UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file No. 1-4422
--------------------------
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2170 Piedmont Road, N.E., Atlanta, Georgia 30324
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 888-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $1 Par Value The New York Stock Exchange
The Pacific Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Rollins, Inc. Common Stock held by
non-affiliates on February 29, 2000, was $220,694,369 based on the closing price
on the New York Stock Exchange on such date of $16 3/16 per share.
Rollins, Inc. had 29,881,458 shares of Common Stock outstanding as of
February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Rollins, Inc.'s Annual Report to Stockholders for the calendar
year ended December 31, 1999 are incorporated by reference into Part I, Item 1,
Part II, Items 5-8, and Part IV, Item 14.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
of Rollins, Inc. are incorporated by reference into Part III, Items 10-13.
<PAGE>
PART I
Item 1. Business
(a) General development of business.
There have been no significant changes in the nature of business conducted
by the Registrant since December 31, 1998. During the year, the Registrant
completed several strategic acquisitions designed to strengthen its market
position. Details of acquisitions and the creation of the joint venture which is
discussed at (c)(1)(ii) below and which are included on page 16 of the 1999
Annual Report to Stockholders are incorporated herein by reference.
(b) Financial information about industry segments.
The Registrant has only one reportable segment, its pest and termite
control business. Revenue, operating profit and identifiable assets for this
segment included on pages 12 and 13 of the 1999 Annual Report to Stockholders
are incorporated herein by reference.
(c) Narrative description of business.
(1)(i) The Registrant is a national service company with headquarters
located in Atlanta, Georgia, providing pest and termite control services to both
residential and commercial customers.
Orkin Exterminating Company, Inc. (Orkin), a wholly-owned subsidiary
founded in 1901, is one of the world's largest pest and termite control
companies. It provides customized services from over 400 locations to
approximately 1.7 million customers. Orkin serves customers in the United
States, Canada, and Mexico, providing essential pest control services and
protection against termite damage, rodents and insects to homes and businesses,
including hotels, food service establishments, dairy farms and transportation
companies.
(ii) In 1999 the Registrant and Johnson Wax Professional entered into a
joint venture, Acurid Retail Services, L.L.C., created to sell and provide pest
elimination services to customers in the retail market. This joint venture was a
further market expansion of AcuridSM, Orkin's premium brand of pest elimination
services for commercial customers, which was first introduced in 1998.
(iii) The Registrant maintains sufficient quantities of chemicals and
other supplies on hand to alleviate any potential short-term shortage in
availability from its national network of suppliers.
(iv) Other than the Orkin(R), PCO Services, Inc.(R), Acurid Retail
Services, L.L.C.(R) trademarks and the AcuridSM service mark, which are
material to the Registrant, governmental licenses, patents, trademarks and
franchises are of minor importance to the Registrant's service operations. Local
licenses and permits are required in order for the Registrant to conduct its
pest and termite control services in certain localities. In view of the
widespread operations of the Registrant's service operations, the failure of a
few local governments to license a facility would not have a material adverse
effect on the results of operations of the Registrant.
(v) The business of the Registrant is affected by the seasonal nature
of the Registrant's pest and termite control services. The metamorphosis of
termites in the spring and summer (the occurrence of which is determined by the
timing of the change in seasons) has historically resulted in an increase in the
revenue and income of the Registrant's pest and termite control operations
during such period.
(vi) The Registrant maintains a sufficient level of materials and
supplies to fulfill its servicing needs.
(vii) The Registrant and its subsidiaries do not have a material part
of their business that is dependent upon a single customer or a few customers,
the loss of which would have a material effect on the business of the
Registrant.
2
<PAGE>
(viii) The dollar amount of service contracts and backlog orders as of
the end of the Registrant's 1999 and 1998 calendar years was approximately
$17,750,960 and $14,231,000, respectively. Backlog services and orders are
usually provided within the month following the month of receipt, except in the
area of prepaid pest control where services are usually provided within twelve
months of receipt.
(ix) The Registrant and its subsidiaries do not have a material portion
of their business that may be subject to renegotiation of profits or termination
of contracts at the election of a governmental entity.
(x) The Registrant believes that Orkin competes favorably with
competitors as one of the world's largest pest and termite control companies.
The principal methods of competition in the Registrant's pest and
termite control business are service and guarantees, including the money-back
guarantee on pest and termite control, and the termite retreatment and damage
repair guarantee to qualified homeowners.
(xi) Expenditures by the Registrant on research activities relating to
the development of new products or services are not significant. Some of the new
and improved service methods and products are researched, developed and produced
by unaffiliated universities and companies. Also, a portion of these methods and
products are produced to the specifications provided by the Registrant.
(xii) Other than the impact on the Registrant of the 1997 provision for
termite contracts which was established to address the abnormal occurrence of
termite claims, and the related cost to more frequently reapply materials, the
capital expenditures, earnings and competitive position of the Registrant and
its subsidiaries are not materially affected by compliance with federal, state
and local provisions which have been enacted or adopted regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment.
(xiii) The number of persons employed by the Registrant and its
subsidiaries as of February 29, 2000 was approximately 9,350.
(d) Financial information about foreign and domestic operations and export
sales.
The Registrant and its subsidiaries do not have foreign operations
which are material to their business in terms of revenue, income (loss) from
continuing operations, or assets.
Item 2. Properties.
The Registrant's administrative headquarters and central warehouse,
both of which are owned by the Registrant, are located at 2170 Piedmont Road,
N.E., Atlanta, Georgia 30324. The Registrant owns or leases several hundred
branch offices and operating facilities used in its business. None of the branch
offices, individually considered, represents a materially important physical
property of the Registrant. The facilities are suitable and adequate to meet the
current and reasonably anticipated future needs of the Registrant.
Item 3. Legal Proceedings.
One of the Registrant's subsidiaries, Orkin Exterminating Company, Inc., is
a named defendant in Helen Cutler and Mary Lewin v. Orkin Exterminating
Company., Inc. et al. pending in the District Court of Houston County, Alabama.
The plaintiffs in the above mentioned case filed suit in March of 1996 and are
seeking monetary damages and injunctive relief for alleged breach of contract
arising out of alleged missed or inadequate reinspections. The attorneys for the
plaintiffs contend that the case is suitable for a class action and the court
has ruled that the plaintiffs would be permitted to pursue a class action
lawsuit against Orkin. The Company believes this case to be without merit and
intends to defend itself vigorously at trial. At this time, the final outcome of
the litigation cannot be determined. However, it is the opinion of Management
that the ultimate resolution of this action will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
3
<PAGE>
Additionally, in the normal course of business, the Registrant is a
defendant in a number of lawsuits which allege that plaintiffs have been damaged
as a result of the rendering of services by Registrant personnel and equipment.
The Registrant is actively contesting these actions. It is the opinion of
Management that the outcome of these actions will not have a material adverse
effect on the Registrant's financial position, results of operations or
liquidity.
Item 3.A. Forward-Looking Statements.
This Annual Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include statements regarding the expected impact of
the outcome of litigation arising in the ordinary course of business and the
outcome of the Helen Cutler and Mary Lewin v. Orkin Exterminating Company.,
Inc., et al. ("Cutler") litigation on the Company's financial condition, results
of operations and liquidity; the Company's potential for recurring revenue; and
the Company's projected 2000 performance. The actual results of the Company
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including, without limitation, the
possibility of a court ruling against the Company in litigation or in the Cutler
litigation; general economic conditions; market risk; changes in industry
practices or technologies; the degree of success of the Company's termite
process reforms and pest control selling and treatment methods; the Company's
ability to identify potential acquisitions; climate and weather trends;
competitive factors and pricing practices; the failure of the Company or its
major suppliers or customers to adequately address the Year 2000 programming
issue; potential increases in labor costs; and changes in various government
laws and regulations, including environmental regulations. All of the foregoing
risks and uncertainties are beyond the ability of the Company to control, and in
many cases the Company cannot predict the risks and uncertainties that could
cause its actual results to differ materially from those indicated by the
forward-looking statements.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders through
the solicitation of proxies or otherwise, during the fourth quarter of 1999.
Item 4.A. Executive Officers of the Registrant.
Each of the executive officers of the Registrant was elected by the
Board of Directors to serve until the Board of Directors' meeting immediately
following the next annual meeting of stockholders or until his earlier removal
by the Board of Directors or his resignation. The following table lists the
executive officers of the Registrant and their ages, offices with the
Registrant, and the dates from which they have continually served in their
present offices with the Registrant.
<TABLE>
<CAPTION>
Date First Elected to
Name Age Office With Registrant Present Office
- ---- --- ------------------------------------------ ----------------------
<S> <C> <C> <C>
R. Randall Rollins (1).................. 68 Chairman of the Board and Chief Executive 10/22/91
Officer
Gary W. Rollins (1)..................... 55 President and Chief Operating Officer 1/24/84
Harry J. Cynkus (2)..................... 50 Chief Financial Officer and Treasurer 5/28/98
Michael W.. Knottek (3)................ 55 Vice President and Secretary 5/28/98
- --------------------------
</TABLE>
(1) R. Randall Rollins and Gary W. Rollins are brothers.
(2) Harry J. Cynkus joined the Registrant in April 1998 and, in May 1998,
was elected Chief Financial Officer and Treasurer. From 1996 to 1998,
Mr. Cynkus served as Chief Financial Officer of Mayer Electric Company,
a $300 million wholesaler of electrical supplies. From 1994 to 1996, he
served as
4
<PAGE>
Vice President - Information Systems for Brach & Brock
Confections, the acquirer of Brock Candy Company, where Mr. Cynkus
served as Vice President - Finance and Chief Financial Officer from
1992 to 1994. From 1989 to 1992, he served as Vice President - Finance
of Initial USA, a division of an international support services
company. Mr. Cynkus is a Certified Public Accountant.
(3) Michael W. Knottek joined the Registrant in June 1997 as Vice President
and, in addition, was elected Secretary in May 1998. From 1992 to 1997,
Mr. Knottek held a variety of executive management positions with
National Linen Service, including Senior Vice President of Finance and
Administration and Chief Financial Officer. Prior to 1992, he held a
variety of senior positions with Initial USA, finally serving as
President from 1991 to 1992.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information regarding dividends, stock prices and number of stockholders on
page 8 of the 1999 Annual Report to Stockholders, and the principal markets on
which the Registrant's Common Stock is traded on page 21 of the 1999 Annual
Report to Stockholders, is incorporated herein by reference.
Item 6. Selected Financial Data.
Selected Financial Data on the inside front cover of the 1999 Annual Report
to Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis included on pages 9 through 11 of the
1999 Annual Report to Stockholders is incorporated herein by reference.
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk.
The information under the caption "Market Risk" included in Management's
Discussion and Analysis on page 10 of the 1999 Annual Report to Stockholders is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Registrant, the Independent
Public Accountants' Report and the financial statement schedule incorporated by
reference in this report are shown on the accompanying Index to the Consolidated
Financial Statements and Schedule.
Quarterly Information is on page 8 of the 1999 Annual Report
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information under the caption "Election of Directors" included on pages
4 and 5 of the Proxy Statement for the Annual Meeting of Stockholders to be held
April 25, 2000 is incorporated herein by reference. Additional information
concerning executive officers is included in Part I, Item 4.A. of this Form
10-K.
5
<PAGE>
Item 11. Executive Compensation.
The information under the caption "Executive Compensation" included on
pages 9 through 10 of the Proxy Statement for the Annual Meeting of Stockholders
to be held April 25, 2000 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information under the captions "Capital Stock" and "Election of
Directors" included on pages 2 through 3 and pages 4 through 5, respectively, of
the Proxy Statement for the Annual Meeting of Stockholders to be held April 25,
2000 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information under the caption "Compensation Committee Interlocks and
Insider Participation" included on page 8 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 25, 2000 is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Consolidated Financial Statements, Financial Statement Schedule and
Exhibits.
1. Consolidated financial statements listed in the accompanying
Index to Consolidated Financial Statements and Schedule are
filed as part of this report.
2. The financial statement schedule listed in the accompanying
Index to Consolidated Financial Statements and Schedule is
filed as part of this report.
3. Exhibits listed in the accompanying Index to Exhibits are
filed as part of this report. The following such exhibits are
management contracts or compensatory plans or arrangements:
(10)(a)Rollins, Inc. 1984 Employee Incentive Stock
Option Plan is incorporated herein by reference to
Exhibit 10 as filed with its Form 10-K for the
year ended December 31, 1996.
(10)(b)Rollins, Inc. 1994 Employee Stock Incentive Plan.
(10)(c)Rollins, Inc. 1998 Employee Stock Incentive
Plan is incorporated herein by reference to
Exhibit A of the March 24, 1998 Proxy Statement
for the Annual Meeting of Stockholders held on
April 28, 1998.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or were required to be filed
during the fourth quarter of calendar year 1999.
(c) Exhibits (inclusive of item 3 above):
(2)(a) Asset Purchase Agreement by and between Orkin
Exterminating Company, Inc. and PRISM Integrated
Sanitation Management, Inc. is incorporated by
reference to Exhibit (2) as filed with its Form
10-Q filed on August 16, 1999.
(b) Stock Purchase Agreement as of September 30, 1999,
by and among Orkin Canada, Inc., Orkin Expansion,
Inc., S.C.Johnson Commercial Markets, Inc., and
S.C. Johnson Professional, Inc.
6
<PAGE>
(c) Asset Purchase Agreement as of October 19, 1999 by
and between Orkin Exterminating Company, Inc., Redd
Pest Control Company, Inc., and Richard L. Redd.
(d) First Amendment to Asset Purchase Agreement dated
as of December 1, 1999, by and among Orkin
Exterminating Company, Inc., Redd Pest Control
Company, Inc. and Richard L. Redd.
(e) Asset Purchase Agreement, dated as of October 1,
1997, by and among Rollins, Ameritech Monitoring
Services, Inc. and Ameritech Corporation is
incorporated herein by reference to Exhibit 2.1 as
filed with its Form 8-K Current Report filed
October 16, 1997.
(3)(i) Restated Certificate of Incorporation of Rollins,
Inc. is incorporated herein by reference to Exhibit
(3)(i) as filed with its Form 10-K for the year
ended December 31, 1997.
(ii) By-laws of Rollins, Inc. are incorporated herein
by reference to Exhibit (3) (ii) as filed with its
Form 10-Q for the quarterly period ended March 31,
1999.
(4) Form of Common Stock Certificate of Rollins, Inc.
is incorporated herein by reference to Exhibit (4)
as filed with its Form 10-K for the year ended
December 31, 1998.
(10)(a)Rollins, Inc. 1984 Employee Incentive Stock
Option Plan is incorporated herein by reference to
Exhibit (10) as filed with its Form 10-K for the
year ended December 31, 1996.
(10)(b)Rollins, Inc. 1994 Employee Stock Incentive Plan.
(10)(c)Rollins, Inc. 1998 Employee Stock Incentive
Plan is incorporated herein by reference to Exhibit
A of the March 24, 1998 Proxy Statement for the
Annual Meeting of Stockholders held on April 28,
1998.
(13) Portions of the Annual Report to Stockholders
for the year ended December 31, 1999 which are
specifically incorporated herein by reference.
(21) Subsidiaries of Registrant.
(23) Consent of Independent Public Accountants.
(24) Powers of Attorney for Directors.
(27)(a)Financial Data Schedule (For Commission Use Only).
(27)(b)Restated Financial Data Schedule (For Commission
Use Only).
7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROLLINS, INC.
By: /s/ R. RANDALL ROLLINS
---------------------------
R. Randall Rollins
Chairman of the Board of Directors
(Principal Executive Officer)
Date: March 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ R. RANDALL ROLLINS By: /s/ HARRY J. CYNKUS
--------------------------- ------------------------
R. Randall Rollins Harry J. Cynkus
Chairman of the Board of Directors Chief Financial Officer
(Principal Executive Officer) and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 15, 2000 Date: March 15, 2000
The Directors of Rollins, Inc. (listed below) executed a power of attorney
appointing Gary W. Rollins their attorney-in-fact, empowering him to sign this
report on their behalf.
Wilton Looney, Director
John W. Rollins, Director
Henry B. Tippie, Director
James B. Williams, Director
Bill J. Dismuke, Director
/s/ GARY W. ROLLINS
- ------------------------
Gary W. Rollins
As Attorney-in-Fact & Director
March 15, 2000
8
<PAGE>
ROLLINS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
(Item 14)
CONSOLIDATED FINANCIAL STATEMENTS OF ROLLINS, INC. AND SUBSIDIARIES:
The Registrant's 1999 Annual Report to Stockholders, portions of which are
filed with this Form 10-K, contains on pages 12 through 20 the consolidated
financial statements for the years ended December 31, 1999, 1998 and 1997 and
the report of Arthur Andersen LLP on the consolidated financial statements for
the years then ended. These consolidated financial statements and the report of
Arthur Andersen LLP are incorporated herein by reference. The consolidated
financial statements include the following:
Annual Report
(1) Consolidated Financial Statements Page(s)
-------------
Consolidated Statements of Financial Position
as of December 31, 1999 and 1998........................... 12
Consolidated Statements of Income for each of
the three years in the period ended
December 31, 1999.......................................... 13
Consolidated Statements of Earnings Retained
for each of the three years in the period
ended December 31, 1999.................................... 13
Consolidated Statements of Cash Flows for each
of the three years in the period ended
December 31, 1999.......................................... 14
Notes to Consolidated Financial Statements................... 15-19
Report of Independent Public Accountants on
Consolidated Financial Statements.......................... 20
Report of Independent Public Accountants on Financial Statement
Schedule, Page 10 of this Form 10-K.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts, Page 11 of this Form
10-K.
Schedules not listed above have been omitted as either not applicable,
immaterial or disclosed in the Consolidated Financial Statements or notes
thereto.
9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Directors and the Stockholders of Rollins, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the Consolidated Financial Statements included in Rollins, Inc.'s annual report
to stockholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 16, 2000. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
Item 14 of this Form 10-K is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 16, 2000
10
<PAGE>
ROLLINS, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (1)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands of dollars)
<TABLE>
<CAPTION>
Additions
----------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts(2) Deductions (3) Period
- ----------- ---------- ---------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts........... $ 5,347 $ 6,551 $ 434 $ 7,403 $ 4,929
------- ------- ------- ------- -------
Year ended December 31, 1998
Allowance for doubtful accounts........... $ 9,326 $ 4,502 $ - $ 8,481 $ 5,347
------- ------- ------- ------- -------
Year ended December 31, 1997
Allowance for doubtful accounts........... $ 4,457 $14,531 $ - $ 9,662 $ 9,326
------- ------- ------- ------- -------
- -----------
</TABLE>
NOTE: (1) The above schedule is prepared reflecting the divestitures of the
Registrant's RPS business segment and Orkin's Plantscaping and Lawn
Care divisions. 1997 has been restated.
(2) Charged to Other Accounts represents beginning balances of allowances
for doubtful accounts of acquired companies.
(3) Deductions represent the write-off of uncollectible receivables, net
of recoveries.
11
<PAGE>
ROLLINS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number
-------
(2)(a) Asset Purchase Agreement by and between Orkin Exterminating
Company, Inc. and PRISM Integrated Sanitation Management, Inc.
is incorporated by reference to Exhibit (2) as filed with its
Form 10-Q filed on August 16, 1999.
(b) Stock Purchase Agreement as of September 30, 1999, by and among
Orkin Canada, Inc., Orkin Expansion, Inc., S.C. Johnson
Commercial Markets, Inc., and S.C. Johnson Professional, Inc.
(c) Asset Purchase Agreement as of October 19, 1999 by and between
Orkin Exterminating Company, Inc., Redd Pest Control Company,
Inc., and Richard L. Redd.
(d) First Amendment to Asset Purchase Agreement dated as of
December 1, 1999, by and among Orkin Exterminating Company,
Inc., Redd Pest Control Company, Inc. and Richard L. Redd.
(e) Asset Purchase Agreement, dated as of October 1, 1997, by
and among Rollins, Ameritech Monitoring Services, Inc. and
Ameritech Corporation is incorporated herein by reference to
Exhibit 2.1 as filed with its Form 8-K Current Report filed
October 16, 1997.
(3)(i) Restated Certificate of Incorporation of Rollins, Inc. is
incorporated herein by reference to Exhibit (3)(i) as filed
with its Form 10-K for the year ended December 31, 1997.
(ii) By-laws of Rollins, Inc.are incorporated herein by reference to
Exhibit 3 (ii) as filed with its Form 10-Q for the quarterly
period ended March 31, 1999.
(4) Form of Common Stock Certificate of Rollins, Inc. is
incorporated herein by reference to Exhibit (4) as filed with
its Form 10-K for the year ended December 31, 1998.
(10)(a) Rollins, Inc. 1984 Employee Incentive Stock Option Plan is
incorporated herein by reference to Exhibit 10 as filed with
its Form 10-K for the year ended December 31, 1996.
(10)(b) Rollins, Inc. 1994 Employee Stock Incentive Plan.
(10)(c) Rollins, Inc. 1998 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit A of the March 24,
1998 Proxy Statement for the Annual Meeting of Stockholders
held on April 28, 1998.
(13) Portions of the Annual Report to Stockholders for the year
ended December 31, 1999 which are specifically incorporated
herein by reference.
(21) Subsidiaries of Registrant.
(23) Consent of Independent Public Accountants.
(24) Powers of Attorney for Directors.
(27)(a) Financial Data Schedule (For Commission Use Only).
(27)(b) Restated Financial Data Schedule (For Commission Use Only).
12
Exhibit 2b
CONFIDENTIAL TREATMENT REQUESTED
Confidential Portions of This Agreement Which Have Been Redacted Are
Marked With Brackets ("[***]"). The Omitted Material Has Been Filed Separately
With The United States Securities and Exchange Commission.
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of September 30,
1999, by Orkin Canada, Inc., a New Brunswick corporation ("Buyer"), Orkin
Expansion, Inc., a Delaware corporation ("Expansion"), S.C. Johnson Commercial
Markets, Inc., a Delaware corporation ("CMI") and S.C. Johnson Professional,
Inc., a Delaware corporation ("JPI" and together with CMI, the "Seller").
RECITALS
A. Seller desires to sell, and Buyer desires to purchase, all of the issued and
outstanding shares (the "Shares") in the capital of PCO Services, Inc., a
Canadian federal corporation (together with the NSULC (as defined below)
subsequent to the Amalgamation (as defined below), the "Company"), together with
certain other assets owned by Seller, and Buyer and Seller desire to enter into
certain other agreements all for the consideration and upon the terms set forth
in this Agreement.
B. Seller desires to sell, and Expansion desires to purchase, Seller's
Intellectual Property Assets (as hereinafter defined), for the consideration and
upon the terms set forth in this Agreement.
C. Prior to the Closing, CMI will contribute the Shares and the Seller's
Intellectual Property Assets to its wholly owned subsidiary JPI.
D. Prior to the Closing (as defined herein) Seller will cause (i) PCO Services,
Inc. to form a Nova Scotia unlimited liability company subsidiary (the "NSULC");
(ii) PCO Services, Inc. to continue from the federal jurisdiction to Nova Scotia
as a limited liability Nova Scotia company; and (iii) PCO Services, Inc. to
amalgamate and consolidate with and into the NSULC under the laws of Nova Scotia
and to continue as an unlimited liability company under the laws of Nova Scotia
(the "Amalgamation").
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"Adjustment Amount" -- as defined in Section 2.5.
"Applicable Contract" -- any Contract (a) under which the Company has
any rights, or (b) under which the Company is subject to any obligation or
liability, in each case which Contract has an economic benefit or obligation to
the Company in excess of CDN [***].
<PAGE>
"Balance Sheet" -- as defined in Section 3.4.
"Best Efforts" -- the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved within the time frame contemplated by this Agreement; provided, that
an obligation to use Best Efforts under this Agreement does not require the
Person subject to that obligation to take any action or actions that would
result in a material reduction in the benefits of or a material increase in
costs under this Agreement and the Contemplated Transactions to such Person.
"Breach" -- a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be deemed to have occurred if there is or has
been any material inaccuracy in or breach of, or any failure to perform or
comply with, such representation, warranty, covenant, obligation, or other
provision, and the term "Breach" means any such material inaccuracy, breach or
failure.
"Buyer" -- as defined in the first paragraph of this Agreement.
"Closing" -- as defined in Section 2.3.
"Closing Cash Payment" -- as defined in Section 2.6(a).
"Closing Date" -- as defined in Section 2.3.
"Company" -- as defined in the Recitals of this Agreement.
"Competition Act" -- the Competition Act (Canada), R.S.C. 1985, c.34,
as amended.
"Consent" -- any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"Contemplated Transactions" -- all of the transactions contemplated by
this Agreement, including:
(a) the sale of the Shares by the Seller to Buyer;
(b) the execution, delivery, and performance of the Noncompetition
Agreement, and the Seller's Release;
(c) the acquisition by Expansion of the Intellectual Property Assets;
(d) the performance by Buyer and Seller of their respective covenants
and obligations under this Agreement; and
(e) Buyer's acquisition of ownership of the Shares and the ability to
exercise control over the Company.
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"Contract" -- any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"Damages" -- as defined in Section 10.2.
"Disclosure Letter" -- the disclosure letter delivered by Seller to
Buyer concurrently with the execution and delivery of this Agreement as
supplemented pursuant to this Agreement.
"Encumbrance" -- any mortgage, charge, claim, lien (statutory or
otherwise), hypothec, adverse claim, option, pledge, security interest, right of
first refusal, or restriction on use, voting, transfer, receipt of income, or
exercise of any other attribute of ownership.
"Employee Plans" -- as defined in Section 3.12.
"Environment" -- soil, land surface or subsurface strata, surface
waters (including, if applicable, navigable waters, ocean waters, streams,
ponds, drainage basins, and wetlands), groundwaters, drinking water supply,
stream sediments, ambient air, plant and animal life.
"Environmental Liabilities" -- any cost, damages, expense, liability,
obligation, or other responsibility arising from or under any Environmental Law
consisting of or relating to:
(a) any environmental contamination existing as of the Closing Date;
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, or remedial, or inspection costs and expenses arising under
Environmental Law; or
(c) financial responsibility under Environmental Law for cleanup costs
or corrective action, including any investigation, cleanup, removal,
containment, or other remediation or response actions ("Cleanup"); or
(d) any other compliance, corrective, investigative, or remedial
measures required under Environmental Law.
"Environmental Law" -- any formerly or currently applicable Legal
Requirement that requires :
(a) advising appropriate authorities, and the public of intended or
actual Releases of Hazardous Materials, violations of discharge limits, or other
prohibitions that could have significant impact on the Environment;
(b) preventing or reducing to acceptable levels the Release of
Hazardous Materials into the Environment;
(c) reducing the quantities, preventing the Release, or minimizing the
hazardous characteristics of wastes that are generated;
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<PAGE>
(d) protecting resources, species, or ecological amenities;
(e) reducing to acceptable levels the risks inherent in the
transportation of Hazardous Materials;
(f) cleaning up Hazardous Materials that have been Released, preventing
the threat of Release, or paying the costs of such clean up or prevention; or
(g) making responsible parties pay private parties, or groups of them,
for damages done to the Environment, or permitting self-appointed
representatives of the public interest to recover for injuries done to public
assets.
"Environmental Permit" -- any Governmental Authorization issued,
granted, given or otherwise made available pursuant to any Environmental Law.
"Facilities" -- any real property, leaseholds, or other interests in
real property currently or formerly owned or operated by the Company and any
buildings, plants or structures currently or formerly owned or operated by the
Company.
"GAAP" -- generally accepted Canadian accounting principles, including
those set out in the Handbook of the Canadian Institute of Accountants, applied
on a basis consistent with the basis on which the Balance Sheet and the other
financial statements referred to in Section 3.4 were prepared.
"Governmental Authorization" -- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body.
"Governmental Body" -- any:
(a) nation, state, province, territory, county, city, town, village,
district, or other jurisdiction of any nature;
(b) federal, state, provincial, territorial, local, municipal, foreign,
or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal); or
(d) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"Hazardous Activity" -- the distribution, generation, application,
handling, importing, management, manufacturing, processing, production,
refinement, Release, storage, transfer, transportation, treatment, or use
(including any withdrawal or other use of groundwater
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[***] - CONFIDENTIAL TREATMENT REQUESTED
containing Hazardous Materials in excess of Legal Requirements) of Hazardous
Materials in, on, under, about, or from the Facilities or any part thereof into
the Environment; provided, however, that the term "Hazardous Activity" shall not
include the use and application of pesticides and other Hazardous Materials in
connection with the lawful conduct of the business of the Company.
"Hazardous Materials" -- any waste or other substance listed, defined,
designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
"Income Tax Act"-- the Income Tax Act (Canada) R.S.C. 1985 c.1 (5th
Supp) as amended.
"Independent Accounting Firm" -- as defined in Section 2.6(d).
"Intellectual Property Assets" -- as defined in Section 3.21.
"Interim Balance Sheet" -- as defined in Section 3.4.
"Investment Canada Act" -- the Investment Canada Act, R.S.C. 1985, c.28
as amended.
"Knowledge" -- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
(b) in the case of the Seller, if a prudent individual could be
expected to discover or otherwise become aware of such fact or other matter in
the course of conducting the business of the Company in the Ordinary Course of
Business.
As used herein, "Knowledge" (including the phrase "to Seller's
Knowledge", "to Buyer's Knowledge" or similar phrases) shall mean, (1) with
respect to Seller, the Knowledge of [***], and (only with respect to the
representations in Section 3.17) [***]and (2) with respect to Buyer, the
Knowledge of [***], and [***].
"Legal Requirement" -- any federal, provincial, territorial, state,
local, municipal, foreign, or other administrative order, constitution, law,
ordinance, regulation, statute, or treaty formerly or currently in effect.
"Material Adverse Effect" or "Material Adverse Change" -- an occurrence
or event shall be deemed to have a Material Adverse Effect or to have caused a
Material Adverse Change
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<PAGE>
if such effect or change materially adversely affects the business or financial
condition of the Company taken as a whole.
"Noncompetition Agreement" -- as defined in Section 2.4(a)(iv).
"Objections" -- as defined in Section 2.6(b).
"Occupational Safety and Health Law" -- any Legal Requirement designed
to provide safe and healthful working conditions and to reduce occupational
safety and health hazards, and any mandatory program of a Governmental Body
designed to provide safe and healthful working conditions.
"Order" -- any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business" -- an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of such
Person;
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority); or
(c) such action is similar to actions customarily taken, without any
authorization by the board of directors (or by any Person or group of Persons
exercising similar authority), in the ordinary course of the normal day-to-day
operations of other Persons that are in the same line of business as such
Person.
"Organizational Documents" -- (a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person; and (e) any amendment
to any of the foregoing.
"Person" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"Proceeding" -- any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"Purchase Price" -- as defined in Section 2.2.
6
<PAGE>
"Purchase Price Adjustment Calculation" --as defined in Section 2.6(b).
"Related Person" -- with respect to a specified person other than an
individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control with
such specified Person;
(b) any Person that holds a Material Interest in such specified Person;
(c) each Person that serves as a director, officer, partner, executor,
or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person serves as a
general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or
(c).
For purposes of this definition, "Material Interest" means direct or
indirect beneficial ownership (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of voting securities or other voting interests
representing at least 50% of the outstanding voting power of a Person or equity
securities or other equity interests representing at least 50% of the
outstanding equity securities or equity interests in a Person.
"Release" -- any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional other than usage or application in the Ordinary
Course of Business.
"Representative" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"Seller" -- as defined in the first paragraph of this Agreement.
"Seller's Release" -- as defined in Section 2.4.
"Shares" -- as defined in the Recitals of this Agreement, together with
any shares issued as a result of the Amalgamation.
"Subsidiary" -- with respect to any Person (the "Owner"), any
corporation or other Person of which securities or other interests having the
power to elect a majority of that corporation's or other Person's board of
directors or similar governing body are held by the
7
<PAGE>
Owner or one or more of its Subsidiaries; when used without reference to a
particular Person, "Subsidiary" means a Subsidiary of the Company.
"Tax" -- any and all federal, provincial, state, local, municipal,
foreign or other taxes, charges, fees, imposts, duties or other assessments of
whatever nature, including any obligation to collect and pay over taxes imposed
on another Person, together with interest, penalties and additional amounts,
imposed by any taxing authority.
"Tax Return" -- any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"Threat of Release" -- a substantial likelihood of a Release that may
require action in order to prevent or mitigate damage to the Environment that
may result from such Release.
"Threatened" -- a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (either in writing, or to the Knowledge of the pertinent party, orally) or
any notice has been given (either in writing, or to the Knowledge of the
pertinent party, orally) that would lead a prudent Person to conclude that such
a claim, Proceeding, dispute, action, or other matter is reasonably likely to be
asserted, commenced, taken, or otherwise pursued in the future.
"Year 2000 Compliant" -- as defined in Section 3.26.
2. SALE AND TRANSFER; CLOSING
2.1 SHARES AND INTELLECTUAL PROPERTY ASSETS
Subject to the terms and conditions of this Agreement, at the Closing,
Seller will sell and transfer the Shares and the Intellectual Property Assets to
Buyer or Expansion, as the case may be, and Buyer or Expansion, as the case may
be, will purchase the Shares and the Intellectual Property Assets from Seller.
2.2 PURCHASE PRICE
The purchase price for the Shares, the Intellectual Property Assets,
and the Noncompetition Agreement will be Twenty Five Million United States
Dollars (US $25,000,000) plus or minus, as the case may be, (a) the Adjustment
Amount; (b) any adjustment made pursuant to Section 2.8(b); and (c) any payment
made pursuant to Article 10 of this Agreement (collectively, the "Purchase
Price").
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2.3 CLOSING
The purchase and sale (the "Closing") provided for in this Agreement
will take place at the offices of Arnall Golden & Gregory, LLP in Atlanta,
Georgia, at 10:00 a.m. (local time) on October 29, 1999, to be effective as of
12:01 a.m., local time, on October 31, 1999, or at such other time and place as
the parties may agree. The effective date of the Closing shall be the "Closing
Date". Subject to the provisions of Section 9, failure to consummate the
purchase and sale provided for in this Agreement on the date and time and at the
place determined pursuant to this Section 2.3 will not result in the termination
of this Agreement and will not relieve any party of any obligation under this
Agreement.
2.4 CLOSING OBLIGATIONS
At the Closing:
(a) Seller will deliver:
(i) certificates representing the Shares, duly endorsed (or
accompanied by duly executed irrevocable stock powers) for
transfer to Buyer;
(ii) a release executed by Seller in form and substance
reasonably satisfactory to the Buyer ("Seller's Release");
(iii)an assignment or assignments, in form and content
acceptable to the Canadian Intellectual Property Office
("CIPO") and/or the United States Patent and Trademark
Office, as appropriate, evidencing the assignment and
transfer to Expansion of the
Intellectual Property Assets;
(iv) a noncompetition agreement in the form of Exhibit
2.4(a)(iv), executed by Seller (the "Noncompetition
Agreement"); and
(v) a certificate executed by Seller representing and
warranting to Buyer that each of Seller's representations
and warranties in this Agreement was accurate in all
material respects as of the date of this Agreement and is
accurate in all material respects as of the Closing Date as
if made on the Closing Date (giving full effect to any
supplements to the Disclosure Letter that were delivered by
Seller to Buyer prior to the Closing Date in accordance with
Section 5.5);
(vi) a duly executed resignation of each director and
officer (who is not an employee of the Company) of the
Company as Buyer may specify in writing, together with a
release from each such director and officer;
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[***] - CONFIDENTIAL TREATMENT REQUESTED
(vii)a duly executed resignation of the auditors of the
Company effective as at the Closing (if applicable);
(viii)an opinion of counsel of Seller, in form and
substance reasonably satisfactory to the Buyer; and
(ix) such other documents as are reasonably required to
consummate the Contemplated Transactions.
(b) Buyer or Expansion, as the case may be, will deliver:
(i)subject to Section 2.7, the Closing Cash Payment, by wire
transfer to an escrow account specified by Buyer, which
shall provide that the interest earned thereon (if any)
shall be retained by Seller, and that the Closing Cash
Payment shall be delivered to an account specified by Seller
on November 1, 1999;
(ii) a certificate executed by Buyer representing and
warranting to Seller that each of Buyer's representations
and warranties in this Agreement was accurate in all
material respects as of the date of this Agreement and is
accurate in all material respects as of the Closing Date as
if made on the Closing Date;
(iii)a letter of no action and/or an advance ruling
certificate under the Competition Act in respect of the
Buyer's pre-notification filing under the Competition Act;
(iv) an opinion of counsel to Buyer, in form and
substance reasonably satisfactory to the Seller; and
(v) such other documents as are reasonably required to
consummate the Contemplated Transactions.
2.5 ADJUSTMENT AMOUNT
The "Adjustment Amount" (which may be a positive or negative number)
will be equal to the amount determined by subtracting the Adjusted Net Worth of
the Company as of the date of the Balance Sheet, determined in accordance with
GAAP (adjusted, as applicable, in the manner set forth in Part 3.4 of the
Disclosure Letter), from the Adjusted Net Worth of the Company as of the Closing
Date. The "Adjusted Net Worth" of the Company shall be equal to the book value
of the assets of the Company, less the book value of the liabilities of the
Company; provided, however, that (a) the Adjusted Net Worth of the Company as of
the date of the Balance Sheet shall be further adjusted by subtracting from the
book value of the assets of the Company [***] of the cash included on
the Balance Sheet and (b) the Adjusted Net
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[***] - CONFIDENTIAL TREATMENT REQUESTED
Worth of the Company as of the Closing Date shall be adjusted by adding the
amount of any [***] for [***] contained on the Balance Sheet.
2.6 ADJUSTMENT PROCEDURE
(a) On or before two (2) business days prior to the Closing
Date, the Seller shall make a good faith estimate of the
Adjustment Amount (using the conversion rate between United
States and Canadian dollars in effect on such date), and shall
notify Buyer in writing of such estimate. Such estimate shall be
added to US $25,000,000, and the resulting number shall be the
"Closing Cash Payment".
