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 June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19343
Valley Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
34-1493345
(IRS Employer Identification Number)
11580 Lafayette Drive NW, Canal Fulton, Ohio 44614
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: (330) 854-4526
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 ]
As of August 31, 1998: (a) 7,906,617 shares of Common Stock, $.01 par
value, of the registrant were outstanding; (b) 2,072,872 shares of Common Stock
were held by non-affiliates; and (c) the aggregate market value of the Common
Stock held by non-affiliates was $2,202427, based on the closing sale price of
$1.0625 per share on August 31, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Part I: None
Part II: None
Part III: All items - see registrant's definitive proxy statement
which involves the election of directors and which will be
filed with the commission within 120 days after the close of
the fiscal year.
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and
Management
Item 13: Certain Relationships and Related Transactions
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Part I
ITEM 1. BUSINESS
General
The Company is engaged in the business of providing specialized
industrial cleaning and other services to divisions and facilities of Fortune
500 companies and other substantial businesses engaged in heavy industry. Such
services generally involve the removal of industrial grime, deposits, wastes,
encrustations or coatings from equipment and facilities. The Company's principal
customers are in the chemical, plastics, power generation, petroleum refining
and primary metals businesses. The Company's industrial cleaning methods
include, in addition to the use of waterblasting, vacuuming, and other more
conventional procedures, the application of ultra-high pressure ("UHP")
waterjetting and cutting methods.
Industrial Cleaning Services
Until 1984 the only technologies used by the Company in providing
commercial and industrial cleaning services were vacuum (wet and dry) and
conventional water blast cleaning techniques. These conventional methods of
service are still provided by the Company. The market applications for the
Company's conventional method services in industrial cleaning are many and
varied, and include removing materials and deposits from items such as heat
exchangers, boilers, condensers, building surfaces, vats, slabs and molds. The
Company also provides sewer cleaning, pipe inspection and other services for its
customers. See "Item 1 - Business-Company Operations". Such other services are
essentially incidental to the Company's business and are not deemed material to
its future operations.
See "Item 1-Business-Company Operations-Revenue by Service Line".
Industrial vacuuming removes industrial waste and debris, and retrieves
salvageable materials, using truck mounted equipment to vacuum up the designated
waste. Most of the Company's vacuum equipment can be used in either a wet or dry
medium, but the Company also uses equipment that only has a wet application. The
Company uses both commercially available equipment and internally designed and
fabricated equipment in the performance of industrial vacuum cleaning
activities. The Company's vacuum equipment can be used to clean underground
lines, pipes, storm drains and sewers, as well as to meet the demands of other
cleaning applications. In performing its conventional vacuum cleaning services,
the vacuumed material is either transported by the Company for disposal on-site
at the customer's location, or is transferred by the Company on-site into
barrels, bins or other storage vessels supplied by the customer, for disposal by
the customer.
In 1984, to overcome the limitations of conventional technologies, the
Company began providing UHP waterjetting services. Although pressurized water
cleaning equipment for use in industrial cleaning, construction, mining and
other applications is commercially available, the UHP equipment used by the
Company is designed and fabricated by the Company. The Company has been able to
enhance and modify its UHP equipment since its first introduction. In 1991, the
Company purchased certain patents and know-how related to equipment designs, UHP
waterjet guns and other technologies. See "Item 1-Business-Proprietary
Technology, Patents Trademarks and Equipment".
Benefits from the application of UHP technology include (1) the use of
a very low volume of water, (2) the uniform cleaning of a material from a
surface, (3) the minimization of surface damage or degradation, (4) the decrease
of environmental and health/safety impacts through the reduction or absence of
dust, fumes, sand, solvents or chemicals and other by-products requiring
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disposal, (5) the reduced volume of residue or waste product (including water)
clean-up, (6) the elimination of many safety hazards associated with
conventional methods and the need for "hot work" permits (i.e., UHP waterjetting
is a non-spark generating activity), and (7) the elimination of airborne
contaminants, reducing preparatory activities (covering surrounding areas) and
clean-up times, which yields increased productivity.
With the addition of an abrasive material into the water stream, the
Company's UHP equipment can also cut virtually any material. This technique is
used where heat or open flames would damage the material being cut or create a
safety hazard. Most of the UHP cutting services involve gas pipelines, storage
tanks and regenerator heads in the refining industry.
Advantages of UHP technology could become more pronounced in the future
as the result of certain actions taken by environmental regulatory agencies
which are expected to restrict the use of conventional cleaning methods. In
1989, the Occupational Safety and Health Administration ("OSHA") promulgated
regulations which significantly reduce allowable exposure levels to crystalline
silica for employees of United States companies, which inhibits the use of
sandblasting in industrial cleaning and facilities maintenance applications.
Sandblasting is not favored by many of the Company's customers because of the
dispersion of particulates into the air, its effect on machinery and equipment,
and the necessity of transporting and disposing of the sand waste thereafter.
Additionally, the institution of increasingly stringent environmental
regulations governing the generation and disposal of all forms of industrial
waste, both hazardous and non-hazardous, will impose significant additional
costs on most conventional industrial cleaning services. The inherent cost
advantages afforded by the absence of particulate and other residue by-products
should enhance the future market demand for UHP services such as those provided
by the Company. See "Item 1-Business-Environmental Standards and Government
Regulations".
Service Procedures
Generally, the Company performs its services at customer facilities
using truck-mounted equipment. Teams of two or more persons operate the
Company's equipment. The Company's employees extend pipe and/or hose, as well as
additional equipment, from the truck into the customer's tank, container, paint
stack, boiler or other area to be cleaned.
The Company has also installed stationary, electrically powered UHP and
conventional waterblast units at some customer facilities. These permanent
installations, utilized where repetitive day-to-day cleaning is required, have
enhanced the Company's service capabilities while reducing customer down time
and overall cleaning costs.
In connection with the use of vacuuming and other conventional
technologies, the waste material is conveyed into the equipment's own holding
tank, or a Company or customer-owned and controlled roll-off container, for
transportation by the customer to a proper customer-designated disposal
location, generally on-site at the customer's facility.
In providing UHP waterjetting services, the Company's cleaning system
either (1) captures all water, waste and residue produced, which permits
pre-treating of such materials in accordance with local requirements prior to
discharge into the available sewer system, or (2) allows direct untreated sewer
discharge of such resultant waste material. Whether or not such waste material
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is pre-treated depends upon the nature of the materials to be removed in the
cleaning process (as disclosed to the Company by the customer), the nature of
any cleaning additives and other materials used by the Company itself, and local
regulations.
Company Operations
The Company's sales from its primary service lines in dollar amounts
and by percentage were as follows:
Year ended June 30
1998 1997 1996
-------- -------- --------
Dollars (in thousands):
UHP $ 11,402 $ 11,629 $ 9,882
Vacuum 6,859 5,947 6,788
Waterblasting 4,755 4,135 3,958
Other 1,415 1,377 1,247
-------- -------- --------
Total $ 24,431 $ 23,088 $ 21,875
======== ======== ========
Percentage:
UHP 46.7% 50.4% 45.2%
Vacuum 28.1% 25.8% 31.0%
Waterblasting 19.4% 17.9% 18.1%
Other 5.8% 5.9% 5.7%
-------- -------- --------
Total 100.0% 100.0% 100.0%
======== ======== ========
The Company does not depend upon any one customer for sales of its
services. During the fiscal year ended June 30, 1998, the Company had sales to
approximately 400 different customers. One customer accounted for 9% and two
other customers were each 7% of Fiscal 1998 net sales. Various plants of E.I.
DuPont (which make independent purchasing decisions) made up 13% of Fiscal 1997
net sales. Four other customers each accounted for 6% of Fiscal 1997 net sales.
The Company does not depend upon a limited number of suppliers for the
conduct of its business. The loss of any one of its suppliers would not have a
material adverse effect on the Company's business.
The Company currently services clients through a number of branch
offices and customer site facilities located throughout the United States and
Puerto Rico. The branch office locations are facilities at which the Company
houses equipment and maintains an administrative staff. Each location is
equipped to perform minor equipment maintenance. The Company has mechanics,
machinists and facilities to perform major equipment maintenance at its
headquarters facility. The customer-site facilities are trailers and equipment
at customer locations used by the Company to service that customer and the
surrounding area.
While the Company has some long-term commitments from customers for the
provision of services, most frequently orders for services are received on a
job-by-job basis. In certain instances the Company maintains equipment at the
locations of customers which have issued "blanket orders" to the Company for the
provision of services over an extended period. Such blanket orders do not
obligate the customer to purchase a specified dollar amount of services. Blanket
orders permit the Company to be contacted to perform services when needed. Such
blanket orders, in combination with the location of the Company's equipment,
allow the Company to expedite its response to a particular customer's needs and
to obtain a potential competitive advantage. The Company provides its services
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primarily at prescribed rates or based upon competitive bidding and in some
cases through direct negotiation with the customer. Due to the nature of its
business, there are relatively few pre-scheduled or contracted service calls.
Most services are performed on an emergency basis or upon less than two weeks
advance notice. Accordingly, the Company does not have any significant backlog
of service orders. Management of the Company does not consider backlog size to
be an important indicator of future performance.
The Company's management knows of no significant seasonal influences
related to the provision of its services.
The Company does not provide a separate guaranty or warranty to
customers for the services it provides. Due to the size and type of customers
serviced, the Company does not generally experience significant delays or other
problems in collecting its accounts receivable. Standard payment terms average
60 days.
Insurance
Much of the work performed by the Company is pursuant to contracts that
require the Company to indemnify the customer for injury or damage occurring on
the work site. The terms of such indemnity agreements vary, but generally they
provide that the Company is required to indemnify the customer for losses
resulting from or incurred in connection with performance by the Company of its
services whether or not the Company has been negligent. Liability for such
indemnification claims is generally covered by the Company's insurance policies.
Although the Company believes that its insurance coverage is generally
consistent with industry practice, there are exclusions from the Company's
insurance coverage for matters of environmental pollution and other types of
environmental damage claims. An uninsured or partially insured claim, if
successful and of sufficient magnitude, could have a material adverse effect on
the Company or its financial condition.
Competition
The market for industrial cleaning services is fragmented. There are
many competitors, no one of which is believed to hold a substantial market
share. The Company competes with a number of companies in substantially all of
the regions in which it operates. Many of these competitors are local operations
servicing a limited geographic area. There are, however, a few large national
and regional competitors that have significantly greater resources than the
Company. In recent years there has been a trend toward consolidation in the
industrial cleaning industry. In 1997 Phillip Services Corp. acquired Allwaste
Inc., one of the Company's national competitors. Other significant regional and
national competitors include C.H. Heist Corp., HydroChem Industrial Services,
Inc., MPW Industrial Services Group, Inc. and Rust International, an
engineering, construction and environmental cleanup firm controlled by Waste
Management, Inc.
The Company's principal competitive advantages are the quality of the
equipment that it uses, its ability to provide quick response times to customer
needs, its safety record, its reputation for competent and professional
performance, and the training and mobility of its service force. Another
important competitive advantage is the Company's UHP proprietary technology and
equipment. See "Item 1 - Business - Proprietary Technology, Patents, Trademarks
and Equipment".
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The Company relies heavily on repeat customers, and uses both the
written and verbal referrals of its satisfied customers to help generate new
customers. Many of the Company's customers or prospective customers have a
qualification procedure for becoming an approved bidder or vendor based upon the
satisfaction of particular performance and safety standards set by the customer.
Such customers often maintain a list of vendors meeting such standards and award
contracts for individual jobs only to such vendors. The Company continuously
monitors and attempts to improve the quality of service it provides, and this
process is intended to help the Company maintain standards of performance which
are acceptable to its customers. The headquarters and Canton, Ohio facilities of
the Company received certification to the International Standard of ISO 9002 in
July 1997. The Company is among the first within its industry to receive
registration to ISO 9002. The Company believes that its relationships with its
customers have been good.
Proprietary Technology, Patents, Trademarks and Equipment
The Company holds three patents expiring in 2004, 2005, and 2013 with
respect to tooling and equipment used in connection with its pressurized water
technology. The Company also is the licensee under an exclusive patent license,
granted by the University of Missouri, involving a certain waterjet cleaning
tool and deposit removal process. The patent being licensed to the Company
terminates in 2000. In June 1991, the Company purchased two of these patents,
the patent license, certain UHP tools, equipment, know-how, and technology and
documentation related to those tools and equipment, a trademark for the term
"Water Laser", and all new related inventions hereinafter developed by the
sellers of the technology. The patents, license, and know-how relate to UHP
technology applicable to industrial cleaning. The acquisition provides the
Company with the potential power to foreclose third parties from the use of such
patent technology. In connection with the purchase of the above technologies and
patents, the Company also received from the sellers an agreement not to engage
in any business involving the development, testing, manufacturing or use of any
technology, tools, equipment, designs or patents which use water or UHP water as
any part of its operation.
The Company has developed a great deal of proprietary technology and
know-how which it uses in connection with its provision of industrial cleaning
services to customers. The Company continues to develop new and proprietary
technology related to its UHP technology and other services, and has additional
patents pending.
Most of the technology and the equipment used in providing conventional
vacuum and waterblasting services are readily available in the industry. The UHP
waterjetting services provided by the Company result from the Company's
proprietary technologies, as well as its self-designed and constructed
equipment, tools and accessories. These technologies include not only the
techniques used by its service personnel in physically providing services, but
also the design of the component parts of the equipment used by the Company in
providing the services. Although certain basic pieces of equipment are readily
available (e.g., diesel and electrical motors, vehicular chassis, etc.), the
design of other components assembled into the Company's UHP waterjetting
equipment is proprietary to the Company. Such components are fabricated in the
Company's machine shops and assembled into finished pieces of equipment at the
Company's headquarters facility.
All of the Company's employees sign confidentiality agreements which
obligate them to protect the Company's proprietary technology and know-how from
unauthorized use and disclosure, and otherwise to treat such information as
confidential. Management of the Company believes that with respect to certain of
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its know-how and design improvements, even if such processes or products were
patentable, any patent protection which could be obtained would not be as
beneficial to the Company as the continued maintenance of such proprietary
information as confidential material whenever possible.
The Company's name and logos have been registered as service marks with
the United States Patent and Trademark Office.
The Company does not operate under any licenses or franchises granted
by third parties, other than the University of Missouri patent license.
Environmental Standards and Government Regulations
The Company's operations are subject to numerous rules and regulations
at the federal, state and local levels. The Company believes that it is in
substantial compliance with the various rules and regulations. The Company has
not experienced any significant regulatory problems.
All of the Company's operations are subject to regulations issued by
the United States Department of Labor under the Occupational Safety and Health
Act ("OSHA"). Additionally, some of the Company's operations are subject to the
provisions of the Federal Mine Safety and Health Act of 1977. These regulations
have strict requirements for protecting employees involved with any materials
that are classified as hazardous. Violations of these rules can result in fines.
