.
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<PAGE>
"WE JAC Group" shall mean and refer to WE JAC, Precision Tune, National
60 Minute Tune, PTW and the shareholders of WE JAC.
SECTION 25.11 CONSTRUCTION.
As used in this Agreement, any reference to the masculine, feminine or
neuter gender shall include all genders, the plural shall include the singular,
and the singular shall include the plural. With regard to each and every term
and condition of this Agreement and any and all agreements and instruments
contemplated hereby, the parties hereto understand and agree that the same have
or has been mutually negotiated, prepared and drafted, and that if at any time
the parties hereto desire or are required to interpret or construe any such term
or condition or any agreement or instrument subject hereto, no consideration
shall be given to the issue of which party hereto actually prepared, drafted or
requested any term or condition of this Agreement or any agreement or instrument
subject hereto. The Exhibits and Schedules to this Agreement constitute a
substantive part of this Agreement and are hereby incorporated into this
Agreement by this reference.
SECTION 25.12 COUNTERPARTS.
This Agreement may be executed in counterparts and multiple originals, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
SECTION 25.13 TIME OF THE ESSENCE.
Time is of the essence with respect to each and every term and provision of
this Agreement.
SECTION 25.14 REPRESENTATIVE OF SELLING STOCKHOLDERS AND SELLING MEMBERS
AND KBG.
The Selling Stockholders of each of the Predecessor Companies whose shares
therein shall be converted to Holding Company Common Stock at the Closing
pursuant to the Subsidiary Mergers and the Selling Stockholders and Selling
Members of each of the other Predecessor Companies who actually exchange shares
or membership interests for Holding Company Common Stock at the Closing and KBG
irrevocably make, constitute and appoint as their exclusive agent and attorney-
in-fact to act on their behalf with respect to any and all matters, claims,
controversies or disputes arising out of the terms of this Agreement including,
without limitation, the matters addressed in Articles XIX and XX hereof, the
individuals named below as the Representative (each a "Representative") of the
indicated Predecessor Company.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY REPRESENTATIVE
- --------------------------------------------------------- ---------------------------------------------------------
<S> <C>
WE JAC Arnold Janofsky
Miracle Industries Effie Eliopulos
Lube Ventures Ernest S. Malas
Rocky Mountain I William R. Klumb
Rocky Mountain II William R. Klumb
Miracle Partners C. Eugene Deal
Prema Properties George A. Bavelis
Ralston Car Wash William R. Klumb
KBG Karl Byrer
</TABLE>
In the event of the death, resignation or incapacity of any Representative,
the majority of the individuals who comprised the board of directors of a
Corporate Predecessor Company immediately prior to the Closing and the members
who held a majority of the membership interest in any other Predecessor Company
shall appoint a successor Representative of the Selling Stockholders and Selling
Members of such Predecessor Company and provide notice of such appointment to
the Holding Company and the Escrow Agent, provided that, if a successor
Representative is not so appointed within 15 days of the death, resignation or
incapacity of any Representative, the Board of Directors of the Holding Company
may appoint as such successor Representative any individual who is a Selling
Stockholder or a Selling Member of such Predecessor Company by providing notice
of such appointment to the Selling Stockholders or Selling Members of such
Predecessor Company and to the Escrow Agent. The Holding Company shall have the
right to rely upon any actions taken or omitted to be taken by the
Representative as being the act or omission of each applicable group of Selling
Stockholders or Selling Members, without the need for any inquiry and any such
actions or omissions of the Representative shall be binding upon the applicable
group of Selling Stockholders or Selling Members. The Representatives shall not
be liable to the parties hereto for any action taken or omitted by the
Representatives in good faith and in no even shall the Representatives be liable
or responsible except for its own gross negligence or willful misconduct. The
Selling Stockholders and Selling Members of each Contributing Company agree that
the Selling Stockholders and Selling Members of each Contributing Company shall
be liable, jointly and severally,
A-120
<PAGE>
<PAGE>
to hold its Representatives from, and to indemnify and reimburse its
Representatives from, all claims, liabilities, losses and expenses (including
out-of-pocket and incidental expenses reasonably incurred and reasonable legal
fees) arising in connection with any action, suit or claim under this Agreement,
provided that the Representatives have not acted with gross negligence, bad
faith or willful misconduct with respect to any of the events relating to such
claims, liabilities, losses or expenses. In no event shall the Representatives
be responsible or liable for special, indirect or consequential loss or damages
of any kind, regardless of the form of action.
IN WITNESS WHEREOF, the parties have executed this First Amendment as of
the date and year set forth in the preamble to this First Amendment.
<TABLE>
<S> <C>
ATTEST: PRECISION AUTO CARE, INC.
By:
WE JAC CORPORATION
By:
LUBE VENTURES, INC.
By:
ROCKY MOUNTAIN VENTURES, INC.
By:
ROCKY MOUNTAIN VENTURES II, INC.
By:
PREMA PROPERTIES, LTD.
By:
MIRACLE INDUSTRIES, INC.
By:
MIRACLE PARTNERS, INC.
By:
RALSTON CAR WASH, LTD.
By:
THE KARL BYRER GROUP, INC.
By:
</TABLE>
A-121
NUMBER SHARES
PA
PRECISION AUTO CARE, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF VIRGINIA
COMMON STOCK CUSIP
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR CERTAIN DEFINITIONS
CHARLOTTE, NC OR NEW YORK, NY
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE,
OF
PRECISION AUTO CARE, INC.
(the "Corporation"), a Virginia corporation. The shares represented by this
Certificate are transferable only on the stock transfer books of the Corporation
by the holder of record hereof, or by his duly authorized attorney or legal
representative, upon the surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
DATED
[PRECISION AUTO CARE SEAL]
PRECISION AUTO CARE, INC.
CORPORATE
SEAL
1997
Secretary VIRGINIA President
(C) SECURITY-COLUMBIAN UNITED STATES BANKNOTE COMPANY 1960
Countersigned and Registered:
FIRST UNION NATIONAL BANK
(Charlotte, NC) Transfer Agent
By and Registrar
Authorized Signature
- ----------------------------------------------
AMERICAN BANKNOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
215-657-3480
- ----------------------------------------------
SALESPERSON - C. SHARKEY -- 215-830-2153
- ----------------------------------------------
/home/joew/inprogress/home14/PRECISION53086
- ----------------------------------------------
- ----------------------------------------------
PRODUCTION COORDINATOR-PAT STOVER-215-830-2155
PROOF OF OCTOBER 8, 1997
PRECISION AUTO CARE, INC.
H 53086fc
- ----------------------------------------------
Opr. JW NEW
- ----------------------------------------------
/net/banknote/home46/P2
- ----------------------------------------------
<PAGE>
PRECISION AUTO CARE, INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entirety
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- __________ Custodian ___________
(Cust) (Minor)
under Uniform Gift to Minors
Act ______________________
(State)
UNIF TRANS MIN ACT -- __________ Custodian ___________
(Cust) (Minor)
under Uniform Transfers to Minors
Act ______________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, __________________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
___________________Shares of Common Stock represented by the within certificate,
and do hereby irrevocably constitute and appoint _______________________________
Attorney to transfer the said shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated ______________________ __________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: __________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
- -------------------------------------------
AMERICAN BANKNOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
215-657-3480
- -------------------------------------------
SALESPERSON - C. SHARKEY -- 215-830-2153
- -------------------------------------------
/home/joew/inprogress/home14/PRECISION53086
- -------------------------------------------
- ----------------------------------------------
PRODUCTION COORDINATOR-PAT STOVER-215-830-2155
PROOF OF OCTOBER 8, 1997
PRECISION AUTO CARE, INC.