(b) In order to finally determine the amount of the Purchase
Price, after the Closing, Seller shall perform an initial
calculation of the Adjustment Amount (the "Purchase Price
Adjustments Calculation") which shall be delivered to Buyer
within 30 days following the Closing Date (using the conversion
rate between United States and Canadian dollars in effect on the
Closing Date). All expenses incurred in connection therewith
shall be borne by Seller; provided, that Buyer shall cooperate
with and provide information and access to information to
Seller, at no cost, during such period. Buyer shall have a
period of 30 days after receipt of the Purchase Price
Adjustments Calculation to present to Seller in writing any
objections and the amounts related thereto (the "Objections")
which Buyer may have with respect to the Purchase Price
Adjustments Calculation, which Objections shall be presented in
reasonable detail. At its own expense, Buyer (including its
internal auditors) and its certified public
accountants/chartered accountants shall have the opportunity
during and following the preparation of the Purchase Price
Adjustments Calculation to consult with Arthur Andersen and the
chief financial officer, controller, or any other officer of
Seller engaged in the calculation, to observe, review, and
examine the work papers, schedules, and other documents prepared
or used in connection with the Purchase Price Adjustments
Calculation, and to review the books and records of Seller
related to such calculation. If no Objections are raised by
Buyer within such 30-day period, the Purchase Price Adjustments
Calculation shall be deemed accepted and approved by Buyer and
the Purchase Price shall be adjusted using the Adjustment Amount
as determined in the Purchase Price Adjustments Calculation.
(c) If, within such 30-day period, Buyer raises Objections,
Buyer and Seller shall attempt in good faith to resolve the
matter or matters in dispute and, if resolved, such resolution
shall be final, conclusive and binding upon the parties hereto
and the Purchase Price shall be finally determined using the
Adjustment Amount as so determined.
(d) If the dispute referred to in Section 2.6(c)is not resolved
by Buyer and Seller within 10 days after delivery of the
Objections, then the specific matters in dispute shall be
submitted to Ernst & Young or such other
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nationally recognized accounting firm as Buyer and Seller may
mutually agree upon (the "Independent Accounting Firm"), which
firm shall be requested to make a determination as to such
matter or matters as are in dispute within 30 days after such
submission of the dispute to the Independent Accounting Firm,
which determination shall be final, conclusive and binding upon
the parties hereto and the Purchase Price shall be finally
determined using the Adjustment Amount as so determined. The
Independent Accounting Firm shall act as experts and not as
arbitrators and shall decide only those matters in dispute. The
Independent Accounting Firm shall simultaneously deliver its
written determination to Buyer and Seller. Seller and Buyer
shall share the fees and expenses of the Independent Accounting
Firm equally. Seller and Buyer agree to cooperate in good faith
with each other, with each other's authorized representatives
and with the Independent Accounting Firm, if any, in order that
any and all matters in dispute may be resolved as soon as
practicable.
(e) If the final Purchase Price Adjustments Calculation results
in a Purchase Price that is greater than the Closing Cash
Payment, then Buyer shall pay the difference between the final
Purchase Price and the Closing Cash Payment to Seller. If the
final Purchase Price Adjustments Calculation results in a
Purchase Price that is less than the Closing Cash Payment, then
Seller shall pay the difference between the final Purchase Price
and the Closing Cash Payment to Buyer. No interest shall be due
or payable respecting any payments to be made pursuant to this
Section 2.6(e). Any and all payments required to be made by
Buyer or Seller as a result of adjustments made pursuant to this
Section 2.6(e) shall be made by wire transfer of immediately
available funds within five business days after the final
determination of the amount of the Purchase Price. The
determination and adjustment of the Purchase Price in accordance
with the provisions of this Section 2.6 shall not limit or
affect any other rights or causes of actions either Buyer or
Seller may have with respect to the representations, warranties,
covenants and indemnities in its favor contained in this
Agreement.
2.7 WITHHOLDING
(a) If a certificate acceptable to the Buyer, acting reasonably,
pursuant to Section 116(2) of the Income Tax Act with respect to
the Shares is not delivered to the Buyer at or before the
Closing, the Buyer shall be entitled to withhold from the
Purchase Price payable at the Closing the amount required to be
remitted to the Receiver General pursuant to Section 116 of the
Income Tax Act (the "Withheld Amount").
(b) If the Seller delivers to the Buyer prior to the 25th day
after the end of the month in which the Closing Date occurs a
certificate acceptable to the Buyer, acting reasonably, issued
by the Minister of National Revenue under Section 116(4) of the
Income Tax Act, the Buyer shall promptly pay to the Seller the
Withheld Amount.
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[***] - CONFIDENTIAL TREATMENT REQUESTED
(c) If the Seller does not deliver to the Buyer within the
specified time the certificate described in Section 2.7(a) or
(b) above and the Buyer has withheld the Withheld Amount, the
Buyer shall (i) remit to the Receiver General the amount
required to be remitted pursuant to Section 116 of the Income
Tax Act (Canada) and the amount so remitted shall be credited to
the Buyer as a payment to the Seller on account of the Purchase
Price, and (ii) pay the remaining portion of the Withheld
Amount, if any, to the Seller.
2.8 RE-PURCHASE OF ACCOUNTS RECEIVABLE
(a) Within thirty (30) days after the Closing, Seller shall
cause the Company to deliver to Buyer a detailed listing of open
accounts receivable of the Company as of the day immediately
preceding the Closing (the "Accounts Receivable") together with
an aging schedule therefor.
(b) Within thirty (30)days after the [***] and [***] day
following the Closing Date, Buyer shall present Seller with a
detailed listing of the accounts and invoices which were listed
on the Accounts Receivable list delivered at Closing and which
remain outstanding on such date (the "Uncollected AR
Calculation"). Seller shall have a period of 30 days after
receipt of the Uncollected AR Calculation to present to Buyer in
writing any objections and the amounts related thereto (the "AR
Objections")which Seller may have with respect to the
Uncollected AR Calculation, which AR Objections shall be
presented in reasonable detail. At its own expense, Seller
(including its internal auditors) and its certified public
accountants/chartered accountants shall have the opportunity
during and following the preparation of the Uncollected AR
Calculation to consult with Arthur Andersen and the chief
financial officer, controller, or any other employee of Buyer or
the Company engaged in the calculation of the Uncollected AR
Calculation, to observe, review, and examine the work papers,
schedules, and other documents prepared or used in connection
with the Uncollected AR Calculation, and to review the books and
records of Buyer related to such calculation. If Seller raises
no AR Objections within such 30-day period, the Uncollected AR
Calculation shall be deemed accepted and approved by Seller. If,
within such 30-day period, Seller raises AR Objections, Buyer
and Seller shall attempt in good faith to resolve the matter or
matters in dispute and, if resolved, such resolution shall be
final, conclusive and binding upon the parties hereto. If the
parties fail to reach such resolution within ten (10) days after
delivery of the AR Objections, the dispute mechanism set forth
in Section 2.6(d) of this Agreement shall apply. Once the
Uncollected AR Calculation is finally determined and any
payments with respect to such invoices during the determination
period, together with any [***] on [***] or [***] which cannot
be [***] to [***] have been [***] thereto, then the reserve
against accounts receivable reflected in the final Purchase
Price Adjustments Calculation shall be subtracted therefrom.
If the result is a positive number, it is the "A/R Overpayment";
if negative, it is the "A/R Underpayment." If there is an A/R
Overpayment, then the Buyer shall be entitled to (A) cause the
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[***] - CONFIDENTIAL TREATMENT REQUESTED
Seller to re-purchase all uncollected Accounts Receivable from
the Company for an amount equal to the A/R Overpayment or (B)
retain one or more Accounts Receivable included on the Accounts
Receivable list (the "Retained A/R"), and cause the Seller to
pay to Buyer the A/R Overpayment, [***] of the book amount of
the Retained A/R. If there is an A/R Underpayment, then
Purchaser shall pay Seller such amount (even though expressed as
a negative number). The Purchase Price shall be adjusted by the
A/R Overpayment or A/R Underpayment, as the case may be.
(c) Between the Closing Date and the date of its presentation of
the Uncollected AR Calculation, Buyer shall, and shall cause the
Company to, (i) undertake to collect the Accounts Receivable in
a manner consistent with the Company's past practices in the
Ordinary Course of Business, and (ii) apply any payments
received from any customer listed on the Accounts Receivable
list in the manner directed by such Customer, and, if the
customer fails to designate an invoice for payment, then the
payment shall be applied against the Accounts Receivable balance
of such customer as in existence immediately preceding the
Closing Date.
2.9 PURCHASE PRICE ALLOCATION
The parties agree to allocate, for all purposes including United
States and Canadian Tax purposes, the Purchase Price among the Shares, the
Intellectual Property Assets, and the Noncompetition Agreement as mutually
agreed by the parties on or before the Closing. Furthermore, the parties
acknowledge that, for United States Tax purposes, the Contemplated Transactions
will be treated as a sale of assets. Accordingly, the parties agree to further
allocate the Purchase Price attributable to the Shares among each class of
assets owned by the Company as mutually agreed by the parties on or before the
Closing. The Parties shall negotiate in good faith to reach an agreement
respecting such allocations prior to the Closing, including an allocation of
[***] to the [***] and at least [***] to the [***].
3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that, except as set
forth in the Disclosure Letter:
3.1 ORGANIZATION AND EXISTENCE
(a) Part 3.1 of the Disclosure Letter contains a complete and
accurate list for the Company of its jurisdiction of
incorporation, other jurisdictions in which it is authorized to
do business, and its capitalization (including the identity of
each shareholder and the number of shares held by each). The
Company is a corporation duly incorporated, organized and
validly existing under the laws of its jurisdiction of
incorporation, with full corporate power and authority to
conduct its business as it is now being conducted, to own or use
the properties and assets
14
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that it purports to own or use, and to perform all its
obligations under Applicable Contracts. The Company is duly
qualified to do business as a foreign corporation under the laws
of each jurisdiction in which either the ownership or use of the
properties owned or used by it, or the nature of the activities
conducted by it, requires such qualification.
(b) Seller has delivered to Buyer copies of the Organizational
Documents of the Company, as currently in effect, and will
deliver copies of the Organizational Documents of the NSULC as
soon as practicable after formation.
3.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding
obligation of Seller, enforceable against Seller in accordance
with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights
of creditors generally and principles governing the availability
of equitable remedies. Seller has the right, power, authority,
and capacity to execute and deliver this Agreement, the Seller's
Release, and the Noncompetition Agreement and to perform its
obligations hereunder and thereunder .
(b) Except as set forth in Part 3.2 of the Disclosure Letter,
neither the execution and delivery of this Agreement nor the
consummation or performance of any of the Contemplated
Transactions will, directly or indirectly (with or without
notice or lapse of time):
(i) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of the
Company, or (B) any resolution adopted by the board of
directors or the shareholders of the Company;
(ii) contravene, conflict with, or result in a violation of,
or give any Governmental Body or other Person the right to
challenge any of the Contemplated Transactions or to
exercise any remedy or obtain any relief under, any Legal
Requirement or any Order to which the Company, or any of the
assets owned or used by the Company, may be subject;
(iii) contravene, conflict with, or result in a violation of
any of the terms or requirements of, or give any
Governmental Body the right to revoke, withdraw, suspend,
cancel, terminate, or modify, any Governmental Authorization
that is held by the Company or that otherwise relates to the
business of, or any of the assets owned or used by, the
Company;
(iv) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to
declare a default or
15
<PAGE>
exercise any remedy under, or to accelerate the maturity
or performance of, or to cancel, terminate, or modify, any
Applicable Contract; or
(v) result in the imposition or creation of any Encumbrance
upon or with respect to any of the assets owned or used by
the Company.
Except as set forth in Part 3.2 of the Disclosure Letter or as may be
required under the Competition Act or the Investment Canada Act, neither Seller
nor the Company is or will be required to give any notice to or obtain any
Consent from any Person in connection with the execution and delivery of this
Agreement or the consummation or performance of any of the Contemplated
Transactions.
3.3 CAPITALIZATION
The authorized capital of PCO Services, Inc. consists of an unlimited
number of common shares, of which 250,600,001 shares are issued and outstanding.
Upon the consummation of the Amalgamation, the authorized capital of the Company
shall consist of an unlimited number of common shares, of which 250,600,001
shares will be issued and outstanding before the Closing, and will constitute
the Shares. Seller is currently the owner of all of the issued and outstanding
shares of PCO Services, Inc., and, before the Closing, will be the record and
beneficial owner and holder of the Shares, free and clear of all Encumbrances.
With the exception of the Shares (which are, or before the Closing will be,
owned by Seller), all of the outstanding equity securities and other securities
of the Company are owned of record and beneficially by the Company, free and
clear of all Encumbrances. No legend or other reference to any purported
Encumbrance appears upon any certificate representing equity securities of the
Company. All of the outstanding equity securities of the Company have been or
(before the Closing) will be duly authorized, validly issued, fully paid and
nonassessable. There are no Contracts relating to the issuance, sale, or
transfer of any equity securities or other securities of the Company. None of
the equity securities or other securities of the Company was or (before the
Closing) will be issued in violation of any Legal Requirement. The Company does
not own, or have any Contract to acquire, any equity securities or other
securities of any Person (other than the Company) or any direct or indirect
equity or ownership interest in any other business.
3.4 FINANCIAL STATEMENTS
Seller has delivered to Buyer: (a) the unaudited balance sheet of the
Company as at June 30 in each of the years 1996 through 1998, and the related
statement of income, and cash flow for each of the fiscal years then ended, (b)
an unaudited balance sheet of the Company as at June 30, 1999 (including the
notes thereto, the "Balance Sheet"), and the related statement of income, and
cash flow for the fiscal year then ended, and (c) an unaudited balance sheet of
the Company as at August 31, 1999 (the "Interim Balance Sheet") and the related
unaudited statement of income, and cash flow for the two (2) months then ended,
including in each case the notes thereto. Such financial statements and notes
fairly present the financial condition and the results of operations, and cash
flow of the Company as at the respective dates of and for the periods referred
to in such financial statements, all in accordance with GAAP, subject, in the
case of interim financial statements, to normal recurring year-end
16
<PAGE>
adjustments (the effect of which will not, individually or in the aggregate,
have a Material Adverse Effect) and the absence of notes (that, if presented,
would not differ materially from those included in the Balance Sheet), and
except as set forth in Part 3.4 of the Disclosure Letter; the financial
statements referred to in this Section 3.4 reflect the consistent application of
such accounting principles throughout the periods involved, except as disclosed
in the notes to such financial statements. No financial statements of any Person
other than the Company are required by GAAP to be included in the financial
statements of the Company.
3.5 BOOKS AND RECORDS
The books of account, minute books, registers, share books, and other
records of the Company, all of which have been made available to Buyer, are
complete and correct and have been maintained in accordance with Legal
Requirements and sound business practices. The minute books of the Company
contain accurate and complete records of all meetings held of, and corporate
action taken by, the shareholders, the Boards of Directors, and committees of
the Boards of Directors of the Company, and no meeting of any such shareholders,
Board of Directors, or committee has been held for which minutes have not been
prepared and are not contained in such minute books. At the Closing, all of
those books and records will be in the possession of the Company.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES
Part 3.6 of the Disclosure Letter contains a complete and accurate list of
all real property, leaseholds, or other interests in real property owned or held
by the Company. Seller has delivered or made available to Buyer copies of the
deeds and other instruments (as recorded) by which the Company acquired such
real property and interests, and copies of all title insurance policies,
opinions, abstracts, and surveys in the possession of Seller or the Company and
relating to such property or interests. The Company owns all the properties and
assets reflected in the Balance Sheet and the Interim Balance Sheet (except for
assets held under capitalized leases disclosed or not required to be disclosed
in Part 3.6 of the Disclosure Letter and personal property sold since the date
of the Balance Sheet and the Interim Balance Sheet, as the case may be, in the
Ordinary Course of Business). All material properties and assets reflected in
the Balance Sheet and the Interim Balance Sheet as being owned by the Company
are free and clear of all Encumbrances and are not, in the case of real
property, subject to any rights of way, building use restrictions, exceptions,
variances, reservations, or limitations of any nature except, with respect to
all such properties and assets, (a) mortgages, hypothecs, or security interests
shown on the Balance Sheet or the Interim Balance Sheet as securing specified
liabilities or obligations, with respect to which no default (or event that,
with notice or lapse of time or both, would constitute a default) exists, (b)
mortgages, hypothecs, or security interests incurred in connection with the
purchase of property or assets after the date of the Interim Balance Sheet (such
mortgages and security interests being limited to the property or assets so
acquired), with respect to which no default (or event that, with notice or lapse
of time or both, would constitute a default) exists, (c) liens, levies and
assessments for current taxes not yet due, and (d) with respect to real
property, (i) minor imperfections of title, if any, none of which individually
or in the aggregate is substantial in amount, or materially impairs the present
use of the property by the Company, (ii) zoning laws and other land use
restrictions that do not impair
17
<PAGE>
the present use of the property subject thereto, or (iii) as set forth in
the applicable deed or lease or as excepted in the applicable title insurance
policy or letter of counsel to the extent currently in Seller's possession.
3.7 CONDITION AND SUFFICIENCY OF ASSETS
The buildings, plants, structures, and equipment of the Company, taken as a
whole, are in good operating condition and repair (ordinary wear and tear
excepted), and are adequate for the uses to which they are being put, and none
of such buildings, plants, structures, or equipment is in need of maintenance or
repairs except for maintenance and repairs that are not material in nature or
cost. The Company owns or has the right to use buildings, plants, structures,
and equipment which are sufficient for the continued conduct of the Company'
businesses after the Closing in substantially the same manner as conducted prior
to the Closing, subject to the obtaining of the consents set forth in Schedule
3.2 to the Disclosure Letter.
3.8 INVENTORY
All inventory of the Company, whether or not reflected in the Balance Sheet
or the Interim Balance Sheet, consists of a quality and quantity usable and
salable in the Ordinary Course of Business, except for obsolete items and items
of below-standard quality, all of which have been written off or written down in
accordance with GAAP in the Balance Sheet or the Interim Balance Sheet or on the
accounting records of the Company as of the Closing Date, as the case may be.
The quantities of each item of inventory (whether raw materials,
work-in-process, or finished goods) are not excessive, but are reasonable in the
present circumstances of the Company.
3.9 ACCOUNTS RECEIVABLE; CUSTOMER PREPAYMENTS; NO UNDISCLOSED
LIABILITIES
All Accounts Receivable of the Company that are reflected on the Balance
Sheet or the Interim Balance Sheet or on the accounting records of the Company
as of the Closing Date represent or will represent valid obligations arising
from sales actually made or services actually performed in the Ordinary Course
of Business. All payments received by the Company from customers in advance of
services being performed are properly reflected as liabilities on the Balance
Sheet and Interim Balance Sheet in accordance with GAAP. Except as set forth in
Part 3.9 of the Disclosure Letter, the Company has no liabilities or obligations
which would be required to be reflected or reserved against in the Balance Sheet
or the Interim Balance Sheet, in each case in accordance with GAAP and are not
so reflected except for current liabilities incurred in the Ordinary Course of
Business since the respective dates thereof.
3.10 TAXES
(a) The Company has filed or caused to be filed on a timely
basis, all Tax Returns that are or were required to be filed by
or with respect to the Company, either separately or as a
member of a group of corporations, pursuant to applicable Legal
Requirements. Seller has made available to Buyer copies of,
18
<PAGE>
and Part 3.10 of the Disclosure Letter contains a complete and
accurate list of, all such Tax Returns relating to income or
capital taxes filed for tax periods ending on June 30, 1995 and
thereafter. The Company has paid, or made provision for the
payment of, all Taxes that have or may have become due pursuant
to those Tax Returns or otherwise (including, without
limitation, any payroll, sales, or other trust fund taxes), or
pursuant to any assessment received by Seller (with respect to
the Company) or the Company, except such Taxes, if any, as are
listed in Part 3.10 of the Disclosure Letter and are being
contested in good faith and as to which adequate reserves
(determined in accordance with GAAP) have been provided in the
Balance Sheet and the Interim Balance Sheet.
(b) The Tax Returns of the Company subject to such Taxes have
been audited by the relevant tax authorities or are closed by
the applicable statute of limitations for all taxable years
through June 30,1995. Part 3.10 of the Disclosure Letter
contains a complete and accurate list of all audits of all such
Tax Returns, including a description of the nature and outcome
of each audit. All deficiencies proposed as a result of such
audits have been paid, reserved against, settled, or, as
described in Part 3.10 of the Disclosure Letter, are being
contested in good faith by appropriate proceedings. Part 3.10
of the Disclosure Letter describes all adjustments to the
income Tax Returns filed by the Company or any group of
corporations including the Company for all taxable years since
June 30, 1993, and the resulting proposal or deficiencies.
Except as described in Part 3.10 of the Disclosure Letter,
neither Seller nor the Company has given or been requested to
give waivers or extensions (or is or would be subject to a
waiver or extension given by any other Person) of any statute
of limitations relating to the payment of Taxes of the Company
or for which the Company may be liable.
(c) The charges, accruals, and reserves with respect to Taxes
on the respective books of the Company are adequate (determined
in accordance with GAAP) and are, to Seller's Knowledge at
least equal to the Company's liability for Taxes. There exists
no proposed tax assessment against the Company except as
disclosed in the Balance Sheet or in Part 3.10 of the
Disclosure Letter. All Taxes that the Company is or was
required by Legal Requirements to withhold or collect have been
duly withheld or collected and, to the extent required, have
been paid to the proper Governmental Body or other Person.
(d) All Tax Returns filed by (or that include on a consolidated
basis) the Company are true, correct, and complete. There is no
tax sharing agreement that will require any payment by the
Company after the date of this Agreement.
(e) The corporate actions described in recital (D) of this
Agreement will not cause Buyer or the Company to become subject
to, or to become liable for the payment of, any Tax.
(f) Seller is not a registrant for the purpose of Part IX of
the Excise Tax Act (Canada).
19
<PAGE>
3.11 NO MATERIAL ADVERSE CHANGE
Since the date of the Balance Sheet, there has not been any Material
Adverse Change in the Company, and no event has occurred or circumstance exists
that is reasonably likely to result in such a Material Adverse Change.
3.12 EMPLOYEE BENEFITS
(a) As used in this Section 3.12, 3.15 and Section 3.19, the
following term has the meaning set forth below.
"Employee Plans" -- means all the employee benefit,
fringe benefit, supplemental unemployment benefit, bonus,
incentive, profit sharing, termination, severance, change of
control, pension, retirement, stock option, stock purchase,
stock appreciation, health, welfare, medical, dental,
disability, life insurance and similar plans, programs,
arrangements or practices relating to the current or former
employees, officers or directors of the Company maintained,
sponsored or funded by the Company, whether written or oral,
funded or unfunded, insured or self-insured, registered or
unregistered.
(b) Part 3.12(b) of the Disclosure Letter lists and describes
all Employee Plans. The Seller has furnished to the Buyer
true, correct and complete copies of all the Employee Plans as
amended as of the date hereof, together with all material
related documentation.
(c) All of the Employee Plans are and have been established,
registered, invested and administered in all substantial
respects in accordance with their terms and are in good
standing under all applicable Legal Requirements, including
Tax laws. None of the Employee Plans are defined benefit
plans.
(d) All Company contributions or premiums under the Employee
Plans have been made in accordance with the terms of the
Employee Plans.
(e) All employee data necessary to administer each Employee
Plan has been provided by the Seller to the Buyer to the
extent permitted by law and is true and correct as of the date
of this Agreement and the Seller will notify the Buyer of any
changes thereto occurring prior to the Closing Date.
(f) No Employee Plan is subject to any pending investigation,
examination or other proceeding, action or claim initiated by
any regulatory authority, or by any other party (other than
routine claims for benefits), and to Seller's Knowledge there
exists no state of facts which could reasonably be expected to
give rise to any such investigation, examination or other
proceeding, action or claim or to affect the registration of
any Employee Plan required to be registered.
20
<PAGE>
(g) No insurance policy or any other agreement affecting any
Employee Plan requires or permits a retroactive increase in
contributions, premiums or other payments due thereunder.
(h) None of the Employee Plans (other than pension plans)
provide benefits to retired employees or to the beneficiaries
or dependents of retired employees.
3.13 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL
AUTHORIZATIONS
(a) Part 3.13 of the Disclosure Letter contains a complete and
accurate list of each material Governmental Authorization that
is held by the Company or that is otherwise necessary for the
conduct of the business of, or to any of the assets owned or
used by, the Company (other than Licenses held directly by
employees of the Company as to which Seller has no Knowledge
of any breach, revocation, withdrawal, cancellation or
termination of any material number thereof). Except (i) as set
forth in Part 3.13 of the Disclosure Letter and (ii) with
respect to environmental matters which are addressed solely
and exclusively in Section 3.18 hereof:
(i) each Governmental Authorization is valid, subsisting
and in good standing and the Company is, and at all times
since January 1, 1998 has been, in substantial compliance
with each Legal Requirement or Governmental Authorization
that is or was applicable to it or to the conduct or
operation of its business or the ownership or use of any
of its assets;
(ii) no event has occurred or circumstance exists that
(with or without notice or lapse of time) (A) may
constitute or result in a violation by the Company of, or
a failure on the part of the Company to comply with, any
Legal Requirement Known to Seller or Governmental
Authorization; (B) may give rise to any obligation on the
part of the Company to undertake, or to bear all or any
portion of the cost of, any remedial action of any nature;
or (C) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation, or termination of,
or any modification to, of any Governmental Authorization;
(iii) the Company has not received, at any time since
January 1, 1998, any notice or other communication either
in writing, or to the Seller's Knowledge, orally) from any
Governmental Body regarding (A) any actual or alleged
violation of, or failure to comply with, any Legal
Requirement or Governmental Authorization, (B) any actual
or alleged obligation on the part of the Company to
undertake, or to bear all or any portion of the cost of,
any remedial action of any nature; or (C) any actual
21
<PAGE>
or alleged revocation, withdrawal, suspension,
cancellation, termination of, or modification to any
Governmental Authorization;
(iv) all applications required to have been filed for the
renewal of the Governmental Authorizations listed in Part
3.13 of the Disclosure Letter have been duly filed on a
timely basis with the appropriate Governmental Bodies, and
all other filings required to have been made with respect
to such Governmental Authorizations have been duly made on
a timely basis with the appropriate Governmental Bodies.
3.14 LEGAL PROCEEDINGS; ORDERS
(a) Except(i)as set forth in Part3.14 of the Disclosure Letter
and (ii) with respect to environmental matters which are
addressed solely and exclusively in Section 3.18 hereof, there
is no pending Proceeding that has been commenced by or against
the Seller or the Company:
(i) that relates to or may affect the business of, or any
of the assets owned or used by, the Company; or
(ii)that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise
interfering with, any of the Contemplated Transactions.
To the Knowledge of Seller no such Proceeding has
been Threatened, and no event has occurred or circumstance
exists that may give rise to or serve as a basis for the
commencement of any Proceeding of the kind set forth in
3.14(a)(ii) above. Seller has provided Buyer with access to
copies of all pleadings, correspondence, and other documents
relating to each Proceeding listed in Part 3.14 of the
Disclosure Letter.
(b) Except(i) as set forth in Part 3.14 of the Disclosure
Letter and (ii) with respect to environmental matters which
are addressed solely and exclusively in Section 3.18 hereof:
(i) there is no Order to which the Company, or any of the
assets owned or used by the Company, is subject;
(ii)Seller is not subject to any Order that relates to
the business of, or any of the assets owned or used
by the Company; and
(iii)to the Knowledge of Seller, no officer or employee of
the Company is specifically and directly subject to any
Order that prohibits such officer or employee from
engaging in or continuing any conduct, activity, or
practice relating to the business of the Company.
22
<PAGE>
(c) Except as (i) set forth in Part 3.14 of the Disclosure
Letter and (ii) with respect to environmental matters which
are addressed solely and exclusively in Section 3.18 hereof:
(i) the Company is, and at all times since January 1, 1998
has been, in substantial compliance with the terms and
requirements of each Order to which it, or any of the
assets owned or used by it, is or has been subject;
(ii) no event has occurred or circumstance exists that
could reasonably be expected to constitute or result in
(with or without notice or lapse of time) a violation of
or failure to materially comply with the terms or
requirements of any Order to which the Company, or any of
the assets owned or used by the Company, is subject; and
(iii)the Company has not received, at any time since
January 1, 1998, any notice or other communication (either
in writing, or to the Seller's Knowledge, oral) from any
Governmental Body regarding any actual or alleged
violation of, or failure to comply with, any term or
requirement of any Order to which the Company, or any of
the assets owned or used by the Company, is or has been
subject.
3.15 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in Part 3.15 of the Disclosure Letter, since the date
of the Balance Sheet, the Company has conducted its business only in the
Ordinary Course of Business and there has not been any:
(a) change in the Company's authorized or issued capital
(except in connection with the Amalgamation); grant of any
stock option or right to purchase shares in the capital of the
Company; issuance of any security convertible into such
capital; grant of any registration rights; purchase,
redemption, retirement, or other acquisition by the Company of
any shares of any such capital stock; or declaration or
payment of any dividend or other distribution or payment in
respect of shares in the capital;
(b) amendment to the Organizational Documents of the Company
except in connection with the Amalgamation;
(c) payment or increase by the Company of any bonuses,
salaries, or other compensation to any shareholder, director,
officer(as such), or (except in the Ordinary Course of
Business) employee or entry into any employment, severance, or
similar Contract with any director, officer, or employee;
23
<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
(d) adoption of, or increase in the level of payments to or
level of benefits under, any Employee Plans for or with any
employees or former employees of the Company;
(e) damage to or destruction or loss of any asset or property
of the Company, whether or not covered by insurance, which had
a Material Adverse Effect;
(f) entry into, termination of (other than by expiration), or
receipt of notice of termination of (i) any license,
distributorship, dealer, sales representative, joint venture,
or similar agreement, or (ii) any Contract or transaction
involving a total remaining commitment by or to the Company of
at least CDN [***];
(g) sale (other than sales of inventory in the Ordinary Course
of Business), lease (other than leases of vehicles in the
Ordinary Course of Business), or other disposition of any
asset or property of the Company (other than dispositions of
vehicles in the Ordinary Course of Business) or mortgage,
pledge, hypothec, or imposition of any lien or other
Encumbrance on any material asset or property of the Company,
including the sale, lease, or other disposition of any of the
Intellectual Property Assets except for the transfer of the
United States trademark registration of "PCO Services, Inc."
by the Company to Seller;
(h) cancellation or waiver of any claims or rights with a
value to the Company in excess of CDN [***];
(i) material change in the accounting methods used by the
Company; or
(j) agreement, whether oral or written, by the Company to do
any of the foregoing.
3.16 CONTRACTS; NO DEFAULTS
(a) Part 3.16(a) of the Disclosure Letter contains a complete
and accurate list, and Seller has delivered to Buyer true and
complete copies (or, where applicable, forms), of:
(i) each Contract that involves performance of services or
delivery of goods or materials by the Company of an amount
or value in excess of CDN [***];
(ii)each Contract that involves performance of services or
delivery of goods or materials to the Company of an amount
or value in excess of CDN [***];
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<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
(iii)each Contract that was not entered into in the
Ordinary Course of Business and that involves expenditures
or receipts of the Company in excess of CDN [***];
(iv) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other
Contract affecting the ownership of, leasing of, title to,
use of, or any leasehold or other interest in, any real or
personal property (except personal property leases and
installment and conditional sales agreements having a
value per item or aggregate payments of less than CDN
[***] and with terms of less than one year);
(v) each licensing agreement or other Contract with
respect to patents, trademarks, copyrights, and form
agreements generally used with employees, consultants and
contractors in respect thereof;
(vi)each collective bargaining agreement and other
Contract to or with any labor union or other employee
representative of a group of employees;
(vii)each joint venture, partnership, and other Contract
(however named) involving a sharing of profits, losses,
costs, or liabilities by the Company with any other Person
other than payments to employees under an Employee Plan;
(viii)each Contract containing covenants that in any way
purport to restrict the business activity of the Company
or limit the freedom of the Company to engage in any line
of business or to compete with any Person;
(ix) each Contract providing for payments to or by any
Person based on sales, purchases, or profits, other than
direct payments for goods or services performed except for
payments to employees pursuant to written policies);
(x) each power of attorney or procuration that is
currently effective and outstanding, except as executed in
the Ordinary Course of Business (with respect to customs);
(xi) each Contract obligating the Company for capital
expenditures in excess of CDN [***];
(xii)each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance
extended by the Company other than in the Ordinary Course
of Business; and
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<PAGE>
(xiii)each amendment, supplement, and modification
(whether oral or written) in respect of any of the
foregoing.
(b) Except as set forth in Part 3.16(b) of the Disclosure
Letter:
(i) Seller (and no Related Person of Seller) does not have
nor may Seller acquire any rights under, and Seller does
not have, nor may Seller become subject to any obligation
or liability under, any Contract that relates solely to
the business of, or any of the assets owned or used by,
the Company; and
(ii) there is no shareholder agreement that restricts, in
whole or in part, the ability of the directors to manage
the business and affairs of the Company.
(c) Except as set forth in Part 3.16(c) of the Disclosure
Letter,each Applicable Contract identified or required to be
identified in Part 3.16(a) of the Disclosure Letter is in full
force and effect and is valid and enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the
rights of creditors generally and principles governing the
availability of equitable remedies.
(d) Except as set forth in Part 3.16(d) of the Disclosure
Letter:
(i) the Company is, and at all times since January 1,
1999, has been, in substantial compliance with the terms
and requirements of each Applicable Contract;
(ii) to the Knowledge of Seller, each other Person that
has or had any obligation or liability under each
Applicable Contract at all times since January 1, 1999 has
been, in substantial compliance with the terms and
requirements of such Contract;
(iii)no event has occurred or circumstance exists that
(with or without notice or lapse of time) is reasonably
likely to contravene, conflict with, or result in a
violation or breach of, or give the Company or other
Person the right to declare a default or exercise any
remedy under, or to accelerate the maturity or performance
of, or to cancel, terminate, or modify, any Applicable
Contract; and
(iv) the Company has not given to or received from any
other Person, at any time since January 1, 1999, any
notice or other communication (either in writing, or to
the Seller's Knowledge, oral) regarding any actual or
alleged violation or breach of, or default under, any
Applicable Contract.
26
<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
(e) There are no renegotiations of or outstanding rights to
renegotiate any material amounts paid or payable to the
Company under current or completed Applicable Contracts with
any Person and, to the Knowledge of Seller, no such Person has
made written demand for such renegotiation.
(f) The Applicable Contracts relating to the sale, design,
manufacture, or provision of products or services by the
Company have been entered into in the Ordinary Course of
Business and have been entered into without the commission of
any act alone or in concert with any other Person, or any
consideration having been paid or promised, that is or would
be in violation of any Legal Requirement.
3.17 INSURANCE
(a) Seller has delivered to Buyer:
(i) true and complete copies of all policies of insurance
to which the Company is a party or under which the
Company, or any director of the Company, is or has been
covered at any time within the three (3) years preceding
the date of this Agreement;
(ii) true and complete copies of all pending applications
for policies of insurance; and
(iii) any statement by the auditor of the Company's
financial statements with regard to the adequacy of such
entity's coverage or of the reserves for claims.
(b) Part 3.17(b) of the Disclosure Letter describes:
(i) any self-insurance arrangement by or affecting the
Company, including any reserves established
thereunder; and
(ii) any contract or arrangement, other than a policy of
insurance, for the transfer or sharing of any risk by the
Company.
(c) Part 3.17(c) of the Disclosure Letter sets forth, by year,
for the current policy year and each of the three preceding
policy years:
(i) a summary of the loss experience under each policy;
(ii) a statement describing each claim under an insurance
policy for an amount in excess of CDN [***], which sets
forth:
(A) the name of the claimant;
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(B) a description of the policy by insurer, type of
insurance, and period of coverage; and
(C) the amount and a brief description of the claim;
and
(iii)a statement describing the loss experience for all
claims that were self-insured, including the number and
aggregate cost of such claims.
(d) Except as set forth on Part 3.17(d) of the Disclosure
Letter:
(i) To Seller's Knowledge, all policies to which the
Company is a party or that provide coverage to either
Seller, the Company, or any director or officer of the
Company:
(A) are valid, outstanding, and enforceable, subject
to applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the rights of
creditors generally and principles governing the
availability of equitable remedies;
(B) are issued by an insurer that is financially sound
and reputable;
(C) are sufficient for compliance with all Legal
Requirements and Applicable Contracts to which the
Company is a party; and
(D) will continue in full force and effect following
the consummation of the Contemplated Transactions to
the extent that they provide "occurrence based"
coverage.
(ii) The Company has not received (A) any refusal of
coverage or any notice that a defense will be
afforded with reservation of rights in response to a
currently open claim, or (B) any notice of
cancellation or any other indication that any
insurance policy is no longer in full force or effect
or that the issuer of any policy is not willing or
able to perform its obligations thereunder.
(iii) The Company has paid all premiums due, and has
otherwise performed all of its obligations, under each
policy to which the Company is a party or that provides
coverage to the Company or any director thereof.
(iv) The Company has given notice to the insurer of all
current claims of which it has Knowledge that may be
insured thereby.