The Company does not believe that its current activities are subject to
the duties pertaining to hazardous waste treatment, storage or disposal
facilities, nor those duties pertaining to hazardous waste generators or
transporters.
In the event the Company performs a cleaning operation involving the
disposal of a waste that would be defined as hazardous under RCRA, the Company
could also be classified as a "generator" of hazardous waste, and therefore
responsible for manifesting and transporting all such waste to permitted
treatment, storage or disposal facilities in accordance with RCRA. As a
generator, the Company could be potentially liable under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), also
known as the Superfund Act. To the Company's knowledge, none of the sites at
which the Company performs services have been designated as Superfund sites.
Moreover, to the Company's knowledge, it has not sent any hazardous substances
or wastes to any site that has been designated as a Superfund site. Many states
have implemented environmental guidelines similar in nature to RCRA and CERCLA.
On the local level, rules and regulations exist and are being
promulgated to govern the discharge of wastewater into sewer systems. These
rules can vary widely by locale. The Company has developed systems that permit
it to comply with these regulations, when applicable. Future changes in such
rules and regulations could have a significant impact on the Company in that
additional capital expenditures might be required. However, the more intensified
regulation also serves to foreclose potential new entrants with little or no
experience in industrial cleaning services, as well as those lacking adequate
capital.
The Company believes that it has obtained the permits and licenses
required to perform its business and believes that it is in substantial
compliance with all federal, state and local laws and regulations governing its
business. To date, the Company has not been subject to any significant fines,
penalties or other liabilities under such laws and regulations. However, no
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assurance can be given that future changes in such law, and regulations, or
interpretations thereof, will not have an adverse impact on the Company's
operations.
The Company's general liability insurance is subject to a pollution
exclusion endorsement. Such exclusion is generally found in the majority of
general liability policies. The Company does not maintain environmental
impairment liability insurance. Thus a claim for damages against the Company
that involves pollution or environmental impairment will not be covered by
insurance, and, depending on the size of the claim, may have a material adverse
effect upon the business and operations of the Company. See "Item 1 -
Business-Insurance".
Employees
As of August 31, 1998, the Company employed 375 full time employees.
Due to the nature of the services provided (i.e., primarily on a job-by-job
basis), the number of Company employees is subject to fluctuation. No employees
are currently covered by collective bargaining agreements. The Company believes
that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's headquarters facility in Canal Fulton, Ohio is comprised
of two buildings: a 16,000 square foot office, equipment warehouse and machine
shop facility and an 9,000 square foot office, machine shop, and service
dispatch facility. The Company owns both buildings, as well as a regional
training and repair facility in Texas.
The Company leases the other facilities used in its business under
short-term leases, generally one to three years. Management does not anticipate
any material problems in negotiating extensions of these existing arrangements.
If necessary, management believes that it would be able to obtain adequate
alternate facilities on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, the Company initiated litigation in 1993
against certain former officers and directors in the United States District
Court for the Northern District of Ohio, Eastern Division. This litigation was
resolved on terms favorable to the Company in December 1996, after the trial had
commenced. All claims between the Company and the former officers and directors
have now been resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended June 30, 1998.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq SmallCap Market of the
Nasdaq Stock Market under the symbol: VALE. The following table sets forth the
high and low sale prices for the periods indicated.
High Low
Fiscal 1997:
July 1, 1996 - September 30, 1996 $ 1.188 $ .688
October 1, 1996 - December 31, 1996 1.438 .938
January 1, 1997 - March 31, 1997 1.563 .938
April 1, 1997 - June 30, 1997 1.688 .875
Fiscal 1998:
July 1, 1997 - September 30, 1997 1.750 1.250
October 1, 1997 - December 31, 1997 1.750 .750
January 1, 1998 - March 31, 1998 1.188 .875
April 1, 1998 - June 30, 1998 1.500 .938
No dividends have been declared on the Common Stock since the inception
of the Company, and the Company does not anticipate paying any cash dividend in
the foreseeable future. In addition, the Company is restricted from paying
dividends on its Common Stock under its credit agreement with its majority
stockholder.
Based on information furnished by certain brokerage firms that are
record holders of the Company's Common Stock, the Company has in excess of 800
beneficial owners of its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Sales $24,431 $23,088 $21,875 $24,231 $27,494
Gross profit 9,040 8,559 6,853 8,562 6,291
Selling, general and
administrative expenses 7,145 7,268 7,254 7,155 8,830
Litigation settlements and
related fees (752) 1,351
Restructuring charges 3,548
Interest expense 593 592 572 895 1,506
Net income (loss) 1,302 1,451 (973) 512 (8,539)
Income (loss) per common
share - basic and diluted .12 .13 (.16) .02 (1.31)
Total assets 15,934 14,568 15,123 15,704 19,740
Total long-term debt 7,585 7,235 7,021 5,858 10,194
Total stockholders' equity 5,354 4,437 4,031 5,412 (251)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report.
FORWARD LOOKING STATEMENTS:
Forward-looking statements in this Form 10-K are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Potential risks and
uncertainties include, but are not limited to, general business and economic
conditions; the financial strength of the various industries the Company serves,
the competitive pricing environment of the industrial cleaning service industry,
the cost and effectiveness of planned marketing campaigns, the success of the
Company to continue to develop new applications and markets for its technology,
and the accuracy of the estimates used to evaluate the likely effect of the
Asset Purchase Agreement discussed later in this section.
Results of Operations - 1998 compared to 1997
Sales increased 5.8% in the fiscal year ended June 30, 1998 from the
prior year. Sales of UHP waterjetting services decreased by 2.0% from the prior
year, and amounted to 47% of total sales in 1998, compared to 50% in 1997. The
decrease in UHP sales was due to one large emergency project in 1997 (hurricane
damage to a customer's facility) that was not repeated. Excluding this project,
UHP sales increased by 4%. UHP sales to the hazardous materials abatement
industry grew from $1.2 million in 1997 to $2.2 million in 1998. The Company
expects UHP sales to this industry to continue increasing in Fiscal 1999. Sales
of the Company's other major service lines, vacuum and conventional
waterblasting, each increased by 15% in 1998 over the prior year. Vacuum
services totaled 28% of sales in 1998, compared to 26% in 1997. Waterblasting
services were 19% of total sales this year, compared to 18% in 1997. The revenue
gains in vacuum and waterblasting came from increased sales to existing
accounts, as well as new customers.
As there was no significant shift in sales between the various service
lines in 1998, gross margin as a percentage of sales was 37%, the same as in
1997. As announced in May 1998, the Company has been selected to be the primary
supplier of vacuum and waterblasting services to FirstEnergy Corp. This
three-year contract is expected to add approximately $3 million of additional
revenues annually to these service lines. This may cause these service lines to
be a higher percentage of total sales in future years. The Company expects that
greater efficiencies due to larger volumes should allow maintenance of its
existing gross margin percentages.
Selling, general and administrative expenses decreased by 2% in 1998
from 1997, and represented 29% of sales this year compared to 31% in the prior
year. Lower insurance expenses due to better loss experience helped cause this
decrease, as well as lower occupancy costs resulting from the purchase of the
Company's headquarters facility. The Company intends to continue its efforts to
control costs in this area. Interest expense remained constant from 1997 to
1998, and amounted to 2% of sales in 1998 and 3% in the prior year.
All of the above factors resulted in net income of $1.3 million in 1998
(5.3% of sales), or $.12 per common share, basic and diluted. This is an
increase of 86% from the comparable 1997 income from operations of $700,000
(3.0% of sales), or $.04 per common share, before gain on settlement of
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litigation. Net income in 1997 was improved by a one-time gain on settlement of
litigation of $752,000, or $.09 per share.
Results of Operations - 1997 compared to 1996
Sales increased 5.5% in the fiscal year ended June 30, 1997 from 1996.
A shift in sales from vacuum services to UHP waterjetting services continued
from the prior year. UHP sales increased 18% in 1997 from 1996, and represented
50% of total sales. In 1996, UHP services represented 45% of total sales. Sales
of vacuum services decreased by 12% and went from 31% of total sales in 1996 to
26% in 1997. Sales of waterblasting services, the Company's other major service
line, increased 5% in 1997 from 1996 and represented 18% of total sales in both
years.
The shift in sales from vacuum services to UHP waterjetting services
was expected. Competition in the vacuum services area has increased steadily in
recent years. There has been consolidation in the industry and some competitors,
including some larger than the Company, have lowered rates to gain market share.
The Company has generally chosen not to compete on price and has emphasized its
UHP waterjetting service line, where management believes it has a clear
technological advantage.
Sales of UHP waterjetting services were also aided in 1997 by new
applications for the Company's technology in the hazardous materials abatement
industry. The Company had sales of $1.2 million in this area in 1997, compared
to less than $400,000 in 1996.
The Company's gross margin in 1997 increased to 37% of sales, from 31%
in the prior year. Increased sales of the UHP waterjetting service line caused
part of this improvement. Lower equipment repair costs resulting from increased
emphasis on preventive maintenance also contributed. Lower equipment
depreciation costs spread over higher revenues also helped to increase the gross
margin percentage.
Selling, general and administrative expenses increased by .2% in 1997
over the prior year, and represented 31% of sales in 1997 and 33% in 1996.
Interest expense increased 4% in 1997 from 1996, and represented 3% of sales in
both years.
Net income in 1997 was increased by a one-time gain on settlement of
litigation of $752,000, or $.09 per common share.
Quarterly Operating Results (unaudited)
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments considered
necessary for a fair presentation of such information for the interim periods.
Three Months Ended
(In thousands, except per share data)
9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98
------- -------- ------- ------- ------- -------- ------- -------
Sales $6,275 $5,133 $5,321 $6,359 $ 5,856 $ 6,058 $ 5,865 $ 6,652
Gross profit 2,367 1,727 2,138 2,327 2,200 2,117 2,210 2,513
Net income 250 437 305 459 304 131 344 523
Earnings per
common share:
basic and
diluted $ .02 $ .04 $ .03 $ .04 $ .03 $ .00 $ .03 $ .06
Net income in the quarter ended December 31, 1996 was increased by
$752,000, or $.09 per common share, by a one-time gain on settlement of
litigation.
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Liquidity and Capital Resources
Working capital totaled $3.6 million at June 30, 1998 and 1997. Cash
generated from operations totaled $3.8 million in 1998, compared to $2.6 million
in 1997. The improvement is primarily due to better management of the various
components of working capital.
Additions to property and equipment were $4.1 million in 1998, which
includes $1.8 million acquired with capital leases, compared to $1.7 million in
1997. Additions to property and equipment in 1996 were $2.5 million. $650,000 of
1998 additions were to purchase the Company's headquarters facility in Ohio and
a regional facility in Texas. $400,000 of these funds were obtained from a 10
year mortgage on the headquarters facility, and the remainder from working
capital. The remaining $3.5 million of additions was for equipment. More than
half of equipment additions were purchased or constructed in the fourth quarter
of 1998, and were necessary to service the FirstEnergy Corp. contract referred
to above. Five-year capital leases financed $1.8 million of the $3.5 million of
equipment purchases. The remainder was purchased from working capital. All 1997
and 1996 additions were financed through operations or borrowings from the
Company's revolving line of credit, which expires in July 2000. The Company
anticipates spending less on additions to property and equipment in Fiscal 1999
than in 1998, but more than in 1997. Total additions to property and equipment
in 1999 are not expected to significantly exceed depreciation expense in that
year.
Financing activities provided $100,000 of cash in 1998, compared with
using $1.0 million in 1997. The Company purchased 500,000 shares of its common
stock in 1997 in accordance with a share purchase program announced in August
1996, for a total cost of $564,000. This expenditure, along with payment of
preferred stock dividends of $385,000, accounted for most of the 1997 use of
cash. The Company does not expect to purchase additional common shares in Fiscal
1999.
During 1997 the Company negotiated an extension of its credit agreement
with its majority stockholder and its bank line of revolving credit. The
existing arrangements were extended two years, to July 2000. The Company had
$1.5 million of credit available under these agreements on June 30, 1998. The
Company expects to have adequate cash flows from operations to meet all
obligations in Fiscal 1999. Capital expenditures will be partially funded from
cash flow, and partially financed under terms similar to those in 1998. The
Company does not anticipate difficulty in obtaining any necessary financing for
these expenditures.
Asset Purchase Agreement
On September 8, 1998, the Company entered into an Asset Purchase
Agreement (the "Agreement") with HydroChem Industrial Services, Inc.
("HydroChem") pursuant to which HydroChem plans to purchase substantially all of
the Company's assets and assume substantially all of the Company's outstanding
liabilities. The stated purchase price is approximately $29.8 million, with
$25.8 million payable in cash at the closing and the remaining $4 million to be
deposited into escrow and held pursuant to an Escrow Agreement (the "Escrow
Agreement"); provided, however, that in the event that the net assets reflected
on the Company's balance sheet at closing are greater or less than $5,353,593
(which was the total at June 30, 1998), any excess or deficiency shall be paid
to the Company (in the case of an excess) or HydroChem (in the case of a
deficiency) as an adjustment to the purchase price. The escrow funds will secure
HydroChem's rights to indemnification, including indemnification with respect to
certain potential environmental expenses and remediation cost and the
collectibility of certain accounts receivable which are to be guaranteed by the
Company. At such time as the Company delivers to HydroChem a certificate to the
13
<PAGE>
effect that the Company has completed environmental remediation as required by
the Agreement (if any), an amount equal to $1 million, less the sum of (i) the
aggregate cost of such environmental remediation and (ii) the aggregate amount
of other claims of HydroChem subject to indemnification under the Agreement in
excess of $3 million, shall be released to the Company from escrow. In addition,
provided that any disputes existing on each of the first and second
anniversaries of the Agreement, respectively, do not exceed specified amounts,
then $1 million of the escrow funds will be released following each such
anniversary, reduced in each instance by payments previously made in
satisfaction of the Company's indemnification and guaranty obligations. If there
are no claims by HydroChem against all or a portion of the escrow funds on the
third anniversary of the Agreement, then the remaining escrow funds will be
released to the Company. To the extent disputed claims do exist, an amount equal
to the disputed amount will continue to be held in escrow until fully resolved.
The escrowed funds will be HydroChem's sole recourse in connection with claims
under the Agreement.
The Company currently estimates that expenses of effecting the
transaction and liquidating the Company over the next several years, including
legal and accounting fees, income taxes (net of net operating loss
carryforwards), and liabilities not assumed by HydroChem, will be approximately
$3.8 million. As a result, the Company anticipates there will be approximately
$22.0 million (exclusive of escrowed funds) available following payment of such
expenses and liabilities. Of this amount, approximately $600,000 will be
utilized to redeem outstanding employee stock options. Stock options will be
redeemed at a price of $3.00 per option share less the exercise price thereof.