H53086bk
- ----------------------------------------------
Opr. JW NEW
- ----------------------------------------------
/net/banknote/home46/P2
- ----------------------------------------------
October 13, 1997
Precision Auto Care, Inc.
748 Miller Drive, S.E.
Leesburg, Virginia 20175
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933,
as amended (the "Act"), of 2,440,000 shares of common stock (the "Common
Stock") of Precision Auto Care, Inc., a Virginia corporation, we have examined
such corporate records, certificates and documents as we deemed necessary for
the purpose of this opinion. Based on that examination, we advise you that in
our opinion the Common Stock has been duly and validly authorized and, when
issued upon the terms set forth in the Registration Statement filed with the
Securities and Exchange Commission (the "Commission"), will be legally issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the Prospectus. In giving our consent, we do not thereby admit that
we are in the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
Miles & Stockbridge,
a Professional Corporation
By: /s/ John B. Frisch
------------------
Principal
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made his 23 day of June, 1995, by and between John F.
Ripley, a resident of Ellicott City, Maryland (the "Executive"), and Precision
Tune, Inc., a Virginia corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Executive desires to provide his services to the Company
and the Company desires to employ the Executive upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
promises, covenants and agreements contained herein, and intending to be legally
bound, the parties hereby agree as follows:
1. Employment and Term.
The Company will employ the Executive, and the Executive hereby accepts
employment with the Company, for an initial term commencing on July 1, 1995, and
continuing for a period of three (3) years until and including June 30, 1998
(the "Initial Term"), unless such employment is earlier terminated as provided
herein. After expiration of the Initial Term, the Executive's employment under
this Agreement shall continue until terminated as provided herein.
2. Duties.
The Executive shall serve in the capacity of President and Chief
Executive Officer. He shall also be elected and serve as a member of the
Company's Board of Directors. During the term of his employment hereunder, the
Executive shall devote his full business time and attention to the performance
of his duties for the Company.
3. Compensation.
(a) Base Salary. The Company shall pay the Executive, and the
Executive shall accept, as full compensation for all services rendered
hereunder, a basic salary (the "Base Salary") and the other compensation and
benefits provided hereunder. The Executive's Base Salary effective July 1, 1995,
shall be at an annual rate of One Hundred Seventy Thousand Dollars ($170,000),
payable in approximately equal installments at such intervals as are consistent
with the Company's pay periods for salaried executive employees. The Executive's
Base Salary shall be reviewed by the Board of Directors no less frequently than
once in any twelve-month period and may be increased, but not decreased
regardless of any change in or diminution of the Executive's duties owed to the
Company.
1
<PAGE>
(b) Performance Bonus. The Executive is entitled to receive a
Performance Bonus as follows: For each fiscal year in which the Company's
before-tax net profits as determined by generally accepted accounting principles
exceed Two Million Dollars ($2,000,000), the Executive shall be entitled to
receive a bonus of ten percent (10%) of the Base Salary he received during that
fiscal year. For each One Hundred Thousand Dollars ($100,000) of before-tax net
profit over Two Million Dollars ($2,000,000), the Executive shall be entitled to
receive a bonus of an additional Five Percent (5%) of the Base Salary he
received during that fiscal year. Net profits before taxes, and any applicable
bonus, will be determined on a fiscal year basis, with the fiscal year running
from May 1 to April 30; provided that, for the period of July 1, 1995 - April
30, 1996, the Performance Bonus shall be based on before-tax net profits during
said ten (10)-month period, using $1,666,667 instead of $2,000,000 and $83,333
instead of $100,000 to determine the percentage of Base Salary payable.
Notwithstanding any other provision of this Agreement, in no event and under no
circumstances shall the Performance Bonus exceed fifty percent (50%) of the Base
Salary received by the Executive during the relevant fiscal year. For purposes
of computing Performance Bonus, the Company's before-tax net profits shall not
include any charge against profits attributable to any amounts paid or payable
pursuant to this Section 3(b). The percentage amount of bonus payable (except,
as indicated above, for the period of July 1, 1995 - April 30, 1996) shall be:
PRE-TAX BONUS
PROFITS PERCENTAGE
------- ----------
$2.0 MM 10%
2.1 MM 15%
2.2 MM 20%
2.3 MM 25%
2.4 MM 30%
2.5 MM 35%
2.6 MM 40%
2.7 MM 45%
2.8 MM 50%
If the Board of Directors changes the Company's fiscal year, the
$2,000,000/$100,000 figures used to determine Performance Bonus shall be
adjusted pro-rata to reflect any transitional fiscal year containing more or
less than twelve (12) months.
(c) Benefits.
(i) The Executive shall be eligible to
participate in retirement, group insurance, medical, dental, vacation and any
other plans or programs of substantially similar character as are made generally
available to executive employees of the Company which do not duplicate the
benefits otherwise
2
<PAGE>
specifically provided in this Agreement. All such benefits are to be provided by
the Company, subject to the terms of any welfare or pension plan sponsored by
the Company.
(ii) If the Executive relocates his
residence to the Leesburg, Virginia, area on or before June 30, 1996, the
Company shall pay Executive Fifteen Thousand Dollars ($15,000).
(iii) The Executive shall be eligible to
participate in a Stock Option Plan, as outlined in the document attached hereto
as Appendix A.
(iv) The Company shall reimburse the
Executive for all expenses incurred by him in the performance of his duties
pursuant to this Agreement.
(v) Executive shall receive such other
benefits and/or allowances as are permitted to him from time to time by the
Board of Directors.
(d) Restructuring of Payments. Notwithstanding anything in
this Agreement to the contrary, in the event that, in the opinion of the
Company's auditors, any payments of compensation to be made hereunder would be
treated as "excess parachute payments" within the meaning of section 280G of the
Internal Revenue Code as amended, the Company and the Executive shall use their
best efforts to restructure any of the payments so as to avoid the imposition of
excise tax upon the Executive and the loss of deduction for such payments by the
Company.
4. Confidentiality.
While employed by the Company under this Agreement and at all times
thereafter, the Executive shall not, without the prior written consent of the
Company, divulge to any third party or use for his own benefit or the benefit of
any third party, or for any purpose other than the exclusive benefit of the
Company, any confidential or proprietary business or technical information
revealed, obtained or developed in the course of his employment with the Company
or his duties performed for the Company or which is otherwise the property of
the Company or any of its subsidiaries or affiliated companies; provided that,
nothing contained herein shall restrict the Executive's use or disclosure of
such information (i) in the proper course of conduct of the Company's business,
(ii) known generally to the public (other than that which he may have disclosed
in breach of this Agreement) or (iii) as required by law so long as the
Executive gives the Company prior notice of such required disclosure unless
precluded from doing so by legal authority.
5. Covenant Not to Compete.
(a) The Executive shall not, within any geographical area
while employed by the Company or while performing duties for
3
<PAGE>
the Company hereunder, and within the United States of America for two (2) years
thereafter, directly or indirectly engage or become interested in (as owner,
stockholder, partner, co-venturer, director, officer, employee, agent,
consultant or otherwise) any business that engages in the auto care industry,
except that the Executive may hold as a passive investment not more than five
percent (5%) of the outstanding securities of any class of any publicly-held
entity that engages in the auto care industry.
(b) It is the desire and the intent of the parties that the
provisions of this Section 6 shall be enforceable to the fullest extent
permissible under applicable law and public policy. Accordingly, if this Section
5 or any portion thereof shall be adjudicated to be invalid or unenforceable,
the length and scope of this Section 5 shall be reduced to the extent necessary
so that this covenant may be enforced to the fullest extent possible under
applicable law.