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[***] - CONFIDENTIAL TREATMENT REQUESTED
3.18 ENVIRONMENTAL MATTERS
Except as set forth in part 3.18 of the Disclosure Letter:
(a) (i) no event has occurred during the last [***] years or
circumstance exists that (with or without notice or lapse of
time) (A) is likely to give rise to any obligation on the part
of the Company to undertake, or to bear all or any portion of
the cost of, any Environmental Liabilities; or (B) is likely
to result directly or indirectly in the revocation,
withdrawal, suspension, cancellation, or termination of, or
requirement to obtain any material modification to, any
Environmental Permit;
(ii) the Company has not received any actual, or to the
Knowledge of Seller Threatened, Order, notice, or other
communication from (i) any Governmental Body or private
citizen acting in the public interest, or (ii) the current or
prior owner or operator of any Facilities, regarding (A) any
actual or alleged violation of, or failure by the Company to
comply with, any Environmental Law or Environmental Permit,
(B) any actual or to the Knowledge of Seller Threatened
obligation on the part of the Company to undertake, or to bear
all or any portion of the cost of, any Environmental
Liabilities; or (C) any actual or to the Knowledge of Seller
Threatened revocation, withdrawal, suspension, cancellation,
termination of, or material modification to any Environmental
Permit; and
(iii) each Environmental Permit is valid, subsisting and
in good standing and the Company is, and at all times during
the last [***] years has been, in material compliance with
each Environmental Law or Environmental Permit that is or was
applicable to it or to the conduct or operation of its
business or the ownership or use of any of its assets.
(b) There are no pending or, to the Knowledge of Seller,
Threatened claims against the Seller or the Company resulting
from any Environmental Liabilities or arising under or
pursuant to any Environmental Law, with respect to or
affecting any of the Facilities.
(c) There are no Hazardous Materials present, at, on, in or
under the Environment at any of the Facilities, other than (i)
as used in the lawful conduct of the business by the Company,
or (ii) which were present at the Facility in question at the
later of the time the Seller acquired the Company and the
Company entered into occupation of the Facility in question.
The Company has not, to the Knowledge of Seller, permitted or
conducted any Hazardous Activity at the Facilities except in
material compliance with all applicable Environmental Laws.
There are no pest control products stored at any of the
Facilities currently owned, leased or operated by the Company
which (a) were manufactured prior to October 30, 1996 or (b)
are listed in Part I of Schedule II to the Canadian
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[***] - CONFIDENTIAL TREATMENT REQUESTED
Environmental Protection Act (as in force as of the date of
Closing), and which the cost to properly dispose of such
products would exceed [***].
Seller has delivered to Buyer true and complete
copies and results of any reports, and any material studies,
analyses, tests, or monitoring possessed by Seller or the
Company pertaining to Hazardous Materials or Hazardous
Activities in, on, or under the Facilities or any other
properties and assets (whether real, personal, or mixed) in
which the Company has or had an interest, or concerning
compliance by the Company with Environmental Laws.
3.19 EMPLOYEES
(a) Part 3.19 of the Disclosure Letter contains, to the extent
permitted by law, complete and accurate list of the following
information for each employee of the Company, including each
employee on leave of absence or layoff status: employer; name;
age, job title; current compensation and any change in
compensation since June 30, 1999; vacation accrued; banked
sick days/personal choice days, if any; bonus days with pay,
if any; and recognized service date for purposes of vesting
and eligibility to participate in any Employee Plan or
vacation plan.
(b) The Company does not have any written employment
agreements (including any confidentiality, non-competition or
proprietary rights agreements hereinafter "Proprietary Rights
Agreements") with any Person except (i) form non-competition
agreements with all employees; or (ii) as are listed in Part
3.16(a) of the Disclosure Letter. Further, to Seller's
Knowledge no employee of the Company is a party to, or is
otherwise bound by, any agreement, including any
confidentiality, non competition, or proprietary rights
agreement, between such employee and any other Person
("Proprietary Rights Agreement") that adversely affects (i)
his ability to perform his duties as an employee of the
Company, or (ii) the ability of the Company to conduct its
business, including any Proprietary Rights Agreement with
Seller or the Company by any such employee. To Seller's
Knowledge (excluding the knowledge of the officer or key
employee in question), no officer or other key employee of the
Company intends to terminate his employment with the Company.
(c) No retired employee or director of the Company, or their
dependents are currently receiving benefits or scheduled to
receive benefits from the Company in the future; other than
pursuant to the terms of an Employee Plan or pursuant to a
Legal Requirement.
(d) The Company is in substantial compliance with Legal
Requirements respecting employment and employment practices,
terms and conditions of employment, pay equity, wages and
hours of work, immigration, human rights, health and safety.
The Company is not liable for the payment of any compensation,
damages, taxes, fine, penalties or other amounts, however
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designated, for the failure to comply with any of the
foregoing Legal Requirements.
(e) All amounts due or accruals due for all salary, wages,
bonuses, commissions, vacations with pay, banked sick days,
personal choice days, bonus days, pension benefits or other
employee benefits are reflected in the Balance Sheet if and to
the extent required by GAAP to be so reflected.
(f) Except as set forth in Part 3.19 of the Disclosure Letter,
no individual employee, officer, director, agent, consultant
or advisor has any agreement as to length of employment or
retainer, length of notice or severance or termination payment
required to terminate his or her employment or retainer or any
combination thereof or any entitlement upon change of control
of the Company or the contemplated transactions, other than
such as results from Legal Requirements or a written policy of
the Company applicable to any particular class or classes of
employees, which policy is set forth in the Company's Policy
Manual or in Schedule 3.12 to the Disclosure Letter.
3.20 LABOR RELATIONS; COMPLIANCE
Except as set forth in Part 3.20 of the Disclosure Letter, since January 1,
1999 the Company has not been and is not a party to any collective bargaining or
other labor Contract with any trade union or employee association nor is any
collective agreement being negotiated except that a collective bargaining
agreement is currently being negotiated with respect to certain employees of the
Company located in the province of Quebec. Except as set forth in Part 3.20 of
the Disclosure Letter, since January 1, 1999, there has not been, there is not
presently pending or existing, and to Seller's Knowledge there is not
Threatened, (a) any strike, slowdown, picketing, work stoppage, or employee
grievance process, (b) any Proceeding against the Company relating to the
alleged violation of any Legal Requirement pertaining to labor relations or
employment matters, including any charge or complaint filed by an employee or
union with any applicable labor relations board or any comparable government
body or under any applicable human rights, employment standards, workers
compensation or occupational health and safety legislation, or (c) any
application for certification of a collective bargaining agent received by or
advised to the Company. To Seller's Knowledge no event has occurred or
circumstance exists that could provide the basis for any work stoppage or other
labor dispute. There is no lockout of any employees by the Company, and the
Company contemplates no such action. No trade union or employee association has
applied to have the Company declared a related or successor employer pursuant to
any applicable labor relations or employment Legal Requirement.
3.21 INTELLECTUAL PROPERTY
(a) Intellectual Property Assets -- The term "Intellectual
Property Assets" means:
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[***] - CONFIDENTIAL TREATMENT REQUESTED
(i) the name "PCO Services", all business names, trading
names, registered and unregistered trademarks, service
marks, and applications which are used in the conduct of
the business of the Company as currently conducted and are
described on Part 3.21(e) of the Disclosure Letter
(collectively, "Marks");
(ii) all patents, patent applications, and inventions and
discoveries that may be patentable which are used in the
conduct of the business of the Company as currently
conducted (collectively, "Patents");
(iii)all copyrights in both published works and
unpublished works which are used in the conduct of the
business of the Company as currently conducted
(collectively, "Copyrights"); and
(iv) all know-how, trade secrets, confidential
information, customer lists, software, technical
information, data, process technology, plans, drawings,
and blue prints; owned, used, or licensed by the Seller or
the Company as licensee or licensor with respect to the
business of the Company as currently conducted
(collectively, "Trade Secrets").
(b) Agreements -- Part 3.21(b) of the Disclosure Letter
contains a complete and accurate list of all Applicable
Contracts relating to Intellectual Property Assets to which
the Company is a party or by which the Company is bound,
except for any license implied by the sale of a product and
perpetual, paid-up licenses for commonly available software
programs with a value of less than CDN [***] under which the
Company is the licensee. There are no outstanding and, to
Seller's Knowledge, no Threatened disputes or disagreements
with respect to any such agreement.
(c) Know-How Necessary for the Business
(i) The Intellectual Property Assets are all those
necessary for the operation of the Company's business as
it is currently conducted.
(d) Patents - Neither Seller nor the Company holds any Patents
applicable to the business of the Company.
(e) (i) Part 3.21(e) of the Disclosure Letter contains a
complete and accurate list and summary description of all
Marks. One or more of the Seller or the Company is the owner
of all right, title, and interest in and to each of the Marks,
free and clear of all liens, security interests, charges,
Encumbrances, equities, and other adverse claims.
(ii) All Marks that have been registered with the US
Patent and Trademark Office or the CIPO are currently in
substantial compliance with all formal legal requirements
(including the timely post-registration
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filing of affidavits of use and payment of renewal fees),
and are not subject to any maintenance fees or taxes or
actions falling due within ninety days after the Closing
Date.
(iii) No Mark has been or is now involved in any
opposition or cancellation proceeding and, to Seller's
Knowledge, no such action is Threatened with the respect
to any of the Marks.
(iv) To Seller's Knowledge, there is no potentially
interfering trademark or trademark application of any
third party.
(v) To Seller's Knowledge, no Mark is infringed or has
been challenged or threatened in any way and none of the
Marks used by the Company infringes or is alleged to
infringe any trade name, trademark, or service mark of any
third party.
(f) Copyrights - Neither Seller nor the Company has any
registered copyrights applicable to the business of the
Company.
(g) Trade Secrets
(i) Seller and the Company have taken all reasonable
precautions to protect the secrecy, confidentiality, and
value of their Trade Secrets.
(ii)Either the Seller or the Company has the right (but
not necessarily exclusive) to use the Trade Secrets.
To Seller's Knowledge, no Trade Secret has been Threatened
in any way.
3.22 CERTAIN PAYMENTS
Since January 1, 1989, neither the Company nor any director, officer,
agent, or employee of the Company, or to Seller's Knowledge any other Person
associated with or acting for or on behalf of the Company, while acting on
behalf of the Company has (a) directly or indirectly made any contribution,
gift, bribe, rebate, payoff, influence payment, kickback, or other payment to
any Person, private or public, regardless of form, whether in money, property,
or services (i) to obtain favorable treatment in securing business, (ii) to pay
for favorable treatment for business secured, (iii) to obtain special
concessions or for special concessions already obtained, for or in respect of
the Company or any Affiliate of the Company, or (iv) in violation of any Legal
Requirement, or (b) intentionally established or maintained any fund or asset
that has not been recorded in the books and records of the Company.
3.23 DISCLOSURE
(a) No representation or warranty of Seller in this Agreement
and no statement in the Disclosure Letter omits to state a
material fact necessary to make
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the statements herein or therein, in light of the
circumstances in which they were made, not misleading.
(b) No notice given pursuant to Section 5.5 will contain any
untrue statement or omit to state a material fact necessary to
make the statements therein or in this Agreement, in light of
the circumstances in which they were made, not misleading.
3.24 RELATIONSHIPS WITH RELATED PERSONS
Except as set forth in Part 3.24 of the Disclosure Letter, neither Seller
nor any Related Person of Seller or of the Company has any interest in any
property (whether real, personal, or mixed and whether tangible or intangible),
used in or pertaining to the Company' businesses. Except as set forth in Part
3.24 of the Disclosure Letter, neither Seller nor any Related Person of Seller
or of the Company has owned (of record or as a beneficial owner) an equity
interest or any other financial or profit interest in, a Person that has (i) had
business dealings or a material financial interest in any transaction with the
Company other than business dealings or transactions conducted in the Ordinary
Course of Business with the Company at substantially prevailing market prices
and on substantially prevailing market terms, or (ii) engaged in competition
with the Company with respect to any line of the products or services of the
Company (a "Competing Business") in any market presently served by the Company.
Except as set forth in Part 3.24 of the Disclosure Letter, neither Seller nor
any Related Person of Seller or of the Company is a party to any Contract with,
or has any claim or right against, the Company.
3.25 BROKERS OR FINDERS
Seller and its agents have incurred no obligation or liability, contingent
or otherwise, for brokerage or finders' fees or agents' commissions or other
similar payment in connection with this Agreement.
3.26 YEAR 2000 COMPLIANCE
Seller and the Company have (i) undertaken a detailed inventory, review,
and assessment of all areas within and affecting the Company' business and
operations that could be adversely affected by the failure of the Company to be
"Year 2000 Compliant" (as hereinafter defined), (ii) developed a plan and time
line for the Company becoming Year 2000 Compliant, (iii) implemented that plan
in accordance with the specified timetable, and (iv) as a result thereof, the
operations and business of the Company is currently, or will be Year 2000
Compliant on or before the Closing Date. As used herein, "Year 2000 Compliant"
shall mean that all software, embedded microchips and other processing
capabilities utilized by the Company on existing computer hardware resources
which are critical to the functioning of the business of the Company will
correctly process, sequence, and calculate, without interruption, all date and
date related data for all dates to, through and for 20 years after January 1,
2000, including leap year calculations.
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3.27 INVESTMENT CANADA ACT
The book value of the assets of the Company as shown on the most recent year-end
balance sheet of the Company prepared in accordance with GAAP was less than CDN.
$184 million. The Company is not engaged in any of the following businesses:
(i) production of uranium or ownership of an interest in a
producing uranium property in Canada;
(ii) any service of a financial nature offered by a financial
institution excluding the underwriting and selling of
insurance policies;
(iii) carriage of passengers or goods from one place to
another by any means, including carriage by air, by rail, by
water, by land and by pipeline (except for its own internal
distribution);
(iv) the publication, distribution or sale of books,
magazines, periodicals or newspapers in print or machine
readable form, other than the sole activity of printing or
typesetting of books, magazines, periodicals or newspapers
(except for (x) advertising materials or (y) training
materials used by the Company's employees);
(v) the production, distribution, sale or exhibition of film
or video recordings (except for (x) advertising materials or
(y) training materials used by the Company's employees);
(vi) the production, distribution, sale or exhibition of audio
or video music recordings;
(vii) the publication, distribution or sale of music in print
or machine readable form; or
(viii) radio communication in which the transmissions are
intended for direct reception by the general public, any radio
or television broadcasting undertakings and any satellite
programming and broadcast network services.
3.28 LIMITATION ON WARRANTIES
Except as expressly set forth in this Article 3, Seller makes no express or
implied warranty of any kind whatsoever including, without limitation, any
representation as to the value of any of the assets of the Company or the future
profitability or future earnings of the Company. ALL IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED.
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4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
4.1 ORGANIZATION AND GOOD STANDING
Buyer is a corporation duly incorporated, organized, validly
existing, and in good standing under the laws of the province
of New Brunswick.
4.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding
obligation of Buyer, enforceable against Buyer in accordance
with its terms. Buyer has the absolute and unrestricted right,
power, and authority to execute and deliver this Agreement and
to perform its obligations under this Agreement.
(b) Except as set forth in Schedule 4.2, neither the execution
and delivery of this Agreement by Buyer nor the consummation
or performance of any of the Contemplated Transactions by
Buyer will give any Person the right to prevent, delay, or
otherwise interfere with any of the Contemplated Transactions
pursuant to:
(i) any provision of Buyer's Organizational Documents;
(ii)any resolution adopted by the board of directors or
the shareholders of Buyer;
(iii)any Legal Requirement or Order to which Buyer may be
subject; or
(iv)any Contract to which Buyer is a party or by which
Buyer may be bound.
Except as set forth in Schedule 4.2, Buyer is not and will not be required
to give any notice to or obtain any Consent from any Person in connection with
the execution and delivery of this Agreement or the consummation or performance
of any of the Contemplated Transactions.
4.3 INVESTMENT INTENT
Buyer is acquiring the Shares for its own account and not with a view to
their distribution within the meaning of Section 2(11) of the Securities Act of
1933, as amended.
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4.4 CERTAIN PROCEEDINGS
There is no pending Proceeding that has been commenced against Buyer and
that challenges, or may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, any of the Contemplated Transactions. To Buyer's
Knowledge, (i) no such Proceeding has been Threatened, and (ii) no event has
occurred or circumstance exists that may serve as a basis for commencement of
any such Proceeding.
4.5 BROKERS OR FINDERS
Buyer and its officers and agents have incurred no obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement.
5. COVENANTS OF SELLER PRIOR TO CLOSING DATE
5.1 ACCESS AND INVESTIGATION
Between the date of this Agreement and the Closing Date, Seller will, and
will cause the Company and its Representatives to, (a) afford Buyer and its
Representatives and prospective lenders and their Representatives (collectively,
"Buyer's Advisors") reasonable access during normal business hours to the
Company's personnel, properties (including subsurface testing), contracts, books
and records, and other documents and data (provided, however, to the extent
Buyer deems subsurface testing to be necessary, Buyer will coordinate with
Seller to ensure (i) minimum disruption of the business of the Company, (ii)
that such subsurface testing will be subject to such reasonable terms and
conditions as Seller may impose including indemnity of Seller and the Company
for all liabilities and expenses relating to or caused by such testing and (iii)
that a representative of Seller will be present at all times and shall be
entitled to obtain split samples), (b) furnish Buyer and Buyer's Advisors with
copies of all such contracts, books and records, and other existing documents
and data as Buyer may reasonably request, and (c) furnish Buyer and Buyer's
Advisors with such additional financial, operating, and other data and
information as Buyer may reasonably request.
5.2 OPERATION OF THE BUSINESSES OF THE COMPANY
Between the date of this Agreement and the Closing Date, unless Buyer
consents otherwise, Seller will, and will cause the Company to:
(a) conduct the business of the Company only in the Ordinary
Course of Business (except for the continuance of the Company
to Nova Scotia and the consummation of the Amalgamation);
(b) use its Best Efforts (consistent with its past practices)
to preserve intact the current business organization of the
Company, keep available the services of the current officers,
employees, and agents of the Company, and maintain the
relations and good will with suppliers, customers, landlords,
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creditors, employees, agents, and others having business
relationships with the Company;
(c) confer with Buyer concerning operational matters of a
material nature; and
(d) otherwise report periodically to Buyer concerning the
status of the business, operations, and finances of the
Company.
5.3 NEGATIVE COVENANT
Except as otherwise expressly permitted by this Agreement, between the date
of this Agreement and the Closing Date, Seller will not, and will cause the
Company not to, without the prior consent of Buyer, take any reasonable
affirmative action, or fail to take any reasonable action within their or its
control, as a result of which any of the changes or events listed in Section
3.15 is more likely than not to occur.
5.4 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, Seller will,
and will cause the Company to, make all filings required by Legal Requirements
to be made by or reasonably deemed advisable by the Buyer to be made by them, in
order to consummate the Contemplated Transactions (including all filings under
the Competition Act and the Investment Canada Act, if applicable) to the extent
such filings have not been made prior to the date hereof. Between the date of
this Agreement and the Closing Date, Seller will, and will cause the Company to,
(a) cooperate with Buyer with respect to all filings that Buyer reasonably
elects to make or is required by Legal Requirements to make in connection with
the Contemplated Transactions, and (b) cooperate with Buyer in obtaining all
consents identified in Schedule 7.3; provided that except as provided in Section
11.1, this Agreement will not require Seller to pay funds to third parties or
dispose of or make any change in any portion of its business or to incur any
other burden in order to cooperate or to obtain a Governmental Authorization.
5.5 NOTIFICATION
Between the date of this Agreement and the Closing Date, Seller will
promptly notify Buyer in writing if Seller or the Company becomes aware of any
fact or condition that causes or constitutes a Breach of any of Seller's
representations and warranties as of the date of this Agreement, or if Seller or
the Company becomes aware of the occurrence after the date of this Agreement of
any fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a Breach of any such representation or warranty
had such representation or warranty been made as of the time of occurrence or
discovery of such fact or condition. Should any such fact or condition require
any change in the Disclosure Letter if the Disclosure Letter were dated the date
of the occurrence or discovery of any such fact or condition, Seller will
promptly deliver to Buyer a supplement to the Disclosure Letter specifying such
change. Any such supplements, shall have the effect of modifying the
representations and warranties of Seller from and after the Closing for purposes
of Article 10 hereof. During the
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[***] - CONFIDENTIAL TREATMENT REQUESTED
same period, Seller will promptly notify Buyer of the occurrence of any Breach
of any covenant of Seller in this Section 5 or of the occurrence of any event
that will make the satisfaction of the conditions in Section 7 impossible or
likely not to occur.
5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS
Except as expressly provided in this Agreement, Seller will cause all
indebtedness owed to [***] by either [***] or any [***] of either [***] to be
paid in full prior to Closing and will terminate all existing lines of credit
(other than as provided under the leases set forth in the Disclosure Letter)
available to the Company to the extent it has not done so prior to the date
hereof.
5.7 NO NEGOTIATION
Until such time, if any, as this Agreement is terminated pursuant to
Section 9, Seller will not, and will cause the Company and each of their
Representatives not to, directly or indirectly solicit, initiate, or encourage
any inquiries or proposals from, discuss or negotiate with, provide any
non-public information to, or consider the merits of any unsolicited inquiries
or proposals from, any Person (other than Buyer or as otherwise contemplated
hereby) relating to any transaction involving the sale of the business or assets
(other than in the Ordinary Course of Business) of the Company, or any of the
capital stock of the Company, or any merger, consolidation, business
combination, or similar transaction involving the Company.
5.8 BEST EFFORTS
Except as set forth in the proviso to Section 5.4, between the date of this
Agreement and the Closing Date, Seller will use its Best Efforts to cause the
conditions in Sections 7 and 8 to be satisfied.
6. COVENANTS OF BUYER PRIOR TO CLOSING DATE
6.1 APPROVALS OF GOVERNMENTAL BODIES
As promptly as practicable after the date of this Agreement, Buyer will,
and will cause each of its Related Persons to, make all filings required by
Legal Requirements to be made by them to or deemed advisable by the Buyer to be
made by them, in order to consummate the Contemplated Transactions (including
all filings under the Competition Act and the Investment Canada Act, if
applicable). Between the date of this Agreement and the Closing Date, Buyer
will, and will cause each Related Person to, (i) cooperate with Seller with
respect to all filings that Seller is required by Legal Requirements to make in
connection with the Contemplated Transactions, and (ii) cooperate with Seller in
obtaining all consents identified in Schedule 7.3 of the Disclosure Letter;
provided that this Agreement will not require Buyer to dispose of or make any
change in any portion of its business or to incur any other burden to obtain a
Governmental Authorization.
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6.2 BEST EFFORTS
Except as set forth in the proviso to Section 6.1, between the date of this
Agreement and the Closing Date, Buyer will use its Best Efforts to cause the
conditions in Sections 7 and 8 to be satisfied.
6.3 KNOWLEDGE OF MISREPRESENTATIONS AND OMISSIONS
As of the date hereof, Buyer has no Knowledge of any material
misrepresentations or omissions in the representations and warranties of the
Seller in this Agreement and the Disclosure Letter, and prior to the Closing,
Buyer shall promptly notify Seller if Buyer obtains Knowledge that the
representations and warranties of Seller in this Agreement and the Disclosure
Letter are not true and correct in all material respects or if any of them
contain errors or omissions. Buyer shall cause Zia Siddiqui (who is a former
employee of Seller, and is a current employee of Buyer) to reasonably cooperate
with Seller in the preparation of the Disclosure Letter.
7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Buyer, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
(a) All of Seller's representations and warranties in this
Agreement (considered collectively) must have been accurate in
all material respects as of the date of this Agreement and
must be accurate in all material respects as of the Closing
Date as if made on the Closing, without giving effect to any
supplement to the Disclosure Letter; and each of Seller's
representations and warranties (considered individually), if
not accurate in all material respects as of the date of this
Agreement or as of the Closing Date, must not have a Material
Adverse Effect.
(b) Each of Seller's representations and warranties in
Sections 3.3, 3.12 and 3.24 must have been accurate in all
respects as of the date of this Agreement, and must be
accurate in all respects as of the Closing Date as if made on
the Closing Date, without giving effect to any supplement to
the Disclosure Letter.
7.2 SELLER'S PERFORMANCE
(a) All of the covenants and obligations that Seller is
required to perform or to comply with pursuant to this
Agreement at or prior to the Closing (considered
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collectively), and each of these covenants and obligations
(considered individually), must have been duly performed and
complied with in all material respects.
(b) Each document required to be delivered pursuant to Section
2.4 must have been delivered, and each of the other covenants
and obligations in Section 5.4 must have been performed and
complied with in all respects.
7.3 CONSENTS
Each of the Consents identified Schedule 7.3 which the parties have agreed
are the material Consents out of those set forth in Part 3.2 of the Disclosure
Letter and Schedule 4.2, must have been obtained and must be in full force and
effect.
7.4 NO PROCEEDINGS
Since the date of this Agreement, there must not have been commenced or
Threatened against Buyer, or against any Person affiliated with Buyer, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.
7.5 NO CLAIM REGARDING SHARES OWNERSHIP OR SALE PROCEEDS
There must not have been made or Threatened by any Person (other than
Seller) any claim asserting that such Person (a) is the holder or the beneficial
owner of, or has the right to acquire or to obtain beneficial ownership of, any
shares of, or any other voting, equity, or ownership interest in, the Company,
or (b) is entitled to all or any portion of the Purchase Price payable for the
Shares.
7.6 COMPETITION ACT
The Seller, the Company and the Buyer shall each have filed all notices and
information required under Part IX of the Competition Act or deemed advisable by
the Buyer, and shall have satisfied any request for additional information
thereunder and the applicable waiting periods and any extensions thereof shall
have expired without the threat of restraint or challenge, or the Buyer shall
have received an Advance Ruling Certificate ("ARC") pursuant to section 102 of
the Competition Act stating that the Commissioner of Competition appointed
thereunder is satisfied that he would not have sufficient grounds on which to
apply for an order in respect of the transaction contemplated by this Agreement.
7.7 BOARD APPROVAL
The Contemplated Transactions shall have been approved by the Board of
Directors of Orkin Exterminating Company, Inc. ("Orkin"), Buyer's parent
corporation.
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8. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
Seller's obligation to sell the Shares and to take the other
actions required to be taken by Seller at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Seller, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS
All of Buyer's representations and warranties in this Agreement (considered
collectively) must have been accurate in all material respects as of the date of
this Agreement and must be accurate in all material respects as of the Closing
Date as if made on the Closing.
8.2 BUYER'S PERFORMANCE
(a) All of the covenants and obligations that Buyer is
required to perform or to comply with pursuant to this
Agreement at or prior to the Closing (considered collectively)
, and each of these covenants and obligations (considered
individually), must have been performed and complied with in
all material respects.
(b) Buyer must have delivered each of the documents required
to be delivered by Buyer pursuant to Section 2.4, must have
delivered the Closing Cash Payment in the manner contemplated
in Section 2.4, subject to any withholding under Section 2.7
and each of the covenants and obligations in Section 6.1 must
have been performed and complied with in all respects.
8.3 CONSENTS
Each of the Consents identified in Schedule 7.3 must have been obtained and
must be in full force and effect; provided, however, that Buyer may waive the
requirement to obtain a Consent, if such waiver will not have an economic
consequence to Seller, and if such requirement is waived, then the failure to
obtain the applicable Consent shall not be a condition precedent to Seller's
obligation to close.
8.4 AMALGAMATION
The Amalgamation shall have occurred and the Company shall be continuing as
a NSULC.
8.5 NO PROCEEDINGS
Since the date of this Agreement, there must not have been commenced or
Threatened against Seller, or against any Person affiliated with Seller, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the
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Contemplated Transactions or the Amalgamation, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions or the Amalgamation.
8.6 BOARD APPROVAL
The Contemplated Transactions shall have been approved by the Boards of
Directors of Seller and of S.C. Johnson & Son, Inc.
9. TERMINATION
9.1 TERMINATION EVENTS
This Agreement may, by notice given prior to or at the Closing, be
terminated:
(a) by either Buyer or Seller if a material Breach of any
provision of this Agreement has been committed by the other
party and such Breach has not been waived;
(b) (i) by Buyer if any of the conditions in Section 7 have
not been satisfied as of the Closing Date or if satisfaction
of such a condition is or becomes impossible (other than
through the failure of Buyer to comply with its obligations
under this Agreement) and Buyer has not waived such condition
on or before the Closing Date; or (ii) by Seller, if any of
the conditions in Section 8 have not been satisfied of the
Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Seller
to comply with its obligations under this Agreement) and
Seller has not waived such condition on or before the Closing
Date;
(c) by mutual consent of Buyer and Seller; or
(d) by either Buyer or Seller if the Closing has not occurred
(other than through the failure of any party seeking to
terminate this Agreement to comply fully with its obligations
under this Agreement) on or before November 5, 1999, or such
later date as the parties may agree upon.
9.2 EFFECT OF TERMINATION
Each party's right of termination under Section 9.1 is in addition to any
other rights it may have under this Agreement or otherwise, and the exercise of
a right of termination will not be an election of remedies. If this Agreement is
terminated pursuant to Section 9.1, all further obligations of the parties under
this Agreement will terminate, except that the obligations in Sections 11.1 and
11.3 will survive; provided, however, that if this Agreement is terminated by a
party because of the Breach of the Agreement by the other party or because one
or more of the conditions to the terminating party's obligations under this
Agreement is not
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satisfied as a result of the other party's failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies will survive such termination unimpaired.
10. INDEMNIFICATION; REMEDIES
10.1 SURVIVAL
All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Letter, the supplements to the Disclosure Letter, the
certificates delivered pursuant to Sections 2.4(a)(v) and 2.4(b)(ii), and any
other certificate or document delivered pursuant to this Agreement will survive
the Closing.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLER
Seller will indemnify and hold harmless Buyer and the Company, and their
respective Representatives, shareholders, controlling persons, and affiliates
(collectively, the "Indemnified Persons") for, and will pay to the Indemnified
Persons the amount of, any loss, liability, claim, damage (including incidental
and consequential damages), expense (including costs of investigation and
defense and reasonable attorneys' fees) or diminution of value, whether or not
involving a third-party claim (collectively, "Damages"), arising, directly or
indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by
Seller in this Agreement, the Disclosure Letter, the
supplements to the Disclosure Letter, or any other certificate
or document delivered by Seller pursuant to this Agreement;
(b) any Breach by Seller of any covenant or obligation of
Seller in this Agreement;
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or
understanding alleged to have been made by any such Person
with Seller or the Company (or any Person acting on their
behalf) in connection with any of the Contemplated
Transactions;
(d) any loss, cost, or liability (including punitive damages,
legal fees and other expenses) not otherwise covered by
insurance that the Buyer or the Company may incur as a result
of, or relating to, those items set forth in Part 3.14 of the
Disclosure Schedule; or
(e) any fixed obligation for a specified sum of money which
arose or accrued before the Closing Date which should have
been (in accordance with GAAP) reflected on the Company's
balance sheet used in the determination of Adjusted Net Worth,
but which was not so reflected .
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[***] - CONFIDENTIAL TREATMENT REQUESTED
10.3 EXCLUSIVE REMEDY
Buyer acknowledges and agrees that, from and after the Closing, its sole
and exclusive remedy with respect to any and all claims relating to the subject
matter of this Agreement and the Contemplated Transactions shall be pursuant to
the indemnification provisions set forth in this Article 10; provided, however,
that notwithstanding the foregoing, Buyer shall be entitled to seek equitable
remedies (including, without limitation, specific performance) with respect to
Breaches, or contemplated Breaches, of Sections 2.1, 2.5, 5.1, 5.4, 11.3, 11.6
and any breach of the Noncompetition Agreement. Except with respect to the
indemnification claims under this Article 10, equitable remedies as set forth in
the preceding sentence, remedies based on fraud, intentional breaches of this
Agreement, or intentional misrepresentations, Buyer hereby waives, from and
after the Closing, to the fullest extent permitted under applicable law, any and
all rights, claims and causes of action it may have against Seller, including
without limitation any such rights, claims or causes or action relating to
environmental matters, relating to the subject matter of this Agreement and the
Contemplated Transactions arising under or based upon any federal, provincial,
state, local or foreign statute, law, ordinance, rule or regulation or
otherwise. Buyer further acknowledges and agrees that (i) other than the
representations and warranties of Seller specifically contained in this
Agreement, there are no representations or warranties of Seller or its
Representatives or any other Person or entity either express or implied with
respect to the Company and (ii) except as expressly provided in this Article 10,
it shall have no claim or right to indemnification based on any information,
documents or materials furnished by Seller or its Representatives or any other
Person, including any information, documents or material made available to Buyer
in expectation of the Contemplated Transactions.
10.4 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER
Buyer will indemnify and hold harmless Seller and its Representatives,
shareholders, controlling persons and affiliates, and will pay to Seller or such
persons the amount of any Damages arising, directly or indirectly, from or in
connection with (a) any Breach of any representation or warranty made by Buyer
in this Agreement or in any certificate or document delivered by Buyer pursuant
to this Agreement, (b) any Breach by Buyer of any covenant or obligation of
Buyer in this Agreement, (c) any liabilities of the Company which accrue on or
after the Closing Date, or which are not subject to indemnification by Seller
pursuant to Section 10.2(d) hereof; (d) any claim by any Person for brokerage or
finder's fees or commissions or similar payments based upon any agreement or
understanding alleged to have been made by such Person with Buyer (or any Person
acting on its behalf) in connection with any of the Contemplated Transactions or
(e) any actual or alleged failure of Buyer to comply with the Investment Canada
Act in connection with the Contemplated Transactions.
10.5 TIME LIMITATIONS
If the Closing occurs, Seller will have no liability (for indemnification
or otherwise) with respect to any representation or warranty, or covenant or
obligation to be performed and complied with prior to the Closing Date, other
than those in Sections 3.3, 3.10, 3.12, and 3.18, unless on or before the
[***] of the Closing Date a claim has arisen, or Buyer has a reasonable good
faith basis for determining that a claim will be
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[***] - CONFIDENTIAL TREATMENT REQUESTED
asserted, and Buyer notifies Seller of such claim specifying the factual basis
of that claim in reasonable detail to the extent then known by Buyer; a claim
with respect to Section 3.3, 3.10, 3.12, or 3.18, or a claim for indemnification
or reimbursement not based upon any representation or warranty or any covenant
or obligation to be performed and complied with on or prior to the Closing Date,
may be made at any time during the applicable statute of limitations for such
underlying claim.
10.6 LIMITATIONS ON AMOUNT - SELLER
Seller will have no liability (for indemnification or otherwise) with
respect to the matters described in Section 10.2 until the total of all Damages
with respect to such matters exceeds US [***] (the "Basket") and then only
for the amount by which such Damages exceed the Basket. Seller shall also have
no liability for Damages in excess of [***] of the Purchase Price
(the "Cap"); provided that the Basket and the Cap shall be inapplicable to any
Damages attributable to intentional breaches of this Agreement, intentional
misrepresentation, or fraud. Furthermore, and notwithstanding the foregoing, (A)
neither the Basket nor the Cap shall be applicable to Damages attributable to
(i) the indemnification obligation contained in Sections 10.2(d) and 10.2(e)
hereof; (ii) a Breach of the representation and warranty with respect to
environmental matters set forth in Section 3.18; or (iii) a Breach of the
representation and warranty with respect to tax matters contained in Section
3.10; and (B) the Basket shall not be applicable to Damages attributable to a
Breach of the representation and warranty on Year 2000 compliance set forth in
Section 3.26 (notwithstanding any qualifiers to such representations and
warranties included in Part 3.26 of the Disclosure letter), provided that Seller
will have no liability (for indemnification or otherwise) with respect to such
Damages until the total of all Damages with respect to such Section 3.26 exceeds
US [***] and then only for the amount by which such Damages exceed US [***].
10.7 LIMITATIONS ON AMOUNT - BUYER
Buyer will have no liability (for indemnification or otherwise) with
respect to the matters described in Section 10.4 until the total of all Damages
with respect to such matters exceeds the Basket and then only for the amount by
which such Damages exceed the Basket. Buyer shall also have no liability for
Damages in excess of the Cap; provided that the Basket and the Cap shall be
inapplicable to any Damages attributable to intentional breaches of this
Agreement, intentional misrepresentation, or fraud. Furthermore, and
notwithstanding the foregoing, neither the Basket nor the Cap shall be
applicable to Damages attributable to the indemnification obligation contained
in Sections 10.4(c) and 10.4(e) hereof.
10.8 PROCEDURE FOR INDEMNIFICATION - THIRD PARTY CLAIMS
(a) Promptly after receipt by an indemnified party under
Section 10.2 or 10.4 of notice of the commencement of any
Proceeding against it (or, in the case of a claim for
indemnification by Buyer under Section 10.2(d) hereof, upon
receipt of a notice from an insurance carrier denying coverage
or rejecting a claim relating to the litigation referenced in
such Section), such indemnified party will, if a claim is to
be made against an indemnifying party under such Section, give
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notice to the indemnifying party of the commencement of such
Proceeding, but the failure to notify the indemnifying party
will not relieve the indemnifying party of any liability that
it may have to any indemnified party, except to the extent
that the indemnifying party demonstrates that the defense of
such action is prejudiced by the indemnifying party's failure
to give such notice.
(b) If any Proceeding referred to in Section 10.8(a) is
brought against an indemnified party and it gives notice to
the indemnifying party of the commencement of such Proceeding,
the indemnifying party will be entitled to participate in such
Proceeding and, to the extent that it wishes (unless (i) the
indemnifying party is also a party to such Proceeding and the
indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the
indemnifying party fails to provide reasonable assurance to
the indemnified party of its financial capacity to defend such
Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with
counsel reasonably satisfactory to the indemnified party and,
after notice from the indemnifying party to the indemnified
party of its election to assume the defense of such
Proceeding, the indemnifying party will not, as long as it
diligently conducts such defense, be liable to the indemnified
party under this Section 10 for any fees of other counsel or
any other expenses with respect to the defense of such
Proceeding, in each case subsequently incurred by the
indemnified party in connection with the defense of such
Proceeding. If the indemnifying party assumes the defense of a
Proceeding, no compromise or settlement of such claims may be
effected by the indemnifying party without the indemnified
party's consent (which consent shall not be unreasonably
withheld or delayed) unless (A) there is no finding or
admission of any violation of Legal Requirements or any
violation of the rights of any Person and no effect on any
other claims that may be made against the indemnified party,
and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and the indemnified
party will have no liability with respect to any compromise or
settlement of such claims effected without its consent. If
notice is given to an indemnifying party of the commencement
of any Proceeding and the indemnifying party does not, within
ten business days after the indemnified party's notice is
given, give notice to the indemnified party of its election to
assume the defense of such Proceeding or its determination
that the claim is not subject to indemnification hereunder,
the indemnifying party will be bound by any determination made
in such Proceeding or any compromise or settlement effected by
the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable
probability that a Proceeding may adversely affect it or its
affiliates other than as a result of monetary damages for
which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the
indemnifying party, assume the exclusive right to defend,
compromise, or settle such Proceeding, but the indemnifying
party will not be bound by any determination of a Proceeding
so defended or any
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compromise or settlement effected without its consent (which
may not be unreasonably withheld).