Currently, options to purchase 387,280 shares are outstanding at a weighted
average exercise price of $1.50 per share. All options, vested and unvested, are
expected to be redeemed. In addition, approximately $5.6 million will be
utilized to redeem the Company's outstanding preferred stock, all of which is
held by Rollins Holding Company, Inc., which is an affiliate of the Company's
largest common stockholder, Rollins Investment Fund, and of Joe Young, a
director of the Company. The remaining amount, anticipated to be approximately
$15.9 million, will be distributed to the Company's common stockholders as soon
after the closing of the transaction as is practicable. Based on 7,906,617
shares of common stock outstanding on August 31, 1998, the initial amount
expected to be distributed to shareholders is expected to be approximately $2.01
per share. Because of the duration of the Escrow Agreement, the Company does not
plan to formally dissolve until all escrow funds have either been released to
the Company or paid to HydroChem. As a result, the Company expects to maintain
its corporate existence for at least three years following the closing of the
transaction. As escrow funds, if any, are released to the Company, they will be
distributed to the common stockholders.
The transaction is subject to approval of the Company's stockholders;
however, the Company has been informed by its largest common stockholder,
Rollins Investment Fund, and by its sole preferred stockholder, Rollins Holding
Company, Inc, which together represent sufficient votes to approve the
transaction, that they intend to take action by written consent to approve the
transaction. Upon receipt of such written consents, the Company will prepare and
forward to each of its stockholders an information statement describing the
transaction.
HydroChem has agreed, effective as of the closing of the transaction,
to offer employment to all employees of the Company (subject to satisfaction of
HydroChem's standard conditions to employment) unless otherwise reasonably
determined by HydroChem. The closing of the transaction is subject to several
terms and conditions, including the receipt of third party or governmental
consents, the material accuracy of all representations and warranties contained
in the Agreement, and no material adverse changes in the financial condition of
the Company.
14
<PAGE>
In addition to standard termination provisions such as those with
respect to material breaches of the Agreement or conflicting laws, the Agreement
may be terminated by HydroChem (i) at any time after December 31, 1998, if by
that date, the conditions to HydroChem's performance under the Agreement have
not been fulfilled or waived, (ii) at any time prior to the later of (A) the
fifteenth business day after the delivery of exhibits and schedules or (B) the
fifteenth business day after such date as HydroChem actually receives certain
preliminary schedules, if HydroChem's general due diligence investigation of the
Company or any subsidiary thereof discloses facts or circumstances which reflect
in a material adverse way on the Company or any subsidiary thereof, (iii) if
there has been a material adverse change in the Company or any subsidiary
following the date of the Agreement. The Company may terminate the Agreement
after December 31, 1998 if, by that date, the conditions to the Company's
performance under the Agreement shall not have been fulfilled or waived. In the
event of any termination of the Agreement as set forth above, there shall by no
liability on the part of either HydroChem or the Company to the other, except
for the material breach of any representation, warranty or covenant contained in
the Agreement which is in the reasonable control of the party in breach.
Following the closing of the transaction, the Company anticipates that
it will be delisted from the Nasdaq Small-Cap Market. Following such delisting,
there will be no trading market for the Company's common stock. As a result,
stockholders may be unable to buy or sell shares of the Company's common stock
and may be required to maintain their investment in the company until it has
been dissolved.
A copy of the Agreement, without exhibits, has been filed as Exhibit
"2.1"to this Form 10-K, and is incorporated by reference herein.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. This
could result in a system failure or miscalculations if a computer program
recognizes a date of "00" as the year 1900 instead of 2000. The Company has
assessed the Year 2000 issue with regard to its internal financial and
operational systems as well as third parties with which the Company has material
relationships.
The Company has completed all significant remediation of Year 2000
issues for its internal financial and operational systems, including both
information technology ("IT") systems and non-IT systems that include embedded
technology such as microcontrollers. The total cost for this remediation effort
was less than $100,000, and was expensed as incurred.
The Company has identified third parties with which it has material
relationships with respect to the Year 2000 issue. These parties are primarily
large financial, telecommunication and information processing entities. All such
third parties have reported to the Company that they are on schedule with their
projects to remediate Year 2000 issues, and that they anticipate being Year 2000
compliant timely. The Company intends to continue to monitor the progress of
these third parties and will develop contingency plans during Fiscal 1999 in the
event one or more of these third parties fail to remediate their Year 2000
issues in such a way as to materially effect the operations of the Company. At
this time the Company believes the risk of such third party failures having a
material impact on the Company's operations is remote.
Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.130, "Reporting Comprehensive Income"("SFAS
15
<PAGE>
No. 130"). SFAS No. 130 established standards for reporting and display of
comprehensive income and its components. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and is not expected to have a
significant impact on the consolidated financial statements of the Company.
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 will be
effective for the fiscal year ending June 30, 1999. As the adoption of SFAS No.
131 requires only additional disclosures, there will be no effect on the
Company's consolidated financial position or results of operations or cash
flows.
In March 1998 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. This statement will be applied
prospectively and is effective for financial statements for fiscal years
beginning after December 15, 1998. The impact of this new standard is not
expected to have a significant effect on the Company's financial position or
results of operations.
In April 1998 the AICPA issued SOP 98-05, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities be expensed as
incurred. This statement is effective for financial statements for fiscal years
beginning after December 15, 1998. The statement requires capitalized costs
related to start-up activities to be expenses as a cumulative effect of a change
in accounting principle when the statement is adopted. The impact of this new
standard is not expected to have a significant effect on the Company's financial
position or results of operations.
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement is effective for fiscal years
beginning after June 15, 1999. The Company plans to adopt this statement at the
beginning of fiscal 2000. This statement is not expected to have a material
impact on the Company's financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required financial statements of the Registrant are set forth
immediately following the signature page to this registration statement. See
"Item 14 - Exhibits, Financial Statements, Schedules and Reports on Form 8-K",
for index to the financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the captions
"Election of Directors" and "Executive Compensation" of the registrant's
definitive proxy statement, and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" of the registrant's definitive proxy statement, and
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Beneficial Ownership of Voting Securities" of the registrant's definitive proxy
statement, and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Executive Compensation" of the registrant's definitive proxy statement, and
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
A. (1) Financial Statements Filed
Valley Systems, Inc. and Subsidiaries:
Report of Independent Accountants.
Consolidated Balance Sheets at June 30, 1998 and 1997.
Consolidated Statements of Income for the years ended June
30, 1998, 1997 and 1996. Consolidated Statements of
Stockholders' Equity for the years ended June 30, 1998,
1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(2) Exhibits
No. Description of Exhibit
- --- ----------------------
2.1 Asset Purchase Agreement between Registrant and HydroChem Industrial
Services, Inc. dated September 9, 1998 (19)
3.1 Restated Certificate of Incorporation of Registrant. (1)
3.2 Certificate of Amendment of Certificate of Incorporation of Registrant.
(16)
3.3 By-laws of Registrant (as amended). (16)
4.1 Form of Designation of Rights and Preferences of the Series A Preferred
Stock. (1)
4.2 Form of Designation of Rights and Preferences of the Series B Preferred
Stock. (1)
17
<PAGE>
No. Description of Exhibit
- --- ----------------------
4.3 Certificate of Designation of Rights and Preferences of Series C
Preferred Stock. (15)
4.4 Specimen Certificate of Common Stock. (1)
4.5 Form of Underwriter's Warrant Agreement. (1)
4.6 1991 Stock Option Plan, and Form of Agreement. (1)(13)
4.7 Warrant Grant Agreement dated June 2, 1994 between the Registrant and
Rollins Investment Fund. (14)
10.1 Employment Agreement, dated as of March 13, 1991, between the Registrant
and Eugene R. Valentine. (1)
10.2 Business Development Contract between the Registrant and the Aberlyn
Group, Inc. dated as of October 1, 1990. (1)
10.3 Agreement and Undertaking dated April 29, 1991 by and among the
Registrant, Eugene R. Valentine, Aberlyn Group, Inc., Lawrence Hoffman
and Robert M. Rubin. (1)
10.4 Form of Voting Trust Agreement between Eugene R. Valentine and the
Aberlyn Group, Inc. (1)
10.5 Letter dated March 15, 1991, to Aberlyn Group, Inc., respecting sale of
Common Stock to Consultant in certain events. (1)
10.6 Lease between the Registrant and Eugene R. Valentine and Cynthia J.
Valentine dated as of November 1, 1988 as amended in March 1991. (1)
10.7 Securities Purchase Agreement dated December 16, 1991 between Rollins
Investment Fund ("RIF") and the Registrant. (2)
10.8 Stock Purchase Agreement, dated June 12, 1992, among Eugene R. Valentine,
Nicholas J. Pace and Rollins Investment Fund. (3)
10.9 Reorganization Agreement dated July 31, 1992 between Registrant and the
stockholders of BMW Industrial Services, Inc., and exhibits thereto. (4)
10.10 Agreement dated July 31, 1992 between Registrant and Power City
Industrial Services, Inc. (4)
10.11 Loan Agreement from Rollins Investment Fund to Eugene R. Valentine and
Cynthia J. Valentine, dated October 14, 1992. (5)
10.12 Loan Agreement from Eugene R. Valentine to Registrant, dated October 16,
1992. (5)
10.13 Standby and Subordination Agreement from Eugene R. Valentine and Cynthia
J. Valentine to Fifth Third Bank. (5)
10.14 Credit and Security Agreement dated December 30, 1991 by and among the
Fifth Third Bank, the Registrant, Valley Systems of Ohio, Inc. and
Diversified Specialty Enterprises, Inc. (6)
10.15 Lease agreements between Munco Development Company and the Registrant
with respect to leases of office space at Crescent Pointe Building,
Canton, Ohio. (6)
10.16 Amendment No.1, dated as of November 16, 1992, to the Credit and Security
Agreement, dated as of December 31, 1991, by and between Registrant and
the Fifth Third Bank. (7)
10.17 Amendment No. 2, dated as of July 20, 1993, to the Credit and Security
Agreement, dated as of December 30, 1991, by and betwee the Registrant
and the Fifth Third Bank. (8)
10.18 Equipment Lease Agreement and Riders No. 1 & No. 2 by and between the
Registrant and Ally Capital Corporation dated December 18, 1992. (9)
10.19 Letter Agreement dated September 9, 1993 between Ally Capital
Corporation and the Registrant and Subordination and Security
Agreement made as of September 9, 1993 between Ally Capital Corporation
and Rollins Investment Fund. (9)
18
<PAGE>
No. Description of Exhibit
- --- ----------------------
10.20 Loan and Security Agreement, dated as of June 29, 1994 by and between
Registrant and Rollins Investment Fund. (15)
10.21 Term Note dated June 29, 1994 from Registrant to Rollins Investment Fund.
(15)
10.22 First Amendment to Term Note dated September 2, 1994 by and between
Registrant and Rollins Investment Fund. (15)
10.23 First Amendment to Loan and Security Agreement dated March 28, 1995 by
and between Registrant and Rollins Investment Fund. (16)
10.24 Second Amendment to Loan and Security Agreement dated November 5, 1996
by and between Registrant and Rollins Investment Fund. (18)
16.1 Letter dated July 8, 1993 from Valley Systems, Inc. to Feldman, Radin &
Co., P.C. terminating the auditor's services. (10)
- --------------------------------------------------------------------------------
(1) Hereby incorporated by reference to the filing of the Registrant's
Registration Statement on Form S-1 declared effective by the SEC on June
11, 1991.
(2) Hereby incorporated by reference to the filing of the Schedule 13D of
Rollins Investment Fund, dated December 20, 1991.
(3) Hereby incorporated by reference to the filing of the Schedule 13D of
Rollins Investment Fund, dated June 18, 1992.
(4) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated August 10, 1992.
(5) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated October 30, 1992.
(6) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated November 6, 1992.
(7) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated December 21, 1992.
(8) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated July 30, 1993.
(9) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 24, 1993.
(10) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated July 9, 1993.
(11) Hereby incorporated by reference to the filing of the Registrant's Form
10-Q dated February 11, 1994.
(12) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated June 29, 1994.
(13) This is a compensatory plan or arrangement.
(14) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated September 2, 1994.
(15) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 26, 1994.
(16) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 25, 1995.
(17) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 24, 1996.
(18) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 22, 1997.
(18) Included as an exhibit in this Form 10-K.
Reports on Form 8-K filed during the three months ended June 30, 1998
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALLEY SYSTEMS, INC.
By: \s\ Ed Strickland
President and
Chief Executive Officer
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.
Signature Title Date
--------- ----- ----
\s\ Ed Strickland President and Chief
Executive Officer September 25, 1998
\s\ Dennis D. Sheets Vice President, Chief Financial
Officer, Treasurer and Secretary September 25, 1998
\s\ Allen O. Kinzer Director September 25, 1998
\s\ Joe M. Young Director September 25, 1998
20
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
REPORT OF INDEPENDENT ACCOUNTANTS 22
CONSOLIDATED BALANCE SHEETS - June 30, 1997 and 1996 23
CONSOLIDATED STATEMENTS OF INCOME - Years ended June
30, 1997, 1996 and 1995 24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years
ended June 30, 1997, 1996 and 1995 25
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended
June 30, 1997, 1996 and 1995 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27-34
All schedules are omitted because they are not required under the
instructions, are inapplicable, or the information is included elsewhere in the
financial statements.