6. Enforcement.
(a) Injunctive Relief. The parties recognize that, in the
event of any breach by the Executive of any of the provisions of Section 4 or 5
hereof, the Company will suffer continuing and irreparable harm for which the
Company will not have an adequate remedy at law. The Executive hereby waives any
and all right to assert any claim or defense that the Company has an adequate
remedy at law for any such breach. In recognition thereof, the Company and the
Executive hereby agree that, in the event of any such breach, the Company will
be entitled to seek injunctive relief or any other appropriate remedy to enforce
such provisions. The parties further agree that this Section 6 shall not in any
way limit remedies at law or in equity otherwise available to the Company. In
the event the Company seeks injunctive relief and is unsuccessful on the merits,
or terminates such action prior to entry of a judgment or other ruling on the
merits, other than a termination of such action due to a settlement agreement
between the Company and the Executive, the Company shall reimburse the Executive
for his reasonable attorneys' fees.
(b) Arbitration. In the event of any dispute between the
parties under or relating to this Agreement or relating to the Executive's
employment by the Company, such dispute shall be submitted to and settled by
arbitration in the Commonwealth of Virginia in accordance with the Employment
Dispute Resolution Rules of the American Arbitration Association then in effect,
by an arbitrator or arbitrators selected in accordance with said rules. The
arbitrator(s) shall have the right and authority to determine how their award or
decision as to each issue and matter in dispute may be implemented or enforced.
Any decision or award shall be final and conclusive on the parties; there shall
be no appeal therefrom other than for claimed bias, fraud or misconduct by the
arbitrator(s); judgment upon any award or decision may be
4
<PAGE>
entered in any court of competent jurisdiction in the Commonwealth of Virginia
or elsewhere; and the parties hereto consent to the application by any party in
interest to any court of competent jurisdiction for confirmation or enforcement
of such award. The party against whom a decision or award is made shall pay the
fees of the American Arbitration Association. Notwithstanding the foregoing, the
Company, at its sole option, shall be entitled to enforce its rights, as
contemplated by Section 6(a) hereof, to injunctive and other equitable relief in
the event of breach of Section 4 or 5 hereof by arbitration pursuant to this
Section 6(b) or directly in any court of competent jurisdiction.
7. Termination of Employment.
(a) Death. The Executive's employment hereunder shall
terminate in the event of Executive's death. Except for any salary and benefits
accrued, vested and unpaid as of the date of any such termination and except for
any benefits to which the Executive or his heirs or personal representatives may
be entitled under and in accordance with the terms of any employee benefit plan,
policy or program maintained by the Company, the Company shall be under no
further obligation hereunder to the Executive or his heirs or personal
representatives, and the Executive or his heirs and personal representatives no
longer shall be entitled to receive any payments or any other rights or benefits
under this Agreement.
(b) Disability. The Company may terminate the Executive's
employment hereunder for "Disability," if an independent physician mutually
selected by the Executive or his representative and the Board of Directors or
its designee has determined that the Executive has been substantially unable to
render to the Company services of the character contemplated by Section 2 of
this Agreement, by reason of a physical or mental illness or other condition
continuing for more than one hundred and eight (180) consecutive days or for
shorter periods aggregating more than two hundred and twenty (220) days in any
period of twelve (12) consecutive months (excluding in each case days on which
the Executive was on vacation). In the event of such Disability, the Executive
shall be entitled to receive any salary and benefits accrued, vested and unpaid
as of the date of any such termination and any benefits to which the Executive
may be entitled under and in accordance with the terms of any employee benefit
plan, policy or program maintained by the Company. The Company shall be under no
further obligation hereunder to the Executive, and the Executive no longer shall
be entitled to receive any other payments, rights or benefits under this
Agreement.
(c) Termination by the Company for Cause. The Company may
terminate the Executive's employment hereunder for "Cause." For purposes of this
Agreement, "Cause" shall mean any of the following:
5
<PAGE>
(i) The Executive's repeated willful
misconduct or gross negligence;
(ii) The Executive's repeated conscious
disregard of his obligations hereunder;
(iii) The Executive's repeated conscious
violation of any provision of the Company's by-laws or of its other stated
policies, standards or regulations;
(iv) A determination that the Executive
has demonstrated a dependence upon any addictive substance, including alcohol,
controlled substances, narcotics or barbiturates; provided, however, that if
the Board of Directors of the Company desires to terminate the Executive for
any of the reasons set forth in clauses (i), (ii) or (iii) of this Section
7(c), the Company within the sixty (60) day period immediately following each
alleged commission of a proscribed act or omission, shall have furnished to the
Executive a written description of the allegedly proscribed act or omission and
a statement advising him that the Company views such conduct as being of the
type that could lead to a termination of the Executive for Cause and, provided
further, that if the Board of Directors of the Company desires to terminate the
Executive on the basis of clause (iii) of this Section 7(c), it must be able to
demonstrate that the Executive has been furnished with a copy of the by-law
provision, policy, standard or regulation, the violation of which the Executive
is being accused, at a time prior to the alleged commission of the violation.
In the event that the Company terminates the Executive's employment for
Cause, the Executive shall be entitled to receive a severance benefit of two (2)
months' Base Salary in effect at the time of termination. The Executive shall
not be entitled to receive any other payments or any other rights or benefits
under this Agreement (except for any salary and benefits accrued, vested and
unpaid as of the date of any such termination); the Company shall be under no
further obligation hereunder to the Executive, and the Company shall have such
rights and remedies as may be available to it for any breach of this Agreement
or otherwise.
(d) Termination by the Company other than for Cause. The
Company may terminate the Executive's employment hereunder at any time for any
other reason, provided that the Company has given the Executive ninety (90)
days' written notice of termination, termination being effective upon expiration
of the notice period. In the event of such termination, the Executive shall be
entitled to receive a severance benefit equal to Base Salary at the rate in
effect at the time of termination for the remainder of the Initial Term or for
eighteen (18) months, whichever is the greater, and shall also be entitled to
receive any salary and benefits accrued, vested and unpaid as of the date
6
<PAGE>
of any such termination and any benefits to which the Executive may be entitled
under and in accordance with the terms of any employee benefit plan, policy or
program maintained by the Company; and upon the Executive's receipt of such
severance benefit, salary and benefits, the Company shall be under no further
obligation hereunder to the Executive and the Executive no longer shall be
entitled to receive any payments or any other rights or benefits under this
Agreement.
(e) Termination by the Executive for Good Reason.
Notwithstanding anything herein to the contrary, the Executive shall be entitled
to terminate his employment hereunder for "Good Reason" without breach of this
Agreement. For purposes of this Agreement, "Good Reason" shall exist in the
event of any of the following:
(i) A change in the Executive's place of
employment outside of a 100-mile radius of Loudoun County, Virginia;
(ii) A material change in title or a
substantial elimination of the duties and responsibilities of the Executive;
(iii) A failure of the Executive to be
elected to the Company's Board of Directors, or, once elected, his removal
therefrom other than in connection with a termination of his employment
hereunder;
(iv) A material breach by the Company of
its obligations hereunder.
(v) A change in control of the Company;
provided that, for purposes of this Section 7(e)(v), a "change in control of the
Company" shall mean (A) the acquisition, directly or indirectly, by any "person"
(as such term is defined in Section 13(d) and 14(d) of the Securities Exchange
Act of 1934 as in effect on the date hereof), of voting power over voting shares
of the Company that would be entitle holders thereof to cast at least twenty
percent (20%) of the votes that all shareholders would be entitled to cast in
the election of directors of the Company; or (B) during any period of two
consecutive years during the Initial Term of this Agreement, individuals who at
the beginning of such period constitute the Company Board of Directors cease for
any reason to constitute at least a majority thereof, unless the election of
each director who is not a director at the beginning of such period shall have
been approved in advance by directors representing at least three fourths of the
directors then in office who are directors at the beginning of such period.