10.9 PROCEDURE FOR INDEMNIFICATION - OTHER CLAIMS
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
11. GENERAL PROVISIONS
11.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives,
counsel, and accountants. Buyer will pay one-half and Seller will pay one-half
of (i) the Competition Act filing fee, and (ii) any amounts required to obtain
the consents listed on Schedule 7.3. In the event of termination of this
Agreement, the obligation of each party to pay its own expenses will be subject
to any rights of such party arising from a Breach of this Agreement by another
party. Upon consummation of the Contemplated Transactions, Buyer shall pay, in
addition to the Purchase Price, any Taxes applicable in connection with the
purchase of the Seller Intellectual Property Assets and/or the execution of the
Noncompetition Agreement (including, without limitation, any applicable Goods
and Services Tax in Canada).
11.2 PUBLIC ANNOUNCEMENTS
Any public announcement or similar publicity with respect to this Agreement
or the Contemplated Transactions will be issued, if at all, at such time and in
such manner as Buyer determines; provided, however, that Buyer shall give
reasonable notice to Seller before making any public announcement with respect
to such matters, and shall allow Seller reasonable time to comment on such
release or announcement in advance of such release or announcement. Unless
consented to by Buyer in advance or required by Legal Requirements, prior to the
Closing Seller, shall, and shall cause the Company to, keep this Agreement
strictly confidential and may not make any disclosure of this Agreement to any
Person who does not have the "need to know". Seller and Buyer will consult with
each other concerning the means by which the Company's employees, customers, and
suppliers and others having dealings with the Company will be informed of the
Contemplated Transactions, and Buyer will have the right to be present for any
such communication.
11.3 CONFIDENTIALITY
Between the date of this Agreement and the Closing Date, Buyer and Seller
will maintain in confidence, and will cause the directors, officers, employees,
agents, and advisors of Buyer and the Company to maintain in confidence, any
written information furnished by another party or the Company in connection with
this Agreement or the Contemplated
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Transactions, unless (a) such information is already known to such party or is
provided to such party by another not bound by a duty of confidentiality or such
information becomes publicly available through no fault of such party, (b) the
use of such information is necessary or appropriate in making any filing or
obtaining any consent or approval required for the consummation of the
Contemplated Transactions, or (c) the furnishing or use of such information is
required by or necessary in connection with legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request. Notwithstanding any implication to the contrary contained
herein, the Confidentiality Agreement dated as of July 26, 1999, between Seller
and Orkin shall remain in full force and effect.
11.4 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by telecopier
(with written confirmation of receipt), provided that a copy is mailed by
registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
If to Seller: S.C. Johnson Commercial Markets, Inc.
8310 16th Street
Sturtevant, Wisconsin 53177
Attn: General Counsel
Telecopy number: (414) 631-4021
If to Buyer: Orkin Canada, Inc.
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324
Attn: President
Telecopy number: (404) 888-2279
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With a copy to: General Counsel
Rollins, Inc.
P.O. Box 647
Atlanta, Georgia 30301
Telecopy number: (404) 888-2731
and to: Arnall Golden & Gregory, LLP
1201 West Peachtree Street
2800 One Atlantic Center
Atlanta, Georgia 30309-3450
Attn: Jonathan Golden, Esq.
Telecopy number: (404) 873-8701
11.5 ARBITRATION
Any controversy, dispute or claim arising out of or relating in any way to
this Agreement or the other agreements contemplated hereby shall, except with
respect to seeking equitable remedies, be settled exclusively by arbitration in
the City of Washington, D.C. Such arbitration shall be administered by the
American Arbitration Association ("AAA") in accordance with its then prevailing
rules (except as otherwise provided herein), by one independent and impartial
arbitrator. Notwithstanding anything to the contrary provided above, the
arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. ss.
1 et seq. The fees and expenses of the AAA and the arbitrator shall be shared
equally by the parties and advanced by them from time to time as required;
provided that at the conclusion of the arbitration, the arbitrator shall award
costs and expenses (including the costs of the arbitration previously advanced
and the fees and expenses of attorneys, accountants and other experts) and
interest at the prime interest rate as set forth in the "Money Rates" section of
the Wall Street Journal on the date of such award to the prevailing party.
Pre-arbitration discovery shall be permitted in accordance with the rules of the
AAA. The arbitrator shall render his award within 90 days of the conclusion of
the arbitration hearing. The arbitrator shall not be empowered to award to
either party any punitive damages in connection with any dispute between them
arising out of or relating in any way to this Agreement or the Contemplated
Transactions arising hereunder or thereunder, and each party hereby irrevocably
waives any right to recover such damages. Notwithstanding anything to the
contrary provided in this Section 11.5 and without prejudice to the above
procedures, either party may apply to any court of competent jurisdiction for
temporary injunctive or other provisional judicial relief if such action is
necessary to avoid irreparable damage or to preserve the status quo until such
time as the arbitration panel is convened and available to hear such party's
request for temporary relief. The award rendered by the arbitrator shall be
final and not subject to judicial review and judgment thereon may be entered in
any court of competent jurisdiction.
11.6 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
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11.7 WAIVER
The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power, or privilege under this Agreement or the documents referred to
in this Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or privilege or the
exercise of any other right, power, or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right arising out of this Agreement
or the documents referred to in this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a party
will be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement or the documents referred to in this Agreement.
11.8 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter (including the Terms Sheet between Buyer and
Seller dated August 27, 1999) and constitutes (along with the documents referred
to in this Agreement) a complete and exclusive statement of the terms of the
agreement between the parties with respect to its subject matter. This Agreement
may not be amended except by a written agreement executed by the party to be
charged with the amendment.
11.9 DISCLOSURE LETTER
(a) The disclosures in the Disclosure Letter, and those in any
Supplement thereto, shall relate only to the representations
and warranties in the Section of the Agreement to which they
expressly relate and not to any other representation or
warranty in this Agreement; provided, however, that the
Disclosure Letter may, by explicit reference, cross-reference
specific disclosures that may be applicable to more than one
Section of the Agreement.
(b) In the event of any inconsistency between the statements
in the body of this Agreement and those in the Disclosure
Letter (other than an exception set forth as such in the
Disclosure Letter with respect to a specifically identified
representation or warranty), the statements in the body of
this Agreement will control.
11.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
Neither party may assign any of its rights under this Agreement without the
prior consent of the other parties, except that Buyer may assign any of its
rights under this Agreement to any Subsidiary of Buyer provided that in such
case Buyer shall continue to remain
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liable under this Agreement. Subject to the preceding sentence, this Agreement
will apply to, be binding in all respects upon, and inure to the benefit of the
successors and permitted assigns of the parties. Nothing expressed or referred
to in this Agreement will be construed to give any Person other than the parties
to this Agreement any legal or equitable right, remedy, or claim under or with
respect to this Agreement or any provision of this Agreement. This Agreement and
all of its provisions and conditions are for the sole and exclusive benefit of
the parties to this Agreement and their successors and assigns.
11.11 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
11.12 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.
11.13 TIME OF ESSENCE
With regard to all dates and time periods set forth or referred to in this
Agreement, time is of the essence.
11.14 GOVERNING LAW
This Agreement will be governed by the laws of the State of Delaware
without regard to conflicts of laws principles.
11.15 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
[SIGNATURE PAGE FOLLOWS]
52
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
BUYER:
ORKIN CANADA, INC.
By:____________________________
Its:___________________________
CMI:
S.C. JOHNSON COMMERCIAL MARKETS, INC.
By:____________________________
Its:___________________________
EXPANSION:
ORKIN EXPANSION, INC.
By:____________________________
Its:___________________________
JPI:
S.C. JOHNSON PROFESSIONAL, INC.
By:____________________________
Its:___________________________
53
Exhibit 2c
CONFIDENTIAL TREATMENT REQUESTED
Confidential Portions of This Agreement Which Have Been Redacted Are
Marked With Brackets ("[***]"). The Omitted Material Has Been Filed Separately
With The United States Securities and Exchange Commission.
ASSET PURCHASE AGREEMENT
This agreement ("Agreement") dated as of October 19, 1999 is by and
between ORKIN EXTERMINATING COMPANY, INC., a Delaware corporation ("Orkin"),
REDD PEST CONTROL COMPANY, INC., a Mississippi corporation ("Redd"), and RICHARD
L. REDD, an individual resident of the state of Mississippi (hereinafter
sometimes referred to as "Richard Redd" or the "Owner").
W I T N E S S E T H:
WHEREAS, Redd is engaged in the Pest Business (as defined in Section
2.01 below); and
WHEREAS, the Owner owns all of the issued and outstanding equity
interests of Redd; and
Whereas, [***], an individual resident of the state of [***], [***],
an individual resident of the state of [***], and [***], an individual resident
of the state of [***] are collectively the "Senior Management" of Redd,
and the obligations of Orkin to consummate the transactions contemplated
herein are conditioned, in part, on certain agreements to be entered into by
the Senior Management; and
WHEREAS, Orkin desires to purchase all of the assets owned and used by
Redd in connection with the Pest Business and assume certain liabilities of Redd
in connection therewith, all upon terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, the promises
hereinafter contained, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
PURCHASE OF ASSETS AND RELATED AGREEMENTS
1.01 Purchase and Sale of Assets. At the Closing (as defined in Section
1.04 below) and subject to the terms hereof, Redd agrees to sell and deliver to
Orkin, and Orkin agrees to purchase, all of Redd's right, title and interest in
the assets used by Redd in the conduct of the Pest Business other than the
Excluded Assets (as defined below) (collectively the "Assets"). The Assets shall
include, but not be limited to, the following:
(a) Customer Contracts and Customer Lists. All of Redd's
rights pursuant to written or oral contracts existing as of the Closing Date to
provide Pest Services to customers ("Customer Contracts"), and Redd's existing
lists of current customers ("Customer Lists").
(b) Accounts Receivable and Prepaid Expenses. All accounts
receivable of Redd as of the Closing Date ("Accounts Receivable"), prepaid
advertising as of the Closing Date, and all other prepaid expenses of Redd
(including leasehold security deposits and prepaid rent for those properties
covered by the Leases as defined in Section 1.01(d) below), other than Prepaid
<PAGE>
Insurance (as defined herein) and other prepaid expenses included in the
Excluded Items (as defined herein), ("Prepaid Expenses").
(c) Fixed Assets. All fixtures, tools, items of furniture,
equipment, computers, vehicles, leasehold improvements and other tangible
personal property assets owned by Redd and used in the Pest Business, including
those listed on Schedule 1.01(c) (the "Fixed Assets").
(d) Leases. To the extent assignable (or, if not assignable,
to the extent that the respective lessor consents to such assignment or Orkin
waives receipt of such consent) all of Redd's leasehold interest in those
operational field office locations and vehicles covered by the leases listed on
Schedule 1.01(d) (the "Leases").
(e) Inventory. All inventories (including inventories covered
by Redd purchase orders, warehoused inventories, owned inventories held by
suppliers, inventories covered by customer purchase orders and sample and
promotional goods) that are used in the conduct of the Pest Business as of the
Closing Date, including any inventories acquired after the date of this
Agreement but excluding any inventories sold or otherwise disposed of after the
date of this Agreement ("Inventory").
(f) Other Contracts and Purchase Orders. All of Redd's rights,
to the extent assignable or transferable (or, if not assignable, to the extent
that each respective third party to such agreement consents to the assignment
thereof, or Orkin waives receipt of such consent), pursuant to: employment
agreements, covenants not to compete and confidentiality agreements with Redd
employees (to the extent Orkin can be a third-party beneficiary), covenants not
to compete and confidentiality agreements with all Redd employees; and those
non-disclosure agreements, confidentiality agreements, licenses, service
contracts and other contracts including those listed on Schedule 1.01(f) hereto
("Other Contracts"). All of Redd's commitments and orders for the purchase and
sale of goods and equipment (including Inventory) and services (including
advertising, maintenance and other incidental services) ("Purchase Orders").
(g) Intellectual Property. All of Redd's right, title and
interest in all logos, service marks and trademarks owned by Redd, including,
without limitation, those items listed on Schedule 1.01(g) hereto, and all of
Redd's right, title, and interest in and to existing quality control procedures
and protocols, service procedures and protocols, field computer software (to the
extent assignable or transferable or if not assignable, to the extent the
licensor consents to the assignment thereof or Orkin waives receipt of such
consent), and technical know-how, and in and to computer data (collectively,
"Intellectual Property").
(h) Other Assets. All of Redd's rights to its telephone
numbers for field office locations listed on Schedule 1.01(h); telephone
directory advertising; existing files and records (including correspondence) of
current and former customers, all licenses, consents, permits, variances,
certifications, and approvals of governmental agencies to the extent
transferable; existing books of account, financial, accounting, marketing, and
other records relating to the operation of the Pest Business (excluding the
corporate minute books and stock ledgers of Redd) and all current, existing
pricing, cost information and supplier lists relating to the Pest Business; and,
except as
2
<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
otherwise provided in this Agreement, all deposits, refunds, causes of action,
rights of recovery, rights of set off and rights of recoupment.
1.02 Excluded Assets. The Assets shall not include the following
items (collectively, the "Excluded Assets"):
(a) Cash and Cash Equivalents. All cash and cash equivalents
(other than cash equivalents included in the Prepaid Expenses).
(b) Insurance Policies; Tax Refunds. All insurance policies
and claims thereunder of Redd, including prepayments of insurance premiums
("Prepaid Insurance"), claims for and rights to receive tax refunds, tax
deductions for losses, expenses and other tax benefits of Redd such as credits
and losses accrued or arising prior to the Closing Date, all tax returns of Redd
(whether relating to the Pest Business or otherwise), and any legal files or
other documents covered by an evidentiary privilege.
(c) Transaction Documentation. All books, documents, records
and files prepared in connection with or relating to the transactions
contemplated by this Agreement.
(d) Transaction Rights. All of Redd's rights under or pursuant
to this Agreement and the other agreements between Redd and Orkin contemplated
hereby.
(e) Corporate Records. All minute books and stockholder and
stock transfer records and similar corporate records of Redd.
(f) Franchise Agreements. All of Redd's contracts to provide
franchising services to the Franchisees specified on Schedule 1.02(f) attached
hereto (the "Redd Franchise Agreements").
(g) C.P.S. Insurance Company, Ltd. and Copesan Services stock.
All of the stock of C.P.S. Insurance Company, Ltd. Copesan Services.
(h) Excluded Items. Those items ("Excluded Items") set forth
on Schedule 1.02(h) attached hereto.
1.03 Assumption of Liabilities.
(a) Orkin shall assume on the Closing Date and shall pay,
perform and discharge when due all of Redd's obligations and liabilities arising
from and after the Closing under the Customer Contracts (other than Termite
Guarantee Contracts, which shall be governed by the provisions of Section
1.03(c) hereof), the Other Contracts, the Leases and the Purchase Orders
("Executory Contractual Liabilities"). As a part of the Purchase Price, Orkin
shall also assume (i) the obligations of Redd under those certain deferred
compensation agreements specified on Schedule 1.03(a)(i) attached hereto (the
"Deferred Compensation Agreements"); (ii) those acquisition debt obligations
specified on Schedule 1.03(a)(ii) attached hereto (the "Acquisition
Obligations"); (iii) that certain outstanding loan from Deposit Guaranty
National Bank, in the principal amount of [***] (the "[***] Loan"); (iv) the
obligations of Redd for
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<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
[***] but [***], [***] with [***], [***], and/or [***] of Redd employees as of
the Closing Date (the "Days Off Accruals"); and (v) specified accounts payable
as identified and in the amount contained on the Assumed Payables List (as
hereinafter defined). Collectively, the liabilities referred to in this Section
1.03(a) are the "Assumed Liabilities".
(b) Except for the Assumed Liabilities, it is expressly
understood and agreed between the parties hereto that ORKIN SHALL NOT ASSUME AND
IS NOT ASSUMING, NOR SHALL ORKIN BECOME LIABLE, OBLIGATED OR RESPONSIBLE FOR THE
PAYMENT OF ANY DEBTS, LIABILITIES OR OBLIGATIONS OR THE PERFORMANCE OF ANY
DUTIES OF REDD OF ANY KIND OR NATURE WHATSOEVER, KNOWN OR UNKNOWN, WHETHER
ARISING BEFORE, ON OR SUBSEQUENT TO THE CLOSING AND WHETHER CONTINGENT OR
LIQUIDATED IN AMOUNT (INCLUDING, WITHOUT LIMITATION, ANY DEBT, LIABILITIES,
OBLIGATIONS OR DUTIES ARISING OUT OF ACCOUNTS PAYABLE (OTHER THAN THOSE INCLUDED
IN THE ASSUMED PAYABLES LIST), TAX LIABILITIES, ENVIRONMENTAL, IMMIGRATION OR
PRODUCT LIABILITY MATTERS, EMPLOYEE BENEFITS, CUSTOMER CONTRACTS OR OTHER
CONTRACTS OR AGREEMENTS (OTHER THAN OBLIGATIONS ARISING UNDER THE EXECUTORY
CONTRACTUAL LIABILITIES FROM AND AFTER THE CLOSING DATE) OR OTHER LIABILITIES OF
REDD).
(c) Notwithstanding anything in this Agreement to the
contrary, Orkin shall not assume any obligation under a [***] unless and
until (i) the [***] to such contract makes a [***] to [***], (ii) the [***]
for which such [***] was made has commenced, and (iii) Orkin inspects and is
satisfied with the condition of such [***].
1.04 Closing. The closing of the transactions contemplated hereby (the
"Closing") shall take place at the offices of Barnes, Broom, Dallas and McLeod,
PLLC, in Jackson, Mississippi, on November 30, 1999. The Closing shall be
effective as of 12:01 am local time on December 1, 1999 (or, if the Closing does
not occur on November 30, 1999 on such other date as may be mutually acceptable
to the parties hereto), which shall be the "Closing Date".
ARTICLE II
DEFINITIONS; PURCHASE PRICE
2.01 Certain Definitions. As used herein, the following terms shall
have the meanings set forth below.
(a) "Assumed Payables List" shall be a list of payables of
Redd which shall be assumed by Orkin and which shall trigger a reduction to the
Purchase Price. A draft of the Assumed Payables List shall be provided by Redd
to Orkin on or before five (5) business days prior to the Closing Date. The
Assumed Payables List shall be updated as of the Closing Date, and shall be
finalized as a part of the Purchase Price Adjustments Calculation after the
Closing Date.
4
<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
(b) "Baseline Assets" shall mean [***], [***] (excluding
Prepaid Insurance, Excluded Items, and any deferred discounts), [***],
and [***].
(c) "Baseline Liabilities" shall mean the [***] of
[***] received by Redd prior to Closing for [***] that have not yet been
[***] under [***].
(d) "Earnest Money Deposit" means the sum of [***]
Dollars [***], which was delivered by Orkin to Redd on [***].
(e) "Holdback" shall be equal to [***] of the total amount of
the Accounts Receivable as of the Closing.
(f) "Major Customers" shall mean those customers identified on
Schedule 3.05 attached hereto, constituting the 20 largest customers (other than
Copesan Services) based on the Revenue generated by such customers for the
twelve months ended September 30, 1999.
(g) "Net Worth" shall mean the difference between the Baseline
Assets and the Baseline Liabilities.
(h) "Permitted Encumbrances" shall mean (i) claims, security
interests, liens and other title encumbrances that are disclosed on Schedule
2.01(h) or the other Schedules hereto, and (ii) mechanics', carriers, workmen's,
repairmen's or other like liens arising or incurred in the ordinary course of
business, liens arising under original purchase price conditional sales
contracts and equipment leases with third parties entered into in the ordinary
course of business and liens for taxes and other governmental charges which are
not yet due and payable or which may thereafter be paid without penalty.
(i) "Pest Business" shall mean the provision of Pest Services
by Redd to customers.
(j) "Pest Services" shall mean the provision of termite, pest
control and elimination services, and the sale or leasing of termite, pest
control and elimination products.
(k) "Revenues" shall mean the net revenues (gross revenues
determined after discounts and allowances other than the 5% prepayment discount
Redd has offered to its customers in the ordinary course of business) accrued
for the period designated, generated in connection with the performance by Redd
of Pest Services for its customers, exclusive of any revenues derived from the
provision of Pest Services under contract or subcontract with Copesan Services,
as determined under GAAP, consistently applied.
(l) "Termite Guarantee Contracts" shall mean contractual
obligations of Redd to perform corrective or treatment measures for the benefit
of a customer with respect to termite infestation or termite damage.
5
<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
2.02 Purchase Price. The purchase price ("Purchase Price") for the
Assets, the Redd Noncompetition Agreement (as defined in Article IX), the
Richard Redd Noncompetition Agreement (as defined in Article IX), and the Senior
Management Noncompetition Agreements (as defined in Article IX) shall be equal
to FIFTEEN MILLION SEVEN HUNDRED AND SEVENTY FIVE THOUSAND DOLLARS
($15,775,000), subject to the adjustments required to be made pursuant to
Sections 2.03 and 2.08.
2.03 Adjustments to Purchase Price. The Purchase Price shall be (i)
decreased by the face amount of the obligations under the [***], (ii) decreased
by the outstanding obligations (including principal and interest) under the
[***] on the Closing Date; (iii) decreased by the outstanding obligations
(including principal and interest) under the [***] on the Closing Date; (iv)
decreased by the [***]; (v) decreased by the [***] included on the [***]; and
(vi) increased or decreased, as the case may be, by the difference between the
Net Worth as of July 31, 1999 and the Net Worth on the Closing Date
(collectively, the "Purchase Price Adjustments"). On or before two business days
prior to the Closing Date, Orkin and Redd shall make a good faith estimate as of
the Closing Date of the Purchase Price Adjustments, which estimate shall be used
in determining the Closing Cash Payment (as defined below) (the "Estimated
Purchase Price Adjustments"). The Purchase Price Adjustments shall be finally
calculated and determined in the manner set forth in Section 2.05 below. The
Purchase Price shall also be subject to the adjustments for Accounts Receivable
set forth in Section 2.08 below.
2.04 Payments at Closing. At the Closing, Orkin shall deliver the
following:
(a) to Redd, by wire transfer of immediately available funds
to an account or accounts designated in writing by Redd, [***] DOLLARS
[***], minus the [***] (which shall be retained by Redd), minus the
Estimated Purchase Price Adjustments, and minus the Holdback (the
"Closing Cash Payment"); and
(b) to Redd, one or more promissory note(s) in the form
attached hereto as Exhibit A with a term of [***], an interest
rate of [***] and an aggregate face amount of [***] DOLLARS
[***] (collectively, the "Promissory Notes"); and
(c) to [***], an amount necessary to satisfy, in full, the
[***], as set forth in a payoff letter to be obtained by Redd from
[***] before the Closing.
In addition, Orkin shall (i) deliver to Richard Redd the amounts due (if any) at
the Closing under the Richard Redd Noncompetition Agreement; and (ii) deliver to
Senior Management the amounts due (if any) at the Closing under the Senior
Management Noncompete Agreements.
2.05 Calculation of Purchase Price Adjustments.
(a) In order to finally determine the amount of the Purchase
Price, Orkin shall perform a calculation of the Purchase Price Adjustments (the
"Purchase Price Adjustments Calculation") which shall be delivered to Redd
within 30 days following the Closing Date. Orkin (including its internal
auditors) and its certified public accountants shall have the opportunity during
the preparation of the Purchase Price Adjustments Calculation to consult with
Stockwell & Company, certified public accountants (at the expense of Redd), and
the chief financial officer,
6
<PAGE>
controller, or any other officer of Redd (to the extent not employed by Orkin),
and to review the books and records of Redd. Redd shall have a period of 30 days
after receipt of the Purchase Price Adjustments Calculation to present to Orkin
in writing any objections and the amounts related thereto (the "Section 2.05
Objections") which Redd may have with respect to the computation of the Purchase
Price Adjustments Calculation, which Section 2.05 Objections shall be presented
in reasonable detail. If no Section 2.05 Objections are raised by Redd within
such 30-day period, the Purchase Price Adjustments Calculation shall be deemed
accepted and approved by Redd and the adjustments to Purchase Price required by
Section 2.03 shall be made accordingly.
(b) Resolution by Parties. If, within such 30-day period, Redd
raises Section 2.05 Objections, Orkin and Redd shall attempt in good faith to
resolve the matter or matters in dispute and, if resolved, such resolution shall
be final, conclusive and binding upon the parties hereto and the adjustments to
Purchase Price required by Section 2.03 shall be made accordingly.
(c) Resolution by Independent Accounting Firm. If the dispute
referred to in Section 2.05(b) is not resolved by Orkin and Redd within 10 days
after delivery of the Section 2.05 Objections, then the specific matters in
dispute shall be submitted to Ernst & Young or such other nationally recognized
accounting firm as Orkin and Redd may mutually agree upon (the "Independent
Accounting Firm"), which firm shall be requested to make a determination as to
such matter or matters as are in dispute within 30 days after the such
submission of the dispute to the Independent Accounting Firm, which
determination shall be final, conclusive and binding upon the parties hereto and
the Purchase Price shall be revised to reflect such determination. The
Independent Accounting Firm shall simultaneously deliver its written
determination to Orkin and Redd. The fees and expenses of the Independent
Accounting Firm shall be shared equally by Redd and Orkin. Redd and Orkin agree
to cooperate in good faith with each other, with each other's authorized
representatives and with the Independent Accounting Firm, in order that any and
all matters in dispute may be resolved as soon as practicable.
2.06 Payment After Determination of Final Purchase Price Adjustments.
If the final Purchase Price Adjustments Calculation results in Purchase Price
Adjustments that are less than the Estimated Purchase Price Adjustments, then
Orkin shall pay the difference between the final Purchase Price Adjustments and
the Estimated Purchase Price Adjustments to Redd. If the final Purchase Price
Adjustments Calculation results in Purchase Price Adjustments that are greater
than the Estimated Purchase Price Adjustments, then Redd shall pay the
difference between the final Purchase Price Adjustments and the Estimated
Purchase Price Adjustments to Orkin. No interest shall be due or payable
respecting any payments to be made pursuant to this Section 2.06. Any and all
payments required to be made by Orkin or Redd as a result of adjustments made
pursuant to this Section 2.06 shall be made by wire transfer of immediately
available funds within five business
7
<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
days after the Purchase Price Adjustments Calculation is finalized. If Redd
fails to pay Orkin any amount due to Orkin under this Section 2.06, Orkin may
elect to set-off such amounts against the obligations due under the Promissory
Notes.
2.07 Allocation. The Purchase Price received by Redd shall be allocated
among each class of Assets of Redd, the Richard Redd Noncompetition Agreement,
and the Senior Management Noncompetition Agreements, as mutually agreed by the
parties on or before the Closing. Redd agrees that it will prepare and file any
notice or other filings required pursuant to
Section 1060 of the Internal Revenue Code of 1986, as amended, and that any such
notices or filings will be prepared based on such tax allocation of the Purchase
Price. Redd agrees to send to Orkin a completed copy of its Form 8594 with
respect to this transaction prior to filing such form with the Internal Revenue
Service.
2.08 Accounts Receivable Adjustment. At the Closing, Redd shall deliver
to Orkin a detailed listing of the Accounts Receivable together with an aging
schedule therefor. On the [***] and [***] following the Closing Date, Orkin
shall present Redd with a detailed listing of the accounts and invoices which
were listed on the Accounts Receivable list delivered at Closing and which
remain outstanding on such date (the "Uncollected AR Calculation"). Redd shall
have a period of 30 days after receipt of the Uncollected AR Calculation to
present to Orkin in writing any objections and the amounts related thereto (the
"AR Objections") which Redd may have with respect to the Uncollected AR
Calculation, which AR Objections shall be presented in reasonable detail. At its
own expense, Redd and its certified public accountants shall have the
opportunity during and following the preparation of the Uncollected AR
Calculation to consult the chief financial officer, controller, or any other
employee of Orkin engaged in the calculation of the Uncollected AR Calculation,
to observe, review, and examine the work papers, schedules, and other documents
prepared or used in connection with the Uncollected AR Calculation, and to
review the books and records of Orkin related to such calculation. If no AR
Objections are raised by Redd within such 30-day period, the Uncollected AR
Calculation shall be deemed accepted and approved by Redd. If, within such
30-day period, Redd raises AR Objections, Orkin and Redd shall attempt in good
faith to resolve the matter or matters in dispute and, if resolved, such
resolution shall be final, conclusive and binding upon the parties hereto. If
the parties fail to reach such resolution within ten (10) days after delivery of
the AR objections, the dispute mechanism set forth in Section 2.05(c) of this
Agreement shall apply.
If the Uncollected AR Calculation includes Accounts Receivable
attributable to the sale of [***] to customers [***], Orkin shall, in good
faith, determine the collectibility of the [***] in accordance with the terms
thereof. That portion of the [***] that Orkin determines to be collectible in
accordance with the terms thereof shall be (i) deemed to be collected for
purposes of the Uncollected AR Calculation, and (ii) [***] of the face amount of
such Accounts Receivable shall be subtracted from the Uncollected AR
Calculation. There shall be no subtraction from the Uncollected AR Calculation
for [***] that Orkin does not determine to be collectible in accordance with the
terms thereof.
8
<PAGE>
If the Uncollected AR Calculation (as finally determined) is greater
than or equal to the Holdback, the Orkin shall be entitled to retain the
Holdback, and Redd shall pay the difference between the Uncollected AR
Calculation and the Holdback to Orkin. If the Uncollected AR Calculation (as
finally determined) is less than the Holdback, the Orkin shall be entitled to
retain only that portion of the Holdback that is equal to the Uncollected AR
Calculation, and shall pay the remainder of the Holdback to Redd. No interest
shall be due or payable respecting any payments to be made pursuant to this
Section 2.08. Any and all payments required to be made by Orkin or Redd as a
result of adjustments made pursuant to this Section 2.08 shall be made by wire
transfer of immediately available funds within five business days after the
Uncollected AR
Calculation is finalized. If Redd fails to pay Orkin any amount due to Orkin
under this Section 2.08, Orkin may elect to set-off such amounts against the
obligations due under the Promissory Notes.
Between the Closing Date and the date of its presentation of the
Uncollected AR Calculation, (i) Orkin shall use its best efforts to collect the
Accounts Receivable; (ii) Orkin shall apply any payments received from any
customer listed on the Accounts Receivable list in the manner directed by such
customer, and, if the customer fails to designate an invoice for payment, then
the payment shall be applied against the oldest outstanding invoice for such
customer; (iii) Orkin shall have the sole right to collect and to endorse with
the name of Redd any checks received on account of any outstanding Accounts
Receivable; (iv) Redd shall promptly forward or cause to be forwarded to Orkin
any and all Accounts Receivable proceeds received by Redd; and (v) Redd shall
cause its chief financial officer, controller, or any other officer of Redd (to
the extent not employed by Orkin) to provide such reasonable assistance to Orkin
as may be necessary or appropriate to ensure that the Accounts Receivable are
collected in a manner consistent with past practice and experience.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF REDD
Redd makes the following representations and warranties to Orkin, all
of which shall survive the Closing as herein provided and each of which is
acknowledged by Redd to be relied upon by Orkin.
3.01 Organization. Redd is a corporation duly organized, validly
existing and in good standing under the laws of the State of Mississippi and has
the corporate power and authority to own and use its properties and to conduct
its business as currently conducted in all places where it does business.
3.02 Authorization; Effect of Agreement; Consents.
(a) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate and shareholder action of Redd. This
Agreement constitutes a valid and binding obligation of Redd, enforceable in
accordance with its terms.
9
<PAGE>
(b) Schedule 3.02(b) to this Agreement lists all approvals and
consents required under the Material Contracts (as defined in Section 3.05
below) in order that Redd's rights thereunder may be assigned to Orkin as
contemplated hereby (the "Consents").
3.03 Title to Assets. Redd has good and marketable title to all
tangible Assets (and a valid and enforceable leasehold interest in all assets
subject to Leases which are Material Contracts) free and clear of all claims,
security interests, liens and other title encumbrances other than Permitted
Encumbrances.
3.04 Condition of Certain Assets. Schedule 1.01(c) includes a true,
correct and complete list as of the date hereof of the material tangible
personal property assets owned by Redd and used in the Pest Business. Except as
disclosed in Schedule 1.01(c), the Fixed Assets and the assets subject to Leases
which are Material Contracts are, in good operating condition, ordinary wear and
tear excepted.
3.05 Leases, Other Contracts, Customer Contracts and Customer Lists.
Schedule 1.01(d) sets forth a true, correct and complete list as of the date
hereof of all real property and vehicle leases used by Redd in the conduct of
the Pest Business ("Material Contracts"). Schedule 3.05 sets forth the Major
Customers who, as of September 30, 1999, are parties to Customer Contracts.
Schedule 3.05 sets forth the commencement and initial expiration dates of such
Customer Contracts of Major Customers, and the monthly rate and the addresses of
such Major Customers. Except as set forth on Schedule 3.05 hereto, there is no
condition or development which threatens to have a material adverse effect upon
the aggregate Revenues related to such Major Customers. Neither Redd nor any
other party to any Material Contract is in breach of, or in default under, such
Material Contract and no event has occurred which, but for the lapse of time or
the giving of notice, or both, would be such a default. Except as disclosed on
Schedule 3.05, as of the date hereof, all Major Customers are active customers
of the Pest Business.
3.06 Inventory. Except as noted on Schedule 3.06, the Inventory is not
obsolete, damaged or defective, has been stored and maintained in accordance
with normal industry practice and is generally suitable for the purposes for
which it is used.
3.07 Intellectual Property. Schedule 1.01(g) sets forth a true, correct
and complete list as of the date hereof of each patent, copyright (other than
copyrighted labels, advertising and promotional materials), logo, service mark
or trademark actively used by Redd. Redd has full right, title and interest to
each patent, copyright, trademark or trade name actively used in the Pest
Business and included in Schedule 1.01(g). There are no pending or threatened
claims against Redd alleging that the conduct of Redd infringes or conflicts
with the rights of others under patents, trademarks, copyrights and trade
secrets. Redd owns or possesses the right to use all the patents, copyrights,
trademarks, trade names, service marks, licenses and rights with respect to the
foregoing necessary for the operation of Redd as now conducted. Redd is not
aware of any violation by a third party of any of Redd's patents, licenses,
trademarks, service marks, trade names, copyrights, trade secrets, or other
proprietary rights used by Redd.
3.08 Availability of Certain Assets. All of the Fixed Assets (other
than vehicles when in use and Fixed Assets leased to customers pursuant to
Customer Contracts or in the possession of
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such customers at their locations, in vehicles covered by the Leases or at the
residences of sales managers and technicians) and Inventory (other than
Inventory when being used) are located at a Redd facility or storage site, or at
the residences of sales managers and technicians (and, on reasonable conditions,
Redd will make such items available for inspection by Orkin). Redd has generally
maintained such items in the ordinary course of its business.
3.09 All Assets. The Assets and all assets subject to Leases,
constitute all material properties of any nature with which Redd has conducted
the Pest Business for the 12-month period prior to the date hereof, subject to
the addition and deletion of assets in the ordinary course of its
business. All facilities currently used by Redd are supplied with utilities
reasonably necessary for the operation of such facilities.
3.10 Financial Statements; Books and Records. Redd has delivered to
Orkin: (a) the unaudited balance sheet of Redd as of December 31 in each of the
years 1997 and 1998, and the related statement of income and cash flow for each
of the fiscal years then ended, (b) an unaudited balance sheet of Redd as of
September 30, 1999 and the related unaudited statement of income and cash flow
for the nine (9) months then ended, including in each case the notes thereto.
Such financial statements and notes fairly present the financial condition and
the results of operations, and cash flow of Redd as of the respective dates of
and for the periods referred to in such financial statements, all in accordance
with the income tax method of accounting, subject, in the case of interim
financial statements, to normal recurring year-end adjustments (the effect of
which will not, individually or in the aggregate, have a material adverse
effect) and the absence of notes (that, if presented, would not differ
materially from those included in the 12/31/98 balance sheet), and reflect the
consistent application of such accounting principles throughout the periods
involved, except as disclosed in the notes to such financial statements. No
financial statements of any person other than Redd are required by Generally
Accepted Accounting Principles ("GAAP") to be included in the financial
statements of Redd. The books of account and other records of Redd, all of which
have been made available to Orkin, are complete and correct and have been
maintained in accordance with sound business practices.
3.11 Absence of Material Changes. Except as set forth in Schedule 3.11,
from July 31, 1999 through the date of this Agreement there has been, and
through the Closing Date there will be: (A) no material adverse change in the
assets constituting the Assets of Redd (including any acquisition or purchase,
sale, pledge or other transfer, exchange or disposition of any asset except in
the ordinary course of business), (B) no increases in the wages and salaries of
the officers or employees of Redd other than in the ordinary course of business;
and (C) no contracts for the purchase of goods and services by Redd providing
for payments in an amount in excess of $5,000 per month except (x) purchases of
inventory in the ordinary course of business, (y) as listed on Schedule 3.11 or
(z) as consented to by Orkin.
3.12 Accounts Receivable. Schedule 3.12 hereto sets forth a true,
correct and complete list of all Accounts Receivable, in the aggregate, in
30-day aging categories as of September 30, 1999. All Accounts Receivable
included in the Assets will have arisen in the ordinary course of the business.