21
<PAGE>
Report of Independent Accountants
To the Stockholders of
Valley Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Valley
Systems, Inc. and Subsidiaries (the "Company") at June 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Cleveland, Ohio
August 27, 1998, except for Note 13, as to which the date is September 9, 1998
22
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and 1997
1998 1997
------------ ------------
ASSETS
Current assets:
Cash $ 207,492 $ 200,093
Accounts receivable 5,740,394 5,638,350
Prepaid supplies 522,992 469,839
Prepaid expenses 155,439 160,772
------------ ------------
Total current assets 6,626,317 6,469,054
Property and equipment, net 8,896,650 7,551,004
Intangible assets 411,000 548,000
------------ ------------
Total assets $15,933,967 $14,568,058
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 726,054 $ 971,611
Accrued expenses 1,610,470 1,428,834
Current portion of long-term debt 659,257 495,929
------------ ------------
Total current liabilities 2,995,781 2,896,374
Long-term debt 7,584,593 7,235,120
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.10 par value; authorized
2,000,000 shares, issued and outstanding
55,000 shares 5,500 5,500
Common stock, $.01 par value; authorized
12,000,000 shares, issued and outstanding
8,512,073 shares 85,121 85,121
Paid-in capital 26,786,040 26,786,040
Accumulated deficit (20,840,060) (21,757,089)
Treasury stock, at cost, 605,456 shares (683,008) (683,008)
------------ ------------
5,353,593 4,436,564
------------ ------------
Total liabilities and stockholders' equity $15,933,967 $14,568,058
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
for the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Sales $24,431,385 $23,088,298 $21,874,776
Cost of sales 15,391,490 14,529,554 15,021,953
------------ ------------ ------------
Gross profit 9,039,895 8,558,744 6,852,823
Selling, general and
administrative expenses 7,144,739 7,267,973 7,254,467
Interest expense 593,127 592,024 571,700
------------ ------------ ------------
Income (loss) from operations
before gain on settlement of
litigation and income taxes 1,302,029 698,747 (973,344)
Gain on settlement of litigation - 752,236 -
------------ ------------ ------------
Income (loss) from operations
before income taxes 1,302,029 1,450,983 (973,344)
Income taxes - - -
------------ ------------ ------------
Net income (loss) $ 1,302,029 $ 1,450,983 $ (973,344)
============ ============ ============
Net earnings per common share:
Basic $ .12 $ .13 $ (.16)
============ ============ ============
Assuming dilution $ .12 $ .13 $ (.16)
============ ============ ============
Weighted average shares used in
computation - basic and diluted 7,906,617 8,203,069 8,490,111
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
24
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 1998, 1997 and 1996
Preferred Common Paid-In Accumulated Treasury
Stock(1) Stock(2) Capital Deficit Stock Total
-------- ------- ----------- ------------- ---------- ----------
Balance, June
30, 1995 $7,500 $85,121 $26,784,040 $(21,464,729) $ - $5,411,932
Purchase of
treasury stock (118,638) (118,638)
Retirement of
Series B
preferred stock (2,000) 2,000 -
Net loss (973,344) (973,344)
Series C
preferred
dividends (288,749) (288,749)
------ ------- ----------- ------------- ---------- ----------
Balance, June
30, 1996 5,500 85,121 26,786,040 (22,726,822) (118,638) 4,031,201
Purchase of
treasury
stock (564,370) (564,370)
Net income 1,450,983 1,450,983
Series C
preferred
dividends (481,250) (481,250)
------ ------- ----------- ------------- ---------- ----------
Balance, June
30, 1997 5,500 85,121 26,786,040 (21,757,089) (683,008) 4,436,564
Net income 1,302,029 1,302,029
Series C
preferred
dividends (385,000) (385,000)
------ ------- ----------- ------------- ---------- ----------
Balance, June
30, 1998 $5,500 $85,121 $26,786,040 $(20,840,060) $(683,008) $5,353,593
====== ======= =========== ============= ========== ==========
(1) Share amounts are equivalent to ten times dollar amounts.
(2) Share amounts are equivalent to one hundred times dollar amounts.
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $1,302,029 $1,450,983 $ (973,344)
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation and amortization 2,758,868 3,138,326 3,516,986
Gain on disposition of property
and equipment (66,083) (5,784) (6,865)
(Increase) decrease in assets:
Accounts receivable (102,044) (953,631) (658,313)
Prepaid supplies (53,153) (26,393) 16,143
Prepaid expenses 5,333 32,815 18,922
Increase (decrease) in liabilities:
Accounts payable (245,557) 214,939 218,840
Accrued expenses 181,636 (1,251,382) (1,531,797)
---------- ---------- ----------
Cash provided by operating activities 3,781,029 2,599,873 600,572
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (2,295,049) (1,665,092) (2,547,375)
Proceeds from dispositions of property
and equipment 240,092 148,240 99,541
---------- ---------- ----------
Cash used by investing activities (2,054,957) (1,516,852) (2,447,834)
---------- ---------- ----------
Cash flows from financing activities:
Net (payments) borrowings from
revolving line of credit (1,467,355) 583,403 2,911,279
Payments of other long-term debt (252,394) (603,060) (702,810)
Additional borrowings of long-term debt 386,076 - -
Payments of preferred stock dividends (385,000) (385,000) (385,000)
Purchase of treasury stock - (564,370) (118,638)
---------- ---------- ----------
Cash (used in) provided by
financing activities (1,718,673) (969,027) 1,704,831
---------- ---------- ----------
Increase (decrease) in cash 7,399 113,994 (142,431)
Cash at beginning of year 200,093 86,099 228,530
---------- ---------- ----------
Cash at end of year $ 207,492 $ 200,093 $ 86,099
========== ========== ==========
Cash paid for:
Interest $ 589,340 $ 592,024 $ 571,700
Non-cash investing activities:
Property and equipment acquired with
capital leases $1,846,474
Non-cash financing activities:
Reclassification of payments from
former directors and officers $1,017,000
Preferred stock dividends accrued $ 96,250
The accompanying notes are an integral part of these
consolidated financial statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business:
The Company is engaged in the business of providing specialized
industrial cleaning and other services to divisions and facilities of
Fortune 500 companies and other substantial businesses engaged in heavy
industry. Such services generally involve the removal of industrial
grime, deposits, wastes, encrustations and coatings from equipment and
facilities. The Company's principal customers are in the chemical,
plastics, power generation, petroleum refining and primary metals
businesses. The Company's industrial cleaning methods include, in
addition to the use of waterblasting, vacuuming and other more
conventional procedures, the application of ultra-high pressure ("UHP")
waterjetting methods.
2. Summary of Significant Accounting Policies:
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All material intercompany transactions have been eliminated in the
accompanying consolidated financial statements.
Revenue Recognition: Sales and the related cost of sales for services
provided are recorded as the services are performed.
Accounts Receivable: The Company's customers are located primarily
throughout the United States. The Company monitors potential credit
losses and such losses have been within management's expectations.
Accounts receivable which become uncollectible are written off against
operations at the time they are deemed to be worthless. The total
uncollectible accounts charged to operations for the years ended June 30,
1998, 1997 and 1996 were $14,000, $51,000, and $6,000, respectively. The
allowance for doubtful accounts was $125,000 at June 30, 1998 and 1997.
Prepaid Supplies: Prepaid supplies consist of item to be used in
operations, and are stated at the lower of cost (first in, first out) or
market.
Property and Equipment: Property and equipment are stated at cost. The
Company uses the straight-line method of depreciation for financial
reporting purposes. For income tax purposes, depreciation is computed by
either the accelerated or modified cost recovery methods. The estimated
useful lives for financial reporting purposes are as follows:
Building and leasehold improvements 7 to 20 years
Automobiles and trucks 3 to 7 years
Equipment 3 to 7 years
The cost and related accumulated depreciation of assets retired, sold or
otherwise disposed of are removed from the accounts and any gain or loss
is reflected in the current years' results of operations.
Income Taxes: Deferred income taxes are provided to reflect the tax
effects of temporary differences between financial and tax reporting,
principally related to depreciation.
27
<PAGE>
2. Summary of Significant Accounting Policies, Continued:
Intangible Assets: Intangible assets include the cost of certain patents,
technology, trademarks, and a non-compete agreement. These items are
being amortized to operations on a straight-line basis over 10 years, the
period in which the economic benefits are estimated to be realized.
Accumulated amortization amounted to $959,000 and $822,000 as of June 30,
1998 and 1997, respectively.
Income (Loss) Per Common Share: In February 1997 the FASB issued
Statement No. 128, "Earnings Per Share" ("FAS No. 128"). FAS No. 128
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock
or potential common stock. It replaces the presentations of primary EPS
with the presentation of basic EPS, and replaces fully diluted EPS with
diluted EPS. It also requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures, and requires a reconciliation of the basic EPS computation to
the diluted EPS calculation. FAS No. 128 is effective for financial
statements for periods ending after December 15, 1997.
Earnings per share of common stock for the periods ended June 30, 1998
have been calculated according to the guidelines of FAS No. 128. Earnings
per share of common stock for the periods ended June 30, 1997 and 1996
have been restated to conform to FAS No. 128.
Basic earnings per common share are computed by dividing net income less
preferred stock dividend requirements ($385,000 per year for all periods
presented) for the period by the weighted average number of shares of
common stock outstanding for the period. Diluted earnings per common
share do not vary from basic earnings per share for any of the periods
presented because there were no dilutive potential shares of common stock
outstanding. The dilutive effect of outstanding potential shares of
common stock is computed using the treasury stock method.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results may differ from
those estimates.
Fair Value of Financial Instruments: The carrying values of accounts
receivable and short-term borrowings represent reasonable estimates of
the fair values of these instruments due to their short maturities. The
fair value of long-term debt is estimated by discounting the future cash
flows using rates currently available to the Company for debt with
similar terms and remaining maturities. The estimated fair values of the
long-term debt at June 30, 1998 approximated its carrying values.
New Accounting Pronouncements: During 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
established standards for reporting and display of comprehensive income
and its components. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997 and is not expected to have a significant impact
on the consolidated financial statements of the Company.
28
<PAGE>
2. Summary of Significant Accounting Policies, Continued:
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No.131"). SFAS No. 131 will be
effective for the fiscal year ending June 30, 1999. As the adoption of
SFAS No. 131 requires only additional disclosures, there will be no
effect on the Company's consolidated financial position or results of
operations or cash flows.
In March 1998 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
establishes new accounting and reporting standards for the costs of
computer software developed or obtained for internal use. This statement
will be applied prospectively and is effective for financial statements
for fiscal years beginning after December 15, 1998. The impact of this
new standard is not expected to have a significant effect on the
Company's financial position or results of operations.
In April 1998 the AICPA issued SOP 98-05, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities be
expensed as incurred. This statement is effective for financial
statements for fiscal years beginning after December 15, 1998. The
statement requires capitalized costs related to start-up activities to be
expenses as a cumulative effect of a change in accounting principle when
the statement is adopted. The impact of this new standard is not expected
to have a significant effect on the Company's financial position or
results of operations.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement is effective for
fiscal years beginning after June 15, 1999. The Company plans to adopt
this statement at the beginning of fiscal 2000. This statement is not
expected to have a material impact on the Company's financial position or
results of operations.
Reclassifications: Certain amounts in the 1997 consolidated financial
statements have been reclassified to conform to the 1998 presentation.
3. Property and Equipment:
Property and equipment consist of the following:
1998 1997
----------- -----------
Land $ 420,683 $ 184,759
Building and leasehold improvements 1,032,752 580,000
Automobiles and trucks 8,600,072 9,753,233
Equipment 8,637,151 7,470,264
Equipment in progress and parts 199,538 339,293
----------- -----------
18,890,196 18,327,549
Less accumulated depreciation
and amortization 9,993,546 10,776,545
----------- -----------
$ 8,896,650 $ 7,551,004
=========== ===========
Included in property and equipment are assets under capital leases of
$3,618,000 and $2,151,000 with related accumulated depreciation of
$1,230,000 and $1,481,000 as of June 30, 1998 and 1997, respectively.
29
<PAGE>
3. Property and Equipment, Continued:
The Company incurred repairs and maintenance costs on property and
equipment of approximately $1,350,000, $1,450,000 and $1,850,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
4. Accrued Expenses:
Accrued expenses consist of the following:
1998 1997
----------- -----------
Accrued payroll and compensation $ 927,000 $ 819,000
Accrued payroll taxes, workers
compensation insurance and other
employee benefits 373,000 184,000
Accrued preferred stock dividends 96,250 96,250
Other accrued liabilities 214,220 329,584
----------- -----------
$ 1,610,470 $ 1,428,834
=========== ===========
5. Long-Term Debt:
Long-term debt is comprised of the following:
1998 1997
----------- -----------
Capitalized leases (A) $ 2,114,640 $ 521,151
Revolving loan - bank (C) 5,742,543 7,209,898
Mortgage loan - bank (D) 386,667 -
----------- -----------
8,243,850 7,731,049
Less: current portion of long-term debt 659,257 495,929
----------- -----------
$ 7,584,593 $ 7,235,120
=========== ===========
A. Capitalized leases are due in monthly installments ranging from
$4,000 to $15,000 and bear interest of 8.5%.
B. The Company has a loan agreement with its majority stockholder,
which expires in 2000 and provides a total credit facility to the
Company as follows:
Through July 1999: $9,000,000
August 1999 through July 2000: $8,000,000
This facility may be utilized by borrowings at .5% over the prime
rate (payable quarterly) or, at the Company's option, by having
the stockholder provide bank letters of credit which the Company
can utilize as collateral for other obligations. The Company
reimburses the stockholder for the actual cost of the letters of
credit. This loan agreement is collateralized by essentially all
assets of the Company, and prohibits payments of common stock
dividends. At June 30, 1998, there are no loans outstanding under
this facility, and the stockholder has issued $8,280,000 in bank
letters of credit, leaving $720,000 of the facility available to
the Company.
C. This obligation represents borrowings under a $7,500,000 revolving
loan agreement with a bank. The loan bears interest at 1.7% below
the prime rate (6.80% at June 30, 1998), payable monthly, and is
collateralized by a bank letter of credit provided by the
Company's majority shareholder under the loan agreement described
in B. above. This revolving loan agreement decreases to $6,500,000
in July 1999 and expires July 2000.
30
<PAGE>
5. Long-Term Debt, Continued:
D. Mortgage loan payable in monthly installments of $2,778 plus
interest on the outstanding balance at the prime rate (8.5% at
June 30, 1998), due September 2007. The Company's headquarters
facility is pledged as security for this loan.
The aggregate maturities on the aforementioned debt are as
follows:
Year Ended June 30
1999 $ 659,000
2000 369,000
2001 6,143,000
2002 434,000
2003 428,000
Thereafter 210,850
------------
$ 8,243,850
============
6. Income Taxes:
The income tax provision for the three years ended June 30, 1998 is
comprised of the following amounts:
1998 1997 1996
----- ----- -----
Current:
Federal $ - $ - $ -
===== ===== =====
Statutory rate 34 % 34 % (34)%
Operating loss utilized (34) (34)
Operating loss not utilizable 34
----- ----- -----
Effective rate - % - % - %
===== ===== =====
Deferred federal income taxes reflect the impact for financial statement
reporting purposes of temporary differences between the financial
statement and tax basis of assets and liabilities. At June 30, 1998 and
1997, the components of the net deferred tax assets and liabilities were
as follows:
<PAGE>
1998 1997
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 50,000 $ 50,000
Vacation accrual 144,000 140,000
Net operating loss carryforwards 7,654,878 8,026,232
Other 164,912 123,253
----------- -----------
8,013,790 8,339,485
Deferred tax liabilities:
Basis difference in fixed assets (596,930) (549,523)
----------- -----------
Net deferred tax assets 7,416,860 7,789,962
Valuation allowance (7,416,860) (7,789,962)
----------- -----------
Net deferred taxes recognized $ - $ -
=========== ===========
The Company has approximately $19,100,000 of net operating loss
carryforwards for future years, which cannot be utilized to create tax
refunds. Such amounts begin to expire in the year 2005.
31
<PAGE>
7. Commitments:
The Company has various capital and operating leases in effect for
equipment, vehicles and facilities with initial terms ranging from one
month to five years with renewal options generally being available.
Minimum commitments under all capital and operating leases at June 30,
1998 are as follows:
Capital Operating
----------- -----------
1999 $ 755,504 $ 170,000
2000 454,699 142,000
2001 454,699 47,000
2002 454,699 24,000
2003 412,202 2,000
----------- -----------
Total minimum lease payments 2,531,803 $ 385,000
===========
Less amount representing interest 417,163
-----------
Total present value of capital
obligation 2,114,640
Less current portion 617,035
-----------
Long-term obligation under
capital leases $ 1,497,605
===========
Operating lease expense amounted to $379,000, $441,000 and $364,000 for
the years ended June 30, 1998, 1997 and 1996, respectively.