In the event of such termination by the Executive, the Executive shall
nonetheless be entitled to receive a severance benefit equal to Base Salary at
the rate in effect at the time of
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<PAGE>
termination for the remainder of the Initial Term or for eighteen (18) months,
whichever is the greater. Except for such severance benefit and except for any
salary and benefits accrued, vested and unpaid as of the date of such
termination, the Executive no longer shall be entitled to receive any payments
or any other rights or benefits under this Agreement, and the Company shall have
no further obligation hereunder to the Executive following any such termination.
(f) Termination by the Executive for other than Good Reason.
The Executive may terminate his employment hereunder at any time for any other
reason, provided the Executive has given the Company ninety (90) days' written
notice of termination, termination being effective upon expiration of the notice
period. In the event of such termination, the Executive shall be entitled to
receive any salary and benefits accrued, vested and unpaid as of the date of any
such termination and any benefits to which the Executive may be entitled under
and in accordance with the terms of any employee benefit plan, policy or program
maintained by the Company. The Company shall be under no further obligation
hereunder to the Executive and the Executive no longer shall be entitled to
receive any other payments, rights or benefits under this Agreement.
(g) Pro-Rata Bonus. Whenever, pursuant to this Section 7, the
Executive is entitled, upon the termination of his employment, to receive
"salary...accrued, vested and unpaid as of the date of any such termination",
the amount due him shall include a pro-rata Performance Bonus. The pro-rata
Performance Bonus shall be based on the Company's pre-tax net profits from the
start of the fiscal year in which the Executive's termination occurs through the
close of the fiscal quarter during which his termination occurs. The applicable
percentage of Base Salary received by the Executive during that fiscal year,
which is payable as bonus, shall be derived from a pro-rata portion of the
$2,000,000/$100,000 figures used to compute a full year's Performance Bonus,
equivalent to the number of fiscal quarters used in calculating the pre-tax net
profitss, e.g., if one quarter of pre-tax net profits are used, the
determinative figures shall be $500,000/$25,000.
8. Place of Employment. The Company agrees that the principal location
at which the Executive is to render his services hereunder will be within a
100-mile radius of Loudoun County, Virginia.
9. Withholding. Anything to the contrary herein notwithstanding, all
payments required to be made hereunder by the Company to the Executive, or his
estate or beneficiaries, shall be subject to the withholding of such amounts as
the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation.
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10. Survival. The Agreement shall survive any termination of the
Executive's employment hereunder unless otherwise provided herein.
11. Miscellaneous.
(a) Successors and Assigns. The Company may assign this
Agreement to, and only to, an entity which is owned more than fifty percent
(50%), directly or indirectly, by the Company, and any person or entity which
acquires all or substantially all of the Company's business, and, subject to the
foregoing, upon such assignment this Agreement shall inure to the benefit of and
be binding upon such entity. This Agreement shall not be assignable by the
Executive and shall inure to the benefit of and be binding upon him and his
personal representative and other legal representatives. It is understood that
this Section 11(a) shall not affect the right of the Executive to terminate his
employment for "Good Reason" pursuant to Section 7(e) hereof.
(b) Notice. Any notice or communication required or permitted
under this Agreement shall be made in writing or sent by certified or registered
mail, return receipt requested and postage prepaid, addressed as follows:
If to the Executive:
John F. Ripley
4446 Cross Country Drive
Ellicott City, Maryland 21042
With a copy to:
Larry M. Wolf, Esq.
Whiteford, Taylor and Preston
1400 Signet Tower
7 St. Paul Street
Baltimore, Maryland 21202
If to the Company:
Precision Tune, Inc.
748 Miller Drive, S.E.
P.O. Box 5000
Leesburg, Virginia 22075
Attention: Roy W. Hibberd, Esq.
With a copy to:
Bassam Ibrahim, Esq.
Popham, Haik, Schnobrich & Kaufman
655 15th Street, N.W., 8th Floor
Washington, DC 20005
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or to such other address as either party may from time to time duly specify by
notice given to the other party in the manner specified above. Notice shall be
deemed given when received by the other party, including by his or its agent.
(c) Entire Agreement; Amendments. This Agreement (including
Appendix A hereto) contains the entire agreement and understanding of the
parties relating to the subject matter hereof and supersedes all prior
discussions, agreements and understandings relating thereto between them. This
Agreement may not be changed or modified, except by an agreement in writing
executed by the Company, with the approval of its Board of Directors or its
designee, and by the Executive.
(d) Waiver. The waiver of a breach of any term or provision of
this Agreement shall not operate as or be construed to be a waiver of any other
or subsequent breach of this Agreement.
(e) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement, and the performance
of the obligations imposed by this Agreement, shall be governed by the laws of
the Commonwealth of Virginia applicable to contracts made and wholly to be
performed in such state, without regard to choice of law principles.
(f) Severability. In the event that any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable, in any respect, such invalidity, illegality
or unenforceability shall not affect any other provision of the Agreement. Such
invalid, illegal or unenforceable provision(s) shall be deemed modified to the
extent necessary to make it (them) valid, legal and enforceable.
(g) Indemnification. The Executive shall be entitled to the
benefit of the indemnification provided by Article 7 of the Bylaws of the
Company; provided that the Company shall be permitted to amend such provision
from time to time so long as the Executive, to the extent permitted by
applicable law, is afforded indemnification at least as favorable as that
provided by Such Article 7 as in effect on the date hereof.
(h) Captions. All captions and section headings used herein
are for convenient reference only and do not form a part of this Agreement.
(i) Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute one and the same Agreement.
(j) Computation of Time. In computing any period of time
pursuant to this Agreement, the day of the act, event or default from which the
designated period of time begins to run
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shall be included, unless it is a Saturday, Sunday, or a legal holiday, in which
event the period shall begin to run on the next day which is not a Saturday,
Sunday, or legal holiday. Likewise, if the period of time concludes on a
Saturday, Sunday or a legal holiday, the period shall run until the end of the
next day thereafter which is not a Saturday, Sunday, or legal holiday.
(k) Pronouns and Plurals. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, neuter, singular,
or plural as the identity of the person or persons may require.
12. Executive's Legal Fees. The Company shall reimburse Executive for
the reasonable legal fees incurred by him in connection with the transaction
which is the subject of this Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
PRECISION TUNE, INC.
By:
_____________________________
Name: Lynn E. Caruthers
_________________________
Title: Chairman of the Board
_________________________
_________________________________
John F. Ripley
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APPENDIX A
STOCK OPTION TERMS
1. ISSUER OF OPTION. WeJac Corporation (the "Corporation").
2. OPTION TYPE. Non-qualified.
3. OPTIONEE. John F. Ripley (the "Optionee").
4. NUMBER OF SHARES. 80,333 common shares (the "Shares")
(i.e., 5% of the fully diluted issued and outstanding common shares,
and all other common stock equivalents of the Corporation, after giving
effect to the issuance of Shares pursuant to the Option), subject to
anti-dilution adjustments as set forth below.
5. EXERCISE PRICE. _______, based upon the current appraised fair market
value of the Shares.
6. DATE OF GRANT. July 1, 1995.
7. OPTION TERM. Five years from the Date of Grant has been proposed; 10
years from the Date of Grant would be preferred as it is customary.
8. VESTING AND EXERCISABILITY. Option shall vest and become exercisable in
three equal annual installments commencing one year from the Date of
Grant, subject to acceleration upon the occurrence of certain events,
as set forth below.