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3.13 No Conflict. The execution and delivery of this Agreement by Redd
and the Owner does not, and the performance of this Agreement by Redd and the
Owner will not, (i) conflict with or violate any law, regulation, court order,
judgment or decree applicable to Redd, the Owner, or by which any of the Assets
are bound or affected, (ii) violate or conflict with either the charter or
bylaws of Redd, or (iii) except as may result from the failure to obtain any
required third-party consent or approval, result in any breach of or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under any Material Contract, instrument, permit, license or franchise
of which Redd is a party.
3.14 Taxes and Assessments. Redd has filed or will file when and as due
all sales, use, payroll, excise, business and license tax returns required by
law to be filed by Redd; and Redd has paid or will pay when and as due all
federal, state, local or foreign taxes or other governmental charges including
interest or penalties imposed to the Closing Date.
3.15 Employees. Redd's employees are not represented by a union or
subject to a collective bargaining agreement and Redd has no knowledge of any
attempts to organize Redd's employees. There are no strikes, labor disputes,
union representation contests, state labor or National Labor Relations Board
proceedings or litigation pending, or to the knowledge of Redd, threatened
against or affecting the operation of the Pest Business or its relations with
its employees, except as set forth on Schedule 3.15. Except for such items which
in the aggregate are not materially adverse to Redd, Redd is, to Redd's
knowledge, in substantial compliance with all federal, state and local laws,
rules and regulations with respect to employment, wages, hours and benefits.
Except as set forth on Schedule 3.15, Redd is not engaged in any unfair labor
practices nor are any unfair labor practices or other complaints pending against
Redd filed with or, to the knowledge of Redd, threatened to be filed with or by
the National Labor Relations Board, Equal Employment Opportunity Commission,
Department of Labor or any similar agency or instrumentality of any state or
local government; and Redd has experienced no strikes or collective work
stoppage over the past three years.
3.16 Benefit Plans.
(a) Schedule 3.16 sets forth a true and complete list of each "employee
benefit plan" (as defined by Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), and any other bonus, profit
sharing, pension, compensation, deferred compensation, stock option, stock
purchase, fringe benefit, severance, post-retirement, scholarship, disability,
sick leave, vacation, individual employment, commission, bonus, payroll
practice, retention, or other plan, agreement, policy, trust fund or arrangement
(each such plan, agreement, policy, trust fund or arrangement is referred to
herein as an "Employee Benefit Plan", and collectively, the "Employee Benefit
Plans") that is currently in effect, was maintained since December 31, 1975 or
which has been approved before the date hereof but is not yet effective, for the
benefit of (i) directors or employees of Redd or any other persons performing
services for Redd, (ii) former directors or employees of Redd or any other
persons formerly performing services for Redd, and/or (iii) beneficiaries of
anyone described in (i) or (ii) (collectively, "Business Employees") or with
respect to which Redd or any "ERISA Affiliate" (hereby defined to include any
trade or business, whether or not incorporated, other than Redd, which has
employees who are or have been at any date of
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determination occurring within the preceding six (6) years, treated pursuant to
Section 4001(a)(14) of ERISA and/or Section 414 of the Code as employees of a
single employer which includes Redd) has or has had any obligation on behalf of
any Business Employee. Except as disclosed on Schedule 3.16 attached hereto,
there are no other benefits to which any Business Employee is entitled, and Redd
specifically represents and warrants that it has no severance pay policy.
(b) Redd has delivered to Orkin, with respect to each Employee Benefit
Plan, true and complete copies of (i) the documents embodying and relating to
each Employee Benefit Plan, including, without limitation, the current plan
documents and documents creating any trust maintained pursuant thereto, all
amendments, investment management agreements, group annuity contracts,
administrative service contracts, insurance contracts, collective bargaining
agreements, the most recent summary plan description with each summary of
material modification, if any, and employee handbooks, (ii) annual reports
including but not limited to Forms 5500, 990 and 1041 for the last three (3)
years for the plan or any related trust, (iii) actuarial valuation reports and
financial statements for the last three (3) years, (iv) each communication
involving the plan or any related trust to or from the Internal Revenue Service
("IRS"), Department of Labor ("DOL"), Pension Benefit Guaranty Corporation
("PBGC") or any other governmental authority including, without limitation, the
most recent determination letter received from the IRS pertaining to any
Employee Benefit Plan intended to qualify under Sections 401(a) or 501(c)(9) of
the Code.
(c) Except as set forth in Schedule 3.16, each Employee Benefit Plan is
in compliance with the provisions of ERISA and the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable to it. Except as set
forth in Schedule 3.16, Redd has not maintained or contributed to any plan
subject to the minimum funding standards of Section 302 of ERISA or Section 412
of the Code during its last six (6) fiscal years, and each plan maintained by an
ERISA Affiliate which is subject to Title IV of ERISA or Section 412 of the Code
is fully accrued and funded in compliance with ERISA and the Code as of the
Closing Date, and if any such plan or plans were terminated as of the Closing
Date, the termination would satisfy the minimum funding requirements of ERISA
and the Code. All Employee Benefit Plans which are "pension plans" as defined in
Section 3(2) of ERISA have received favorable determination letters from the
Internal Revenue Service as to their tax-qualified status and the tax-exempt
status of any related trust under Sections 401(a) and 501 of the Code,
respectively, which determinations are currently in effect.
(d) Except as set forth in Schedule 3.16, neither Redd nor any ERISA
Affiliate maintains or contributes to, is required to maintain or contribute to,
or, since December 31, 1975, has maintained or contributed to, a "multiemployer
plan" (as defined by Section 4001(a)(3) of ERISA).
(e) Orkin shall not, as a result of the transactions contemplated by
this Agreement (or any employment by Orkin of Business Employees): (i) become
liable for any contribution, tax, lien, penalty, cost, interest, claim, loss,
action, suit, damage, cost assessment or other similar type of liability or
expense of Redd or any ERISA Affiliate (including predecessors thereof) with
regard to any Employee Benefit Plan or any Employee Benefit Plan sponsored,
maintained or contributed to by an ERISA Affiliate (including predecessors
thereof) (assuming a like definition of "Employee
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Benefit Plan" were applicable to ERISA Affiliates as to those same types of
agreements, policies, trusts, funds and arrangements sponsored, maintained or
contributed to by them) (each such plan for an ERISA Affiliate, an "ERISA
Affiliate Employee Benefit Plan"), including, without limitation withdrawal
liability arising under Title IV, Subtitle E, Part 1 of ERISA, liabilities to
the PBGC, or liabilities under Section 412 of the Code or Section 302(a)(2) of
ERISA, or (ii) be or become a party to any Employee Benefit Plan or any ERISA
Affiliate Employee Benefit Plan.
(f) No ERISA Affiliate and none of the Assets is subject to any lien
arising under ERISA or the Code, including, but not limited to, a lien arising
pursuant to Title IV of ERISA or Section 412 of the Code or a lien arising as a
result of any tax imposed by Chapter 43 of Subtitle D of the Code. Neither Redd
nor any ERISA Affiliate has ceased operations at a facility so as to become
subject to the provisions of Section 4062(e) of ERISA.
(g) Redd, each ERISA Affiliate, each Employee Benefit Plan and each
Employee Benefit Plan "sponsor" or "administrator" (within the meaning of
Section 3(16) of ERISA) has complied in all respects with the applicable
requirements of Part 6 of Subtitle B of Title I of ERISA and Section 4980B of
the Code (such statutory provisions and predecessors thereof are referred to
herein collectively as "COBRA"). Schedule 3.16 attached hereto lists the name of
each Business Employee who has experienced a "Qualifying Event" (as defined in
COBRA) with respect to an Employee Benefit Plan who is eligible for
"Continuation Coverage" (as defined in COBRA) and whose maximum period for
Continuation Coverage has not expired. Included in such lists are the current
address for each such individual, the date and type of each Qualifying Event,
whether the individual has already elected Continuation Coverage and, for any
individual who has not yet elected Continuation Coverage, the date on which such
individual was notified of his or her rights to elect Continuation Coverage.
3.17 Compliance with Laws; Licenses and Permits. Except as set forth
on Schedule 3.17 hereto:
(a) Redd is in substantial compliance with the Federal Fair
Labor Standards Act, Title VII of the Civil Rights Act of 1964, the Equal Pay
Act, the Age Discrimination in Employment Act and Executive Order 11246, and all
other applicable laws, orders, rules and regulations enacted or promulgated by
the Environmental Protection Agency, the Occupational Health and Safety
Administration and by all other governmental bodies and agencies, including
state labor boards. Redd has not received notice of any noncompliance with the
foregoing.
(b) Redd has all material governmental licenses, permits and
approvals necessary for its operations and has not received since December 31,
1996, notice of any violations in respect of any such license, permits or
approvals. No proceeding is pending or, to the knowledge of Redd is threatened,
which seeks revocation or limitation of any such license, permits or approvals.
3.18 Customers. Redd has a Customer Contract with each of its customers
included on the Customer List. All services to such customers have been rendered
in material compliance with such Customer Contracts, and have been performed in
material compliance with the applicable laws, rules and regulations (including
business and professional codes, home solicitation acts, credit
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sales acts, and the Federal Insecticide, Fungicide and Rodenticide Act) of all
federal, state and local governmental bodies, agencies and boards, including
departments of agriculture except as set forth in Schedule 3.18.
3.19 Litigation. Except as set forth in Schedule 3.19, there is no
suit, claim, action or proceeding which is pending or threatened against Redd.
3.20 Fulfillment of Guarantees. All requests or demands for treatment
or other service made by customers to fulfill warranties or guarantees made or
given by Redd to such customers have been handled in the ordinary course of
business.
3.21 Broker's Fees. Redd has incurred no obligation or liability,
contingent or otherwise, for any brokerage fee, finder's fee, agent's commission
or other like payment in connection with this Agreement or the transactions
contemplated hereby.
3.22 Environment, Health and Safety.
(a) Redd has obtained all material permits, licenses,
approvals and other authorizations which are required under all Environmental
Laws (as defined below) and is in compliance in all material respects with the
terms and conditions of all such licenses, approvals and authorizations, and in
compliance with all other limitations, restrictions and requirements, including
without limitation, the submission of all required reports, notices and other
filings, contained in any applicable Environmental Law.
(b) Except as identified on Schedule 3.22(b), there is no
pending, threatened, charge, complaint, action, suit, proceeding hearing,
investigation, claim, or demand against Redd under any Environmental Law as
amended or other laws, rules or regulations of any federal, state or municipal
government or agency thereof concerning environmental matters nor has Redd
received any notice of any of the foregoing.
(c) Except as identified on Schedule 3.22(c), Redd is not
subject to any pending (nor does Redd have knowledge of any threatened) claim,
complaint, action, suit, proceeding, hearing, investigation, or demand, from any
governmental or private agency, entity or person concerning any intentional or
unintentional act or omission by Redd, any predecessor to Redd, or by any other
person or entity, with respect to (1) the investigation, remediation, or other
activities related to the spillage, clean-up, management, manufacture or
processing, or other handling of Hazardous Materials on, under or at any
property now or previously owned, leased or operated by Redd, (2) any actual or
alleged violation with respect to any Environmental Law or (3) any actual or
alleged claim related to any damage to health, safety or the environment caused
by Hazardous Materials.
(d) Redd is not subject to any pending (nor does Redd have any
knowledge of any threatened) private, governmental or judicial claim, order,
decree, or investigation related to the clean-up, management, manufacture or
processing, or other handling of Hazardous Materials on, under or at any
property now or previously owned, leased or operated by Redd.
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(e) Schedule 3.22(e) sets forth any material past or present
enforcement actions, orders, consent decrees or agreements, citations,
violations or notices of violation, or penalties against or paid by Redd in
connection with any Environmental Law since December 31, 1996.
(f) Except as disclosed on Schedule 3.22(e), there are no
active, inactive or abandoned underground storage tanks ("USTs") for Hazardous
Materials on any property leased or operated by Redd. To Redd's knowledge, each
such UST identified in Schedule 3.22(e) is in material compliance with all
requirements of Environmental Laws.
(g) Except as disclosed on Schedule 3.22(g), there is no
presence of any material quantities of PCB or asbestos materials at any property
leased or operated by Redd.
(h) Except as disclosed on Schedule 3.22(h), no material
quantities of Hazardous Materials have been released, spilled, leaked, pumped,
poured, emitted, emptied, discharged, injected, escaped, leached, dumped or
disposed of into, on or from any property leased or operated by Redd.
(i) Except as disclosed on Schedule 3.22(i), there are no
environmental reports, investigations, studies, audits, tests, reviews or other
analyses conducted by, or which are in the possession of, Redd in relation to
any Facility (as defined in Section 3.24(a)) which have not been made available
to Orkin. Redd has no knowledge of any material omissions or misstatements in
any such reports, investigations, studies, audits, tests, reviews or other
analyses relating to environmental conditions on or at any Facility.
(j) For purposes hereof, the term "Environmental Laws" shall
mean any and all federal, state, local and foreign statutes, laws, regulations,
requirements, ordinances, rules, judgments, orders, decrees, permits,
concessions, grants, franchises, licenses, agreements or other governmental
restrictions, including without limitation, the Comprehensive Environmental
Response Compensation and Liability Act, as amended ("CERCLA"), the Hazardous
Materials Transportation Act, as amended, the Resource Conservation and Recovery
Act, as amended, the Clean Water Act, as amended, the Federal Insecticide,
Fungicide and Rodenticide Act, as amended, the Toxic Substances Control Act, as
amended, and any other federal, state or local law, regulation, requirement,
ordinance, rule, judgment, order, decree, permit, concession, grant, franchise,
license, agreement, other governmental restriction or any common law based on
nuisance, tort or strict liability, relating to the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substances or wastes, hazardous
constituents, petroleum, petroleum products, radon gas, and radioactive matter
into the environment or otherwise related to the manufacture, generation,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or wastes, hazardous constituents, petroleum, petroleum
products, radon gas and radioactive matter to the extent enacted and in effect
on or prior to the Closing Date.
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3.23 Immigration Matters.
(a) With respect to all of Redd's employees, copies of all
Forms I-9 (Employment Eligibility Verification Forms) completed pursuant to the
Immigration Reform and Control Act of 1986 and all regulations promulgated
thereunder ("IRCA") and any and all copies of documentation, records or other
papers retained with Forms I-9, have been or, at Orkin's request, will be made
available to Orkin prior to the Closing. Redd has complied in all material
respects with IRCA with respect to the completion of Forms I-9 for all such
employees and the reverification of the employment status of any and all such
employees whose employment authorization documents indicated a limited period of
employment authorization.
(b) With respect to all former employees of Redd who left
Redd's employment within three years prior to the Closing, Redd has complied in
all material respects with IRCA with respect to the maintenance of Forms I-9 for
at least three years from the date of employment or for one year beyond the date
of termination, whichever is later. Copies of all Forms I-9 maintained for
such former employees pursuant to IRCA, and any and all copies of documentation,
records or other papers retained with Forms I-9, have been or, at Orkin's
request, will be made available to Orkin prior to the Closing.
(c) Except as disclosed on Schedule 3.23, Redd has had no
material immigration law violations and has only employed individuals authorized
to work in the United States. Since December 31, 1994, Redd has not been the
subject of any inspection or investigation relating to its compliance with or
violation of IRCA, nor has it been warned in writing, fined or otherwise
penalized by reason of any failure to comply with IRCA, nor is any such
proceeding pending or threatened.
3.24 Matters Relating to the Facilities.
(a) Other than as set forth on Schedule 3.24, there are no
encroachments, rights-of-way, easements, or conditions to the knowledge of Redd
which could adversely affect the present use of the field locations leased under
the Leases included in the Material Contracts (individually, a "Facility" or
collectively, the "Facilities").
(b) There are no condemnation, or eminent domain proceedings
pending or contemplated, against any Facility or any part thereof and Redd has
received no notice of the intent of any public authority or other entity to take
or use any Facility. There are no contemplated real property assessments
affecting any Facility or any portion thereof which will adversely affect such
Facility.
(c) Redd has received no written notice of any pending, and
there is no threatened, action or governmental proceeding relating to, zoning
changes which will adversely affect any Facility, nor is there any existing
event or condition which would reasonably constitute a basis for any such
proceeding. There is no present use of any real property adjacent to any
Facility which adversely affects the conduct of the Pest Business.
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[***] - CONFIDENTIAL TREATMENT REQUESTED
(d) Except as set forth in Schedule 3.24 attached hereto,
usable public sanitary and storm sewers, public water facilities, and gas and
electrical facilities (collectively, the "Public Utilities") as currently used
at each Facility as provided in the applicable Lease are of capacity sufficient
for the current operation of such Facility.
(e) Each Facility currently has access to and from public
streets and roads and there are no facts or conditions that would result in the
termination or material impairment of the present access from any Facility to
such existing highways and roads.
3.25 Year 2000 Compliance. Redd is currently, or will be, Year 2000
Compliant on or before the Closing Date. As used herein, "Year 2000 Compliant"
shall mean that all software, embedded microchips and other processing
capabilities utilized by Redd on existing computer hardware resources which are
critical to the functioning of the business of Redd will correctly process,
sequence, and calculate, without interruption, all date and date related data
for all dates to, through and after January 1, 2000, including leap year
calculations, and shall recognize, store and transmit date data in a format
which clearly indicates the correct century. Provided, however, that
notwithstanding the foregoing, Redd makes no representation or warranty of Year
2000 Compliance with respect to its [***] system, its [***] system or its
[***] system.
3.26 Complete Copies. The copies of all leases, instruments,
agreements, licenses, permits, certificates or other documents which are listed
on disclosure schedules attached hereto which have been delivered or made
available to Orkin have been or will be complete and correct in all material
respects.
3.27 Hart-Scott Rodino Act. Immediately prior to the Closing the
"Person" (as defined in the Regulations issued by the Federal Trade Commission
under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended)
within which Redd is included will have total assets (as shown on its last
regularly prepared balance sheet or financial statement) of less than
$10,000,000.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ORKIN
Orkin hereby makes the following representations and warranties to Redd
and the Owner, all of which shall survive the Closing as herein provided and
each of which is acknowledged by Orkin to be relied upon by Redd and the Owner:
4.01 Organization. Orkin is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power and authority to own and use its properties and to conduct
its business as currently conducted in all places where it does business.
4.02 Authorization; Effect of Agreement. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby have been, or before the Closing will be, duly authorized by
all necessary corporate action of Orkin and Rollins, Inc. This Agreement
constitutes a valid and binding obligation of Orkin enforceable against Orkin
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in accordance with its terms, and the guaranty is a valid and binding obligation
of Rollins, Inc., enforceable against Rollins, Inc. in accordance with its
terms.
4.03 No Conflict. The execution and delivery of this Agreement by Orkin
does not, and the performance of this Agreement by Orkin will not, (i) conflict
with or violate any law, regulation, court order, judgment or decree applicable
to Orkin, (ii) violate or conflict with either the charter or bylaws of Orkin or
(iii) result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under any material
contract, instrument, permit, license or franchise to which Orkin is a party.
4.04 Broker's Fees. Orkin has not incurred any obligation or liability,
contingent or otherwise, for any brokerage fee, finder's fee, agent's commission
or other like payment in connection with this Agreement or the transactions
contemplated hereby.
ARTICLE V
COVENANTS OF REDD AND ORKIN
5.01 Covenant of Further Assurances.
(a) Each party hereto shall use its best efforts to take all
actions and to do all things reasonably necessary in order to consummate and
effect the transactions contemplated by this Agreement (subject to the
limitations contained in this Agreement). Without further consideration, each
party hereto will, at any time and from time to time following the Closing,
execute and deliver such further instruments of conveyance and transfer, and
take such other action as the other party may reasonably request (subject to the
limitations set forth in this Agreement), to consummate the transactions
contemplated by this Agreement, including, without limitation, obtaining a
release of the personal guaranty of Richard Redd with respect to the Deposit
Guaranty Loan and the Motor Vehicle Lease Agreement.
(b) Certain of the Assets may be in the possession of third
parties on the Closing Date. Prior to the Closing, except as otherwise provided
in this Agreement, Redd and Orkin shall agree on reasonable procedures to
transfer possession of the Assets to Orkin as soon as practicable after the
Closing Date, and Redd shall provide reasonable assistance to Orkin in
connection with the transfer thereof. Each of Redd and Orkin shall bear their
own respective out-of-pocket costs incurred in connection with transferring such
Assets.
5.02 Consents. Orkin acknowledges that certain consents to the
transactions contemplated by this Agreement may be required from parties to the
Customer Contracts, Leases and Other Contracts and that such consents have not
been obtained. Orkin and Redd agree that they will use their reasonable efforts
to jointly seek and obtain prior to Closing the consent of all Major Customers
to the transactions contemplated by this Agreement. Redd shall use its
reasonable efforts to obtain and deliver to Orkin prior to the Closing the
consent of each lessor of the Leases. If any Lessor requires the payment of any
fees in order to obtain such consent, the parties shall bear the cost of such
fees equally.
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5.03 Employee and Related Matters.
(a) Offers of Employment to Seller's Employees. Prior to or
after the Closing, Orkin may offer employment to any Business Employees;
provided, however, that notwithstanding anything to the contrary set forth
herein, it is understood that there is no obligation on the part of Orkin to
make any such offers of employment. Any Business Employee who accepts an offer
and is hired by Orkin effective as of the Closing is a "Transferred Employee".
With respect to Transferred Employees, Orkin and Redd agree to cooperate fully
in the transition of any such persons. Nothing contained in this Section shall
be construed to affect or limit any right Orkin or its affiliates may have after
the Closing with respect to the terms and conditions of employment of any
Business Employees (including but not limited to provision of employee benefits
different from those provided through the Employee Benefit Plans) or to
terminate the employment of any Transferred Employee at any time.
(b) Limitation. Notwithstanding the provisions of clause (a)
of this Section, Orkin shall not be required to offer employment to a person and
such person shall not be an "Transferred Employee" if, as of the Closing Date,
(i) such person has been determined to be eligible for and actually receiving
disability benefits on the Closing Date pursuant to an occurrence prior to the
Closing Date, excepting any person who is able to perform the essential
functions, with or without reasonable accommodation, of the position which they
would have been offered if there had been no disability benefits paid or (ii)
such person fails to comply with those Orkin employment criteria described on
Schedule 5.03(b) ("Orkin Minimum Employment Criteria").
(c) Accrued Benefits.Redd shall be responsible for vacation
pay (resulting from earned vacation days not taken) and sick pay which accrued
on or before the Closing Date of all Business Employees who do not become
Transferred Employees. With respect to Business Employees who become Transferred
Employees, Orkin shall afford such employees the right to take paid vacation and
sick time earned prior to the Closing Date and which is included in the Days Off
Accruals; provided, however, that if Redd is required, by virtue of collective
bargaining agreements or otherwise, to pay such employees for any accrued but
unused vacation and sick time, Orkin need not afford such employees the right to
take such vacation and sick time.
(d) Actions by Redd. Redd shall be responsible for providing
all notices and other communications to employees which may be required under
the Worker Adjustment and Retraining Act (the "WARN" Act") other than those
required solely due to actions of Orkin. Redd shall offer, or cause to be
offered by one or more of its ERISA Affiliates, and shall be responsible for
providing all notices and other communications to, and shall be responsible for,
Continuation Coverage to individuals who would be eligible to elect such
coverage if the transactions contemplated by this Agreement were treated as a
Qualifying Event with respect to all Business Employees as a result of the
transactions contemplated by this Agreement. Redd shall provide, or cause to be
provided by an ERISA Affiliate, all applicable notifications of any conversion
rights or privileges available under any Employee Benefit Plan or ERISA
Affiliate Employee Benefit Plan which is an "employee welfare benefit plan" (as
that term is defined in Section 3(1) of ERISA)
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which arise as a result of the transactions contemplated by this Agreement.
Orkin shall neither assume nor have any obligations or liabilities whatsoever in
respect of severance, WARN Act, payroll and/or unemployment tax, pension,
profit-sharing, health insurance, COBRA or other employee benefit liabilities in
respect of any Business Employee whose employment with Redd terminates on or
before the Closing, whether or not employed by Orkin, and Redd shall be liable
for any penalties, excise taxes or interest resulting from failure to provide
such benefits.
(e) Severance. Redd shall be liable for any compensation (if
any) accrued and due for the period of time prior to the Closing, or owed as a
result of the transactions contemplated by this Agreement, to any Business
Employee of Redd, including any payment due under the WARN Act. Orkin agrees to
adopt, effective as of the Closing Date, a [***] for Transferred Employees,
which shall provide that any Transferred Employee (other than Transferred
Employees who are also Senior Management) who is terminated by Orkin within the
[***] period after the Closing for any reason other than for "cause" (as defined
in Orkin's employee benefits policy) will be provided [***] notice of
termination, or, in the alternative, [***] pay in lieu of notice of termination.
After the termination of each such "special severance pay plan", Orkin agrees
that Transferred Employees shall be eligible to participate in Orkin's then
existing severance pay plan and with respect to such severance pay plan, all
Transferred Employees shall be provided [***] for the period that the
Transferred Employees were employed by Redd.
(f) Benefit Plans. Effective as of the Closing Date,
Transferred Employees shall be eligible to participate in any ERISA qualified or
employee welfare programs and/or benefits and any incentive or other
compensation program (e.g., pension, retirement, profit sharing, stock option,
incentive, vacation, education reimbursement or assistance, deferred
compensation, hospitalization, medical, dental, life insurance, sick pay,
disability, severance or other plan, program, policy or arrangement) ("Employee
Benefits") offered by Orkin, to the same extent that Orkin's similarly-situated
employees are eligible to participate in such programs and/or plans. Other than
for purposes of calculating any qualified defined benefit retirement benefit or
for purposes of determining a Transferred Employee's vested interest in any
employer "match" contribution under Orkin's Code Section 401(k) qualified
savings plan, Orkin shall grant all Transferred Employees service credit for the
period that the Transferred Employees were employed by Redd. Such service credit
shall apply for all eligibility and vesting requirements set forth in any
Employee Benefits. Redd shall take such actions as may be necessary to allow all
Transferred Employees to "roll-over" any moneys held in Redd's Code Section
401(k) qualified savings plan into Orkin's Code Section 401(k) qualified savings
plan effective as soon as practicable after the Closing. Redd agrees to fully
vest, effective as of the Closing Date, but contingent on the Closing, all
Transferred Employees who are participants in the Redd's Code Section 401(K)
qualified savings plan.
5.04 Customers.
(a) From and after the date hereof and until the Closing Date,
Redd shall use its reasonable efforts to retain its customers, including using
its reasonable efforts, in all material respects, to:
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(i) service all customers with the same service
personnel used by Redd to service such customers (to the extent reasonably
practicable) and with a level of service and quality consistent with Redd's past
practices;
(ii) abide by the terms of all existing contracts
(including Customer Contracts) relating to the
customers and the operation of the Pest Business with respect to such customers;
(iii) abide by the terms of all guarantees associated
with Customer Contracts for such customers and
perform all necessary work and satisfy all obligations thereunder;
(iv) communicate with and call upon the customers in
a manner consistent with Redd's past practices and with the same sales personnel
used by Redd to communicate and call upon such customers (to the extent
reasonably practicable); and
(v) take such other actions relating to the to
provision of Pest Services the customers consistent
with Redd's past practices.
(b) From and after the date hereof and until the Closing Date,
Redd agrees to use its reasonable efforts to cooperate with Orkin in
consummating the transactions contemplated hereby and in effecting an orderly
transition all the customers, the Assets and the Assumed Liabilities to Orkin.
5.05 Access. Prior to the Closing, Redd shall grant to Orkin or cause
to be granted to Orkin and its representatives, employees (including information
technology personnel), counsel and accountants reasonable access, during normal
business hours and upon reasonable notice, (i) to the personnel, properties,
systems, books and records of Redd relating to the Pest Business, (ii) to the
employees employed in the Pest Business for the purpose of facilitating hiring
by Orkin and integrating employees into Orkin's operations, (iii) to the books
and records of Redd for the purpose of providing Orkin with information
demonstrated by Orkin as required to be included in a required filing under Form
8-K promulgated under the Securities Exchange Act of 1934, as amended, and (iv)
subject to the consent of the relevant landlord or lessor, to the premises
covered by the Leases for the purpose of conducting a Phase I environmental
investigation of such premises (it being agreed by the parties hereto that in
the event that Orkin, in the process of such investigations, discovers an
Environmental Violation at any of such premises which materially and adversely
affects such premises, then Orkin must disclose to Redd the results of the Phase
I investigation and may refuse to assume, and Redd shall not assign and
transfer, the Lease(s); provided however, that all requests for access shall be
directed to such person as Redd shall designate from time to time.
5.06 Sales or Transfer Taxes and Other Charges.
(a) Except as otherwise specifically provided in this
Agreement, Orkin and Redd shall each be responsible for and shall pay fifty
percent (50%) of the cost of all sales, use, value-added, excise, business,
goods and services, transfer, stamp, recording, registration, conveyance, or
similar taxes or expenses that may be imposed as the result of the sale and
transfer
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of the Assets (including without limitation, any duty or other tax chargeable in
respect of any instrument transferring property and all filing fees or expenses
payable in connection with the sale and transfer of the intellectual property
described in Section 1.01(g), but excluding any and all penalties, interest and
additions to any of such taxes which shall be paid by the party against whom
such penalty, interest or addition was levied), and the parties shall cooperate
in timely making all filings, returns, reports, and forms as may be required to
comply with the provisions of any applicable tax law. Redd shall be responsible
for the preparation and filing of any sales and use tax filings necessitated by
the consummation of the transactions contemplated in this Agreement, but shall
provide drafts of any such filings to Orkin within a reasonable period of time
prior to the due date for filing the same, and shall revise such filings, as
appropriate, to take into account any reasonable comments thereto as provided by
Orkin. Orkin shall be responsible for the preparation and filing of any transfer
tax filings necessitated by the consummation of the transactions contemplated in
this Agreement, but shall provide drafts of any such filings to Redd within a
reasonable period of time prior to the due date for filing the same, and shall
revise such filings, as appropriate, to take into account any reasonable
comments thereto as provided by Redd.
(b) The following expense items relating to the Pest Business
shall be apportioned at the Closing in an equitable manner (based on actual tax
or other relevant bills or, to the extent such bills are not available prior to
the Closing, based on the most recently ascertainable tax or other relevant
bills). To the extent necessary, the parties shall make appropriate adjustments
and payments one to the other after the Closing so that the income and expense
items with respect to the period up to the Closing Date shall be for Redd's
account and the income and expense items with respect to the period on and after
the Closing Date shall be for Orkin's account:
(i) Real estate taxes and payments in lieu of tax
with respect to the properties covered by the Leases on the basis of the fiscal
year for which assessed.
(ii) Personal property taxes, if any, on the basis
of the fiscal year for which assessed.
(iii) Utilities, telephone charges and other
apportionments and adjustments on the basis of the fiscal
year for which assessed.
5.07 Tax Assistance. After the Closing and upon reasonable written
notice, the parties shall furnish or cause to be furnished to each other and
their respective representatives, employees, counsel, and accountants access
during normal business hours, such information and assistance relating to the
Pest Business as is reasonably necessary for financial reporting and accounting
matters, the preparation and filing of any tax returns, reports, or forms, or
the defense of any tax claim or assessment; provided, however, that this access
shall not unreasonably disrupt the normal operations of Orkin or Redd, and the
party requesting cooperation shall pay the reasonable out-of-pocket costs
incurred by the party furnishing cooperation. This cooperation will continue for
a reasonable period from the Closing Date plus any additional time during which
a party has been advised (a) that there is an ongoing tax audit with respect to
periods before the Closing Date or (b) that the period is open to assessment.
Redd shall be responsible for any tax returns and filings attributable to income
earned, or fiscal or filing periods ending, before the Closing Date, and Orkin
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shall be responsible for any tax returns and filings attributable to income
earned, or fiscal or filing periods ending, on or after the Closing Date.
5.08 Updated Schedules. Prior to the Closing, Redd shall have the right
to supplement, modify or update the Schedules hereto to reflect any changes in,
or facts, events or circumstances relating to, the Pest Business that occur in
the ordinary course of business prior to the Closing; provided, however, that
any such supplements, modifications or updates shall be subject to Orkin's
rights under Section 6.01 hereof.
5.09 Termite Guarantee Contracts. From and after the Closing, Orkin
shall provide services on behalf of Redd under the Termite Guarantee Contracts.
Until the earlier of (i) the expiration date of a Termite Guarantee Contract, or
(ii) the beginning of a renewal period for which Orkin has assumed such
contract, all costs and expenses attributable to services performed pursuant to
such contract shall be borne by Redd, and shall be reimbursed by Redd to Orkin
within thirty (30) days after the presentation of an invoice therefor. Such
costs and expenses shall be equal to direct labor and materials costs
attributable to such services, plus an overhead charge equal to [***] of such
direct costs. If Redd fails to pay Orkin any amount due to Orkin under this
Section 5.09, Orkin shall first treat such amount as an uncollected account
receivable and included in the Uncollected AR Calculation under Section 2.08
hereof, if due and payable within the one hundred and eighty (180) day period
following the Closing Date, and then with respect to any additional amount
set-off such amounts against the obligations due under the Promissory Notes.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF ORKIN
The obligation of Orkin to consummate the transactions contemplated by
this Agreement is subject to the satisfaction of each of the following
conditions unless waived in writing by Orkin:
6.01 Representations and Warranties;Covenants. The representations and
warranties of Redd made in this Agreement shall be true and correct in all
respects on and as of the Closing Date as though made on and as of the Closing
Date and Redd and the Owner, as the case may be, shall have performed or
complied with all obligations and covenants required by this Agreement to be
performed or complied with by them by the time of the Closing, except to the
extent of changes or developments caused or contemplated by the transactions
expressly contemplated by this Agreement, for representations and warranties
that speak as of a specific date or time (which need only be true and correct as
of such date or time) and for breaches of such representations and warranties
and covenants that, in the aggregate, together with all supplements,
modifications and updates to the Schedules made by Redd as permitted by Section
5.10 above, would not have a material adverse effect on the Pest Business; and
Redd and the Owner shall have delivered to Orkin a certificate dated the Closing
Date confirming the foregoing.
Notwithstanding the foregoing, the parties hereto acknowledge that all
or some portion of the Schedules contemplated by this Agreement may not be
attached hereto on the date hereof. Redd covenants and agrees to deliver such
Schedules to Orkin as soon as practicable after the date hereof, but in any
event no later than five (5) business days prior to the Closing, and further
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[***] - CONFIDENTIAL TREATMENT REQUESTED
acknowledges that such Schedules shall be acceptable to Orkin in its sole
discretion in order for Orkin to be obligated to consummate the transactions
contemplated herein.
6.02 No Injunctions, etc. No injunction or order of any court or
administrative agency of competent jurisdiction shall be in effect as of the
Closing which restrains or prohibits the consummation of the transactions
contemplated herein.
6.03 Revenue Validation. Orkin shall be satisfied, in its sole
discretion, that the Revenues of Redd for the twelve (12) month period ending
August 31, 1999 are no less than $12,750,000.
6.04 Deliveries. At the Closing, Redd or the Owner, as the case may be,
shall have delivered, or cause to be delivered, to Orkin each of the following
documents:
(a) a bill of sale and any other appropriate instruments of
transfer, assignment and conveyance in form and substance reasonably
satisfactory to Orkin, all dated as of the Closing Date, evidencing and
effecting the sale and transfer to Orkin of the Assets (it being understood that
none of the foregoing shall require Redd or any other person to make any
additional representations, warranties or covenants, express or implied, not
contained in this Agreement, and any additional statement contained therein
shall not constitute a representation or warranty), including assignments of the
Intellectual Property included in the Assets in form appropriate for recordation
with relevant governmental agencies or authorities responsible for intellectual
property.
(b) an opinion of counsel to Redd and the Owner in form
reasonably satisfactory to Orkin and its counsel.
(c) the Redd Noncompetition Agreement, the Richard Redd
Noncompetition Agreement and the Senior Management Noncompetition Agreements,
duly executed by the Redd, Richard Redd, and each of Senior Management, as
applicable.
(d) Waivers of Rights Agreement signed by the Senior
Management and Richard Redd in the form attached hereto as Exhibit B.
(e) the Senior Management Employment Agreements with Orkin,
executed by each member of Senior Management, in the form attached hereto as
Exhibit C.
(f) the Copesan Commission and Termination of Deferred
Compensation Agreement between Richard Redd and Orkin, duly executed by Richard
Redd, in the form attached hereto as Exhibit D.
6.05 Closing of Related Transactions.
(a) That certain [***] by [***]Redd to [***] in the face
amount of [***] shall be paid in full or otherwise satisfied.
(b) All other amounts owed by Redd to Richard Redd, or owed by
Richard Redd to Redd, shall be paid in full or otherwise satisfied.
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6.06 Board Approval. The transactions contemplated by this Agreement
shall have been approved by the Board of Directors of Orkin and Rollins, Inc.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF REDD AND THE OWNER
The obligation of Redd and the Owner to consummate the transactions
contemplated by this Agreement is subject to the satisfaction of the following
conditions unless waived in writing by Redd and the Owner:
7.01 Representations and Warranties; Covenants. The representations and
warranties of Orkin made in this Agreement shall be true and correct in all
respects on and as of the Closing Date as though made on and as of the Closing
Date and Orkin shall have performed or complied with all obligations and
covenants required by this Agreement to be performed or complied with by Orkin
by the time of the Closing, except to the extent of changes or developments
caused or contemplated by the transactions expressly contemplated by this
Agreement and for representations and warranties that speak as of a specific
date or time (which need only be true and correct as of such date or time), and
for breaches of such representations and warranties and covenants that, in the
aggregate, would not have a material adverse effect on Orkin or its business
taken as a whole; and Orkin shall have delivered to Redd a certificate dated the
Closing Date confirming the foregoing.
7.02 No Injunctions, etc. No injunction or order of any court or
administrative agency of competent jurisdiction shall be in effect as of the
Closing which restrains or prohibits the consummation of the transactions
contemplated herein.