8. Litigation:
In addition to the matters discussed below, the Company is involved in
various litigation arising in the ordinary course of business. Management
believes that the ultimate resolution of such litigation will not have a
material effect on the Company's operations or financial position.
A. The Company filed a lawsuit in September 1993 against certain of
its former directors and officers, as well as other parties. This
lawsuit was settled in December 1996.
B. During the fiscal year ended June 30, 1996, the Company determined
that amounts contributed to it by two former officers and directors
that were previously classified as loans to the Company were not
loans. Instead, such contributions were determined to be repayments
by the former officers and directors of amounts owed by those
officers and directors to the Company at the time the contributions
were made. Because the former officers and directors in the lawsuit
described above contested this determination, an equal amount was
reserved. As a result of the settlement of this lawsuit, the
reserve was eliminated in the quarter ended December 31, 1996,
resulting in a gain of $752,000 after related expenses of the
litigation.
9. Major Customers:
The following table shows the percentage of total sales made to major
customers for each fiscal year:
1998 1997 1996
---- ---- ----
Customer A 9% 6% 10%
Customer B 7% 13% 14%
Customer C 7% 6% 5%
32
<PAGE>
10. Stockholders' Equity:
A. At June 30, 1995, there were 20,000 shares of Series B Preferred
Stock outstanding. These shares were transferred to the Company in
1996 as part of a settlement of litigation, and were then retired.
B. In September 1994, the Company issued 55,000 shares of Series C
Preferred Stock to its majority stockholder, which then transferred
them to an affiliate. Each share of the Series C Preferred Stock is
entitled to a cumulative annual dividend of $7.00, payable
quarterly. The proceeds from the sale of the preferred shares
totaled $5.5 million; $3.0 million in the conversion of debt for
equity and $2.5 million of cash. In the event the Company is merged
or consolidated such that the majority shareholder no longer holds
a controlling interest in the surviving or resulting entity, the
preferred stock must be redeemed and retired for $5.5 million plus
any accrued and unpaid cumulative dividends.
11. Stock Options and Warrants:
A. In 1991, the Company adopted a stock option plan. Up to 400,000
shares of common stock may be issued under the plan. Outstanding
options on June 30, 1998 were as follows:
Shares
-----------------------
Option Price Total Exercisable Expiration Date
------------ -------- ----------- ---------------
$3.00 10,000 10,000 2001
$1.50 22,080 22,080 2001
$1.50 40,500 40,500 2002
$1.50 217,000 130,200 2004
$1.50 37,700 7,540 2006
$1.50 20,000 4,000 2007
-------- --------
347,280 214,320
======== ========
B. In October 1994, the Company issued stock options to its directors
to purchase a total of 50,000 shares of its common stock at $1.50
per share. These options can be exercised up to 10,000 shares on or
after each of the first five anniversary dates, and expire in
October 2004. These options are not part of the stock option plan
above. The Company also issued options under the plan to certain
employees to purchase a total of 246,200 shares of common stock at
$1.50 per share. These options can be exercised up to 20% of the
shares on or after each of the first five anniversary dates and
expire in 2004.
C. On July 5, 1996, the Company modified options issued under the plan
to purchase 34,780 shares of common stock at an original exercise
price of $3.00 per share by repricing the options to $1.50 per
share. There was no compensation expense recognized related to this
modification. The Company also issued options under the plan to
certain employees to purchase a total of 64,700 shares of common
stock at $1.50 per share. These options can be exercised up to 20%
of the shares on or after each of the first five anniversary dates
and expire in 2006.
33
<PAGE>
11. Stock Options and Warrants, continued:
D. In 1997 the Company issued options under the plan to certain
employees to purchase a total of 35,000 shares of common stock at
$1.50 per share. These options can be exercised up to 20% of the
shares on or after each of the first five anniversary dates and
expire in 2007.
E. In 1998, 1997 and 1996, respectively, options to purchase 46,700,
24,000 and 18,300 shares of common stock were forfeited.
F. The Company has elected to adopt the "disclosure-only" provisions
of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" ("SFAS No. 123"), with no
compensation cost recognized for options granted at or above market
value. For SFAS No. 123, the fair value of each option granted was
estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions for 1998 and 1997: (a)
risk-free interest rates of 6.40% to 7.04%; (b) no dividend yield
in either year; (c) expected terms of 8 years; and (d) volatility
of 95%.
If the Company had elected to recognize the compensation cost of
its stock option plan based on the fair value of the awards under
that plan in accordance with SFAS No. 123, net income would have
increased to $1,383,952 ($.13 per common share, assuming dilution)
for the year ended June 30, 1998 and reduced to $1,306,346 ($.11
per common share, assuming dilution) for the year ended June 30,
1997.
G. At June 30, 1998, warrants to purchase shares of the Company's
common stock were outstanding as follows:
Warrant
Price Shares Expiration Date
$ 3.09 2,314,000 May 2000
$ 15.00 100,000 September 2001
12. Employee Benefit Plan:
In 1991, the Company adopted a 401(k) plan that covers substantially all
employees. The plan is a discretionary plan in that the Company may or
may not make contributions to the plan. The Company did not contribute to
the plan during the three years ended June 30, 1998.
13. Subsequent Event:
On September 9, 1998 the Company entered into an Asset Purchase Agreement
whereby essentially all assets of the Company will be sold to, and
substantially all liabilities of the Company will be assumed by,
HydroChem Industrial Services, Inc. The purchase price for these assets
and liabilities is $29.8 million, adjusted for increases or decreases in
net assets after June 30, 1998. This transaction is expected to close in
the second quarter of the fiscal year ended June 30, 1999.
34
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 207,492
<SECURITIES> 0
<RECEIVABLES> 5,865,394
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,626,317
<PP&E> 18,890,196
<DEPRECIATION> 9,993,546
<TOTAL-ASSETS> 15,933,967
<CURRENT-LIABILITIES> 2,995,781
<BONDS> 0
0
5,500
<COMMON> 85,121
<OTHER-SE> 5,262,972
<TOTAL-LIABILITY-AND-EQUITY> 15,933,967
<SALES> 24,431,385
<TOTAL-REVENUES> 24,431,385
<CGS> 15,391,490
<TOTAL-COSTS> 15,391,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,000
<INTEREST-EXPENSE> 593,127
<INCOME-PRETAX> 1,302,029
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,302,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,302,029
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
ASSET PURCHASE AGREEMENT
By and Between
HYDROCHEM INDUSTRIAL SERVICES, INC.
as Buyer
and
VALLEY SYSTEMS, INC.
as Seller
589876.1
<PAGE>
TABLE OF CONTENTS
Definitions.....................................................1
affiliate..............................................1
Agreement..............................................1
Assets.................................................1
Bill of Sale, Assignment and Assumption Agreement......1
Board..................................................1
Business Property Rights...............................1
Buyer..................................................1
Buyer Indemnitees......................................1
Buyer's Ceiling Amount.................................1
CERCLA.................................................1
Claim..................................................1
Closing................................................1
Closing Balance Sheet..................................1
Closing Date...........................................2
Closing Financial Statements...........................2
Closing Schedules......................................2
Code...................................................2
control................................................2
Customer...............................................2
Delivery Date..........................................2
Employee...............................................2
Encumbrances...........................................2
Environment............................................2
Environmental Contamination............................2
Environmental Due Diligence Review.....................2
Environmental Law......................................2
Environmental Liabilities..............................2
Environmental Remediation..............................2
ERISA..................................................2
Escrow Agent...........................................2
Escrow Agreement.......................................2
Escrow Fund............................................2
Exchange Act...........................................3
Expenses...............................................3
Facilities.............................................3
Former Facilities......................................3
Financial Statements...................................3
Floor Amount...........................................3
fraud..................................................3
GAAP...................................................3
Governmental Body......................................3
589876.1
i
<PAGE>
Hazardous Materials.........................................3
HSR Act.....................................................3
Indemnified Party...........................................3
Indemnifying Party..........................................4
knowledge...................................................4
Leases......................................................4
Legal Requirement...........................................4
Losses......................................................4
material....................................................4
Order.......................................................4
Person......................................................4
Preliminary Schedules.......................................4
Proceeding..................................................4
Proxy Materials.............................................4
Purchase Price..............................................4
Receivables Guaranty........................................4
Release.....................................................4
Rules.......................................................4
Schedules...................................................5
SEC.........................................................5
SEC Reports.................................................5
Securities Act..............................................5
Seller......................................................5
Seller's Ceiling Amount.....................................5
Stockholders................................................5
Stockholders' Meeting.......................................5
Subsidiary..................................................5
Superior Takeover Proposal..................................5
Termination Date............................................5
Third Party.................................................5
Third Party Claim...........................................5
Threatened..................................................5
WARN........................................................5
1. Purchase and Sale of Assets; Assumption of Specified Liabilities..5
-------- --- ---- -- ------- ---------- -- --------- -----------
1.1 Agreement to Purchase and Sell.....................5
1.2 Purchase Price; Payment. .........................9
-------- ------ -------
1.3 Assumption of Specified Liabilities................9
---------- -- --------- -----------
1.4 Non-Assumption of Certain Liabilities..............9
-------------- -- ------- -----------
1.5 Stockholder Approval; Voting......................10
----------- --------- ------
1.6 Closing...........................................11
-------
1.7 Delivery of Schedules.............................11
-------- -- ---------
1.8 Allocation of Purchase Price......................11
---------- -- -------- -----
1.9 Closing Balance Sheet Adjustment..................11
------- ------- ----- ----------
589876.1
ii
<PAGE>
2. Representations and Warranties of Seller...................12
--------------- --- ---------- -- ------
2.1 Existence; Good Standing; Corporate Authority;
---------- ---- --------- --------- ----------
Compliance With Law...............................12
---------- ---- ---
2.2 Authorization, Validity and Effect of Agreements..13
-------------- -------- --- ------ -- ----------
2.3 Capitalization and Ownership......................13
-------------- --- ---------
2.4 Affiliated Entities...............................14
---------- --------
2.5 Jurisdictions.....................................15
-------------
2.6 Records...........................................15
-------
2.7 Officers and Directors; Bank Accounts; Powers of
-------- --- ---------- ---- --------- ------ --
Attorney........................................15
--------
2.8 Financial Statements. ...........................15
--------- ----------
2.9 Undisclosed Liabilities...........................16
----------- -----------
2.10 Absence of Certain Changes or Events..............17
------- -- ------- ------- -- ------
2.11 Taxes.............................................18
-----
2.12 Real Property.....................................18
---- --------
2.13 Personal Property.................................18
-------- --------
2.14 Title to Property; Encumbrances...................19
----- -- --------- ------------
2.15 Insurance.........................................19
---------
2.16 Business Property Rights..........................19
-------- -------- ------
2.17 Collective Bargaining Agreements..................20
---------- ---------- ----------
2.18 Employees.........................................21
---------
2.19 Other Contracts...................................22
----- ---------
2.20 No Breach or Default..............................22
-- ------ -- -------
2.21 Litigation........................................22
----------
2.22 Accounts Receivable...............................23
-------- ----------
2.23 Inventories and Supplies..........................23
----------- --- --------
2.24 Environmental Matters.............................23
------------- -------
2.25 Customers and Suppliers...........................24
--------- --- ---------
2.26 No Brokers........................................24
-- -------
2.27 No Misrepresentation or Omission..................24
-- ----------------- -- --------
2.28 Survival of Representations and Warranties........25
-------- -- --------------- --- ----------
3. Representations and Warranties of Buyer....................25
--------------- --- ---------- -- -----
3.1 Existence; Good Standing; Corporate Authority;
---------- ---- --------- --------- ----------
Compliance With Law............................25
---------- ---- ---
3.2 Authorization, Validity and Effect of Agreements. 25
-------------- -------- --- ------ -- ----------
3.3 Survival of Representations and Warranties........26
-------- -- --------------- --- ----------
4. Indemnification............................................26
---------------
4.1 Indemnification by Seller.........................26
--------------- -- ------
4.2 Indemnification by Buyer. .......................28
--------------- -- -----
4.3 Conditions of Indemnification.....................28
---------- -- ---------------
4.4 Monetary Limits of Indemnification................29
-------- ------ -- ---------------
4.5 Environmental Remediation.........................31
------------- -----------
5. Other Covenants and Agreements.............................32
----- --------- --- ----------
5.1 Guaranty of Receivables...........................32
-------- -- -----------
589876.1
iii
<PAGE>
5.2 Restrictive Covenants.............................32
----------- ---------
5.3 Escrow............................................34
------
5.4 Conduct of the Business...........................36
------- -- --- --------
5.5 Due Diligence; Access to Information and Customers37
--- ---------- ------ -- ----------- --- ---------
5.6 Acquisition Proposals.............................39
----------- ---------
5.7 Public Announcements..............................40
------ -------------
5.8 Notification of Certain Matters...................40
------------ -- ------- -------
5.9 Best Efforts......................................40
---- -------
5.10 Execution of Additional Documents.................40
--------- -- ---------- ---------
5.11 Fees and Expenses.................................41
---- --- --------
5.12 Limitation of Liability...........................41
---------- -- ---------
5.13 HSR Act Filings...................................41
--- --- -------
5.14 Employees.........................................41
---------
5.15 Dispute Resolution................................42
------- ----------
6. Conditions of Closing......................................42
6.1 Buyer's Conditions to Closing.....................42
6.2 Seller's Conditions to Closing....................45
7. Termination and Abandonment................................46
7.1 Reasons for Termination...........................46
7.2 Procedure Upon and Effect of Termination..........47
8. Miscellaneous..............................................48
-------------
8.1 Notices. ........................................48
-------
8.2 Binding Effect; Benefits..........................49
------- ------- --------
8.3 Entire Agreement.................................49
------ ---------
8.4 Governing Law.....................................49
--------- ---
8.5 Survival..........................................49
--------
8.6 Counterparts......................................49
------------
8.7 Headings..........................................50
--------
8.8 Waivers...........................................50
-------
8.9 Incorporation of Exhibits and Schedules...........50
------------- -- -------- --- ---------
8.10 Severability......................................50
------------
8.11 Assignability.....................................50
-------------
8.12 Drafting..........................................50
--------
8.13 References........................................51
----------
8.14 Calendar Days, Weeks and Months...................51
-------- ----- ----- --- ------
8.15 Gender; Plural and Singular.......................51
------- ------ --- --------
8.16 Cumulative Rights.................................51
---------- ------
8.17 No Implied Covenants..............................51
-- ------- ---------
8.18 Attorneys' Fees...................................51
---------- ----
8.19 Indirect Action...................................51
-------- ------
589876.1
iv
<PAGE>
SCHEDULES...........................................................53
EXHIBITS............................................................54
589876.1
v
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is entered into this
_____ day of September, 1998, by and between HydroChem Industrial Services,
Inc., a Delaware corporation ("Buyer"), and Valley Systems, Inc., a Delaware
corporation ("Seller").