9. VESTING UPON AN INITIAL PUBLIC OFFERING. The Option shall vest in full
on the effective date (the "Public Offering Date") of the Corporation's
registration statement under the Securities Act of 1933, as amended
(the "Securities Act").
10. VESTING UPON CERTAIN EXTRAORDINARY TRANSACTIONS. The Option shall vest
in full in the event (i) the Corporation consolidates or merges into or
with another corporation (including an affiliated corporation), unless
the Corporation is the survivor and the transaction does not
significantly affect the Corporation's pre-existing capital structure,
including the relative interests of shareholders of the Corporation
immediately prior to the transaction, or (ii) the Corporation sells or
conveys all or substantially all of its property or assets to any other
person.
11. SUCCESSORS TO THE CORPORATION. The Option shall provide that it is
binding on successors to the Corporation by merger, share exchange,
etc.
12. VESTING UPON TERMINATION OF EMPLOYMENT. If the Optionee's employment
is terminated for cause (as defined in the employment agreement), the
Option shall be forfeited to the Corporation to the extent it has not
vested as of the date of termination for cause. If Optionee's
employment with the Corporation or its affiliates terminates for any
other reason, including but not limited death or permanent disability,
then the Option shall be deemed to have vested in full as the date of
termination.
13. VESTING UPON A CHANGE IN CONTROL. The Option shall vest in full in the
event of a Change in Control (as to be defined) of the Corporation.
<PAGE>
14. REGISTRATION OF SHARES. The Option shall include "piggyback
registration rights" for the Optionee to have the Shares included in
any registration statement filed by the Corporation under the
Securities Act (with standard exceptions and limitations, including,
but not limited to, underwriter cutbacks and lock-up requirements)
and/or register the Shares on Form S-8 for resale by the Optionee as
soon as practicable after the initial public offering and shall use its
best efforts to qualify the Shares under applicable state "blue sky
laws".
15. ANTI-DILUTION. The Option shall provide that, in the event the
Corporation issues additional common shares prior to an initial public
offering, the number of Shares will be increased proportionally, so
that the number of Shares subject to the Option continues to equal five
percent of the Corporation's fully diluted, issued and outstanding
common shares, and all other common stock equivalents (after giving
effect to the issuance of Shares pursuant to the Option).
16. INVESTMENT INTENT. Any requirement for the Optionee to represent that
the Shares will be held only for investment intent shall only be
applicable for so long as the shares are not publicly traded.
17. CALL RIGHTS. The Corporation shall be entitled to call the Option or
the Shares held by Optionee if the Corporation has not conducted an
initial public offering by July 1, 2000 or in the event neither a
Change in Control nor an extra- ordinary transaction has occurred as of
such date. In connection with an exercise of call rights, the
Corporation shall pay the Optionee (i) in respect of the Option, an
amount equal to the excess, if any, of (A) the aggregate fair value of
the Shares subject to the Option as of the call date, over (B) the
aggregate exercise price of the Option with respect to the Shares, and
(ii) in respect of any outstanding Shares issued in full or partial
exercise of the Option, the aggregate fair value of such Shares.
Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this ____ day of ______________, 199__, by and
between William R. Klumb, a resident of Englewood, Colorado (the "Executive"),
and Precision Auto Care, Inc., a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Executive desires to provide his services to the Company
and the Company desires to employ the Executive upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
promises, covenants and agreements contained herein, and intending to be legally
bound, the parties hereby agree as follows:
1. Employment and Term.
The Company will employ the Executive, and the Executive hereby accepts
employment with the Company, for an initial term commencing on the date the
Company successfully completes its Initial Public Offering ("IPO"), and
continuing for a period of three (3) years until and including the same month
and day in 2000 (the "Initial Term"), unless such employment is earlier
terminated as provided herein. After expiration of the Initial Term, Executive's
employment under this Agreement shall continue until terminated as provided
herein.
2. Duties.
The Executive shall serve in the capacity of Vice President, Auto Wash
Operations. During the term of his employment hereunder, the Executive shall
devote his full business time and attention to the performance of his duties for
the Company. The executive shall be responsible for the creation and
implementation of the Company's Auto Wash division, the provision of assistance
to other divisions in the creation of the Auto Wash Franchise Program, the
development of new systems, the supervision of upgrading of car wash facilities,
the hiring and supervising of regional directors, the monitoring of compliance
with budgets for the Auto Wash division, supporting Auto Wash franchisees, the
creation of strategic plans for the Auto Wash division, and the installation and
supervision of a new computer system for the Auto Wash division.
3. Compensation.
(a) Base Salary. The Company shall pay the Executive,
and the Executive shall accept, as full compensation for all services rendered
hereunder, a basic salary (the "Base
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Salary") and the other compensation and benefits provided hereunder. The
Executive's Base Salary effective the date his employment commences with the
Company shall be at an annual rate of Ninety Thousand Dollars ($90,000.00),
payable in approximately equal installments at such intervals as are consistent
with the Company's pay periods for salaried executive employees.
(b) Performance Bonus. The Executive shall be entitled to
receive a Performance Bonus pursuant to the Company's performance bonus plan(s)
for all Vice Presidents in the Company, the specifics of which shall be
determined at a later occasion, and which shall be approved by the Board of
Directors. The Performance Bonus for the Executive shall be tied to the
performance of the Company's Auto Wash division and shall be comparable in
amount and on terms comparable to the performance bonuses and criteria
established for other Vice Presidents in the Company.
(c) Benefits.
(i) The Executive shall be eligible to
participate in retirement, group insurance, medical, dental, vacation and any
other plans or programs of substantially similar character as are made generally
available to executive employees of the Company which do not duplicate the
benefits otherwise specifically provided in this Agreement. All such benefits
are to be provided by the Company, subject to the terms of any welfare or
pension plan sponsored by the Company.
(ii) The Executive shall be eligible to
participate in the anticipated Company Stock Option Plan as may approved by the
Board of Directors and the Chief Executive Officer. In the event the Stock
Option Plan is approved, ratified, and implemented by the Board of Directors for
Company executives, Executive shall receive an option to purchase Twelve
Thousand Five Hundred (12,500) shares with a three-year vesting period, one
third of the total number of options being eligible for exercise on each of the
first, second, and third anniversaries of the date of execution of Executive's
Stock Option Plan. The exercise price for said stock options will be at the
offering price at the commencement of trade on the date of the IPO and the term
will be for ten (10) years. The Company agrees to file and use reasonable
efforts to become effective a registration statement on Form S-8 under the
Securities Act of 1933, as amended, with respect to the Company's Stock Option
Plan.
(iii) The Company shall reimburse the
Executive for all expenses incurred by him in the performance of his duties
pursuant to this Agreement.
(iv) Executive shall receive such other benefits
and/or allowances as are permitted to him from time to time by the Company.
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4. Confidentiality.
While employed by the Company under this Agreement and at all times
thereafter, the Executive shall not, without the prior written consent of the
Company, divulge to any third party or use for his own benefit or the benefit of
any third party, or for any purpose other than the exclusive benefit of the
Company, any confidential or proprietary business or technical information
revealed, obtained or developed in the course of his employment with the Company
or his duties performed for the Company or which is otherwise the property of
the Company or any of its subsidiaries or affiliated companies; provided that,
nothing contained herein shall restrict the Executive's use or disclosure of
such information (I) in the proper course of conduct of the Company's business,
(ii) known generally to the public (other than that which he may have disclosed
in breach of this Agreement) or (iii) as required by law so long as the
Executive gives the Company prior notice of such required disclosure unless
precluded from doing so by legal authority, or (iv) possessed by Executive at
the time of the execution of this Agreement.