7.03 Deliveries. At Closing, Orkin shall have delivered:
(a) the Closing Cash Payment;
(b) the Promissory Notes;
(c) the Redd Noncompetition Agreement, the Richard Redd
Noncompetition Agreement, and the Senior Managemen Noncompetition
Agreements, each duly executed by Orkin;
(d) the Senior Management Employment Agreements with Orkin,
executed by Orkin;
(e) the Copesan Commission and Termination of Deferred
Compensation Agreement between Richard Redd and Orkin, duly executed
by Orkin;
(f) a License Agreement between Orkin and Redd in the form
attached hereto as Exhibit E, duly executed by Orkin, which License
Agreement shall grant Redd a limited license to use the Intellectual
Property after the Closing with respect to Redd's obligations as a
franchisor under the Redd Franchise Agreements;
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(g) an assumption agreement in form and substance reasonably
satisfactory to Redd and the Owner, evidencing the assumption by Orkin
of the Assumed Liabilities, including, but not limited to, that certain
Motor Vehicle Lease Agreement between Automotive Rentals, Inc. ("ARI")
and Redd (the "Motor Vehicle Lease Agreement");
(h) a Guaranty executed by Rollins, Inc., Orkin's parent
company, in the form attached hereto as Exhibit F;
(i) an opinion of counsel to Orkin in form reasonably
satisfactory to Redd and its counsel; and
(j) evidence of payment of the Deposit Guaranty Loan.
7.04 Board Approval. The transactions contemplated by this Agreement
shall have been approved by the sole shareholder of Redd, and, to the extent
required, the Board of Directors of Redd.
ARTICLE VIII
INDEMNIFICATION
8.01 Indemnification by Redd. Subject to the provisions of Section 8.04
hereof, Redd shall indemnify and hold harmless Orkin, its officers, directors,
employees, affiliates, subsidiaries, agents and permitted assigns, from and
against any and all liabilities, obligations, claims, demands, losses, actions
and suits at law, administrative proceedings and investigations, or proceedings
in equity, damages, judgments, assessments, charges, fines, penalties, costs and
expenses, including reasonable attorneys' fees but excluding punitive damages
(collectively, "Losses"), arising out of or caused by (i) a breach of any
representation or warranty of Redd or the Owner contained in this Agreement,
(ii) a breach of any covenant of Redd or the Owner contained in this Agreement
and (iii) any liability or obligation of Redd that is not an Assumed Liability,
or (iv) any failure to perform before Closing under any Customer Contract,
Lease, Purchase Order or Other Contract.
8.02 Indemnification by Orkin. Orkin shall indemnify and hold harmless
Redd, its officers, directors, employees, affiliates, subsidiaries, agents and
permitted assigns, and the Owner, from and against any and all liabilities,
obligations, claims, demands, losses, actions and suits at law, administrative
proceedings and investigations, or proceedings in equity, damages, judgments,
assessments, charges, fines, penalties, costs and expenses, including reasonable
attorneys' fees but excluding punitive damages (collectively, "Losses") arising
out of or caused by (i) a breach of any representation or warranty of Orkin
contained in this Agreement, (ii) a breach of any covenant of Orkin contained in
this Agreement, (iii) any Assumed Liabilities, or (iv) any failure to perform
after Closing under any Customer Contract, Lease, Purchase Order or Other
Contract.
8.03 Procedures Relating to Indemnification.
(a) In order for a party (the "indemnified party") to be
entitled to any indemnification provided for under this Agreement with respect
to a claim or demand made by any third party against the indemnified party (a
"Third Party Claim"), such indemnified party must
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notify the party from whom indemnification is sought (the "indemnifying party")
in writing, and in reasonable detail, of the Third Party Claim as promptly as
reasonably possible after receipt by the indemnified party of written notice of
the Third Party Claim; provided, however, that failure to give such notification
will not affect the indemnification provided under this Agreement except to the
extent the indemnifying party has been actually prejudiced as a result of the
failure to provide prompt and reasonably detailed written notice. Thereafter,
the indemnified party shall deliver to the indemnifying party, within five
business days after the indemnified party's receipt of notice, copies of all
notices and documents (including court papers) received by the indemnified party
relating to the Third Party Claim.
(b) If a Third Party Claim is made against an indemnified
party, the indemnifying party will be entitled to participate in the defense of
such claim and, if it so chooses and acknowledges its obligation to indemnify
the indemnified party therefor, to assume the defense of such claim with counsel
selected by the indemnifying party and reasonably satisfactory to the
indemnified party. Notwithstanding any acknowledgment made pursuant to the
immediately preceding sentence, the indemnifying party shall be entitled to
continue to assert any limitation on its indemnification responsibility
contained in Section 8.01 or in Section 8.02. Should the indemnifying party so
elect to assume the defense of a Third Party Claim, the indemnifying party will
not be liable to the indemnified party for legal expenses subsequently incurred
by the indemnified party in connection with the defense thereof. If the
indemnifying party assumes such defense, the indemnified party shall have the
right to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the indemnifying party, with the
understanding that the indemnifying party shall control the defense thereof. The
indemnifying party shall be liable for the fees and expenses of counsel employed
by the indemnified party for any period during which the indemnifying party has
not assumed defense thereof. If the indemnifying party chooses to defend a Third
Party Claim, the parties shall cooperate in the defense or prosecution of the
claim. This cooperation will include the retention and (upon the indemnifying
party's request) the provision to the indemnifying party of records and
information that are reasonably relevant to such Third Party Claim, and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. Whether or not
the indemnifying party assumes defense of the Third Party Claim, the indemnified
party shall not admit any liability with respect to, or settle, compromise, or
discharge, such Third Party Claim without the indemnifying party's prior written
consent (which consent will not be unreasonably withheld). If the indemnifying
party shall have assumed the defense of the Third Party Claim, the indemnifying
party shall not settle such Third Party Claim without the indemnified party's
prior written consent (which consent will not be unreasonably withheld).
8.04 Year 2000 Compliance Representation by Redd; Right of Setoff.
------------------------------------------------------------
(a) Notwithstanding the provisions of Section 8.01(i) above,
the obligation of Redd to indemnify Orkin with respect to a breach of Redd's
representations and warranties with respect to Year 2000 compliance (as set
forth in Section 3.25 hereof) shall apply only if the Losses attributable to a
breach of such Section exceed [***] dollars [***], and shall only
apply to the extent that such losses exceed [***] dollars [***].
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(b) Without limiting other remedies available to Orkin, Orkin
shall have the right to set-off any amounts payable by Redd to Orkin pursuant to
the indemnification provisions of this Article VIII against the obligations due
under the Promissory Notes.
ARTICLE IX
COVENANTS NOT TO COMPETE
9.01 Redd. Redd shall execute and deliver at Closing a Noncompetition
Agreement in the form attached as Exhibit G (the "Redd Noncompetition
Agreement"). The shall acknowledge in the Noncompetition Agreement that the
geographic area and the period and nature of the agreed restrictions set forth
therein are necessary and reasonable for the protection of Orkin and shall
acknowledge that the restrictions contained therein relate exclusively to the
Pest Business.
9.02 Richard Redd. Richard Redd shall execute and deliver at Closing a
Noncompetition Agreement in the form attached as Exhibit H (the "Richard Redd
Noncompetition Agreement"). Richard Redd shall acknowledge in the Noncompetition
Agreement that the geographic area and the period and nature of the agreed
restrictions set forth therein are necessary and reasonable for the protection
of Orkin and shall acknowledge that the restrictions contained therein relate
exclusively to the Pest Business.
9.03 Senior Management. Each member of Senior Management shall execute
and deliver at Closing a Noncompetition Agreement in the form attached hereto as
Exhibit I (the "Senior Management Noncompetition Agreement"). Each member of
Senior Management shall acknowledge in the Noncompetition Agreement that the
geographic area and the period and nature of the agreed restrictions set forth
therein are necessary and reasonable for the protection of Orkin and shall
acknowledge that the restrictions contained therein relate exclusively to the
Pest Business
ARTICLE X
GENERAL
10.01 Notices. All notices, requests, demands, approvals, consents,
waivers or other communications hereunder shall be in writing and shall be
deemed to have been duly given if (a) delivered personally (including delivery
by an express courier service which guarantees next day delivery), (b) mailed by
registered or certified mail, return receipt requested, postage prepaid, or (c)
sent by telecopy, with written confirmation of receipt and a copy sent by the
methods described in (a) or (b), as follows (or to such other address as any
party shall specify by notice in writing to all other parties):
If to Redd: c/o Barnes, Broom, Dallas & McLeod, PLLC
1817 Crane Bridge Drive, Suite B
Jackson, Mississippi 39216
Attn: William E. McLeod
Telecopy number: 601-981-6336
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If to Orkin: Orkin Exterminating Company, Inc.
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324
Attn: President
Telecopy number: 404-888-2279
With a copy to: General Counsel
Rollins, Inc.
P.O. Box 647
Atlanta, Georgia 30301
Telecopy number: 404-888-2731
With a copy to: Jonathan Golden, Esq.
Arnall Golden & Gregory
2800 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3450
Telecopy number: (404) 873-8701
Any such notice, request, demand, approval, consent, waiver or other
communication shall be deemed to have been received (i) if by personal delivery,
on the date of delivery if delivered by hand or on the next business day if sent
by express courier, (ii) if by mail, on the third business day following the
mailing thereof, or (iii) if by telecopy as described above, upon transmission.
10.02 Entire Agreement; Amendments; Waiver. This Agreement (including
the disclosure schedules and other documents to be delivered at or prior to
Closing) constitutes the entire agreement and understanding of the parties
hereto, and supersedes all prior agreements and understandings among the parties
hereto, in respect of the subject matter hereof and no amendment or modification
of the Agreement may be made except in writing signed by all parties hereto. At
any time prior to Closing, either party hereto may (i) extend the time for the
performance of any of the obligations or other acts of the other party hereto;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto; or (iii) waive compliance
with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by the party to be bound thereby. The failure of either party to assert
any of its rights hereunder shall not constitute a waiver of any such rights.
10.03 Expenses. Each of Orkin, on the one hand, and Redd and the Owner,
on the other hand, shall pay its or their own expenses incidental to the
preparation and negotiation of this Agreement and the consummation of the
transactions contemplated hereby, except as otherwise expressly provided herein.
10.04 Bulk Sales Laws. Without implying that such laws apply to the
transactions contemplated hereby, the parties shall not comply with the
provisions of bulk sales or bulk transfer laws of any states relating to
creditors rights. Redd agrees, in addition to the provisions of Section 8.01, to
indemnify and hold Orkin harmless from any loss, cost, or expense which arises
out of any
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noncompliance with any state bulk sales or bulk transfer law relating
to creditor's rights, and Orkin shall have the right to set-off any amounts
payable by Redd to Orkin pursuant to this Section 10.04 against the obligations
due under the Promissory Notes.
10.05 Confidentiality.
(a) Orkin shall use all reasonable efforts to cause its
directors, officers, employees, advisors, and affiliates to keep confidential
for a period of three years from the Closing Date all information concerning
Redd, other than information that relates solely to the Assets, the Pest
Business or the Assumed Liabilities, and other than any such information that is
available to the public on the Closing Date or thereafter becomes available to
the public, other than the result of a breach of this Section 10.05(a).
Nonetheless, Orkin may disclose any confidential information required by law or
legal or administrative process to be disclosed without violating this Section
10.05(a).
(b) Redd and the Owner agree to use all reasonable efforts
after the Closing Date to keep, and to cause Redd's directors, officers,
employees, advisors and affiliates to keep the Information (as defined below)
confidential for a period of three years from the Closing Date, except that any
Information required by law or legal or administrative process to be disclosed
may be disclosed without violating the provisions of this Section 10.05(b). or
purposes hereof, the term "Information" means all information exclusively
concerning the Pest Business, the Assets and the Assumed Liabilities, other than
any such information that is available to the public on the Closing Date, or
that thereafter becomes available to the public other than as a result of a
breach of this Section 10.05(b), or that is developed independently by Redd or
its affiliates or is obtained from third parties.
10.06 Announcements. Except to the extent required by law, regulations
or judicial process or as may be necessary to obtain any Consents or for
financial reporting purposes, and except to the extent disclosed to the parties'
respective accountants and other representatives as necessary in connection with
the ordinary conduct of their respective businesses (so long as the recipients
of such information agree to keep the terms of this Agreement confidential),
each party agrees not to disclose the existence or terms of this Agreement to
any third party without the prior written consent of the other parties, which
consent shall not be unreasonably withheld. Notwithstanding the foregoing, the
parties agree that each party shall have the right to announce publicly the
existence and the terms of this Agreement if such party reasonably believes that
such disclosure is required by the Securities Exchange Act of 1934 or
regulations promulgated thereunder or by the rules and regulations of the New
York Stock Exchange, provided that each party shall give reasonable notice to
the other before making any such announcement and shall allow the other party
reasonable time to comment on such release or announcement in advance of such
release or announcement.
10.07 Termination.
(a) This Agreement may be terminated at any time prior to
Closing:
31
<PAGE>
(i) by the mutual written consent of Orkin, on
the one hand, and Redd and the Owner, on the other hand; or
(ii) by Orkin, on the one hand, and Redd and the
Owner, on the other hand, if the Closing has not occurred by January 1, 2000,
provided the terminating party has not, through breach of a representation,
warranty or covenant, prevented the Closing from occurring on or before such
date.
(b) In the event Orkin on the one hand, and Redd and the
Owner, on the other hand, seeks to terminate this Agreement as provided in
Section 10.07(a) above, such terminating party shall give the other parties
notice thereof, whereupon this Agreement (other than Sections 10.05 and 10.06
and this Section 10.07(b)) shall terminate without any liability of any party
hereto, other than (i) any liability for a pre-termination breach of warranty,
representation or covenant of any non-terminating party contained herein, and
(ii) in the case of Redd and the Owner, an obligation to return to Orkin the
Earnest Money Deposit.
10.08 Headings. The headings and captions in this Agreement and in any
Exhibit or Schedule hereto are solely for the convenience of the parties and
shall be of no force or effect in the construction of the Agreement.
10.09 Governing Law; Arbitration.
(a) This Agreement shall be construed in accordance with the
internal laws of the State of Mississippi applicable to agreements made and to
be performed entirely within such state, without regard to the conflicts of law
principles of such state.
(b) Any controversy, dispute or claim arising out of or
relating in any way to this Agreement or the other agreements contemplated
hereby shall, except with respect to seeking equitable remedies, be settled
exclusively by arbitration in the city of Birmingham, Alabama. Such arbitration
shall be administered by the American Arbitration Association ("AAA") in
accordance with its then prevailing rules (except as otherwise provided herein),
by one independent and impartial arbitrator. The fees and expenses of the AAA
and the arbitrator shall be shared equally by the parties and advanced by them
from time to time as required; provided that at the conclusion of the
arbitration, the arbitrator shall award costs and expenses (including the costs
of the arbitration previously advanced and the fees and expenses of attorneys,
accountants and other experts) and interest at the prime interest rate to the
prevailing party. Pre-arbitration discovery shall be permitted in accordance
with the rules of the AAA. The arbitrator shall render his award within 90 days
of the conclusion of the arbitration hearing. Notwithstanding anything to the
contrary provided in this Section 10.09(b) and without prejudice to the above
procedures, either party may apply to any court of competent jurisdiction for
temporary injunctive or other provisional judicial relief if such action is
necessary to avoid irreparable damage or to preserve the status quo until such
time as the arbitration panel is convened and available to hear such party's
request for temporary relief. The award rendered by the arbitrator shall be
final and not subject to judicial review and judgment thereon may be entered in
any court of competent jurisdiction.
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<PAGE>
10.10 Counterparts. This Agreement may be executed in two or more
counterparts (including by means of telecopied signature pages), each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. This Agreement shall become effective when counterparts,
which together contain the signatures of all parties hereto, shall have been
delivered to Redd and Orkin.
10.11 Assignment. Except as set forth below, this Agreement and any
rights and obligations hereunder shall not be assignable or transferable by the
parties hereto without the prior written consent of the other parties and any
purported assignment without such consent shall be void and without effect;
provided that, without the consent of Redd or the Owner, Orkin may assign its
right to purchase any of the Assets hereunder to one or more wholly-owned
subsidiaries of Orkin upon written notice of such assignment to Redd and the
Owner. Provided, however, that no such assignment by Orkin shall limit or
otherwise affect Orkin's obligations hereunder, and that Orkin shall execute
such documentation as Redd and the Owner shall determine to be necessary or
appropriate to evidence its continued obligations to Redd or the Owner after the
Closing under any instruments contemplated herein (including, without
limitation, the Promissory Notes).
10.12 No Third-Party Beneficiaries. This Agreement is for the sole
benefit of the parties hereto, and their permitted assigns and nothing herein
express or implied shall give or be construed to give to any person or entity,
other than the parties hereto and such permitted assigns, any legal or equitable
rights hereunder.
(Signatures On Next Page)
33
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first hereinabove set forth, by their
representatives thereunto duly authorized.
"ORKIN":
ORKIN EXTERMINATING COMPANY, INC.
By:------------------------------
Title:---------------------------
"REDD":
REDD PEST CONTROL COMPANY, INC.
By:-------------------------------
Title:----------------------------
"RICHARD REDD"
----------------------------------
Richard L. Redd
34
<PAGE>
SCHEDULES
Schedule Title
1.01(c) Fixed Assets
1.01(d) Leases
1.01(f) Other Contracts
1.01(g) Intellectual Property
1.01(h) Field Office locations; telephone numbers
1.02(f) Franchise Agreements
1.02(h) Excluded Items
1.03(a)(ii) Deferred Compensation Agreements
1.03(a)(ii) Acquisition Obligations
2.01(h) Permitted Encumbrances
3.02(b) Consents
3.05 Major Customers
3.06 Inventory
3.10 Financial Schedules
3.11 Absence of Material Changes
3.12 Receivables
3.15 Labor Disputes
3.16 Employee Benefit Plans
3.17 Notice of Violations of Governmental
Licenses, Permits or
Approvals
3.18 Customer Compliance
3.19 Litigation
<PAGE>
3.22 Environmental Matters
3.23 Immigration Matters
3.24 Facilities
5.03(b) Orkin Minimum Employment Criteria
<PAGE>
LIST OF EXHIBITS
Exhibit Title
A Form of Promissory Note (Section 2.04(b)
B Form of Waiver of Rights Agreement (Section 6.03(d)
C Form of Senior Management Employment Agreements (6.03(e))
D Form of Capesan Commission and Termination of Deferred
Compensation Agreement (Section 6.04(f))
E Form of License Agreement (Section 7.03(f))
F Form of Guaranty of Rollins, Inc. (Section 7.03(h))
G Form of Redd Noncompetition Agreement (Article IX)
H Form of Richard Redd Noncompetition Agreement (Article IX)
I Form of Senior Management Noncompetition Agreement
(Article IX)
<PAGE>
Schedule 1.03
Contractual Liabilities to be assumed by Orkin
(i) Deferred Compensation Agreements
1. Deferred Compensation Agreement, dated January 3, 1992, by and
between Redd and Bert Marvin Jordan.
2. Deferred Compensation Agreement, dated October 18, 1993, by and
between Redd and Clement Lucas Burwell, Jr.
3. Deferred Compensation Agreement, dated January 3, 1992 by and
between Redd and Clint Eugene Case.
(ii)Acquisition Obligations
[insert].
EXHIBIT 2d
CONFIDENTIAL TREATMENT REQUESTED
Confidential Portions of This Agreement Which Have Been Redacted Are
Marked With Brackets ("[***]"). The Omitted Material Has Been Filed Separately
With The United States Securities and Exchange Commission.
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
This First Amendment to Asset Purchase Agreement (the "Amendment") is
entered into as of the 1st day of December, 1999 by and among ORKIN
EXTERMINATING COMPANY, INC., a Delaware corporation ("Orkin"), REDD PEST CONTROL
COMPANY, INC., a Mississippi corporation ("Redd"), and RICHARD L. REDD, an
individual resident of the state of Mississippi ("Richard Redd").
WITNESSETH:
WHEREAS, on October 19, 1999, the parties entered into that certain
ASSET PURCHASE AGREEMENT (the "Agreement"; capitalized terms used but not
otherwise defined herein shall have the meaning as set forth in the Agreement),
whereby Redd agreed to sell all of the Assets owned and used by Redd in
connection with the Pest Business and assume certain liabilities of Redd in
connection therewith (other than the Excluded Assets); and
WHEREAS, Redd has heretofore transferred certain of its assets to
Richard Redd, and
WHEREAS, certain actions which have occurred at or with respect to
Redd's pest control operations in [***],[***], and [***]could be construed as
having a material adverse change upon the Business, but Orkin desires to
waive its right to terminate the Agreement as a result thereof, subject to the
agreements as further set forth herein; and
WHEREAS, the parties hereto desire to amend the Agreement in certain
other respects as specifically set forth herein; and
WHEREAS, except as specifically set forth herein, the parties hereto
desire to affirm the terms and conditions, and their obligations, under the
Agreement, and wish to agree that such terms, conditions, and obligations, as
amended pursuant to this Amendment, are and shall remain in full force and
effect.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. The recitals set forth above are true and correct and are
incorporated into this Amendment by this reference.
2. The parties acknowledge and agree that the Closing shall occur on
Friday, December 3, 1999 at the offices of Barnes, Broom, Dallas and McLeod,
PLLC, in Jackson, Mississippi. The Closing shall be effective as of 12:01am
local time on December 4, 1999 (or, if the Closing does not occur on December 3,
1999, on such other date as may be mutually acceptable to the parties), which
shall be the "Closing Date".
3. Orkin acknowledges that Redd has transferred all of the depreciable
assets used in the conduct of the Business to Richard Redd on or before the date
hereof ( the "Transferred
<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
Assets"), and further acknowledges that such transaction is not a material
adverse change upon the Business. Richard Redd agrees to sell and transfer the
Transferred Assets to Orkin at the Closing by Bill of Sale, free and clear of
all liens and encumbrances other than the Permitted Encumbrances, in exchange
for a payment equal to the book value of the Transferred Assets (as set forth on
Redd's last financial statement immediately preceding the Closing Date) in
immediately available funds. Redd acknowledges and agrees that the Closing Cash
Payment shall be reduced by the amount paid to Richard Redd for the Transferred
Assets. Redd further acknowledges and agrees that, notwithstanding the transfer
of the Transferred Assets to Richard Redd, each and every of its representations
and warranties with respect to the Transferred Assets (other than the
representation and warranty with respect to title to the Transferred Assets,
which is amended to provide that Redd represents and warrants that title to such
assets is in Richard Redd, as opposed to Redd) are true, correct, and complete,
are being relied upon by Orkin, and a breach thereof shall entitle Orkin to make
a claim for indemnification against Redd under the provisions of Section 8.01 of
the Agreement.
4. The parties acknowledge and agree that, notwithstanding the Closing
Date, Orkin shall be entitled to all revenues generated in the conduct of the
Business from and after December 1, 1999 (the "Cutover Date"), and shall be
obligated to pay, or to reimburse Redd for, all ordinary and necessary
operational expenses incurred in the operation of the Business by Redd from and
after the Cutover Date until the Closing Date. Provided, however, that such
expenses shall not include insurance expenses and other comparable overhead
expenses incurred by Redd, other than Orkin's obligation to reimburse Redd for
[***] of Redd's cost of providing health insurance for Redd's employees for
the month of December, 1999, promptly upon presentation of a bill therefor, and
also shall not include any lease or other occupancy costs or expenses
attributable to any Redd locations other than those locations which are listed
on Schedule 1.01(d) of the Agreement. Except as specifically set forth in this
paragraph or as expressly set forth in the Agreement, Orkin does not assume any
expense, obligation, loss, cost or liability incurred by Redd before the Closing
Date, whether incurred before, on, or after the Cutover Date, and Redd shall
indemnify Orkin therefor pursuant to the provisions of Section 8.01 of the
Agreement. Redd shall establish a separate account into which all revenues
attributable to the operation of the Business from and after the Cutover Date
shall be deposited, which account shall be delivered to Orkin at the Closing.
5. The parties acknowledge and agree that, notwithstanding the
provisions of the Agreement to the contrary, the Closing Cash Payment shall also
be reduced by [***] DOLLARS (the [***]).
The [***] shall not be delivered to a third party, but shall
be retained by Orkin in whole or in part, or shall be paid by Orkin in whole or
in part to Redd, pursuant to the further provisions of this paragraph.
Redd represents and warrants that, as of [***], the monthly
recurring pest control revenue attributable to the customers serviced by its
[***] and [***] branches, and by [***] and [***] in its [***] branch, is equal
to or greater than [***]. For purposes hereof, [***] is the "Base Revenue". Redd
further represents and warrants that those accounts listed on Attachment 1
hereto are all of the accounts serviced by its [***] and [***] branches, and
2
<PAGE>
[***] - CONFIDENTIAL TREATMENT REQUESTED
by [***] and [***] in its [***] branch, which generate recurring pest control
revenue. The accounts listed on Attachment 1 are the "Target Revenue Accounts"
for purposes hereof.
The parties hereto agree that "Target Revenue",for purposes hereof,
shall be equal to [***] of the Base Revenue, or [***].
As soon as practicable after [***], Orkin shall determine
the monthly recurring pest control revenue attributable to the Target Revenue
Accounts for the month of [***] (the "True Up Revenue"). If the True Up
Revenue is equal to or greater than the Target Revenue, then Orkin shall
promptly deliver the [***], plus simple interest thereon from the Closing Date
until the date of payment at an interest rate of [***], to Redd. If the True Up
Revenue is less than the Target Revenue (the amount being the "Shortfall"), then
Orkin shall be entitled to retain that portion of the Revenue Holdback which
shall be equal to the [***] (ie, the [***] multiplied by [***]), multiplied by
[***] (the "Orkin Holdback Retention"). If the Orkin Holdback Retention is less
than the [***], then Orkin shall promptly deliver the [***], less the Orkin
Holdback Retention, plus simple interest thereon from the Closing Date until the
date of payment at an interest rate of [***] to Redd.
For example, if Orkin determined that the True Up Revenue is
[***], then the [***] will be [***]. If the Shortfall is [***], then the Orkin
Holdback Retention will be [***]. Orkin shall be entitled to retain [***] of the
[***], and shall be required to deliver [***], plus simple interest thereon from
the Closing Date until the date of payment at an interest rate of [***], to
Redd, promptly after Orkin has determined the True Up Revenue.
Orkin acknowledges that, subject to the forgoing provisions, to its
knowledge, there are no additional issues, conditions or developments with
respect to Redd's revenues which Orkin would contend as having a material
adverse effect or change upon the Business so as to give Orkin a right to
terminate the Agreement pursuant to the provisions of Section 6.01 and/or 10.07
thereof, or which Orkin would claim to be a breach of Redd's representations and
warranties set forth in the fourth sentence of Section 3.05, Section 3.11, or
Section 6.01 of the Agreement.
6. Redd and Richard Redd shall deliver an indemnity agreement, in form
and substance reasonably satisfactory to Orkin, which shall set forth Redd's and
Richard Redd's acknowledgement and agreement that Orkin shall not assume and
shall be indemnified against any obligations due Richard Redd from Redd. Orkin
acknowledges that the delivery of such an instrument shall satisfy the
conditions precedent to the Closing set forth in Section 6.05 of the Agreement.
7. The parties hereto acknowledge and agree that the Days Off Accruals,
for purposes of determining the adjustment to the Purchase Price as set forth in
Section 2.03 of the Agreement, shall not include accrued but unused vacation
days for Redd employees, and that therefore such obligation is not an Assumed
Liability. Redd covenants and agrees to pay its
3
<PAGE>
employees an amount necessary to
satisfy its vacation pay accrual with respect to its employees, and to obtain
documentation acknowledging that they have no carryover vacation pay accruals
upon the commencement of their employment with Orkin.
8. The Agreement, as amended by this Amendment, contains the entire
agreement and understanding between the parties hereto with respect to the
subject matters thereof, and no amendment or modification thereto may be made
except in writing signed by all parties hereto. This Amendment shall be
construed in accordance with the internal laws of the State of Mississippi
applicable to agreements made and to be performed entirely within such state,
without regard to the conflicts of law principles of such state. Any claim for
indemnification for a breach of a representation or warranty as set forth in
this Amendment shall be governed by the provisions of Article VIII of the
Agreement, and any dispute between the parties with respect to this Amendment
shall be settled in the manner set forth in Section 10.09(b) of the Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment as of the date
first set forth above.
"ORKIN"
ORKIN EXTERMINATING COMPANY, INC.
By:_____________________________________
Title:__________________________________
"REDD"
REDD PEST CONTROL COMPANY, INC.
By:_____________________________________
Title:____________________________________
"RICHARD REDD"
----------------------------------------
Richard L. Redd
4
<PAGE>
Attachment 1
Target Revenue Accounts
5
ROLLINS, INC.
1994 EMPLOYEE STOCK INCENTIVE PLAN
SECTION 1. Purpose; Definitions.
The purpose of the Rollins, Inc. 1994 Employee Stock Incentive Plan
(the "Plan") is to enable Rollins, Inc. (the "Company") to attract, retain and
reward directors and key employees of the Company and its Subsidiaries and
Affiliates, and strengthen the mutuality of interests between such persons and
the Company's shareholders, by offering such persons performance-based stock
incentives and/or other equity interests or equity-based incentives in the
Company, as well as performance-based incentives payable in cash.
For purposes of this Plan, the following terms shall be defined as set
forth below:
(a) "Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board as a participating
employer under this Plan, provided that the Company directly or
indirectly owns at least 20% of the combined voting power of all
classes of stock of such entity or at least 50% of the ownership
interests in such entity.
(b) "Board" means the Board of Directors of the Company.
(c) "Book Value" means, at any given date, (i) the consolidated
stockholders' equity in the Company and its Subsidiaries, as shown on
the Company's consolidated balance sheet as of the end of the
immediately preceding fiscal year, subject to such adjustments as the
Committee shall in good faith specify at or after grant, divided by
(ii) the number of shares of Outstanding Stock as of such year-end date
(as adjusted by the Committee for subsequent events).
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(e) "Committee" means the Committee referred to in Section 2 of this
Plan. If at any time no Committee shall be in office, then the
functions of the Committee specified in this Plan may be exercised by
the Board or the Compensation Committee of the Board, as set forth in
Section 2 hereof.
(f) "Company" means Rollins, Inc., a corporation organized under the
laws of the State of Delaware, or any successor corporation.
(g) "Disability" means disability as determined under procedures
established by the Committee for purposes of this Plan and shall in all
events be consistent with the definition of "disabled" provided in
Sections 422(c)(6) and 22(e)(3) of the Code.
<PAGE>
-18-
(h) "Disinterested Person" shall have the meaning set forth in Rule
16b-3 as promulgated by the Securities and Exchange Commission
("Commission")under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or any successor definition adopted by the
Commission.
(i) "Early Retirement" means retirement with the express written
consent of the Committee (given for purposes of this Plan only at or
before the time of such retirement) from active employment with the
Company and/or any Subsidiary or Affiliate or pursuant to the early
retirement provisions of the applicable pension plan of such entity.
(j) "Fair Market Value" means, as of any given date, unless otherwise
determined by the Committee in good faith:
(i) if the Stock is listed on an established stock
exchange or exchanges, or traded on the NASDAQ National Market
System ("NASDAQ/NMS") the highest closing price of the Stock
as listed thereon on the applicable day, or if no sale of
Stock has been made on any exchange or on NASDAQ/NMS on that
date, on the next preceding day on which there was a sale of
Stock;
(ii) if the Stock is not listed on an established
stock exchange or NASDAQ/NMS but is instead traded
over-the-counter, the mean of the dealer "bid" and "ask"
prices of the Stock in the over-the-counter market on the
applicable day, as reported by the National Association of
Securities Dealers, Inc.;
(iii) if the Stock is not listed on any exchange or
traded over-the-counter, the value determined in good faith by
the Committee.
(k) "Incentive Stock Option" means any Stock Option designated as an
"Incentive Stock Option" within the meaning of Section 422 of the Code.
(l) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(m) "NormalRetirement" means retirement from active employment with the
Company and/or any Subsidiary or Affiliate on or after age 65.
(n) "Other Stock-Based Award" means an award under Section 7 below that
is valued in whole or in part by reference to, or is otherwise based
on, Stock.
(o) "Outstanding Stock" shall include all outstanding shares of Common
Stock, $1.00 par value, of the Company as well as the number of shares
of Common Stock into which then outstanding shares of capital stock of
the Company, of whatever
2
<PAGE>
class, are convertible as of the year-end immediately preceding the
date of calculation thereof (as adjusted by the Committee for certain
events).
(p) "Performance-Accelerated Restricted Stock" means Restricted Stock
which is subject to restrictions for a stated period of time based on
continued employment, with the opportunity for the restriction period
to be shortened based on the achievement of predetermined performance
goals.
(q) "Performance Stock" means Stock awarded under Section 7 below at
the end of a specified performance period, the amount of which is
determined by multiplying a performance factor times either (i) the
Fair Market Value of the Stock on the last day of the performance
period, or (ii) the difference between the Fair Market Value of the
Stock on the first and last days of the performance period; provided,
however, that at the discretion of the Committee, participants may
receive the value of Performance Stock in cash, as determined by
reference to the Fair Market Value on the date the amount of the award
is determined.
(r) "Performance Unit" means an award pursuant to Section 7 with a
starting value and an associated performance period, such that at the
end of the performance period participants receive an amount, payable
in either cash or Stock, at the discretion of the Committee, equal to
(i) the number of units earned based on a predetermined performance
schedule times the starting unit value, or (ii) the number of units
granted times the ending unit value based on a predetermined
performance schedule.
(s) "Plan" means this Rollins, Inc. 1994 Employee Stock Incentive Plan,
as hereafter amended from time to time.
(t) "Premium Stock Option" means any Stock Option with an exercise
price in excess of the Fair Market Value, as computed on the date of
grant of the Stock Option.
(u) "Retirement" means Normal or Early Retirement.
(v) "Restricted Stock" means Stock awarded under Section 7 below which
is (i) subject to restrictions for a stated period of time based on
continued employment, (ii) subject to restrictions which will only
lapse upon the achievement of predetermined performance goals, or (iii)
subject to a combination of the restrictions described in (i) and (ii)
above.
(w) "Stock" means the Common Stock, $1.00 par value per share, of the
Company.
(x) "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 below to receive an amount in either cash or
stock, equal to the difference between the Fair Market Value of the
Stock on the date of exercise and the Fair Market Value of the Stock on
the date of grant of the right.
3
<PAGE>
(y) "Stock Option" or "Option" means any option to purchase shares of
Stock granted pursuant to Section 5 below.
(z) "Subsidiary" means any corporation (other than the Company)in an
unbroken chain of corporations beginning with the Company if each of
the corporations (other than the last corporation in the unbroken
chain) owns stock possessing 100% or more of the total combined voting
power of all classes of stock in one of the other corporations in the
chain.
SECTION 2. Administration.
This Plan shall be administered by a Committee of not less than two
Disinterested Persons, who shall be members of the Board and who shall serve at
the pleasure of the Board, such Committee to be designated by the Board. The
functions of the Committee specified in this Plan may be exercised by the Board
or by the Compensation Committee of the Board, however, if and to the extent
that no Committee meeting the requirements of this Section 2 has been designated
by the Board as having the authority to so administer this Plan and if a
resolution to such effect is adopted by the Board after due consideration of the
impact of such resolution upon the status of this Plan under Rule 16b-3
promulgated pursuant to the Exchange Act ("Rule 16b-3").
The Committee shall have full authority to grant, pursuant to the terms
of this Plan, to directors, officers and other key employees eligible under
Section 4: (i) Stock Options, including, without limitation, Incentive Stock
Options, Non-Qualified Stock Options and Premium Stock Options, (ii) Stock
Appreciation Rights and/or (iii) Other Stock-Based Awards, including, without
limitation, Restricted Stock, Performance-Accelerated Restricted Stock,
Performance Stock and Performance Units.
In particular, the Committee shall have the authority:
(i) subject to Section 4 hereof, to select the directors,
officers and other key employees of the Company or its Subsidiaries and
Affiliates to whom Stock Options, Stock Appreciation Rights and/or
Other Stock-Based Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Stock Options,
Stock Appreciation Rights and/or Other Stock-Based Awards, or any
combination thereof, are to be granted hereunder to one or more
eligible employees;
(iii) to determine the number of shares of Stock to be covered
by each such award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent
with the terms of this Plan, of any award granted hereunder (including,
but not limited to, the share price and any restriction or limitation,
or any vesting, acceleration or waiver of forfeiture
4
<PAGE>
restrictions regarding any Stock Option or other award and/or the
shares of Stock relating thereto, based in each case on such factors as
the Committee shall determine, in its sole discretion);
(v) to determine whether and under what circumstances Stock
Options, Stock Appreciation Rights, Performance Stock and Performance
Units may be settled in cash;
(vi) to determine whether, to what extent and under what
circumstances Stock Option grants and/or other awards under this Plan
and/or other cash awards made by the Company are to be made, and
operate, on a tandem basis vis-a-vis other awards under this Plan
and/or cash awards made outside of this Plan, or on an additive basis;
and
(vii) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining
the amount (if any) of any deemed earnings on any deferred amount
during any deferral period).
The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing this Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of this Plan and any
award issued under this Plan (and any agreements relating thereto); and to
otherwise supervise the administration of this Plan.
Except as otherwise specifically provided herein, all decisions made by
the Committee pursuant to the provisions of this Plan shall be made in the
Committee's sole discretion and shall be final and binding on all persons,
including the Company and all Plan participants.
SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
distribution under this Plan shall be 1,200,000 shares. Such shares may consist,
in whole or in part, of authorized and unissued shares or treasury shares.