WHEREAS, Seller desires to sell, and Buyer desires to purchase,
substantially all of the assets of Seller for the consideration and upon the
terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises, the provisions and
the respective agreements hereinafter set forth, the parties hereto hereby agree
as follows:
Definitions
For purposes of this Agreement, the following terms have the following
meanings.
"affiliate"--as defined in Section 4.1.
"Agreement"--this Asset Purchase Agreement.
"Assets"--as defined in Section 1.1.1.
"Bill of Sale, Assignment and Assumption Agreement"--as defined in
Section 1.1.3.
"Board"--as defined in Section 1.5.
"Business Property Rights"--as defined in Section 2.16.2.
"Buyer"--HydroChem Industrial Services, Inc., a Delaware corporation.
"Buyer Indemnitees"--as defined in Section 4.1.
"Buyer's Ceiling Amount"--as defined in Section 4.4.2.
"CERCLA"--the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 or any successor law, and regulations and rules issued
pursuant to that Act or any successor law.
"Claim"--as defined in Section 4.3.
"Closing"--as defined in Section 1.6.
"Closing Balance Sheet"--as defined in Section 2.8.5.
<PAGE>
"Closing Date"--as defined in Section 1.6.
"Closing Financial Statements"--as defined in Section 2.8.5.
"Closing Schedules"--as defined in Section 1.7.
.
"Code"--the Internal Revenue Code of 1986, as amended, and the
regulations and rules issued pursuant thereto, as amended.
"control"--as defined in Section 4.1.
"Customer"--as defined in Section 5.2.1.
"Delivery Date"--as defined in Section 1.7.
"Employee"--any employee of Seller or any Subsidiary.
"Encumbrances"--as defined in Section 2.4.2.
"Environment"--soil, land surface or subsurface strata, surface waters
(including navigable water, ocean waters, streams, ponds, drainage basins, and
wetlands), ground water, sediments, ambient air and natural resources.
"Environmental Contamination"--as defined in Section 4.5.1.
"Environmental Due Diligence Review"--as defined in Section 5.5.2.
"Environmental Law"--any federal, state, or local law that governs
protection of the Environment, including, without limitation, those laws
relating to the Release, storage or handling of Hazardous Materials; those
relating to the treatment, storage, transport, disposal, or other management of
waste materials of any kind, and those relating to the protection of
Environmentally sensitive areas.
"Environmental Liabilities"--any costs, damages, expense, fine,
penalty, costs of investigation and remediation or any other liability arising
from or under any Environmental Law.
"Environmental Remediation"--as defined in Section 4.5.2.
"ERISA"--the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Escrow Agent"--as defined in Section 5.3.1
"Escrow Agreement"--as defined in Section 5.3.1.
a-72684.2
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<PAGE>
"Escrow Fund"--as defined in Section 1.2.
"Exchange Act"--as defined in Section 2.8.1.
"Expenses"--as defined in Section 5.11.
"Facilities"--any real property, leaseholds, or other interests
currently owned or operated by Seller or any Subsidiary and any buildings,
plants or structures currently owned or operated by Seller or any Subsidiary.
"Former Facilities"--any real property, leaseholds, or other interests
formerly owned or operated by Seller or any Subsidiary and any buildings, plants
or structures formerly owned or operated by Seller or any Subsidiary.
"Financial Statements"--as defined in Section 2.8.4.
"Floor Amount"--as defined in Section 4.4.
"fraud"--fraud perpetrated or alleged to have been perpetrated by an
Indemnifying Party against an Indemnified Party.
"GAAP"--United States generally accepted accounting principles,
applied on a consistent basis.
"Governmental Body"--any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental authority of any nature (including any governmental
agency, branch, department, or entity and any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"Hazardous Materials"--any "hazardous substance," "pollutant or
contaminant," and "petroleum" and "natural gas liquids," as those terms are
defined or used in Section 101 of CERCLA, and any other substances regulated
because of their effect or potential effect on public health and/or the
Environment including, without limitation, PCB's, lead paint, asbestos, and
radioactive materials.
a-72684.2
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<PAGE>
"HSR Act"--the Hart-Scott-Rodino Antitrust Improvements Act of 1976 or
any successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Indemnified Party"--as defined in Section 4.3.
"Indemnifying Party"--as defined in Section 4.3.
"knowledge"--the actual knowledge of any director, officer, regional
manager, or branch manager of Seller.
"Leases"--as defined in Section 2.12.2.
"Legal Requirement"--any applicable federal, state, local, municipal,
foreign, international, multinational, or other administrative order,
constitution, law, ordinance, principle of common law, regulation, statute, or
treaty.
"Losses"--as defined in Section 4.1.
"material"--an item is "material" if its presence or absence, as
required by the context, would have a material adverse effect upon the assets,
financial condition, results of operations, business or affairs of a Person and
any affiliates of such Person with whom such Person, in accordance with GAAP,
consolidates financial statements, taken as a whole.
"Order"--any award, decision, injunction, judgment, order, ruling, or
verdict entered, issued, made, or rendered by any court, administrative agency,
or other Governmental Body or by any arbitrator.
"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.
"Preliminary Schedules"--as defined in Section 1.7.
.
"Proceeding"--any action, arbitration, audit, hearing, investigation,
inquiry, 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.
"Proxy Materials"--as defined in Section 1.5.
"Purchase Price"--as defined in Section 1.2.
"Receivables Guaranty"--as defined in Section 5.1.
a-72684.2
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<PAGE>
"Release"--any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, pumping, pouring, emptying, or injecting into the
Environment, whether intentional or unintentional.
"Rules"--as defined in Section 5.15.
"Schedules"--all Schedules to this Agreement, including the
Preliminary Schedules and the Closing Schedules.
"SEC"--as defined in Section 2.8.2.
.
"SEC Reports"--as defined in Section 2.8.2.
"Securities Act"--as defined in Section 2.8.1.
"Seller"--Valley Systems, Inc., a Delaware corporation.
"Seller's Ceiling Amount"--as defined in Section 4.4.1.
"Stockholders"--as defined in Section 2.3.
"Stockholders' Meeting"--as defined in Section 1.5.
"Subsidiary"--as defined in Section 2.4.1.
"Superior Takeover Proposal"--as defined in Section 5.6.
"Termination Date"--as defined in Section 5.4.1.
"Third Party"--as defined in Section 5.6.
"Third Party Claim"--as defined in Section 4.3.
"Threatened"--a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand, notice or statement has
been made (orally, to the knowledge of Seller, or in writing).
"WARN"--as defined in Section 2.18.7.
a-72684.2
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<PAGE>
1. Purchase and Sale of Assets; Assumption of Specified Liabilities.
1.1 Agreement to Purchase and Sell.
1.1.1 Upon the terms and subject to the conditions
set forth herein and upon the representations and warranties
made herein by each of the parties hereto to the other, at the
Closing (as such term is hereinafter defined), Seller shall
sell, grant, convey, assign, transfer and deliver to Buyer,
and Buyer shall purchase and acquire from Seller, all of the
assets and properties of Seller of every kind, nature and
description (wherever located), as the same shall exist on the
Closing Date, except those assets and properties specifically
excluded pursuant to Section 1.1.2 hereof (said assets and
properties so to be sold, granted, conveyed, transferred,
assigned and delivered to Buyer being hereinafter collectively
referred to as the "Assets"). Without limiting the generality
of the foregoing, the Assets shall include, but shall not be
limited to, the following assets and properties of Seller:
(i) all real property, interests in real
property (including, without limitation, leases), and
structures and improvements located on real property,
and all the easements and uses which benefit any such
real property;
(ii) all notes and accounts receivable;
(iii) all machinery, inventories,
inventories of parts, computers, furniture,
furnishings, fixtures, office supplies and equipment,
automobiles, trucks, vehicles, returnable containers,
tools and parts, and work in process;
(iv) all technology, know-how, designs,
devices, processes, methods, inventions, drawings,
schematics, specifications, standards, trade secrets
and other proprietary information, and all patents
and applications therefor and all trademarks and
trade names, trademark and trade name registrations,
service marks and service mark registrations,
copyrights and copyright registrations, the
applications therefor and the licenses thereto,
together with the goodwill and the business
appurtenant thereto;
(v) all drawings, blueprints,
specifications, designs and data of Seller (including
drawings, blueprints, specifications, designs and
data of Seller used by or in the possession of any
Third Party);
(vi) all catalogues, brochures, sales
literature, promotional material and other selling
material of Seller;
(vii) all books and records and all files,
documents, papers, agreements, books of account and
other records pertaining to the Assets or
a-72684.2
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<PAGE>
to the business of Seller which are located at the
offices, plants, warehouses or other locations used
in connection with the Assets;
(viii) all rights, title and interest of
Seller under all contracts, agreements, licenses,
leases, sales orders, purchase orders and other
commitments Buyer will assume pursuant to Section 1.3
hereof;
(ix) all laboratory equipment (including
laboratory notes and supplies) and chemical
inventories;
(x) all lists of past, present and
qualified prospective customers of the business of
Seller;
(xi) all goodwill relating to the business
of Seller as a going concern, together with the right
to represent oneself to third parties as the new
owner of such business;
(xii) all governmental and product licenses
and permits, approvals, license and permit
applications and license and permit amendment
applications;
(xiii) all claims against third parties,
whether or not asserted and whether now existing or
hereafter arising, related to the business of Seller
or the Assets (including, without limitation, all
claims based on any indemnities or warranties in
favor of Seller relating to any of the Assets);
(xiv) all other assets and rights of every
kind and nature, real or personal, tangible or
intangible, of Seller;
(xv) all cash on hand, including bank
accounts and temporary cash investments;
(xvi) all claims for refunds of taxes and
other governmental charges for periods ending on or
prior to the Closing Date;
(xvii) all shares of capital stock of the
Subsidiaries; and
(xviii) all safe deposit boxes and
lockboxes, as well as the contents thereof.
Without limiting the generality of the foregoing, the
Assets shall, except as set forth in Section 1.1.2 hereof,
include all assets set forth in a detailed list of fixed
assets as of June 30, 1998, prepared from the accounting
records of Seller and attached hereto as Schedule 1.1.1, and
all such assets as may have been acquired by Seller which
would be included on a list prepared in like manner from such
a-72684.2
7
<PAGE>
accounting records as of the Closing Date, except any such
assets which may have been disposed of since June 30, 1998, in
the ordinary course of business on a basis consistent with
past practice.
1.1.2 Anything herein contained to the contrary
notwithstanding, the following assets and properties of Seller
are specifically excluded from the Assets and shall be
retained by Seller:
(i) claims or rights against third parties
relating to liabilities or obligations which are not
expressly assumed by Buyer pursuant to Section 1.3
hereof; and
(ii) rights under insurance policies,
including rights to any cancellation value on the
Closing Date, except that Seller shall assign, to the
extent such assignment is enforceable, to Buyer rights
under policies (or make the proceeds available) with
respect to claims arising out of transactions prior to
the Closing Date which Buyer shall have agreed to
assume pursuant to Section 1.3 below; in the event that
such an assignment is not enforceable and in order that
the full value of all rights of the character described
in this clause (ii) of this Section 1.1.2 and all
claims on such policies may be realized, Seller shall,
by itself or by its agents, at the request and expense
and under the direction of Buyer, until the entire
Escrow Fund has been released pursuant to Section 5.3
hereof, in the name of Seller or otherwise as Buyer
shall specify and as shall be permitted by law, take
all such action and do or cause to be done all such
things as shall in the reasonable opinion of Buyer be
necessary or proper (x) in order that the rights of
Seller under such policies shall be preserved and (y)
for, and to facilitate, the collection of the monies
due and payable, and to become due and payable, to
Seller in and under every such policy in respect of
every such claim, and Seller shall hold the same for
the benefit of and pay the same over promptly to Buyer.
(iii) Seller's stock books, minute books and
other corporate and financial books and records (but
Seller shall, upon request by Buyer and, after Closing,
at Buyer's expense, provide copies of such financial
books and records to Buyer).
1.1.3 Subject to Section 1.1.4 hereof, at the Closing,
Seller shall execute and deliver to Buyer (i) a Bill of Sale,
Assignment and Assumption Agreement, in the form attached hereto
as Exhibit "A" (the "Bill of Sale, Assignment and Assumption
Agreement"), under the terms of which Seller shall sell, grant,
convey, assign, transfer and deliver the Assets to Buyer, and
(ii) such other bills of sale, deeds, instruments of assignment
and other appropriate documents as may be reasonably requested
by Buyer in order to carry out the intentions and purposes
hereof.
a-72684.2
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<PAGE>
1.1.4 Nothing in this Agreement shall be construed as
an attempt or agreement to assign (i) any contract, agreement,
license, lease, sales order, purchase order or other commitment
which is nonassignable without the consent of the other party or
parties thereto unless such consent shall have been given or
(ii) any contract or claim as to which all the remedies for the
enforcement thereof enjoyed by Seller would not pass to Buyer as
an incident of the assignments provided for hereby. In order,
however, that the full value of every contract and claim of the
character described in clauses (i) and (ii) of this Section
1.1.4 and all claims and demands on such contracts may be
realized, Seller shall, by itself or by its agents, at the
request and expense and under the direction of Buyer, until the
entire Escrow Fund has been released pursuant to Section 5.3
hereof, in the name of Seller or otherwise as Buyer shall
specify and as shall be permitted by law, take all such action
and do or cause to be done all such things as shall in the
reasonable opinion of Buyer be necessary or proper (x) in order
that the rights and obligations of Seller under such contracts
shall be preserved and (y) for, and to facilitate, the
collection of the monies due and payable, and to become due and
payable, to Seller in and under every such contract and claim
and in respect of every such claim and demand, and Seller shall
hold the same for the benefit of and pay the same over promptly
to Buyer.
1.2 Purchase Price; Payment. Upon the terms and subject to the
conditions set forth herein, in reliance upon the representations,
warranties, covenants and agreements of Seller contained herein, and in
exchange for the sale, grant, conveyance, assignment, transfer and
delivery of the Assets, Buyer agrees, subject to Section 1.9 hereof, to
pay to Seller the sum of $29,800,771 (the "Purchase Price"), payable at
the Closing as follows: (i) by wire transfer of $25,800,771 in
immediately available funds to Seller in such bank accounts as
designated by Seller in writing to Buyer at least 24 hours prior to the
Closing; and (ii) by depositing $4,000,000 (the "Escrow Fund") with the
Escrow Agent to be held and disposed of pursuant to the Escrow
Agreement.