5. Covenant Not to Compete.
(a) The Executive shall not, within any geographical area
while employed by the Company or while performing duties for the Company
hereunder, and within the United States of America for one (1) year thereafter,
directly or indirectly engage or become interested in (as owner, stockholder,
partner, co-venturer, director, officer, employee, agent, consultant or
otherwise) any business other than the Company that engages in the auto care,
quick lube or car wash industries, except that the Executive may hold as a
passive investment not more than five percent (5%) of the outstanding securities
of any class of any publicly-held entity that engages in the auto care industry.
(b) It is the desire and the intent of the parties that the
provisions of this Section 5 shall be enforceable to the fullest extent
permissible under applicable law and public policy. Accordingly, if this Section
5 or any portion thereof shall be adjudicated to be invalid or unenforceable,
the length and scope of this Section 5 shall be reduced to the extent necessary
so that this covenant may be enforced to the fullest extent possible under
applicable law.
6. Enforcement.
(a) Injunctive Relief. The parties recognize that, in the
event of any breach by the Executive of any of the provisions of Section 4 or 5
hereof, the Company will suffer continuing and irreparable harm for which the
Company will not have an adequate remedy at law. The Executive hereby waives any
and all right to assert any claim or defense that the Company has an adequate
remedy at law for any such breach. In recognition thereof, the Company and the
Executive hereby agree that, in the event of any such breach, the Company will
be entitled to seek injunctive relief or any other appropriate remedy to enforce
such provisions. The parties further agree that this Section 6 shall not in any
way limit remedies at law or in
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equity otherwise available to the Company. In the event the Company seeks
injunctive relief and is unsuccessful on the merits, or terminates such action
prior to entry of a judgment or other ruling on the merits, other than a
termination of such action due to a settlement agreement between the Company and
the Executive, the Company shall reimburse the Executive for his reasonable
attorneys' fees.
(b) Arbitration. In the event of any dispute between the
parties under or relating to this Agreement or relating to the Executive's
employment by the Company, such dispute shall be submitted to and settled by
arbitration in the State of Colorado in accordance with the Employment Dispute
Resolution Rules of the American Arbitration Association then in effect, by an
arbitrator or arbitrators selected in accordance with said rules. The
arbitrator(s) shall have the right and authority to determine how their award or
decision as to each issue and matter in dispute may be implemented or enforced.
Any decision or award shall be final and conclusive on the parties; there shall
be no appeal therefrom other than for claimed bias, fraud or misconduct by the
arbitrator(s); judgement upon any award or decision may be entered in any court
of competent jurisdiction in the State of Colorado or elsewhere; and the parties
hereto consent to the application by any party in interest to any court of
competent jurisdiction for confirmation or enforcement of such award. The party
against whom a decision or award is made shall pay the fees of the American
Arbitration Association. Notwithstanding the foregoing, the Company, at its sole
option, shall be entitled to enforce its rights, as contemplated by Section 6(a)
hereof, to injunctive and other equitable relief in the event of breach of
Section 4 or 5 hereof by arbitration pursuant to this Section 6(b) or directly
in any court of competent jurisdiction.
7. Termination of Employment.
(a) Death. The Executive's employment hereunder shall
terminate in the event of the Executive's death. Except for any salary and
benefits accrued, vested and unpaid as of the date of any such termination and
except for any benefits to which the Executive or his heirs or personal
representatives may be entitled under and in accordance with the terms of any
employee benefit plan, policy or program maintained by the Company, the Company
shall be under no further obligation hereunder to the Executive or his heirs or
personal representatives, and the Executive or his heirs and personal
representatives no longer shall be entitled to receive any payments or any other
rights or benefits under this Agreement.
(b) Disability. The Company may terminate the Executive's
employment hereunder for "Disability," if an independent physician mutually
selected by the Executive or his representative and the Board of Directors or
its designee has determined that the Executive has been substantially unable to
render to the Company services of the character contemplated by Section 2 of
this Agreement, by reason of a physical or mental illness or other condition
continuing for more than one hundred and eighty (180) consecutive days or for
shorter periods aggregating more than two hundred and twenty (220) days in any
period of twelve (12) consecutive months (excluding in each case days on which
the Executive was on vacation). In the event of such Disability, the Executive
shall be entitled to receive any salary and benefits
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accrued, vested and unpaid as of the date of any such termination and any
benefits to which the Executive may be entitled under and in accordance with the
terms of any employee benefit plan, policy or program maintained by the Company.
The Company shall be under no further obligation hereunder to the Executive, and
the Executive no longer shall be entitled to receive any other payments, rights
of benefits under this Agreement.
(c) Termination by the Company for Cause. The Company may
terminate the Executive's employment hereunder for "Cause." For purposes of this
Agreement, "Cause" shall mean any of the following:
(i) The Executive's repeated willful misconduct
or gross negligence in the performance of his duties hereunder;
(ii) The Executive's repeated conscious failure
to perform any of his material duties hereunder;
(iii) The Executive's repeated conscious
violation of any provision of the Company's by-laws or of its other stated
policies, standards or regulations which is materially harmful to the financial
condition or the business reputation of the Company;
(iv) A determination that the Executive has
demonstrated a dependence upon any addictive substance, including alcohol,
controlled substances, narcotics or barbiturates; provided, however, that if the
Board of Directors of the Company desires to terminate the Executive for any of
the reasons set forth in clauses (i), (ii) or (iii) of this Section 7(c), the
Company within the sixty (60) day period immediately following each alleged
commission of a proscribed act or omission, shall have furnished to the
Executive a written description of the allegedly proscribed act or omission and
a statement advising him that the Company views such conduct as being of the
type that could lead to termination of the Executive for Cause and, provided
further, that if the Board of Directors of the Company desires to terminate the
Executive on the basis of clause (iii) of this Section 7(c), it must be able to
demonstrate that the Executive has been furnished with a copy of the by-law
provision, policy, standard or regulation, the violation of which the Executive
is being accused, at a time prior to the alleged commission of the violation.
In the event that the Company terminates the Executive's employment for
Cause, the Executive shall be entitled to receive a severance benefit of two (2)
months' Base Salary in effect at the time of termination. The Executive shall
not be entitled to receive any other payment or any other rights or benefits
under this Agreement (except for any salary and benefits accrued, vested and
unpaid as of the date of any such termination); the Company shall be under no
further obligation hereunder to the Executive, and the Company shall have such
rights and remedies as may be available to it for any breach of this Agreement
or otherwise.
(d) Termination by the Company other than for Cause. The
Company may
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terminate the Executive's employment hereunder at any time for any other reason,
provided that the Company has given the Executive ninety (90) days' written
notice of termination, termination being effective upon expiration of the notice
period. In the event of such termination, the Executive shall be entitled to
receive a severance benefit equal to Base Salary at the rate in effect at the
time of termination for twelve (12) months, and shall also be entitled to
receive any salary, performance bonus, and benefits accrued, vested and unpaid
as of the date of any such termination and and to the continuation for the same
twelve (12) month period of any benefits to which the Executive may be entitled
under and in accordance with the terms of any employee benefit plan, policy or
program maintained by the Company; and upon the Executive's receipt of such
severance benefit, performance bonus, salary and benefits, the Company shall be
under no further obligation hereunder to the Executive and the Executive no
longer shall be entitled to receive any payment or any other rights or benefits
under this Agreement. In the event of termination of the Executive's employment
hereunder pursuant to this Section 7(d), all outstanding stock options held by
Executive shall become fully vested as of the date of such termination and shall
be immediately exercisable by Executive for all shares covered thereby.
(e) Termination by the Executive for Good Reason.