Subject to section 6(b)(iv) below, if any shares of Stock that have
been optioned hereunder cease to be subject to a Stock Option, or if any such
shares of Stock that are subject to any Other Stock-Based Award granted
hereunder are forfeited or any such award otherwise terminates without a payment
being made to the participant in the form of Stock, such shares shall again be
available for distribution in connection with future awards under this Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividends, stock split or other changes in corporate
structure affecting the Stock, and subject to Sections 5(k) and 5(m), such
substitution or adjustment shall be made in the aggregate number of shares
reserved for issuance under this Plan, in the number and option price of shares
subject to outstanding Options granted under this Plan and in the number of
shares subject to other outstanding awards granted under this Plan as may be
determined to be appropriate by the
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Committee, in its sole discretion, provided that the number of shares subject to
any award shall always be a whole number. Such adjusted option price shall be
used to determine the amount payable by the Company upon the exercise of any
Stock Appreciation Right associated with any Stock Option.
SECTION 4. Eligibility.
Directors, officers and other key employees of the Company or its
Subsidiaries and Affiliates (but excluding members of the Committee if a
Committee meeting the requirements of Section 2 is designated by the Board) who
are responsible for or contribute to the management, growth and/or profitability
of the business of the Company and/or its Subsidiaries and Affiliates are
eligible to be granted awards under this Plan. Notwithstanding the foregoing,
Incentive Stock Options may only be granted to employees of the Company and any
of its Subsidiaries or Affiliates that are a "subsidiary corporation" (within
the meaning of Section 424(f) of the Code). Furthermore, no director who is not
also an employee of the Company shall be eligible to receive Incentive Stock
Options.
SECTION 5. Stock Options.
Stock Options may be granted alone, in addition to or in tandem with
other awards granted under this Plan and/or cash awards made outside of this
Plan. Any Stock Option granted under this Plan shall be in such form as the
Committee may from time to time approve.
Stock Options granted under this Plan may be of two types: (i)
Incentive Stock Options, and (ii) Non-Qualified Stock Options. Incentive Stock
Options and Non-Qualified Stock Options may be issued as Premium Stock Options
at the discretion of the Board.
Subject to the restrictions contained in Section 4 hereof concerning
the grant of Incentive Stock Options, the Committee shall have the authority to
grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or
both types of Stock Options (in each case with or without Stock Appreciation
Rights). To the extent that the Fair Market Value of the shares with respect to
which Incentive Stock Options first become exercisable by an optionee during any
calendar year (under the Plan and any other plans granting Incentive Stock
Options which are established by the Company or its Subsidiaries) exceeds
$100,000, such Options shall be treated as Non-Qualified Stock Options.
Options granted under this Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Committee shall deem desirable:
(a) Option Price. The option price per share of Stock
purchasable under a Stock Option shall be determined by the Committee
at the time of grant but shall be (i) not less than 100% (or, in the
case of an employee who owns stock possessing more than 10 percent of
the total combined voting power of all classes of capital stock of the
Company or of any of its subsidiary or parent corporations, not less
than 110%) of the
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Fair Market Value of the Stock at grant, in the case of Incentive Stock
Options, and (ii) not less than 90% of the Fair Market Value of the
Stock at grant, in the case of Non-Qualified Stock Options.
(b) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Stock Option shall be exercised more than ten
years (or, in the case of an employee who owns stock possessing more
than 10 percent of the total combined voting power of all classes of
stock of the Company or any of its subsidiary or parent corporations,
more than five years) after the date the Option is granted.
(c) Exercisability. Stock Options shall be exercised at such
time or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant; provided, however, that,
except as provided in Section 5(f), 5(g), or 5(k), unless otherwise
determined by the Committee at or after grant, no Stock Option shall be
exercisable until at least one year after the granting of the Option.
If the Committee provides, in its sole discretion, that any Stock
Option is exercisable only in installments, the Committee may waive
such installment exercise provisions at any time at or after grant in
whole or in part, based on such factors as the Committee shall
determine, in its sole discretion.
(d) Method of Exercise. Subject to whatever installment
exercise provisions or other restrictions apply under Section 5(c),
Stock Options may be exercised in whole or in part at any time during
the option period, by giving written notice of exercise to the Company
specifying the number of shares to be purchased; provided, however,
that if exercised in part, a Stock Option may not be exercised for
fewer than 100 shares, unless the remaining balance of the Stock Option
is less than 100 shares, in which case the Stock Option may be
exercised for the remaining balance.
Such notice shall be accompanied by payment in full of the
purchase price, either by cash or such instrument as the Committee may
accept. Payment in full or in part may also be made in the form of
unrestricted Stock already owned by the optionee for a period of at
least six months, based, in each case, on the Fair Market Value of the
Stock on the date the option is exercised, unless it shall be
determined by the Committee, at or after grant, in its sole discretion,
that unrestricted Stock is not a permissible form of payment with
respect to any Stock Option or Options.
No shares of Stock shall be issued until full payment therefor
has been made. An optionee shall generally have the rights to dividends
or other rights of a shareholder with respect to shares subject to the
Stock Option when the optionee has given written notice of exercise,
has paid in full for such shares, and, if requested, has given the
representation described in Section 10(a).
(e) Non-Transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of
descent and distribution, and all Stock Options shall be exercisable,
during the optionee's lifetime, only by the optionee.
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(f) Termination by Death. Subject to Section 5(k), if an
optionee's employment by the Company and/or any Subsidiary or Affiliate
terminates by reason of death, any Stock Option held by such optionee
may thereafter be exercised to the extent such option was exercisable
at the time of death or on such accelerated basis as the Committee may
determine at or after grant (or as may be determined in accordance with
procedures established by the Committee), by the legal representative
of the estate or by the legatee of the optionee under the will of the
optionee, for a period of six months (or such other period as the
Committee may specify at grant) from the date of such death or until
the expiration of the stated term of such Stock Option, whichever
period is the shorter.
(g) Termination by Reason of Disability. Subject to Section
5(k), if an optionee's employment by the Company and/or any Subsidiary
or Affiliate terminates by reason of Disability, any Stock Option held
by such optionee may thereafter be exercised by the optionee or his/her
guardian, to the extent it was exercisable at the time of termination
or on such accelerated basis as the Committee may determine at or after
grant (or as may be determined in accordance with procedures
established by the Committee), for a period of one year (or such other
period as the Committee may specify at grant) from the date of such
termination of employment or until the expiration of the stated term of
such Stock Option, whichever period is the shorter; provided, however,
that, if the optionee dies within such one-year period (or such other
period as the Committee may specify at grant), any unexercised Stock
Option held by such optionee shall thereafter be exercisable only
pursuant to Section 5(f). In the event of termination of employment by
Disability, if a Stock Option theretofore designated as an Incentive
Stock Option is exercised more than one year after such termination of
employment, such Stock Option shall be treated as a Non-Qualified Stock
Option.
(h) Termination by Reason of Retirement. Subject to Section
5(k), if an optionee's employment by the Company and/or any Subsidiary
or Affiliate terminates by reason of Normal or Early Retirement, any
Stock Option held by such optionee may be exercised by the optionee, to
the extent it was exercisable at the time of such Retirement, for a
period of three months, less one day, (or such other period as the
Committee may specify at grant) from the date of such termination, or
the expiration of the stated term of such Stock Option, whichever
period is the shorter; provided, however, that if the optionee dies
within such three-month, less one day, period (or such other period as
the Committee may specify at grant), any unexercised Stock Option held
by such optionee shall thereafter be exercisable only pursuant to
Section 5(f). In the event of termination of employment by Retirement,
if a Stock Option theretofore designated as an Incentive Stock Option
is exercised more than three (3) months after such termination of
employment, such Stock Option shall be treated as a Non-Qualified Stock
Option.
(i) Other Termination. Unless otherwise determined by the
Committee (or pursuant to procedures established by the Committee) at
or after grant, if an optionee's employment by the Company and/or any
Subsidiary or Affiliate terminates for any reason other than death,
Disability or Normal or Early Retirement, as in the case of voluntary
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<PAGE>
resignation of employment by the optionee, the Stock Option shall
thereupon terminate and shall be immediately forfeited, regardless of
its vesting status.
(j) Buyout Provisions. The Committee may at any time offer to
buy out for a payment in cash or Stock a Stock Option previously
granted, based on such terms and conditions as the Committee shall
establish and communicate to the optionee at the time that such offer
is made.
(k) Certain Recapitalizations. In general, if the Company is
merged into or consolidated with another corporation under
circumstances in which the Company is not the surviving corporation, or
if the Company is liquidated, or sells or otherwise disposes of
substantially all of its assets to another corporation (any such
merger, consolidation, etc. being hereinafter referred to as a
"Non-Acquiring Transaction") while unexercised Options are outstanding
under this Plan, after the effective date of a Non-Acquiring
Transaction each holder of an outstanding Option shall be entitled,
upon exercise of such Option, to receive such stock or other securities
as the holders of the same class of stock as those shares subject to
the Option shall be entitled to receive in such Non-Acquiring
Transaction based upon the agreed upon conversion ratio or per share
distribution. However, in the discretion of the Board of Directors,
after giving due consideration to the impact on the optionee, if any,
pursuant to Rule 16b-3, any limitations on exercisability of Options
may be waived so that all Options, from and after a date prior to the
effective date of such Non-Acquiring Transaction shall be exercisable
in full. Furthermore, in the discretion of the Board of Directors, the
right to exercise may be given to each holder of an Option during a
30-day period preceding the effective date of such Non-Acquiring
Transaction. Any outstanding Options not exercised within such 30-day
period may be cancelled by the Board of Directors as of the effective
date of any such Non-Acquiring Transaction. To the extent that the
foregoing adjustments relate to stock or securities of the Company,
such adjustments shall be made by the Board of Directors, whose
determination in that respect shall be final, binding and conclusive.
The Committee need not treat all optionees and/or Options in the same
manner.
(l) Subdivision or Consolidation. Except as set forth in this
Plan, optionees shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any
stock dividend or any other increase or decrease in the number of
shares of stock of any class or by reason of any dissolution,
liquidation, merger, or consolidation or spinoff of stock of another
corporation, and no issue by the Company of shares of stock of any
class shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares subject to the Stock
Option. The grant of any Stock Option pursuant to this Plan shall not
affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or to transfer all or any part of its
business or assets.
(m) Fractional Shares. If any adjustment referred to herein
shall result in a fractional share for any optionee under any Stock
Option hereunder, such fraction shall
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<PAGE>
be completely disregarded and the optionee shall only be entitled to
the whole number of shares resulting from such adjustment.
(n) Compliance with Section 422. Unless otherwise determined
by the Committee with the consent of the optionee, any Option granted
hereunder and designated as an Incentive Stock Option shall comply with
all relevant provisions of Section 422 of the Code; provided, however,
that to the extent that any such Option which is designated as an
Incentive Stock Option hereunder fails for any reason to comply with
the provisions of Section 422 it shall be treated as a Non-Qualified
Stock Option.
SECTION 6. Stock Appreciation Rights.
(a) Grant and Exercise. Stock Appreciation Rights may be
granted alone, in addition to or in tandem with all or part of any
other award granted under this Plan. In the case of a Non-Qualified
Stock Option, such tandem rights may be granted either at or after the
time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such tandem rights may be granted only at the time of the
grant of such Stock Option.
A Stock Appreciation Right or applicable portion thereof
granted in tandem with a given Stock Option shall terminate and no
longer be exercisable upon the termination or exercise of the related
Stock Option, subject to such provisions as the Committee may specify
at grant where a Stock Appreciation Right is granted with respect to
less than the full number of shares covered by a related Stock Option.
A Stock Appreciation Right may be exercised by an optionee,
subject to Section 6(b), in accordance with the procedures established
by the Committee for such purpose. Upon such exercise, the optionee
shall be entitled to receive an amount determined in the manner
prescribed in Section 6(b). Stock Options which were issued in tandem
with exercised Stock Appreciation Rights shall no longer be exercisable
to the extent that the related Stock Appreciation Rights have been
exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with the
provisions of this Plan, as shall be determined from time to time by
the Committee, including the following:
(i)Except as set forth below, the term of each Stock
Appreciation Right shall be fixed by the Committee, but no
such Stock Appreciation Right shall be exercised more than ten
years after the date it is granted. Stock Appreciation Rights
granted in tandem with Stock Options shall be exercisable only
at such time or times and to the extent that the Stock Options
to which they relate shall be exercisable in accordance with
the provisions of Section 5 and this Section 6 whenever the
Fair Market Value of the Stock exceeds the option price per
share specified in the related Stock Option. The foregoing
notwithstanding, no Stock Appreciation Right granted hereunder
to a Plan participant who is subject to Section 16(b) of the
Exchange Act shall be exercisable during the first six months
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<PAGE>
of its term, except that, with the exception of Stock
Appreciation Rights granted in tandem with Incentive Stock
Options, in the discretion of the Committee, after giving due
consideration to the impact on the participant, if any,
pursuant to Rule 16b-3, this special limitation may be waived
in the event of death or Disability of the optionee prior to
the expiration of the six-month period. The exercise of Stock
Appreciation Rights held by participants who are subject to
Section 16(b) of the Exchange Act shall comply with Rule
16b-3(e)(3) thereunder, or any successor provision, to the
extent applicable.
(ii)Stock Appreciation Rights shall be exercised at
such time or times and subject to such terms and conditions as
shall be determined by the Committee at or after grant;
provided, however, that, except as provided in Section 5(f),
5(g), or 5(k), as incorporated herein by Section 6(b)(vi)
below, unless otherwise determined by the Committee at or
after grant, no Stock Appreciation Right shall be exercisable
until at least one year after its date of grant. If the
Committee provides, in its sole discretion, that any Stock
Appreciation Right is exercisable only in installments, the
Committee may waive such installment exercise provisions at
any time at or after grant in whole or in part, based on such
factors as the Committee shall determine, in its sole
discretion. Upon the exercise of a Stock Appreciation Right, a
participant shall be entitled to receive an amount in cash
and/or shares of Stock equal in value to the excess of Fair
Market Value of the Stock on the date of exercise over the
Fair Market Value of the Stock on the date of grant multiplied
by the number of Stock Appreciation Rights exercised, with the
Committee having the right to determine the form of payment.
Subject to whatever installment exercise provisions or other
restrictions apply hereunder, Stock Appreciation Rights may be
exercised in whole or in part at any time during the term
thereof by giving written notice of exercise to the Company
specifying the number of rights to be exercised.
(iii) No Stock Appreciation Right shall be transferable by
a participant otherwise than by will or by the laws of descent
and distribution, and all Stock Appreciation Rights shall be
exercisable, during the participant's lifetime, only by the
participant.
(iv)Upon the exercise of a tandem Stock Appreciation
Right, the Stock Option or part thereof to which such Stock
Appreciation Right is related shall be deemed to have been
exercised for the purpose of the limitation set forth in
Section 3 of this Plan on the number of shares of Stock to be
issued under this Plan, but only to the extent of the number
of shares issued under the Stock Appreciation Right at the
time of exercise based on the value of the Stock Appreciation
Right at such time.
(v)Stock Appreciation Rights issued in tandem with
Incentive Stock Options shall contain such terms and
conditions as the Committee may determine to be necessary for
the qualification of the Incentive Stock Options.
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(vi)Sections 5(f)-(m) hereof shall apply equally to
all Stock Appreciation Rights granted pursuant to this Plan,
as if each reference therein to a "Stock Option" was instead a
reference to a "Stock Appreciation Right."
SECTION 7. Other Stock-Based Awards.
(a) Administration. Other awards of Stock and other awards
that are valued in whole or in part by reference to, or are otherwise
based on, Stock ("Other Stock-Based Awards"), including, without
limitation, Restricted Stock, Performance-Accelerated Restricted Stock,
Performance Stock, Performance Units and Stock awards or options valued
by reference to Book Value or Subsidiary performance, may be granted
either alone or in addition to or in tandem with Stock Options or Stock
Appreciation Rights granted under this Plan and/or cash awards made
outside of this Plan.
Subject to the provisions of this Plan, the Committee shall
have authority to determine the persons to whom and the time or times
at which such awards shall be made, the number of shares of Stock to be
awarded pursuant to such awards, and all other conditions of the
awards. The Committee may also provide for the grant of Stock upon the
completion of a specified performance period or event.
The provisions of Other Stock-Based Awards need not be the
same with respect to each recipient.
(b) Terms and Conditions. Other Stock-Based Awards made
pursuant to this Section 7 shall be subject to the following terms and
conditions:
(i) Subject to the provisions of this Plan and the
award agreement referred to in Section 7(b)(v) below, Other
Stock-Based Awards and shares subject to such awards made
under this Section 7 may not be sold, assigned, transferred,
pledged or otherwise encumbered, in the case of shares of
Stock, prior to the date on which the shares are issued, or,
if later, the date on which any applicable restriction,
performance or deferral period lapses, and in all other cases,
not at all.
(ii) Subject to the provisions of this Plan and the
award agreement and unless otherwise determined by the
Committee at grant, the recipient of an award under this
Section 7 shall be entitled to receive, currently or on a
deferred basis, as determined by the Committee, interest or
dividends or interest or dividend equivalents with respect to
the number of shares covered by the award, as determined at
the time of the award by the Committee, in its sole
discretion, and the Committee may provide that such amounts
(if any) shall be deemed to have been reinvested in additional
Stock or otherwise reinvested.
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(iii) Any award under this Section 7 and any Stock
covered by any such award shall vest or be forfeited to the
extent so provided in the award agreement, as determined by
the Committee, in its sole discretion.
(iv) In the event of the participant's Retirement,
Disability or death, and in other instances, the Committee
may, in its sole discretion, waive in whole or in part any or
all of the remaining limitations, performance requirements or
restrictions imposed (if any) with respect to any or all of an
award under this Section 7 and/or accelerate the payment of
cash or Stock pursuant to any such award.
(v) Each award under this Section 7 shall be
confirmed by, and subject to the terms of, an agreement or
other instrument executed by the Company and by the
participant.
(vi) Stock (including securities convertible into
Stock) issued on a bonus basis under this Section 7 may be
issued for no cash consideration.
(vii) Other Stock-Based Awards, to the extent they
constitute derivative securities for purposes of Section 16 of
the Exchange Act, and are owned by persons who are subject to
Section 16(b) of the Exchange Act, shall be transferable only
when and to the extent a Stock Option would be transferable
under Section 5(e) of this Plan. The Committee may also take
into account other provisions contained in the Exchange Act or
which are promulgated pursuant thereto.
(viii) Unless otherwise determined by the Committee at
or after grant, if a participant's employment by the Company
and/or any Subsidiary or Affiliate terminates by reason of
death or Disability, a pro rata portion of the restrictions
pertaining to continued employment on any Restricted Stock
will lapse, based on the number of full months the participant
was employed during the restriction period divided by the
total number of months in the restriction period. All such pro
rata awards will be determined and distributed at such time as
awards are paid to other Plan participants.
(ix) Unless otherwise determined by the Committee at
or after grant, if a participant's employment by the Company
and/or any Subsidiary or Affiliate terminates by reason of
Normal Retirement, all of the restrictions pertaining to
continued employment on any Restricted Stock will lapse. Any
such award will be determined and distributed at such time as
awards are paid to other Plan participants.
(x) Unless otherwise determined by the Committee at
or after grant, if a participant's employment by the Company
and/or any Subsidiary or Affiliate terminates by reason of
death or Disability, the estate of the participant or the
participant, as applicable, will receive a pro rata portion of
the payment or Stock
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the participant would have received for Performance Stock or
Performance Units, based on the number of full months in the
performance period prior to the participants's death or
Disability, divided by the total number of months in the
performance period. All such pro rata payments will be
determined and distributed at such time as awards are paid to
other Plan participants.
(xi) Unless otherwise determined by the Committee at
or after grant, if a participant's employment by the Company
and/or any Subsidiary or Affiliate terminates by reason of
Early Retirement and if such Early Retirement occurs before
age 65 and before completion of 10 years of service with the
Company and/or a Subsidiary or Affiliate subsequent to the
date of grant of Restricted Stock or Performance-Accelerated
Restricted Stock, all such Restricted Stock and
Performance-Accelerated Restricted Stock will be forfeited by
the participant. In addition, in the event of Normal or Early
Retirement before the end of the performance period for
Performance Stock or Performance Units, no awards will be paid
unless specifically approved by the Committee on a
case-by-case basis.
(xii) Unless otherwise determined by the
Committee (or pursuant to procedures established by the
Committee) at or after grant, if a participant's employment by
the Company and/or any Subsidiary or Affiliate terminates for
any reason other than death, Disability or Normal or Early
Retirement, as in the case of voluntary resignation of
employment by the participant, all Other Stock-Based Awards
shall be immediately forfeited.
(xiii) The Committee may at any time offer to buy
out for a payment in cash or Stock an Other Stock-Based Award
previously granted, based on such terms and conditions as the
Committee shall establish and communicate to the participant
at the time that such offer is made.
(xiv) Except as set forth in this Plan,
participants shall have no rights by reason of any subdivision
or consolidation of shares of stock of any class or the
payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class or by
reason of any dissolution, liquidation, merger, or
consolidation or spinoff of stock of another corporation, and
no issue by the Company of shares of stock of any class shall
affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to any Other
Stock-Based Award. The grant of any Other Stock-Based Award
pursuant to this Plan shall not affect in any way the right or
power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve,
liquidate or sell, or to transfer all or any part of its
business or assets.
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SECTION 8. Amendments and Termination.
The Board may amend, alter, or discontinue this Plan, but, except as
otherwise provided herein, no amendment, alteration, or discontinuation shall be
made which would impair the rights of an optionee or participant under a Stock
Option, Stock Appreciation Right or Other Stock-Based Award theretofore granted,
without the optionee's or participant's consent, or which, without the approval
of the Company's stockholders, would:
(a) materially increase the benefits accruing to participants
under this Plan;
(b) materially increase the number of securities which may be
issued under this Plan; or
(c) materially modify the requirements as to eligibility for
participation in this Plan.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices.
Subject to the above provisions, the Board shall have broad authority
to amend this Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.
SECTION 9. Unfunded Status of Plan.
This Plan is intended to constitute an "unfunded" plan for incentive
and deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
this Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder; provided, however, that, unless the Committee otherwise determines
with the consent of the affected participant, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of this Plan.
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SECTION 10. General Provisions.
(a) The Company shall not be obligated to sell or issue any
shares pursuant to any Option unless the shares with respect to which
the Option is being exercised are at the time effectively registered or
exempt from registration under the Securities Act of 1933, as amended
(the "1933 Act"). The Company shall have no obligation to register
pursuant to the 1933 Act any shares of Stock issued pursuant to this
Plan. The Committee may require each person purchasing shares pursuant
to a Stock Option or other award under this Plan to represent to and
agree with the Company in writing that the optionee or participant is
acquiring the shares for investment and without a view to distribution
thereof. The certificates for such shares may include any legend which
the Committee deems appropriate to reflect any restrictions on
transfer.
All certificates for shares of Stock or other securities
delivered under this Plan shall be subject to such conditions,
stop-transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the
Stock is then listed, and any applicable federal or state securities
law, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required, and such
arrangements may be either generally applicable or applicable only in
specific cases.
(c) The adoption of this Plan shall not confer upon any
employee of the Company or of any Subsidiary or Affiliate any right to
continued employment with the Company or a Subsidiary or Affiliate, as
the case may be, nor shall it interfere in any way with the right of
the Company or a Subsidiary or Affiliate to terminate the employment of
any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includable in the gross income of the participant for federal income
tax purposes with respect to the exercise of any Option or Stock
Appreciation Right or any award under this Plan, the participant shall
pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any federal, state, or local taxes of any
kind required by law to be withheld with respect to such amount. The
obligations of the Company under this Plan shall be conditional on such
payment or arrangements, and the Company and its Subsidiaries or
Affiliates shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional types of Plan awards at the time of any
dividend payment shall only be
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permissible if sufficient shares of Stock are available under Section 3
for such reinvestment, taking into account other Plan awards then
outstanding.
(f) This Plan and all awards made and actions taken hereunder
shall be governed by and construed in accordance with the Delaware
General Corporation Law, to the extent applicable, and in accordance
with the laws of the State of Georgia in all other respects.
(g) The value of awards made pursuant to this Plan shall not
be included as part of the definition of "cash compensation" in
connection with any other benefit offered by the Company.
SECTION 11. Effective Date of Plan.
This Plan shall be effective as of January 25, 1994.
SECTION 12. Term of Plan.
No Stock Option, Stock Appreciation Right or Other Stock-Based Award
shall be granted pursuant to this Plan on or after the tenth anniversary of the
effective date of this Plan, but awards granted prior to such tenth anniversary
may extend beyond that date.
17
<PAGE>
ROLLINS, INC.
1994 EMPLOYEE STOCK INCENTIVE PLAN
January 25, 1994
18
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1................................................. Purpose; Definitions
..............................................................................1
SECTION 2........................................................Administration
..............................................................................4
SECTION 3.................................................Stock Subject to Plan
..............................................................................5
SECTION 4...........................................................Eligibility
..............................................................................6
SECTION 5.........................................................Stock Options
..............................................................................6
(a).............................................................Option Price
...........................................................................6
(b)..............................................................Option Term
...........................................................................7
(c)...........................................................Exercisability
...........................................................................7
(d).......................................................Method of Exercise
...........................................................................7
(e)...........................................Non-Transferability of Options
...........................................................................7
(f).....................................................Termination by Death
...........................................................................8
(g)......................................Termination by Reason of Disability
...........................................................................8
(h)......................................Termination by Reason of Retirement
...........................................................................8
(i)........................................................Other Termination
...........................................................................8
(j)........................................................Buyout Provisions
...........................................................................9
(k)................................................Certain Recapitalizations
...........................................................................9
(l).............................................Subdivision or Consolidation
...........................................................................9
(m)........................................................Fractional Shares
...........................................................................9
(n)..................................................Compliance with Section
..........................................................................10
SECTION 6.............................................Stock Appreciation Rights
..........................................................................10
(a).......................................................Grant and Exercise
..........................................................................10
(b).....................................................Terms and Conditions
<PAGE>
..........................................................................10
SECTION 7..............................................Other Stock-Based Awards
..........................................................................12
(a)...........................................................Administration
..........................................................................12
(b).....................................................Terms and Conditions
..........................................................................12
SECTION 8............................................Amendments and Termination
..........................................................................15
SECTION 9...............................................Unfunded Status of Plan
..........................................................................15
SECTION 10...................................................General Provisions
..........................................................................16
SECTION 11...............................................Effective Date of Plan
..........................................................................17
SECTION 12.........................................................Term of Plan
..........................................................................17
Exhibit 13
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In thousands except per share data) 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------
OPERATIONS SUMMARY
<S> <C> <C> <C> <C> <C>
Revenues $ 586,639 $ 549,136 $ 538,639 $ 532,785 $ 529,788
Income (Loss) from Continuing
Operations After Income Taxes 7,150 3,177 (104,781) 22,386 38,661
Income From Discontinued
Operations After Income Taxes - 3,410 106,278 409 616
Net Income 7,150 6,587 1,497 22,795 39,277
Earnings (Loss) Per Share
Continuing Operations .24 .10 (3.09) .63 1.08
Discontinued Operations - .11 3.13 .01 .02
---------------------------------------------------------------------------
Basic and Diluted .24 .21 .04 .64 1.10
Dividends per Share .20 .50 .60 .58 .56
FINANCIAL POSITION
Total Assets $ 312,940 $ 327,265 $ 432,680 $ 296,656 $ 306,111
Noncurrent Capital Lease Obligations 2,450 6,090 9,239 12,163 7,422
Long-Term Debt 5,328 - - - -
Stockholders' Equity 71,790 80,235 145,644 190,290 214,318
Shares Outstanding at Year-End 29,881 30,489 33,279 34,594 35,858
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rollins, Inc. is one of the nation's largest consumer services companies.
Through its wholly-owned subsidiary, Orkin Exterminating Company, Inc., the
Company provides essential pest control services and protection against termite
damage, rodents and insects to approximately 1.7 million residential and
commercial customers. Orkin serves customers in the United States, Canada and
Mexico from over 400 locations. You can learn more about Orkin by visitng our
Web site at www.orkin.com.
<PAGE>
QUARTERLY INFORMATION
ROLLINS, INC. AND SUBSIDIARIES
STOCK PRICES AND DIVIDENDS
(Rounded to the nearest 1/16)
<TABLE>
<CAPTION>
Stock Prices Dividends Stock Prices Dividends
1999 High Low Paid 1998 High Low Paid
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter $17 3/4 $14 3/4 $.05 First Quarter $21 5/8 $19 1/2 $.15
Second Quarter 17 3/8 15 1/2 .05 Second Quarter 21 1/8 19 1/2 .15
Third Quarter 17 1/8 15 5/16 .05 Third Quarter 20 7/8 16 7/8 .15
Fourth Quarter 16 3/4 14 3/4 .05 Fourth Quarter 17 7/8 15 1/4 .05
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The number of stockholders of record as of December 31, 1999 was 2,759.
<TABLE>
<CAPTION>
PROFIT AND LOSS INFORMATION
(In thousands except per share data) First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Revenues $ 129,886 $ 162,342 $ 154,102 $ 140,309
Income (Loss) from Continuing Operations 467 7,623 1,432 (2,372)
Income from Discontinued Operations - - - -
Net Income (Loss) 467 7,623 1,432 (2,372)
Earnings (Loss) per Share
Continuing Operations .02 .25 .05 (.08)
Discontinued Operations - - - -
---------------------------------------------------------------------------
Basic and Diluted .02 .25 .05 (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Revenues $ 122,965 $ 155,050 $ 144,493 $ 126,628
Income (Loss) from Continuing Operations (1,764) 6,913 880 (2,852)
Income from Discontinued Operations - - - 3,410
Net Income (Loss) (1,764) 6,913 880 558
Earnings (Loss) per Share
Continuing Operations (.05) .21 .03 (.09)
Discontinued Operations - - - .11
---------------------------------------------------------------------------
Basic and Diluted (.05) .21 .03 .02
- ------------------------------------------------------------------------------------------------------------------------------------
1997
Revenues $ 126,951 $ 154,371 $ 140,287 $ 117,030
Income (Loss) from Continuing Operations 5,095 6,219 (11,863) (104,232)
Income from Discontinued Operations 49 100 9,529 96,600
Net Income (Loss) 5,144 6,319 (2,334) (7,632)
Earnings (Loss) per Share
Continuing Operations .15 .19 (.36) (3.07)
Discontinued Operations - - .29 2.84
---------------------------------------------------------------------------
Basic and Diluted .15 .19 (.07) (.23)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Management's Discussion and Analysis
ROLLINS, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
% Change From Prior Year
Increase (Decrease)
-------------------------
(In thousands) 1999 1998 1997 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 586,639 $ 549,136 $ 538,639 6.8% 1.9%
Income (Loss) From Continuing
Operations After Income Taxes 7,150 3,177 (104,781) 125.1 103.0
Income From Discontinued
Operations After Income Taxes - 3,410 106,278 (100.0) (96.8)
Net Income 7,150 6,587 1,497 8.5 340.0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GENERAL OPERATING COMMENTS
During the year, the Company expanded its presence in the pest and termite
control industry through several strategic acquisitions. These acquisitions,
along with the Company's continued emphasis on building recurring revenue and a
further expansion of its commercial operations, led to an increase in revenues
of 6.8%, the highest annual revenue growth in six years. The financial results
for the fourth quarter 1999 represent the seventh consecutive
quarter-over-quarter improvements in both revenues and income from continuing
operations. Income from continuing operations for the year ended December 31,
1999 increased to $7.2 million, a 125.1% increase over the prior year. This
improvement is primarily the result of the success of our new selling and
treatment programs and acquisition activity.
The acquisitions of PRISM, the nation's fourth largest commercial pest
control company; Redd Pest Control Company, Inc., a premier pest control
provider in the Southeastern United States; and PCO Services, Inc. (PCO),
Canada's leading pest control company, have clearly established the Company as
the largest commercial pest control provider in North America. In addition to
strategic acquisitions, the Company and Johnson Wax Professional entered into a
joint venture, Acurid Retail Services, L.L.C., created to sell and provide pest
elimination services to customers in the retail market.
CONTINUING OPERATIONS - 1999 VERSUS 1998
Revenues from both the Company's pest and termite control operations experienced
increases during the year. Factors contributing to the Company's overall 6.8%
revenue growth were increases in customer base and average sales price.
The Company's continued efforts to provide services that best fit our
customers' needs, along with the positive impact of acquisitions, have led to an
increase in our residential and commercial pest control customer base.
The increase in termite control revenue is primarily a result of our new
service offering of directed liquid in conjunction with termite baiting.
Management believes this new treatment technique also creates the potential for
new recurring revenue as a result of the periodic monitoring of the termite
baiting stations. Termite baiting was implemented in selected markets during the
year, and is scheduled to be offered Company-wide in 2000.
Cost of Services Provided was approximately $14.1 million higher than the
prior year but improved to represent 58.2% of revenues compared to 59.6% for the
prior year. This improvement as a percentage of revenues was primarily due to
lower termite claim provisions, lower operating insurance costs and lower
material and supply costs as well as better leveraging of fixed costs due to
higher revenues.
Sales, General and Administrative expenses increased $9.1 million but
decreased as a percent of revenues to 38.1% compared to 39.0% for the prior
year. This improvement as a percentage of revenues resulted primarily from
better leveraging of our fixed costs due to higher revenues and improved
efficiencies in sales, fleet and telephone costs. These cost savings were
partially offset by additional costs related to various new service and
marketing programs throughout the Company.
Interest Income declined $5.9 million or 66.1% during the year primarily
due to a decrease in invested funds over the prior year. The decrease in
invested funds resulted primarily from the conversion of investments to cash to
fund acquisitions.
The Company's net tax provision of $4.4 million, as compared to $1.9
million in 1998, reflects increased taxable income in 1999.
New programs scheduled for 2000 include expanded customer preferred service
alternatives and the continued use of technological advances. Focus, our new
centralized computer system, should improve information flow to and from the
branches and the home office. The Company also plans to improve the logistics of
operations by introducing new routing and scheduling software and a new vehicle
tracking software application which will assist the technicians in becoming more
efficient, productive and safe.
The Company's financial results for 1999, along with consecutive quarterly
improvements and new operational programs, present an encouraging outlook for
2000.
CONTINUING OPERATIONS - 1998 VERSUS 1997
The Company's 1.9% increase in revenues in 1998 was due primarily to growth in
recurring pest control revenue resulting from the success of our more
consumer-friendly selling and treatment programs and to an increase in termite
renewal
9
<PAGE>
Management's Discussion and Analysis (continued)
ROLLINS, INC. AND SUBSIDIARIES
revenue resulting from higher average renewal prices. Revenue was also impacted
positively by the Company's ten pest control acquisitions in 1998, including two
companies in Canada. These revenue increases were partially offset by a decline
in termite sales revenue caused by placing our emphasis on changing contracts
and sales practices that were initiated in response to the capabilities of
modern-day termiticides, new building materials and construction practices.
Cost of Services Provided decreased in 1998 on both a dollar and percentage
of revenues basis, primarily due to reductions in termite claims experience and
operating insurance costs. Sales, General and Administrative expenses also
decreased on both a dollar and percentage of revenues basis, primarily due to
reduced expenditures related to Year 2000 system modifications and to lower bad
debt expense. The Company's net tax provision of $1.9 million, as compared to a
benefit of $64.2 million in 1997, reflects increased taxable income in 1998.
Key programs implemented in 1998 included improved sales and service
programs to meet the changing demands of today's busy customers. We also
introduced a premium brand of service for our commercial customers, Acuridsm ;
related activities included the opening of additional commercial branches,
improved service technology, expanded guarantees, and new vehicle and uniform
identification. As a result of these programs, we achieved strong gains in
customer base and revenues in this division.
We implemented aggressive changes in sales policies, treatment standards
and guarantees offered in termite control. These internal enhancements, along
with extensive reinspection, retreatment and repair programs, in conjunction
with the establishment of our national quality control department, allow us to
more effectively provide termite control service to all our new and existing
customers. These termite remediation expenditures in 1998 were charged against
the Accrual for Termite Contracts. We provided an advanced termite training
course, developed exclusively by the Company in partnership with Texas A&M, to
Orkin employees who have previously completed both in-branch and classroom
termite control training. This comprehensive program provides the best termite
training in the industry.
DISCONTIUED OPERATIONS
In 1997, the Company estimated its liabilities associated with its divested
operations and recorded a Gain on Disposal, net of taxes, of $106.1 million on
the sales of the Orkin Lawn Care and Plantscaping businesses and the Rollins
Protective Services division. These divestitures were completed as part of the
Company's shift towards a single operational focus on its core pest control
business. In the fourth quarter of 1998, the Company recorded an additional
gain, net of taxes, of $3.4 million as a result of the reevaluation of the
Company's liabilities for costs associated with these discontinued operations.
YEAR 2000 ISSUES
Aware that the Year 2000 (Y2K) information technology programming issue could
have a significant potential impact on its future operations and financial
reporting, the Company began its assessment and remediation processes in 1997
regarding its primary financial and operating systems. The Company's assessment
activities included (1) identifying all software and operating systems - both
information technology (IT) systems and non-IT systems with embedded technology
which are critical to operations and/or financial reporting, (2) testing of such
software and systems for Y2K compliance, and (3) obtaining assurances from the
Company's vendors and its large commercial customers. The Company's remediation
activities included replacing certain software and operating systems, followed
by testing to ensure the Y2K compliancy of the replacements.
As of February 16, 2000, the Company has not experienced any material
adverse effects as a result of Y2K related problems. Although the Company has
not endured any material adverse Y2K effects and does not anticipate any such
problems, it is possible that certain Y2K problems may exist but have not yet
materialized. The total amount of Y2K expenditures as of December 31, 1999 was
approximately $19.5 million. Any additional Y2K expenditures are not expected to
have a material impact on the Company's results of operations, cash flows or
financial position.
MARKET RISK
The Company maintains an investment portfolio, comprised of U.S. government and
corporate debt securities, which is subject to interest rate risk exposure. This
risk is managed through conservative policies to invest in high-quality
obligations. The Company has performed an interest rate sensitivity analysis
using a duration model over the near term with a 10% change in interest rates.