1.3 Assumption of Specified Liabilities. At the Closing, and as
additional consideration for the sale, grant, conveyance, assignment,
transfer and delivery of the Assets, subject, however, to Sections 1.1.4
and 1.4 hereof, Buyer shall assume and agree to pay, perform and
discharge when due only the following:
(i) those liabilities or obligations of Seller which
are listed on Schedule 1.3A hereof (which shall be the detail of
the liabilities reflected in the balance sheet included in the
Financial Statements dated June 30, 1998 as updated to the
Closing Date pursuant to Section 1.9 hereof) which updated
Schedule 1.3A shall prevail in the event of a conflict between
the Closing Balance Sheet and such updated Schedule 1.3A); and
(ii) those liabilities and obligations of Seller which
arise under the terms of a contract, agreement, license, lease,
sales order, purchase order or other commitment which is listed
on Schedule 1.3B hereof (as updated to the Closing Date pursuant
to Section 1.9 hereof) or is not required by the last sentence
of this Section
a-72684.2
9
<PAGE>
1.3(ii) to be so listed. Schedule 1.3B shall only list (x)
master service agreements of Seller assumed by Buyer and (y)
contracts, agreements, licenses, leases, sales orders, purchase
orders or other commitments of Seller assumed by Buyer which
involve services or annual payments to or from Seller in excess
of $10,000.
Subject to Sections 1.1.4 and 1.4 hereof, at the Closing, Buyer
shall execute and deliver to Seller the Bill of Sale, Assignment and
Assumption Agreement assuming the liabilities and obligations of Seller
referred to in this Section 1.3.
1.4 Non-Assumption of Certain Liabilities. Buyer is not
assuming, and shall not be deemed to have assumed, any liabilities or
obligations of Seller of any kind or nature whatsoever, except as
expressly provided in Section 1.3 hereof. Anything in Section 1.3 hereof
or elsewhere herein to the contrary notwithstanding and without limiting
the generality of the foregoing, it is hereby agreed that Buyer is not
assuming, and shall not be deemed to have assumed, any liability and
shall not have any obligation for or with respect to any liability or
obligation of Seller:
(i) under any employee benefit plan of Seller;
(ii) in respect of (x) any sales, use or excise taxes,
income taxes, taxes based on or measured by income or franchise
taxes attributable to periods or events prior to or ending on
the Closing Date or (y) any sales, use or excise taxes, income
taxes, or any other taxes, legal, accounting, brokerage,
finder's fees, or other expenses of whatsoever kind or nature
incurred by Seller or any affiliate, stockholder, director,
Employee or officer of Seller as a result of the consummation of
the transactions contemplated hereby (other than such taxes,
fees and expenses which are accrued in the ordinary course of
business prior to Closing);
(iii) arising out of any action, condition, suit or
proceeding based upon an event occurring or a claim arising (x)
prior to the Closing Date or (y) after the Closing Date in the
case of claims in respect of products sold or services provided
by Seller prior to the Closing Date and attributable to acts
performed or omitted by Seller prior to the Closing Date,
provided, however, that Buyer shall assume any such liability or
obligation to the extent it has been reserved against on the
Closing Balance Sheet;
(iv) pursuant to existing loan agreements (other than
payment obligations assumed pursuant to Section 1.3 above), and
all agreements executed in connection therewith; or
(v) to any present or former shareholder, officer,
director or Employee of Seller (including, without limitation,
for bonuses, fringe benefits, vacation or holiday pay, wages or
severance pay, but excluding any accrued liabilities
specifically assumed by Buyer pursuant to Section 1.3 above).
a-72684.2
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<PAGE>
1.5 Stockholder Approval; Voting. Seller, acting through its
Board of Directors (the "Board"), shall, unless there exists a Superior
Takeover Proposal, as soon as practicable after the date hereof (i) duly
call, prepare (in cooperation with Buyer) and give written notice of,
convene and hold a special meeting of its stockholders (the
"Stockholders' Meeting") for the purpose of considering and taking
action upon this Agreement and all transactions contemplated hereby;
(ii) include in such written notice of the Stockholders' Meeting the
recommendation of the Board that the stockholders of Seller vote in
favor of the approval and adoption of this Agreement and all
transactions contemplated hereby, unless the Board has determined, in
accordance with Section 5.6, that there exists a Superior Takeover
Proposal, in which case the Board may recommend that the stockholders of
Seller vote against the approval and adoption of this Agreement and all
transactions contemplated hereby; (iii) distribute to its stockholders
the definitive proxy materials with respect to the sale of the Assets in
accordance with Regulation 14A under the Exchange Act, other applicable
federal and state laws, (the "Proxy Materials") and (iv), use its
reasonable efforts to obtain the necessary approvals by Seller's
stockholders of this Agreement and all transactions contemplated hereby.
Contemporaneously herewith, each of Rollins Investment Fund and Rollins
Holding Company, Inc., has executed an agreement whereby each of them
has agreed to vote or cause to be voted at the Stockholders' Meeting all
shares of capital stock respectively beneficially owned by them in favor
of the transactions contemplated by this Agreement unless there exists a
Superior Takeover Proposal.
1.6 Closing. The closing of the purchase and sale of the Assets
provided herein (the "Closing") shall occur (i) at the office of Haynes
and Boone, LLP, 901 Main Street, Suite 3100, Dallas, Texas 75202, at
10:00 a.m., local time, on the first business day immediately following
the day on or by which the last to be fulfilled or waived of the
conditions set forth in Section 6 hereof shall be fulfilled or waived in
accordance herewith or (ii) at such other time and place or on such
other date as Seller and Buyer may mutually agree (such date and time of
Closing being herein referred to collectively as the "Closing Date").
1.7 Delivery of Schedules and Exhibits. Within twenty business
days of the date of this Agreement, Seller shall deliver to Buyer all
schedules and Exhibits to this Agreement (the date of such delivery
being referred to herein as the "Delivery Date"), such schedules being
true and correct in all material respects at and as of the Delivery Date
(except for Schedules 1.1.1 and 1.3A, which shall be true and correct at
and as of June 30, 1998) (collectively, the "Preliminary Schedules").
The Preliminary Schedules shall be updated as required pursuant to
Section 1.3 hereof and otherwise as necessary so as to be true and
correct at and as of the Closing Date (collectively, as so updated, the
"Closing Schedules"). The Closing Schedules shall be delivered in
accordance with Section 1.9 hereof; provided that any objection by Buyer
to any of the Closing Schedules delivered not later than five days prior
to Closing must be made by Buyer prior to Closing. Each of the
Preliminary Schedules and the Closing Schedules shall be in a form
reasonably satisfactory to Buyer.
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<PAGE>
1.8 Allocation of Purchase Price. The consideration given by
Buyer under this Agreement (including without limitation the payment of
the Purchase Price and the assumption of liabilities pursuant to Section
1.3 hereof) shall be allocated among the Assets in accordance with
section 1060 of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder. A schedule setting forth such proposed
allocations shall be prepared by Buyer and delivered to Seller within
120 days following the Closing Date. The allocation as set forth on such
schedule shall be reasonably determined by Buyer and shall be reasonably
satisfactory to Seller. Buyer and Seller agree to make such allocation
in filing their respective tax returns or declarations for applicable
United States income tax purposes.
1.9 Closing Balance Sheet Adjustment.
1.9.1 Within 45 days following the Closing Date,
Seller, with the reasonable assistance and cooperation of Buyer
(including use of employees of Buyer who were employees of
Seller immediately prior to Closing at no cost to Seller), shall
prepare and deliver to Buyer the Closing Balance Sheet and the
Closing Schedules. The Closing Balance Sheet and the Closing
Schedules shall be prepared from the books and records of Seller
and the Subsidiaries concerning their respective businesses in
accordance with GAAP on a basis consistent with that used in the
preparation of the balance sheet included in the Financial
Statements dated June 30, 1998. Buyer, with the reasonable
assistance and cooperation of Seller, shall have 30 days to
review the Closing Balance Sheet and the Closing Schedules after
receipt thereof from Seller. On or before the expiration of such
30-day period, Buyer shall deliver to Seller a written statement
accepting or objecting to the Closing Balance Sheet and the
Closing Schedules. In the event that Buyer shall object to the
Closing Balance Sheet, the Closing Schedules or both, such
statement shall include a detailed itemization of Buyer's
objections and its reasons therefor. If no statement is
delivered by Buyer to Seller within such 30-day period, Buyer
shall be deemed to have accepted the Closing Balance Sheet and
the Closing Schedules.
1.9.2 In the event that Buyer shall timely object to
the Closing Balance Sheet, Buyer and Seller shall promptly meet
and in good faith attempt to resolve such objection or
objections. Any of such objections which cannot be resolved
between Buyer and Seller within 30 days following Seller's
receipt of Buyer's statement of objections shall be submitted to
binding arbitration conducted by the independent accounting firm
of Arthur Andersen LLP. In the event that Buyer shall timely
object to any of the Closing Schedules, such objection shall be
resolved in accordance with Section 5.15 hereof.
1.9.3 In the event that the net assets reflected on the
Closing Balance Sheet, after all of Buyer's objections thereto
shall have been resolved in accordance with Section 1.9.2
hereof, are greater or less than $5,353,593 (i.e. the amount of
the net assets reflected on the balance sheet included in the
Financial Statements dated June 30, 1998), then the amount of
any such excess or deficiency shall be paid to Seller (in the
case of an excess) or Buyer (in the case of a deficiency) by the
other by wire
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transfer of immediately available United States funds within
three business days of such resolution, receipt of Buyer's
written acceptance of the Closing Balance Sheet or expiration of
Buyer's 30-day period for objection to the Closing Balance
Sheet.
2. Representations and Warranties of Seller. Subject to attachment of
the Schedules as provided in Section 1.7 hereof, Seller hereby represents and
warrants to Buyer as follows (Seller reserving the right to attach at the
Delivery Date and update at and as of the Closing Date Schedules in addition to
those called for herein and to add references thereto in the following
warranties and representations as appropriate):
2.1 Existence; Good Standing; Corporate Authority; Compliance
With Law. Seller (i) is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation; (ii) is duly licensed or qualified to do business as a
foreign corporation and is in good standing under the laws of any other
jurisdictions in which the character of the properties owned or leased
by it therein or in which the transaction of its business makes such
qualification necessary except where the failure to be so qualified
would not be material; (iii) has all requisite corporate power and
authority to own its properties and carry on its business as now
conducted; (iv) is not in material default with respect to any Order of
any Governmental Body or arbitration board; (v) is not in material
violation of any Legal Requirement to which it is subject; and (vi) has
obtained all material licenses, permits and other authorizations and has
taken all actions required by applicable laws or governmental
regulations in connection with its business as now conducted.
2.2 Authorization, Validity and Effect of Agreements.
2.2.1 The execution and delivery of this Agreement and
all agreements and documents contemplated hereby by Seller, and
the consummation by it of the transactions contemplated hereby,
have been duly authorized by the Board and, except for the
approval of Seller's stockholders, no other corporate
proceedings on the part of Seller are necessary to authorize
this Agreement and the transactions contemplated hereby.
2.2.2 This Agreement constitutes, and all agreements
and documents contemplated hereby when executed and delivered
pursuant hereto for value received will constitute, the valid
and legally binding obligations of Seller enforceable in
accordance with their terms, except that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
fraudulent transfer, moratorium, bulk sales, preference,
equitable subordination, marshalling or other similar laws of
general application now or hereafter in effect relating to the
enforcement of creditors' rights generally and except that the
remedies of specific performance, injunction and other forms of
equitable relief are subject to certain tests of equity
jurisdiction, equitable defenses and the discretion of the court
before which any proceeding therefor may be brought.
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2.2.3 The execution and delivery of this Agreement by
Seller does not, and the consummation of the transactions
contemplated hereby by Seller will not, except as set forth in
Schedule 2.2 hereof (which Schedule 2.2 will include reference
to compliance with the HSR Act), (i) require the consent,
approval or authorization of, or declaration, filing or
registration with, any Governmental Body or any Third Party;
(ii) result in the breach of any term or provision of, or
constitute a default under, or result in the acceleration of or
entitle any party to accelerate (whether after the giving of
notice or the lapse of time or both) any obligation under, or
result in the creation or imposition of any Encumbrance upon any
part of the property of Seller or any Subsidiary pursuant to any
provision of, any Order, indenture, mortgage, lease, license,
lien, or other agreement or instrument to which Seller or any
Subsidiary is a party or by which any of them is bound; or (iii)
violate or conflict with any provision of the bylaws or the
Certificate of Incorporation of Seller or of any Subsidiary as
amended to the date hereof.
2.3 Capitalization and Ownership. The authorized capital stock
of Seller consists solely of (i) 12,000,000 shares of common stock, par
value $.01 per share, of which 7,906,617 shares and no more are
presently issued and outstanding and (ii) 55,000 shares of Series C
preferred stock, par value $0.10 per share, of which 55,000 shares and
no more are presently issued and outstanding. All of such capital stock
has been duly authorized and validly issued and is fully paid and
nonassessable. Except as set forth in Schedule 2.3B hereof, there are no
outstanding rights, warrants, options, subscriptions, agreements or
commitments giving anyone any right to require Seller to sell or issue,
or to require the Stockholders to sell or otherwise transfer, any
capital stock or other securities of Seller.
2.4 Affiliated Entities.
2.4.1 Except as set forth in Schedule 2.4 hereof,
Seller does not own, directly or indirectly, a majority or
controlling interest in any corporation, business trust, joint
stock company, partnership or other business organization or
association relating to the business operations of Seller. The
affiliated entities set forth in Schedule 2.4 hereof are
hereinafter referred to individually as a "Subsidiary" and
collectively as the "Subsidiaries". Schedule 2.4 includes each
significant subsidiary, as such term is defined in Rule 1-02 of
Regulation S-X promulgated by the SEC, of Seller.
2.4.2 Except as otherwise set forth in Schedule 2.4
hereof, Seller owns, directly or indirectly, all of the issued
and outstanding capital stock or other securities or ownership
interest of each of the Subsidiaries free and clear of all
options, indentures, mortgages, leases, licenses, restrictions
(other than restrictions under applicable securities laws),
liens, charges, assessments, pledges, security interests,
adverse claims, equities, limitations, community property
interests, conditions, equitable interests, rights of first
refusal, easements, servitudes or other encumbrances of any
kind, including any restriction on use, voting, transfer,
receipt of income, or exercise of any other attribute of
ownership (collectively,
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"Encumbrances"), and all of the capital stock or other
securities or ownership interests in each of the Subsidiaries
which is owned, directly or indirectly, by Seller have been duly
authorized and validly issued and are fully paid and
nonassessable. Except as set forth in Schedule 2.4 hereof, none
of the Subsidiaries has any commitment to issue or sell any
shares of its capital stock or other securities or ownership
interest or any securities or obligations convertible into or
exchangeable for, or giving any Person (other than Seller) any
right to acquire from such Subsidiary, any shares of capital
stock or other securities or ownership interest of such
Subsidiary.