Notwithstanding anything herein to the contrary, the Executive shall be entitled
to terminate his employment hereunder for "Good Reason" without breach of this
Agreement. For purposes of this Agreement, "Good Reason" shall exist in the
event of any of the following:
(i) A material change in title or a substantial
elimination of the duties and responsibilities of the Executive;
(ii) A material breach by the Company of its
obligations hereunder.
(iii) A change in control of the Company;
provided that, for the purposes of this Section 7(e)(iii), a "change in control
of the Company" shall mean (A) the acquisition, directly or indirectly, by any
"person" (as such term is defined in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934 as in effect on the date hereof), of voting power over
voting shares of the Company that would entitle holders thereof to cast at least
fifty percent (50%) of the votes that all shareholders would be entitled to cast
in the election of directors of the Company; or (B) during any period of two
consecutive years during the Initial Term of this Agreement, individuals who at
the beginning of such period constitute the Company Board of Directors cease for
any reason to constitute at least a majority thereof, unless the election of
each director who is not a director at the beginning of such period shall have
been approved in advance by directors representing at least three fourths of the
directors then in office who are directors at the beginning of such period.
In the event of such termination by the Executive, the Executive shall
nonetheless be entitled to receive a severance benefit equal to Base Salary at
the rate in effect at the time of termination for twelve (12) months and to the
continuation for the same 12-month period of any benefits to which the Executive
may be entitled under and in accordance with the terms of any
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employee benefit plan, policy or program maintained by the Company. Except for
such severance benefit and except for any salary, performance bonus, and
benefits accrued, vested and unpaid as of the date of such termination, the
Executive no longer shall be entitled to receive any payments or any other
rights of benefits under this Agreement, and the Company shall have no further
obligation hereunder to the Executive following any such termination. In the
event of termination of the Executive's employment hereunder pursuant to this
Section 7(e), all oustanding stock options held by Executive shall become fully
vested as of the date of such termination and shall be immediately exercisable
by Executive for all shares covered thereby.
(f) Termination by the Executive for other than Good Reason.
The Executive may terminate his employment hereunder at any time for any other
reason, provided the Executive has given the Company ninety (90) days' written
notice of termination, termination being effective upon expiration of the notice
period. In the event of such termination, the Executive shall be entitled to
receive any salary benefits accrued, vested and unpaid as of the date of any
such termination and any benefits to which the Executive may be entitled under
and in accordance with the terms of any employee benefit plan, policy or program
maintained by the Company. The Company shall be under no further obligation
hereunder to the Executive and the Executive no longer shall be entitled to
receive any other payments, rights or benefits under this Agreement.
8. Place of Employment.
The Company agrees that the principal location at which the Executive
is to render his services hereunder will be Denver, Colorado, unless a
modification is understood and agreed to in writing by Executive and Company.
The failure of Executive to agree to a change in the principal locatio of which
his services are to be rendered shall not constitute "Cause" as defined in
Section 7(c).
9. Withholding.
Anything to the contrary herein notwithstanding, all payments required
to be made hereunder by the Company to the Executive, or his estate or
beneficiaries, shall be subject to the withholding of such amounts as the
Company may reasonably determine it should withhold pursuant to any applicable
law or regulation.
10. Survival.
The Agreement shall survive any termination of the Executive's
employment hereunder unless otherwise provided herein.
11. Miscellaneous.
(a) Successors and Assigns. The Company may assign this
Agreement to, and
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only to, an entity which is owned more than fifty percent (50%), directly or
indirectly, by the Company, and any person or entity which acquires all or
substantially all of the Company's business, provided such assignees agree by a
written agreement in form satisfactory to Executive to assume the Company's
obligations hereunder, and subject to the foregoing, upon such assignment this
Agreement shall inure to the benefit of and be binding upon such entity. This
Agreement shall not be assignable by the Executive and shall inure to the
benefit of and be binding upon him and his personal representative and other
legal representatives. It is understood that this Section 11(a) shall not affect
the right of the Executive to terminate his employment for "Good Reason"
pursuant to Section 7(e) hereof.
(b) Notice. Any notice or communication required or permitted
under this Agreement shall be made in writing or sent by certified or registered
mail, return receipt requested and postage prepaid, addressed as follows:
If to the Executive:
William R. Klumb
11500 East Dorado Avenue
Englewood, Colorado 80111
If to the Company:
Precision Auto Care, Inc.
748 Miller Drive, SE
P.O. Box 5000
Leesburg, Virginia 20175
Attn: John F. Ripley
or to such other address as either party may from time to time duly specify by
notice given to the other party in the manner specified above. Notice shall be
deemed given when received by the other party, including by his or its agent.
(c) Entire Agreement; Amendments. This Agreement contains the
entire agreement and understanding of the parties relating to the subject matter
hereof and supersedes all prior discussions, agreements and understandings
relating thereto between them. This Agreement may not be changed or modified,
except by an agreement in writing executed by the Company, and by the Executive.
(d) Waiver. The waiver of a breach of any term or provision of
this Agreement shall not operate as or be construed to be a waiver of any other
subsequent breach of this Agreement.
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(e) Governing Law. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement, and
the performance of the obligations imposed by this Agreement, shall be governed
by the laws of the State of Colorado applicable to contracts made and wholly to
be performed in such state, without regard to choice of law principles.
(f) Severability. In the event that any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable, in any respect, such invalidity or
unenforceability shall not affect any other provision of this Agreement. Such
invalid, illegal or unenforceable provision(s) shall be deemed modified to the
extent necessary to make it (them) valid, legal and enforceable.
(g) Indemnification. The Executive shall be entitled to the
benefit of the indemnification provided by Article 7 of the Bylaws of the
Company; provided that the Company shall be permitted to amend such provision
from time to time so long as the Executive, to the extent permitted by
applicable law, is afforded indemnification at least as favorable as that
provided by such Article 7 as in effect on the date hereof.
(h) Captions. All captions and section headings used herein
are for convenient reference only and do not form a part of this Agreement.
(i) Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute one and the same Agreement.
(j) Computation of Time. In computing any period of time
pursuant to this Agreement, the day of the act, event or default from which the
designated period of time begins to run shall be included, unless it is a
Saturday, Sunday, or a legal holiday, in which the period shall begin to run on
the next day which is not a Saturday, Sunday, or legal holiday. Likewise, if the
period of time concludes on a Saturday, Sunday or legal holiday, the period
shall run until the end of the next day thereafter which is not a Saturday,
Sunday, or legal holiday.
(k) Pronouns and Plurals. All pronouns and variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or plural
as the identity of the person or persons may require.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
PRECISION AUTO CARE, INC.
By:
_________________________________
Name:
_______________________________
Title:
______________________________
WILLIAM R. KLUMB
_____________________________________
William R. Klumb
10
Exhibit 10.10
August 26, 1997
Via Facsimile
Ernest S. Malas
Miracle Car Wash
1458 Park Avenue West
Mansfield, Ohio 44906
Dear Ernie:
This letter confirms our agreement that Precision Auto Care, Inc.
("PAC") and you will enter into a three (3) year consulting agreement commencing
on and contingent upon the closing of PAC's initial public offering and the
closing under the Plan of Reorganization and Agreement for Share Exchange Offers
by November 14, 1997.
Under the consulting agreement, you will be required to devote your
full time attention to assisting PAC in business development activities and
relationships with its manufacturing distributors.
For your services as a consultant, you will be paid consulting fees of
$10,000 per month and will be eligible for bonuses under a plan similar to the
bonus plan applicable to senior vice presidents of PAC.
Under the consulting agreement, you will be required to maintain the
confidentiality of confidential information of PAC and will be prohibited from
competing with PAC anywhere in the United States during the term of the
consulting agreement and for a period of two years thereafter.