The Company's portfolio is not subject to material interest rate risk exposure
based on this analysis, and no material changes in market risk exposures or how
those risks are managed are expected.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In second quarter 1999, the Financial Accounting Standards Board
voted to delay the effective date of this standard to fiscal years beginning
after June 15, 2000. The adoption of this standard, effective for the Company as
of January 1, 2001, is not expected to materially impact the results of
operations or financial condition of the Company.
10
<PAGE>
Management's Discussion and Analysis (continued)
ROLLINS, INC. AND SUBSIDIARIES
Financial Condition
<TABLE>
<CAPTION>
% Change From Prior Year
Increase (Decrease)
-------------------------
(Dollars in thousands) 1999 1998 1997 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and Short-Term Investments $ 5,689 $ 1,244 $ 125,842
Marketable Securities 12,967 110,229 75,037
------------------------------------------------
18,656 111,473 200,879 (83.3)% (44.5)%
Current Ratio 1.0 1.7 2.3 (41.2) (26.1)
Total Assets 312,940 327,265 432,680 (4.4) (24.4)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its current cash balances, future cash flows from operating
activities and line of credit will be sufficient to finance its current
operations and obligations, and fund expansion of the business for the
foreseeable future. The Company experienced positive cash flow from operating
activities during the year in the amount of $8.2 million. This increase in cash
flow is an improvement over cash flow used in operating activities of $679,000
in 1998 and cash flow provided by operating activities of $5.7 million in 1997.
The 1999 increase resulted from favorable changes in working capital related
primarily to differences in the timing of accrued expenses and higher income
from continuing operations in 1999, adjusted for non-cash items.
The Company invested $79.8 million in acquisitions and capital expenditures
in 1999 and expects to invest between $25.0 and $30.0 million in 2000, inclusive
of improvements to its management information systems. Acquisition expenditures
consisted primarily of the acquisitions of PCO Services, Inc. and the commercial
pest elimination business operations of PRISM, both subsidiaries of Johnson Wax
Professional, and the acquisition of the pest control business operations of
Redd Pest Control Company, Inc. See Note 3 to the accompanying consolidated
financial statements for further discussion. Capital expenditures in 1999
consisted primarily of equipment replacements and upgrades and improvements to
the Company's management information systems.
A total of $6.1 million was paid in cash dividends in 1999. During the
year, a total of $11.8 million was paid for repurchases of 718,900 shares, or
2.4%, of the Company's Common Stock. These repurchased shares were retired in
1999; an additional 881,100 shares may be repurchased under the current
authorization. The capital expenditures, acquisitions, cash dividends and stock
repurchases were primarily funded through existing cash balances, marketable
securities and operating activities. The Company maintains a $40.0 million line
of credit, which is available for future acquisitions and growth, if needed.
In 1997 and 1998, Orkin and other pest control industry companies received
letters from the Federal Trade Commission (FTC) advising of its investigation of
the pest control industry - more specifically, the termite and moisture control
practices of the industry - and requesting certain information voluntarily from
the Company. Orkin has voluntarily provided the information requested and has
advised the FTC of the Company's intention to continue to cooperate fully with
this investigation. At this point in time, management does not believe this
investigation will have a material effect upon its results of operations or
financial condition. In addition, the Company is aggressively defending a class
action lawsuit filed in Dothan, Alabama. For further discussion, see Note 9 to
the accompanying consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements regarding the expected impact of the outcome of
litigation arising in the ordinary course of business and the outcome of the
Helen Cutler and Mary Lewin v. Orkin Exterminating Company., Inc., et al.
("Cutler") litigation on the Company's financial condition, results of
operations and liquidity; the Company's potential for recurring revenue; and the
Company's projected 2000 performance. The actual results of the Company could
differ materially from those indicated by the forward-looking statements because
of various risks and uncertainties including, without limitation, the
possibility of a court ruling against the Company in litigation or in the Cutler
litigation; general economic conditions; market risk; changes in industry
practices or technologies; the degree of success of the Company's termite
process reforms and pest control selling and treatment methods; the Company's
ability to identify potential acquisitions; climate and weather trends;
competitive factors and pricing practices; the failure of the Company or its
major suppliers or customers to adequately address the Year 2000 programming
issue; potential increases in labor costs; and changes in various government
laws and regulations, including environmental regulations. All of the foregoing
risks and uncertainties are beyond the ability of the Company to control, and in
many cases the Company cannot predict the risks and uncertainties that could
cause its actual results to differ materially from those indicated by the
forward-looking statements.
11
<PAGE>
consolidated statements of financial position
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
At December 31, (In thousands except share data) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Short-Term Investments $ 5,689 $ 1,244
Marketable Securities 12,967 110,229
Trade Receivables, Net 44,878 42,353
Materials and Supplies 13,429 13,335
Deferred Income Taxes 19,644 20,083
Other Current Assets 11,142 11,864
------------------------------------
Current Assets 107,749 199,108
Equipment and Property, Net 46,245 35,466
Goodwill and Other Intangible Assets 112,024 47,092
Deferred Income Taxes 45,015 44,369
Other Assets 1,907 1,230
------------------------------------
Total Assets $ 312,940 $ 327,265
====================================
LIABILITIES
Capital Lease Obligations $ 3,638 $ 3,419
Accounts Payable 15,275 10,890
Accrued Insurance 11,165 18,348
Accrued Payroll 23,100 18,400
Accrued Pension 6,523 5,635
Unearned Revenue 20,441 15,210
State Income Taxes Payable 6,295 7,188
Accrual for Termite Contracts 15,000 25,800
Other Expenses 10,004 10,203
------------------------------------
Current Liabilities 111,441 115,093
Capital Lease Obligations 2,450 6,090
Accrued Insurance 43,745 38,975
Accrual for Termite Contracts 54,352 66,350
Long-Term Accrued Liabilities 29,162 20,522
------------------------------------
Total Liabilities 241,150 247,030
------------------------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 29,881,402 and 30,488,741
shares issued 29,881 30,489
Earnings Retained 41,909 49,746
------------------------------------
Total Stockholders' Equity 71,790 80,235
------------------------------------
Total Liabilities and Stockholders' Equity $ 312,940 $ 327,265
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
consolidated statements of income
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31, (In thousands except per share data) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Customer Services $ 586,639 $ 549,136 $ 538,639
------------------------------------------------------------
COSTS AND EXPENSES
Cost of Services Provided 341,487 327,353 362,161
Depreciation and Amortization 13,433 11,458 10,712
Provision for Termite Contracts - - 117,000
Sales, General and Administrative 223,235 214,182 225,356
Interest Income (3,048) (8,981) (7,588)
------------------------------------------------------------
575,107 544,012 707,641
------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 11,532 5,124 (169,002)
------------------------------------------------------------
PROVISION (BENEFIT) FOR INCOME TAXES
Current (2,694) (4,937) 6,021
Deferred 7,076 6,884 (70,242)
------------------------------------------------------------
4,382 1,947 (64,221)
------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 7,150 3,177 (104,781)
------------------------------------------------------------
DISCONTINUED OPERATIONS
Operating Income, Less Income Tax Expense of $119 - - 192
Gain on Disposal, Less Income Tax Expense of
$2,090 and $70,214 in 1998 and 1997, Respectively - 3,410 106,086
------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS - 3,410 106,278
------------------------------------------------------------
NET INCOME $ 7,150 $ 6,587 $ 1,497
============================================================
EARNINGS (LOSS) PER SHARE
Continuing Operations $ .24 $ .10 $ (3.09)
Discontinued Operations - .11 3.13
------------------------------------------------------------
EARNINGS PER SHARE - BASIC AND DILUTED $ .24 $ .21 $ .04
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
consolidated statements of earnings retained
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31, (In thousands except per share data) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 49,746 $ 112,365 $ 155,696
Net Income 7,150 6,587 1,497
Cash Dividends (6,076) (16,064) (20,360)
Common Stock Purchased and Retired (11,076) (53,429) (24,733)
Common Stock Issued for Acquisition of Companies 1,892 - -
Other 273 287 265
------------------------------------------------------------
Balance at End of Year $ 41,909 $ 49,746 $ 112,365
============================================================
DIVIDENDS PER SHARE $ .20 $ .50 $ .60
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
13
<PAGE>
consolidated statements of cash flows
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31, (In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 7,150 $ 6,587 $ 1,497
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Provision for Termite Contracts - - 117,000
Provision for Self-Insurance Reserves - - 15,000
Provision for Bad Debts - - 8,000
Depreciation and Amortization 13,433 11,458 10,712
Provision (Benefit) for Deferred Income Taxes 7,076 8,974 (69,228)
Discontinued Operations, Net of Taxes - (3,410) (106,278)
Other, Net 1,471 5,121 7,169
(Increase) Decrease in Assets:
Trade Receivables 2,243 7,087 7,505
Materials and Supplies 1,310 1,719 (3,388)
Other Current Assets (759) 1,638 (2,034)
Other Non-Current Assets (6,611) 520 (2,330)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (1,186) (15,167) 11,608
Unearned Revenue 5,134 1,379 2,154
Accrued Insurance (2,413) 5,220 9,629
Accrual for Termite Contracts (22,798) (24,850) -
Long-Term Accrued Liabilities 4,112 (6,955) (1,336)
------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 8,162 (679) 5,680
============================================================
INVESTING ACTIVITIES
Purchases of Equipment and Property (18,818) (10,402) (8,956)
Net Cash Used for Acquisition of Companies (60,964) (3,517) (1,440)
Net Proceeds from Sale of Discontinued Operations,
Net of Current Taxes Paid - - 156,469
Marketable Securities, Net 97,145 (35,033) 9,846
------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 17,363 (48,952) 155,919
============================================================
FINANCING ACTIVITIES
Dividends Paid (6,076) (16,064) (20,360)
Common Stock Purchased and Retired (11,795) (56,195) (26,083)
Payments on Capital Leases (3,421) (2,868) (2,521)
Other 212 160 300
------------------------------------------------------------
Net Cash Used in Financing Activities (21,080) (74,967) (48,664)
============================================================
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - - 757
------------------------------------------------------------
Net Increase (Decrease) in Cash and Short-Term Investments 4,445 (124,598) 113,692
Cash and Short-Term Investments at Beginning of Year 1,244 125,842 12,150
------------------------------------------------------------
Cash and Short-Term Investments at End of Year $ 5,689 $ 1,244 $ 125,842
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
14
<PAGE>
notes to consolidated financial statements
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES
Business Description - Rollins, Inc. (the Company) is a national service company
with headquarters located in Atlanta, Georgia, providing pest and termite
control services to both residential and commercial customers.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information." As the Company has only one reportable segment - its pest and
termite control business - the majority of the disclosures required by SFAS 131
do not apply to the Company. In regard to the general disclosures required by
SFAS 131, the Company's results of operations and its financial condition are
not significantly reliant upon any single customer or the Company's foreign
operations.
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of Rollins, Inc. and its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Estimates Used in the Preparation of Consolidated Financial Statements - The
preparation of the consolidated 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
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenues - Revenue is recognized at the time services are performed.
Cash and Short-Term Investments - The Company considers all investments with a
maturity of three months or less to be cash equivalents. Short-term investments
are stated at cost which approximates fair market value. Marketable Securities -
The Company's marketable securities are classified as "available for sale" and
have been recorded at current market value with an offsetting adjustment to
stockholders' equity.
Materials and Supplies - Materials and supplies are recorded at the lower of
cost (first-in, first-out basis) or market.
Equipment and Property - Depreciation and amortization, which includes the
amortization of assets recorded under capital leases, are provided principally
on a straight-line basis over the estimated useful lives of the related assets.
Annual provisions for depreciation are computed using the following asset lives:
buildings, ten to forty years; and furniture, fixtures, and operating equipment,
three to ten years. The cost of assets retired or otherwise disposed of and the
related accumulated depreciation and amortization are eliminated from the
accounts in the year of disposal with the resulting gain or loss credited or
charged to income. Expenditures for additions, major renewals and betterments
are capitalized and expenditures for maintenance and repairs are expensed as
incurred.
Insurance - The Company self-insures, up to specified limits, certain risks
related to general liability, workers' compensation and vehicle liability. The
estimated costs of existing and future claims under the self-insurance program
are accrued based upon historical trends as incidents occur, whether reported or
unreported (although actual settlement of the claims may not be made until
future periods) and may be subsequently revised based on developments relating
to such claims. These estimated outstanding claims have been reflected in the
Consolidated Statements of Financial Position in the line items entitled Accrued
Insurance.
Advertising - Advertising expenses are charged to income during the year in
which they are incurred. The total advertising costs were approximately $28.3
million in 1999 and $27.5 million for each of the years 1998 and 1997.
Income Taxes - The Company follows the practice of providing for income taxes
based on SFAS 109, "Accounting for Income Taxes", which requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the consolidated financial statements or tax
returns.
Earnings Per Share - In 1997, the Company adopted SFAS 128, "Earnings Per
Share" (EPS), which requires companies to present basic EPS and diluted EPS.
Basic EPS is computed on the basis of weighted-average shares outstanding.
Diluted EPS is computed on the basis of weighted-average shares outstanding plus
common stock options outstanding during the year which, if exercised, would have
a dilutive effect on EPS. Basic and diluted EPS are the same for all years
reported.
A reconciliation of the number of weighted-average shares used in computing
basic and diluted EPS is as follows:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Basic EPS 30,325 31,973 33,896
Effect of Dilutive
Stock Options 7 30 28
-------------------------------------
Diluted EPS 30,332 32,003 33,924
- --------------------------------------------------------------------------------
Stock-Based Compensation - As permitted by SFAS 123, "Accounting for
Stock-Based Compensation," the Company accounts for employee stock compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 10 to the
consolidated financial statements for additional information.
Comprehensive Income - In 1997, the Financial Accounting Standards Board
issued SFAS 130, "Reporting Comprehensive Income," effective for fiscal years
beginning after December 15, 1997. For the years ended December 31, 1999, 1998
and 1997, comprehensive income is not materially different from net
15
<PAGE>
notes to consolidated financial statements (continued)
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
income and, as a result, the impact of SFAS 130 is not reflected in the
Company's consolidated financial statements.
Reclassifications - Certain amounts for previous years have been reclassified
to conform with the 1999 consolidated financial statement presentation.
2. CHANGES IN ACCOUNTING ESTIMATES
In the fourth quarter of 1997, the Company made certain changes in accounting
estimates totaling $23.0 million due to 1997 events and new information becoming
available. The Company's provision for its self-insurance program for
automobile, workers' compensation, and general liability was increased by $15.0
million. This provision has been reflected in the Consolidated Statements of
Income in the line item entitled Cost of Services Provided. The provision for
bad debts was also increased by $8.0 million and has been reflected in the
Consolidated Statements of Income in the line item entitled Sales, General and
Administrative.
In the fourth quarter of 1997, a provision for termite contracts of $117.0
million was recorded related to the estimated costs of reinspections,
reapplications, repair claims and associated labor, chemicals, and other costs
incurred relative to termite work performed prior to December 31, 1997. These
anticipated costs reflected the Company's response to current trends in the
termite treatment area of its operations and the pest control industry. The
provision was reflected in the 1997 Consolidated Statements of Income in the
line item entitled Provision for Termite Contracts. The related liabilities at
December 31, 1999 and 1998, reflecting the estimated costs incurred but as yet
unpaid related to termite work performed prior to these dates, have been
reflected in the Consolidated Statements of Financial Position in the line items
entitled Accrual for Termite Contracts.
3. ACQUISITIONS AND JOINT VENTURE
On April 30, 1999, the Company and Johnson Wax Professional entered into a joint
venture, Acurid Retail Services, L.L.C. (Acurid Retail), created to sell and
provide pest elimination services to customers in the retail market and jointly
contributed existing customers to the joint venture. The Company owns 50% of the
joint venture, which is accounted for using the equity method. In addition, on
April 30, 1999, the Company's wholly-owned subsidiary, Orkin Exterminating
Company, Inc. (Orkin), acquired the remaining pest elimination business
operations of PRISM, a subsidiary of Johnson Wax Professional, for approximately
twenty-four million dollars. The acquisition was accounted for as a purchase
with the results of operations of the business acquired included from the
effective date of the acquisition. The acquisition resulted in excess costs over
net assets acquired of approximately sixteen million dollars which are being
amortized over a life of twenty years using the straight-line method.
On October 29, 1999, Orkin acquired PCO Services, Inc. (PCO), a subsidiary of
Johnson Wax Professional. Orkin acquired all the shares of capital stock of PCO
for approximately twenty-five million dollars. The acquisition was accounted for
as a purchase with the results of operations of the business acquired included
from the effective date of the acquisition. The acquisition resulted in excess
costs over net assets acquired of approximately five hundred thousand dollars
which are being amortized over a life of twenty years using the straight-line
method.
On December 3, 1999, Orkin acquired the pest control business operations of
Redd Pest Control Company, Inc. (Redd) for approximately thirteen million
dollars, of which approximately seven million was paid in cash. Under the terms
of the agreement, Orkin acquired all the pest control customers of Redd,
together with certain assets. The acquisition was accounted for as a purchase
with the results of operations of the business acquired included from the
effective date of the acquisition. The acquisition resulted in excess costs over
net assets acquired of approximately eight million dollars which are being
amortized over a life of twenty years using the straight-line method.
4. DISCONTINUED OPERATIONS
In October 1997, the Company sold its Rollins Protective Services (RPS) business
segment for approximately $200.0 million in cash. In July 1997, the Company sold
its Lawn Care and Plantscaping divisions for approximately $37.0 million in
cash. In 1997, the Company estimated its liabilities associated with these
divested operations and recorded a gain from the sales of RPS and the Lawn Care
and Plantscaping divisions of $106.1 million, net of taxes. In the fourth
quarter of 1998, the Company reevaluated its liabilities associated with these
divested operations and recorded an additional gain of $3.4 million, net of
taxes.
The Company's results of operations for the year ended December 31, 1997 have
been restated for the divestitures of the RPS business segment and the Lawn Care
and Plantscaping divisions. The results of operations of these divested
operations and the gains on their disposal have been reflected in the
Consolidated Statements of Income in the section entitled Discontinued
Operations.
Summarized financial information for the discontinued operations is as
follows:
<TABLE>
<CAPTION>
(In thousands) 1997
- --------------------------------------------------------------------------------
<S> <C>
Revenues $ 64,721
Income Before Income Taxes 311
Net Income 192
Assets -
Liabilities -
Net Assets of Discontinued Operations $ -
- --------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
notes to consolidated financial statements (continued)
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
5. TRADE RECEIVABLES
Trade receivables, net, at December 31, 1999, totaling $44.9 million and at
December 31, 1998, totaling $42.4 million are net of allowances for doubtful
accounts of $4.9 million and $5.3 million, respectively. Trade receivables
include installment receivable amounts which are due subsequent to one year from
the balance sheet dates. These amounts were approximately $6.7 million and $9.0
million at the end of 1999 and 1998, respectively. The carrying amount of
installment receivables approximates fair value because the interest rates
approximate market rates.
6. EQUIPMENT AND PROPERTY
Equipment and property are presented at cost less accumulated depreciation and
are detailed as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Buildings $ 10,158 $ 9,759
Operating Equipment 56,445 44,805
Furniture and Fixtures 10,186 8,542
Computer Equipment Under
Capital Leases 7,787 8,736
-------------------------------
84,576 71,842
Less - Accumulated
Depreciation 41,912 39,704
-------------------------------
42,664 32,138
Land 3,581 3,328
-------------------------------
$ 46,245 $ 35,466
- --------------------------------------------------------------------------------
</TABLE>
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over net assets of businesses acquired
and is stated at cost less accumulated amortization. Goodwill which arose from
acquisitions prior to November 1970 is not being amortized for financial
statement purposes, since, in the opinion of Management, there has been no
decrease in the value of the acquired businesses. Goodwill arising from
acquisitions since November 1970 is being amortized from fifteen to forty years.
Other intangible assets include trademarks, customer contracts and
non-compete agreements and are being amortized from three to twenty years.
8. INCOME TAXES
A reconciliation between taxes computed at the statutory rate on the Income
(Loss) From Continuing Operations Before Income Taxes and the Provision
(Benefit) for Income Taxes is as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Income Taxes
at Statutory Rate $ 4,036 $ 1,595 $ (64,680)
State Income Taxes
(Net of Federal Benefit) 697 367 268
Other (351) (15) 191
----------------------------------------
$ 4,382 $ 1,947 $ (64,221)
- --------------------------------------------------------------------------------
</TABLE>
The Provision (Benefit) for Income Taxes was based on a 38.0% estimated
effective income tax rate on Income (Loss) From Continuing Operations Before
Income Taxes for the years ended December 31, 1999, 1998 and 1997. The effective
income tax rate differs from the annual federal statutory tax rate primarily
because of state income taxes.
During 1999, the Company paid income taxes of $662,000, net of refunds
received. For 1998, the Company received a refund of income taxes of $2.4
million, net of payments. Income taxes remitted, related to both continuing and
discontinued operations, were $85.2 million for the year ended December 31,
1997.
Components of the net deferred income tax assets (liabilities) at December 31,
1999 and 1998 include:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Termite Accrual $ 34,322 $ 40,125
Insurance Reserves 35,035 31,909
Safe Harbor Lease (9,847) (11,449)
Other 5,149 3,867
-------------------------------
$ 64,659 $ 64,452
- --------------------------------------------------------------------------------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company has capitalized lease obligations and several operating leases. The
minimum lease payments under the capital leases and non-cancelable operating
leases with terms in excess of one year, in effect at December 31, 1999, are
summarized as follows:
<TABLE>
<CAPTION>
Capitalized Operating
(In thousands) Leases Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
2000 $ 3,918 $ 22,618
2001 2,231 19,837
2002 307 14,239
2003 - 9,682
2004 - 6,751
Thereafter - 34,390
----------------------------
$ 6,456 $107,517
==========
Amount Representing Interest (368)
----------
Present Value of Obligations 6,088
Portion Due Within One Year (3,638)
----------
Long-Term Obligations $ 2,450
- --------------------------------------------------------------------------------
</TABLE>
Total rental expense under operating leases charged to operations was $25.6
million, $25.4 million and $23.5 million for the years ended December 31, 1999,
1998 and 1997, respectively.
The Company is aggressively defending a lawsuit filed in Dothan, Alabama, in
which the plaintiffs seek compensatory damages for alleged breach of contract
arising out of alleged missed or inadequate reinspections. The attorneys for the
plaintiffs contend that the case is suitable for a class action and the court
has ruled that the plaintiffs would be permitted to pursue a class action
lawsuit against Orkin. The Company believes this
17
<PAGE>
notes to consolidated financial statements (continued)
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
case to be without merit and intends to defend itself vigorously at trial. At
this time, the final outcome of the litigation cannot be determined. However, it
is the opinion of Management that the ultimate resolution of this action will
not have a material adverse effect on the Company's financial position, results
of operations or liquidity.
The Company is involved in other litigation matters incidental to its
business. With respect to such other suits, Management does not believe the
litigation in which it is involved will have a material effect upon its results
of operations or financial condition.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory tax-qualified defined benefit retirement
plan (the Plan) covering all employees meeting certain age and service
requirements. The Plan provides benefits based on the average compensation for
the highest five years during the last ten years of credited service (as
defined) in which compensation was received, and the average anticipated Social
Security covered earnings. The Company funds the Plan with at least the minimum
amount required by ERISA.
The funded status of the Plan and the resulting accrued benefit liability are
summarized as follows at December 31:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $ 77,288 $ 66,908
Service Cost 4,379 3,611
Interest Cost 5,694 5,182
Actuarial (Gain) Loss (8,263) 4,258
Benefits Paid (3,672) (2,671)
-------------------------------
Benefit Obligation at End of Year 75,426 77,288
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at
Beginning of Year 63,258 59,741
Actual Return on Plan Assets 2,928 6,188
Employer Contribution 4,000 -
Benefits Paid (3,672) (2,671)
-------------------------------
Fair Value of Plan Assets at End of Year 66,514 63,258
-------------------------------
Funded Status (8,912) (14,030)
Unrecognized Net Actuarial Loss 2,546 8,621
Unrecognized Prior Service Cost (157) (226)
-------------------------------
Accrued Benefit Liability $ (6,523) $ (5,635)
- --------------------------------------------------------------------------------
</TABLE>
Accrued benefit liabilities at December 31, 1999 and 1998 of $6.5 million and
$5.6 million, respectively, have been reflected in the Consolidated Statements
of Financial Position in the line item entitled Accrued Pension.
The weighted-average assumptions as of December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 8.0% 7.0% 7.5%
Expected Return on Plan Assets 9.5% 9.5% 9.5%
Rate of Compensation Increase 5.0% 4.0% 4.5%
- --------------------------------------------------------------------------------
</TABLE>
The components of net periodic benefit cost for the past three years are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 4,379 $ 3,611 $ 3,221
Interest Cost 5,694 5,182 4,437
Expected Return on
Plan Assets (5,751) (5,269) (5,007)
Net Amortizations:
Amortization of Net Asset - - (575)
Amortization of Net Loss 634 203 -
Amortization of Net
Prior Service Cost (69) (36) (31)
---------------------------------------
Net Periodic Benefit Cost $ 4,887 $ 3,691 $ 2,045
- --------------------------------------------------------------------------------
</TABLE>
In 1998, the Company adopted SFAS 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits." The 1997 amounts shown in the tables above
have been restated in accordance with the disclosures required by SFAS 132.
At December 31, 1999, the Plan's assets were comprised of listed common
stocks and U.S. government and corporate securities. Included in the assets of
the Plan were shares of Rollins, Inc. Common Stock with a market value of $4.5
million.
The Company sponsors a deferred compensation 401(k) plan that is available to
substantially all employees with six months of service. The charges to expense
for the Company match were approximately $2.2 million in 1999, $1.5 million in
1998 and $1.7 million in 1997.
The Company has two Employee Incentive Stock Option Plans, the first adopted
in January 1994 (1994 Plan) and the second adopted in April 1998 (1998 Plan) as
a supplement to the 1994 Plan. An aggregate of 3.0 million shares of Common
Stock may be granted under various stock incentive programs sponsored by these
plans, at a price not less than the market value of the underlying stock on the
date of grant. Options may be issued under the 1994 Plan and the 1998 Plan
through January 2004 and April 2008, respectively, and expire ten years from the
date of grant, if not exercised.
18
<PAGE>
notes to consolidated financial statements (continued)
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
Options are also outstanding under a prior Employee Incentive Stock Option
Plan (1984 Plan). Under this plan, 1.2 million shares of Common Stock were
subject to options granted during the ten-year period ended October 1994. The
options were granted at the fair market value of the shares on the date of grant
and expire ten years from the date of grant, if not exercised. No additional
options will be granted under the 1984 Plan.
Option transactions during the last three years for the 1998, 1994 and 1984
Plans are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of Shares Under
Stock Options:
Outstanding at
Beginning of Year 1,144,620 359,785 300,132
Granted 874,000 890,000 197,600
Exercised (246) (3,550) (7,657)
Cancelled (252,200) (101,615) (130,290)
----------------------------------------
Outstanding at End of Year 1,766,174 1,144,620 359,785
Exercisable at End of Year 263,834 106,960 80,405
Weighted-Average
Exercise Price:
Granted $ 16.31 $ 19.69 $ 19.25
Exercised 13.25 13.18 12.47
Cancelled 18.53 20.77 22.57
Outstanding at End of Year 18.66 20.42 22.29
Exercisable at End of Year 21.29 23.40 23.31
- --------------------------------------------------------------------------------
</TABLE>
Information with respect to options outstanding and options exercisable at
December 31, 1999 is as follows:
Exercise Number Average Remaining Number
Price Outstanding Contractual Life Exercisable
$12.25 3,180 0.08 years 3,180
13.25 11,494 1.08 11,494
19.08 4,200 2.08 4,200
25.50 2,900 3.08 2,900
28.38 78,900 4.08 57,900
24.25 4,000 5.08 1,920
20.88 40,000 6.08 9,360
19.25 117,000 7.08 36,880
19.69 715,000 8.33 136,000
16.31 789,500 9.08 -
- --------------------------------------------------------------------------------
1,766,174 263,834
- --------------------------------------------------------------------------------
The Company applied Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for its stock options and,
accordingly, no compensation cost has been recognized for stock options in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date of its stock options granted in 1999,
1998 and 1997 under SFAS 123 (See Note 1 to the consolidated financial
statements), the Company's net income, as disclosed on the Consolidated
Statements of Income, would have been reduced by approximately $1.2 million in
1999, $578,000 in 1998 and $103,000 in 1997. Earnings per share would have been
reduced by $.04 in 1999 and $.02 in 1998, with no earnings per share effect in
1997.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $4.30, $6.07 and $5.34, respectively, on the date of
grant, using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-Free Interest Rate 5.12% 6.04% 5.69%
Expected Life, in Years 8 8 8
Expected Volatility 21.30% 23.22% 18.55%
Expected Dividend Yield 2.49% 2.37% 2.17%
- --------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
REPORT OF MANAGEMENT
To the Stockholders of Rollins, Inc.:
We have prepared the accompanying financial statements and related information
included herein for the years ended December 31, 1999, 1998 and 1997. The
opinion of Arthur Andersen LLP, the Company's independent public accountants, on
those financial statements is included herein. The primary responsibility for
the integrity of the financial information included in this annual report rests
with management. Such information was prepared in accordance with generally
accepted accounting principles, appropriate in the circumstances, based on our
best estimates and judgments and giving due consideration to materiality.
Rollins, Inc. maintains internal accounting control systems which are adequate
to provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and which produce records adequate for preparation of financial
information. The system and controls and compliance therewith are reviewed by an
extensive program of internal audits and by our independent public accountants.
There are limits inherent in all systems of internal accounting control based on
the recognition that the cost of such a system should not exceed the benefit to
be derived. We believe the Company's system provides this appropriate balance.
The Board of Directors pursues its review and oversight role for these financial
statements through an Audit Committee composed of three outside directors. The
Audit Committee's duties include recommending to the Board of Directors the
appointment of an independent accounting firm to audit the financial statements
of Rollins, Inc. The Audit Committee meets periodically with management and the
Board of Directors. It also meets with representatives of the internal auditors
and independent public accountants and reviews the work of each to insure that
their respective responsibilities are being carried out and to discuss related
matters. Both the internal auditors and independent public accountants have
direct access to the Audit Committee.
/s/ R. Randall Rollins /s/ Harry J. Cynkus
- ---------------------- -------------------
R. Randall Rollins Harry J. Cynkus
Chairman of the Board and Chief Financial Officer
Chief Executive Officer and Treasurer
Atlanta, Georgia
February 16, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Stockholders of Rollins, Inc.:
We have audited the accompanying statements of financial position of Rollins,
Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1999 and 1998
and the related statements of income, earnings retained and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from 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 financial position of Rollins, Inc. and subsidiaries
as of December 31, 1999 and 1998 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Atlanta, Georgia
February 16, 2000
20
<PAGE>
directors, officers and stockholders' information
DIRECTORS
John W. Rollins
Chairman of the Board and Chief Executive Officer of
Rollins Truck Leasing Corp. (vehicle leasing and trans-
portation), Chairman of the Board of Dover Downs
Entertainment, Inc. (entertainment complex)
Henry B. Tippie +
Chairman of the Board and Chief Executive Officer of
Tippie Services, Inc. (management services)
R. Randall Rollins *
Chairman of the Board and Chief Executive Officer of
Rollins, Inc., Chairman of the Board and Chief Executive
Officer of RPC, Inc. (oil and gas field services, and boat
manufacturing)
Wilton Looney +
Honorary Chairman of the Board of Genuine Parts Company
(automotive parts distributor)
James B. Williams +
Chairman of the Executive Committee of SunTrust Banks,
Inc. (bank holding company)
Gary W. Rollins *
President and Chief Operating Officer of Rollins, Inc.
Bill J. Dismuke
Retired President of Edwards Baking Company
* Member of the Executive Committee
+ Member of the Audit and Compensation Committees
OFFICERS
R. Randall Rollins
Chairman of the Board and Chief Executive Officer
Gary W. Rollins
President and Chief Operating Officer
Harry J. Cynkus
Chief Financial Officer and Treasurer
Michael W. Knottek
Vice President and Secretary
STOCKHOLDERS' INFORMATION
Annual Meeting
The Annual Meeting of the Stockhoolders will be held
at 9:30 a.m. Tuesday, April 25, 2000, at the Company's
corporate offices in Atlanta, Georgia.
Transfer Agent and Registar
For inquiries related to stock certificates, including
changes in address, lost certificates, dividends and tax
forms, please contact:
SunTrust Bank
Stock Transfer Department
P.O. Box 4625
Atlanta, GA 30302
Telephone:1-800-568-3476
Stock Exchange Information
The Common Stock of the Company is listed on the
New York and Pacific Stock Exchanges and traded on
the Philadelphia, Chicago and Boston Exchanges under
the symbol ROL.
Dividend Reinvestment Plan
This Plan provides a simple, convenient and inexpensive
way for stockholders to invest cash dividends in additional
Rollins, Inc. shares. For further information, contact
SunTrust Bank, at the above address.
Form 10-K
The Company's annual report on form 10-K to the
Securities and Exchange Commission provides certain
additional information. Stockholders may obtain a copy by
contacting the Chief Financial Officer at the Company's
mailing address.
Corporate Offices
Rollins, Inc.
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324
Mailing Address
Rollins, Inc.
P.O. Box 647
Atlanta, Georgia 30301
Telephone
(404) 888-2000
Design: Critt Graham + Associates, Atlanta/Boston
Printing: Corporate Printers, Cumming, GA
Exhibit 21
List of Subsidiaries
Rollins, Inc.
The following list sets forth the subsidiaries of Rollins, Inc. as of February
29, 2000. Each corporation whose name is indented is a wholly-owned subsidiary
of the corporation next above which is not indented.
<TABLE>
<CAPTION>
Corporation Name State/Country of Incorporation
------------------------------------------------------------------------ --------------------------------------
<S> <C>
Orkin Exterminating Company, Inc. Delaware
Orkin Systems, Inc. Delaware
Dettlebach Pesticide Corporation Georgia
Kinro Advertising Company Delaware
Orkin Expansion, Inc. Delaware
Orkin S.A. de C.V. Mexico
Orkin International, Inc. Delaware
PCO Services, Inc. Canada
Rollins Continental, Inc. New York
Rollins Expansion, Inc. Delaware
Red Diamond Insurance Co. Vermont
Rollins Supply, Inc. Delaware
Red Diamond Insurance Co. Vermont
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports, included (or incorporated by reference) in this Form 10-K, into the
Company's previously filed Form S-8 Registration Statement (No. 33-06404), Form
S-8 Registration Statement (No. 33-26056), Form S-8 Registration Statement (No.
33-52355), and Form S-8 Registration Statement (No. 33-47528).
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 15, 2000
Exhibit 24
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, in the capacities indicated, as of this day of , 2000.
/s/ James B. Williams
---------------------------
James B. Williams, Director
Witness:
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, in the capacities indicated, as of this day of , 2000.
/s/ John W. Rollins
-------------------------
John W. Rollins, Director
Witness:
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, in the capacities indicated, as of this day of , 2000.
/s/ Henry B. Tippie
-------------------------
Henry B. Tippie, Director
Witness:
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, in the capacities indicated, as of this day of , 2000.
/s/ Wilton Looney
-----------------------
Wilton Looney, Director
Witness:
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, in the capacities indicated, as of this day of , 2000.
/s/ Bill J. Dismuke
-------------------------
Bill J. Dismuke, Director
Witness:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF FINACIAL POSITION AT DECEMBER 31, 1999, 1998 AND 1997 AND
STATEMENTS OF INCOME AND EARNINGS RETAINED FOR THE YEARS ENDED DECEMBER 31,
1999, 1998 AND 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,689
<SECURITIES> 12,967
<RECEIVABLES> 49,806
<ALLOWANCES> 4,929
<INVENTORY> 13,429
<CURRENT-ASSETS> 107,749
<PP&E> 81,557
<DEPRECIATION> 41,912
<TOTAL-ASSETS> 312,940
<CURRENT-LIABILITIES> 111,441
<BONDS> 0
0
0
<COMMON> 29,881
<OTHER-SE> 41,909
<TOTAL-LIABILITY-AND-EQUITY> 312,940
<SALES> 0
<TOTAL-REVENUES> 586,639
<CGS> 0
<TOTAL-COSTS> 341,487
<OTHER-EXPENSES> 233,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,532
<INCOME-TAX> 4,382
<INCOME-CONTINUING> 7,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,150
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF FINACIAL POSITION AT DECEMBER 31, 1999, 1998 AND 1997 AND
STATEMENTS OF INCOME AND EARNINGS RETAINED FOR THE YEARS ENDED DECEMBER 31,
1999, 1998 AND 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-1-1998 JAN-1-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,244 125,842
<SECURITIES> 110,229 75,037
<RECEIVABLES> 47,700 58,492
<ALLOWANCES> 5,347 9,326
<INVENTORY> 13,335 15,010
<CURRENT-ASSETS> 199,108 301,618
<PP&E> 75,170 71,641
<DEPRECIATION> 39,704 37,002
<TOTAL-ASSETS> 327,265 432,680
<CURRENT-LIABILITIES> 115,093 130,718
<BONDS> 0 0
0 0
0 0
<COMMON> 30,489 33,279
<OTHER-SE> 49,746 112,365
<TOTAL-LIABILITY-AND-EQUITY> 327,265 432,680
<SALES> 0 0
<TOTAL-REVENUES> 549,136 538,639
<CGS> 0 0
<TOTAL-COSTS> 327,353 362,161
<OTHER-EXPENSES> 216,659 345,480
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,124 (169,002)
<INCOME-TAX> 1,947 (64,221)
<INCOME-CONTINUING> 3,177 (104,781)
<DISCONTINUED> 3,410 106,278
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,587 1,497
<EPS-BASIC> .21 .04
<EPS-DILUTED> .21 .04
</TABLE>