The consulting agreement will provide you a severance benefit equal to
18 months of consulting fees in the event that the consulting agreement is
terminated by PAC other than for "cause" or by you for "good reason" as those
terms will be defined in the severance plan applicable to senior vice presidents
of PAC.
<PAGE>
Ernest S. Malas
August 26, 1997
Page 2
By executing this letter, you and PAC agree to negotiate and execute a
definitive form of the consulting agreement embodying the foregoing terms and
such other terms as are customary in a consulting agreement of this nature.
Very truly yours,
John F. Ripley
Accepted and Agreed
this ______ day of August, 1997.
________________________________
Ernest S. Malas
STATEMENT OF UNDERSTANDING
This Statement of Understanding is entered into this 12th day of
October, 1997, by and between Precision Tune Auto Care, Inc. (PTAC) and the
Association of Precision Tune Area Subfranchisors (APTASF). With a view to the
best interests of the PAC system, the parties agree as follows:
1. PTAC will use its reasonable efforts to eliminate any territorial conflicts
overlaps between PTAC Area Subfranchisors (the Area Subs) and the Lube Depot
Developers in a manner which is in compliance with PTACs legal obligations and
in the best interests of the PTAC system (the System). As permitted by law, PTAC
shall seek the advice of an APTASF representative who is not affected by the
conflict or overlap. PTAC also agrees not to allow any Lube Depot Developer to
use the Precision mark in any territory in which a PTAC Area Sub has valid and
continuing area subfranchisor rights.
2. PTAC will provide each APTASF member which has a valid Area Subfranchisor
Agreement with an option for 14 months after the closing of the Precision Auto
Care, Inc. initial public offering (the IPO) to elect to execute a Precision
Lube Area Subfranchisor Agreement and/or a Precision Auto Wash Area
Subfranchisor Agreement. The terms of such agreements will be substantially the
same as their existing Area Sub agreements, except that the Precision Auto Wash
Agreement will provide for a 50/50 royalty split, if the Area Subs meet minimum
performance standards jointly developed by PTAC and APTASF. The agreements will
also require a prototype to be open and in operation within 24 months after the
IPO.
3. Prior to the execution of an applicable Area Sub agreement and in the event
that an Area Sub fails to execute an Area Sub agreement within the option period
described in Paragraph 2 above, PTAC shall have the right to establish, or
franchise others to establish, Precision Lube Express and Precision Auto Wash
operations, as applicable, in the Area Subs territory.
For centers established prior to execution of an applicable Area Sub
agreement, APTASF members shall have a right of first refusal to establish the
center itself under the then-current franchise terms.
For centers established after the expiration of the option period,
APTASF members shall have no rights whatsoever, except that (a) PTAC shall
adhere to site approval described in Paragraph 4 below; and (b) PTAC shall
indemnify the applicable APTASF member from any claim for encroachment by a PTAC
franchisee.
1
<PAGE>
4. PTAC and APTASF agree to jointly develop site approval criteria and
procedures for the locating of Precision Lube Express and Precision Auto Wash
operations in areas occupied by Area Subs. Area Subs shall have site location
vetoes for Precision Lube Express and Precision Auto Wash centers to be
established within their territories for centers which are located within a
certain distance (as jointly determined) of existing PTAC centers.
5. PTAC and APTASF agree to jointly develop procedures and criteria for transfer
and renewal of Area Sub agreements. Subject to compliance with applicable
contract requirements, such transfers and renewals will not be unreasonably
delayed, refused, or hindered.
6. PTAC and APTASF agree to jointly develop procedures for use of PTAC customer
lists with a view toward avoiding unfair competition with the Precision Lube
Express and Precision Auto Wash systems.
7. PTAC and APTASF agree to jointly develop procedures to assure that
advertising for the Precision Lube Express and Precision Auto Wash systems are
not unfairly subsidized by the PTAC system within the context of the previously
defined (in the S-1 Registration Statement) marketing contribution for the
Precision Lube Express and Precision Auto Wash systems.
8. PTAC and APTASF agree to jointly develop procedures and criteria for purchase
and acquisition of buildings, fixtures, equipment, and supplies, including which
items must be purchased from PTAC (or its affiliates), from approved suppliers,
or in accordance with specifications. APTASF members agree to voluntarily
purchase all such items from PTAC (or its affiliates) for the initial 24 months
of each members operations, with prices for such items to be competitive in the
market.
9. PTAC and APTASF agree to use reasonable efforts to jointly develop a system
agreement among PTAC, APTASF members, and, if possible, representatives of an
association of PTAC franchisees, in order to develop a joint process to address
certain system-wide issues to be agreed upon.
10. PTAC agrees to continue to provide appropriate management attention to PTACs
core businesses.
11. PTAC agrees to cease requiring APTASF members to sign a waiver for
non-drive-thru locations which PTAC approves as an exception to the drive-thru
only policy.
12. The APTASF members which have signed this Statement of Intent constitute the
officers of APTASF and represent that they have authority to act on behalf of
APTASF. Notwithstanding, APTASF shall use their best efforts to obtain the
acknowledgment, by signature, of all APTASF members within five days after
execution of this Statement of Understanding.
2
<PAGE>
13. APTASF states that APTASF has no objection to and does not, and will not,
oppose in any way whatsoever the Companys pending merger and financing
transactions. In this regard, APTASF agrees to use reasonable efforts to provide
comfort to the Companys underwriters with respect to the terms of this Statement
of Understanding and with regard to their good relations with PTAC.
[Balance of Page intentionally left blank.]
3
<PAGE>
In Witness Whereof, the parties have executed this Statement of
Understanding as of the date first mentioned above.
Precision Tune Auto Care, Inc. Association of Precision Tune Area
Subfranchisors Members:
BY:_________________________ BY:________________________
John F. Ripley, President Its:
BY:________________________
Its:
BY:________________________
Its:
BY:________________________
Its:
4
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 15, 1997, with respect to the financial
statements and financial statement schedule of WE JAC Corporation, included in
the Pre-Effective Amendment No. 2 to the Registration Statement (Form S-1 dated
on or about October 13, 1997) and related Prospectus of Precision Auto Care,
Inc. for the registration of 2,440,000 shares of its common stock.
Vienna, Virginia /s/ Ernst & Young LLP
October 13, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 28, 1997, with respect to the financial statements
of Miracle Industries, Inc., included in the Pre-Effective Amendment No. 2 to
the Registration Statement (Form S-1 dated on or about October 13, 1997) and
related Prospectus of Precision Auto Care, Inc. for the registration of
2,440,000 shares of its common stock.
Vienna, Virginia /s/ Ernst & Young LLP
October 13, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 21, 1997, with respect to the financial statements
of Lube Ventures, Inc., included in the Pre-Effective Amendment No. 2 to the
Registration Statement (Form S-1 dated on or about October 13, 1997) and related
Prospectus of Precision Auto Care, Inc. for the registration of 2,440,000 shares
of its common stock.
Vienna, Virginia /s/ Ernst & Young LLP
October 13, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 21, 1997, with respect to the financial statements
of Prema Properties, Ltd., included in the Pre-Effective Amendment No. 2 to the
Registration Statement (Form S-1 dated on or about October 13, 1997) and related
Prospectus of Precision Auto Care, Inc. for the registration of 2,440,000 shares
of its common stock.
Vienna, Virginia /s/ Ernst & Young LLP
October 13, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 15, 1997, with respect to the financial
statements of Precision Auto Care, Inc., included in the Pre-Effective Amendment
No. 2 to the Registration Statement (Form S-1 dated on or about October 13,
1997) and related Prospectus of Precision Auto Care, Inc. for the registration
of 2,440,000 shares of its common stock.
Vienna, Virginia /s/ Ernst & Young LLP
October 13, 1997