2.4.3 Each Subsidiary (i) is duly organized, validly
existing and in good standing under the laws of its jurisdiction
of organization; (ii) has all requisite power and authority to
own its properties and carry on its business as now conducted;
(iii) is duly licensed or qualified to do business and is in
good standing in each jurisdiction in which the character of the
properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary
except where the failure to be so qualified would not be
material; (iv) has obtained all material licenses, permits and
other authorizations and has taken all actions required by
applicable laws or governmental regulations in connection with
its business as now conducted; (v) is not in material default
with respect to any order of any court, governmental authority
or arbitration board or tribunal to which it is a party or is
subject; and (vi) is not in material violation of any laws,
ordinances, governmental rules or regulations to which it is
subject.
2.4.4 No Subsidiary nominally or beneficially owns any
material assets or is subject to any material liabilities.
2.5 Jurisdictions. Schedule 2.5 hereof contains a list of all
jurisdictions in which Seller and each Subsidiary is presently licensed
or qualified to do business. To the best knowledge of Seller, Seller and
each Subsidiary has complied in all material respects with all
applicable laws of each such jurisdiction and all applicable rules and
regulations of each regulatory agency therein. Neither Seller nor any
Subsidiary (i) has been denied admission to conduct any type of business
in any jurisdiction in which it is not presently admitted as set forth
in such Schedule 2.5, (ii) has had its license or qualifications to
conduct business in any jurisdiction revoked or suspended, or (iii) has
been involved in any Proceeding to revoke or suspend a license or
qualification.
2.6 Records. Seller shall have delivered or made available to
Buyer and its counsel on or prior to the Delivery Date true and complete
copies of the Certificate of Incorporation, bylaws, minutes of all
meetings of directors and shareholders and certificates reflecting all
actions taken by the directors or shareholders without a meeting,
partnership agreements and certificates, and other organizational
documents, of Seller and each Subsidiary, and such documents are in full
force and effect on the date hereof.
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2.7 Officers and Directors; Bank Accounts; Powers of Attorney.
The officers and directors of each Subsidiary are as set forth in
Schedule 2.7 hereof. Schedule 2.7 hereof also sets forth (i) the name of
each bank, savings institution or other Person with which Seller or any
Subsidiary has an account, lockbox or safe deposit box and the names and
identification of all Persons authorized to drawn thereon or to have
access thereto, and (ii) the names of all Persons, if any, holding
powers of attorney from any Subsidiary and a summary statement of the
terms thereof.
2.8 Financial Statements.
2.8.1 Since June 30, 1996, the filings required to be
made by Seller and the Subsidiaries under the Securities Act of
1933, as amended (the "Securities Act"), or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), have been
filed with the SEC as required by each such law or regulation,
including all forms, statements, reports, agreements and all
documents, exhibits, amendments and supplements appertaining
thereto, and Seller and the Subsidiaries have complied in all
material respects with all applicable requirements of the
appropriate act and the rules and regulations thereunder.
2.8.2 Seller shall have made available to Buyer on or
prior to the Delivery Date a true and complete copy of each
report, schedule, registration statement and definitive proxy
statement filed by Seller and the Subsidiaries with the
Securities and Exchange Commission (the "SEC") since June 30,
1996 (such documents as filed, and any and all amendments
thereto, being collectively referred to herein as the "SEC
Reports").
2.8.3 The SEC Reports, including without limitation any
financial statements or schedules included therein, at the time
filed, and all forms, reports or other documents filed by Seller
and the Subsidiaries with the SEC after the date hereof, did not
and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
2.8.4 The audited consolidated financial statements and
unaudited interim financial statements of Seller and the
Subsidiaries included in the SEC Reports (collectively, the
"Financial Statements") have been prepared, and the audited
consolidated financial statements and unaudited interim
financial statements of Seller and the Subsidiaries as included
in all forms, reports or other documents filed with the SEC
after the date hereof will be prepared in accordance with GAAP
(except as may be indicated therein or in the notes thereto and
except with respect to unaudited statements as permitted by Form
10-Q) and fairly present in all material respects the financial
position of Seller and the Subsidiaries as of the respective
dates thereof or the results of operations and cash flows for
the respective periods then ended, as the
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case may be, subject, in the case of the unaudited interim
financial statements, to normal, recurring audit adjustments.
2.8.5 As soon as reasonably practical following the
Closing Date, Seller (with the reasonable assistance and
cooperation of Buyer and employees of Buyer who were employees
of Seller immediately prior to Closing, such assistance to be at
no cost to Seller) will cause to be prepared each of the
following with respect to Seller and the Subsidiaries, as at and
of the Closing Date: an audited consolidated balance sheet (the
"Closing Balance Sheet"), an audited consolidated statement of
operations, an audited consolidated statement of cash flows and
an audited consolidated statement of stockholders' equity
(collectively with the Closing Balance Sheet, the "Closing
Financial Statements"), which Closing Financial Statements will
be prepared in accordance with GAAP on a basis consistent with
the Financial Statements. In addition, the Closing Balance Sheet
shall be in the form of the balance sheet included in the
Financial Statements dated June 30, 1998. One half of the fees
paid to independent accounting firms incurred in connection with
the preparation of the Closing Financial Statements shall be
paid by Seller and the other half shall be paid by Buyer.
2.9 Undisclosed Liabilities. Neither Seller nor any of the
Subsidiaries has any liabilities or obligations (whether absolute,
accrued, contingent or otherwise) of a nature required by GAAP to be
reflected in a consolidated balance sheet, except liabilities,
obligations or contingencies (i) that are accrued or reserved against in
the audited consolidated financial statements of Seller or reflected in
the notes thereto for the year ended June 30, 1998, (ii) have been
accrued or been reserved against since June 30, 1998, and are disclosed
on Schedule 2.9 or (iii) that were incurred after June 30, 1998, in the
ordinary course of business and would not have a material effect on
Seller or any Subsidiary.
2.10 Absence of Certain Changes or Events. Since June 30, 1998,
neither Seller nor any Subsidiary has:
(i) incurred any obligation or liability (fixed or
contingent), except normal trade or business obligations
incurred in the ordinary course of business and consistent with
past practice, none of which is materially adverse, and except
in connection with this Agreement and the transactions
contemplated hereby;
(ii) discharged or satisfied any Encumbrance or paid
any obligation or liability (fixed or contingent), other than in
the ordinary course of business and consistent with past
practice;
(iii) mortgaged, pledged or subjected to any
Encumbrance any of its assets or properties (other than inchoate
real estate tax liens not due and payable, mechanic's,
materialman's and similar statutory liens arising in the
ordinary course of business and purchase money security
interests arising as a matter of law between the date of
delivery and payment);
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(iv) transferred, leased or otherwise disposed of any
of its assets or properties except for a fair consideration in
the ordinary course of business and consistent with past
practice or, except in the ordinary course of business and
consistent with past practice, acquired any assets or
properties;
(v) cancelled or compromised any debt or claim, except
in the ordinary course of business and consistent with past
practice;
(vi) waived or released any rights of material value;
(vii) except pursuant to those contracts listed on the
Schedules hereof, transferred or granted any rights under any
concessions, leases, licenses, agreements, patents, inventions,
trademarks, trade names, service marks or copyrights or with
respect to any know-how;
(viii) made or granted any wage or salary increase
applicable to any group or classification of Employees
generally, entered into any employment contract with, or made
any loan to, or entered into any material transaction of any
other nature with, any officer or Employee, except in the
ordinary course of business or as listed on the Schedules
hereof;
(ix) entered into any transaction, contract or
commitment, except (a) contracts listed on the Schedules hereof
and (b) this Agreement and the transactions contemplated
hereby; or
(x) suffered any casualty loss or damage (whether or
not such loss or damage shall have been covered by insurance)
which affects in any material respect its ability to conduct
business.
2.11 Taxes. Seller and each Subsidiary (i) has duly and timely
filed or caused to be filed all federal, state, local and foreign tax
returns (including, without limitation, consolidated and/or combined tax
returns) required to be filed by it prior to the date hereof which
relate to it or with respect to which it or the Assets are liable or
otherwise in any way subject; (ii) has paid or fully accrued for all
taxes shown to be due and payable on such returns (which taxes are all
the taxes due and payable under the laws and regulations pursuant to
which such returns were filed); and (iii) has properly accrued for all
such taxes accrued in respect of it or the Assets for periods subsequent
to the periods covered by such returns. No deficiency in payment of
taxes for any period has been asserted by any taxing body and remains
unsettled at the date hereof and no audits are in process and no
notification of audit to begin has been received for which claims are
unasserted. Seller's tax returns for tax year 1995 have been audited by
the Internal Revenue Service. Copies of all federal, state, local and
foreign income (or franchise) tax returns of Seller and the Subsidiaries
for tax years 1996 and thereafter have been made available for
inspection by Buyer.
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2.12 Real Property.
2.12.1 Schedule 2.12A hereof identifies the real
property owned, either in whole or in part, by Seller and each
Subsidiary.
2.12.2 Schedule 2.12B hereof identifies the real
property leased or subleased by Seller and any Subsidiary (the
"Leases"). Neither Seller nor any Subsidiary has received any
written notification that it is in default with respect to any
of the Leases nor are there any disputes between any landlord
and Seller or any Subsidiary with respect to the Leases that
would affect the right of Seller or such Subsidiary, as the case
may be, to remain in possession or otherwise affect the current
use of the property leased. Except as set forth in Schedule
2.12B hereof, Seller or such Subsidiary, as the case may be, has
performed all material obligations required to be performed by
it to date under, and is not in material default in respect of,
any Lease, and no event has occurred which, with due notice or
lapse of time or both, would constitute such a material default.
To the best of Seller's knowledge, no other party to any Lease
is in material default in respect thereof, and no event has
occurred which, with due notice or lapse of time or both, would
constitute such a default.
2.12.3 True and complete copies of all Leases and all
title reports, surveys and other leases relating to the real
property owned by Seller or the Subsidiaries shall have been
made available to Buyer or its representatives on or prior to
the Delivery Date.
2.13 Personal Property. The machinery, equipment, furniture,
fixtures and other tangible personal property owned, leased or used by
Seller or any of the Subsidiaries are sufficient and adequate to carry
on their respective businesses as presently conducted and are in good
operating condition and repair and are suitable for the purposes for
which they are used, normal "wear and tear" excepted.
2.14 Title to Property; Encumbrances. Seller and each Subsidiary
has good, valid and, in the case of real properties, marketable title to
all the properties and assets shown on the Financial Statements or
thereafter acquired, including the Assets (except for (i) inventory
subsequently sold or otherwise disposed of for fair value in the
ordinary course of business consistent with past practice, (ii) accounts
receivable subsequently collected in the ordinary course of business
consistent with past practice and (iii) immaterial amounts of inventory,
machinery and equipment that have been determined to be obsolete or
otherwise not necessary and have been disposed of in the ordinary course
of business consistent with past practice), in each case free and clear
of all Encumbrances except for any Encumbrance reflected in Schedule
2.14 hereof. All buildings, structures, improvements and fixtures owned,
leased or used by Seller or any Subsidiary in the conduct of their
respective businesses conform in all material respects to all applicable
codes, and rules adopted by any applicable Governmental Body or national
and local associations and boards of insurance underwriters; and all
such buildings, structures, improvements and fixtures are in good
operating condition and repair, normal "wear and tear" excepted.
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2.15 Insurance. Schedule 2.15 hereof sets forth a complete list
of all policies of or binders for fire, liability, worker's compensation
and other forms of insurance owned or held by Seller or any Subsidiary.
All such policies, or binders thereof, are in full force and effect, all
premiums with respect thereto covering all periods up to and including
the respective dates set forth in Schedule 2.15 hereof have been paid,
and no notice of cancellation or termination has been received with
respect to any such policy or binder. Such policies or binders (i) are
sufficient for compliance with all requirements of law currently
applicable to Seller or any Subsidiary and of all agreements to which
Seller or any such Subsidiary is a party or by which any of them is
bound; (ii) are in such amounts and types of coverage as are customarily
maintained by businesses of the size and type as Seller's or any such
Subsidiary's; (iii) provide insurance coverage adequate for the Assets
and present operations of Seller and any such Subsidiary; (iv) will
remain in full force and effect through the respective dates set forth
in Schedule 2.15 hereof without the payment of additional premiums; and
(v) will not in any way be affected by, or terminate or lapse by reason
of, the transactions contemplated by this Agreement. Schedule 2.15
hereof also identifies all risks which Seller or any Subsidiary has
designated as being self-insured. Neither Seller nor any Subsidiary has
been refused any insurance with respect to its assets or operations, nor
has its coverage been limited, by any insurance carrier to which it has
applied for any such insurance or with which it has carried insurance
during the last five years.
2.16 Business Property Rights.
2.16.1 Schedule 2.16 hereof sets forth (i) all computer
software, patents, and registrations for trademarks, trade
names, service marks and copyrights which are unexpired as of
the date hereof and which are used in connection with the
operation of Seller's and each Subsidiary's business, as well as
all applications pending on said date for patents or for
trademark, trade name, service mark or copyright registrations,
and all other trade secrets and proprietary rights, owned or
held by Seller and each Subsidiary and which are reasonably
necessary to, or used in connection with, the business of Seller
or such Subsidiary; and (ii) all licenses (other than shrink
wrap licenses) granted by or to Seller or any Subsidiary and all
other agreements to which Seller or any Subsidiary is a party
and which relate, in whole or in part, to any items of the
categories mentioned in (i) above or to any trade secret or
other proprietary rights of Seller or any Subsidiary which are
reasonably necessary to, or used in connection with, the
business of Seller or any Subsidiary.
2.16.2 The property referred to in Section 2.16.1
hereof, together with (i) all designs, methods, inventions,
know-how, related thereto and (ii) all trademarks, trade names,
service marks, and copyrights claimed or used by Seller or any
Subsidiary which have not been registered (collectively
"Business Property Rights"), constitute all such proprietary
rights owned or held by Seller or any Subsidiary and which are
reasonably necessary to, or used in the conduct of the business
of Seller or any Subsidiary. All of those items designated as
trade secrets and all related designs, methods, inventions and
know-how constitute trade secrets of Seller or any
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Subsidiary within the meaning of all applicable laws, and Seller
and each Subsidiary has taken all necessary steps required by
law to protect these trade secrets as such. With respect to each
such trade secret, the documentation relating to such trade
secret is current, accurate, and sufficient in detail and
content to identify it and to allow its full and proper use. No
such trade secrets are part of the public knowledge or
literature, nor have they been used, divulged, or appropriated
for the benefit of any Third Party or otherwise to the detriment
of Seller or any Subsidiary.
2.16.3 Seller or a Subsidiary, as the case may be, owns
or has valid rights to use all such Business Property Rights
without conflict with the rights of others. Except as set forth
in Schedule 2.21 hereof, no Person or corporation has made or,
to the knowledge of Seller or the Subsidiaries, Threatened to
make any claims that the operation of the business of Seller or
the Subsidiaries is in violation of or infringes any other
proprietary or trade rights of any Third Party. To the knowledge
of Seller or the Subsidiaries, no Third Party is in violation of
or is infringing upon any Business Property Rights.
2.17 Collective Bargaining Agreements. There are no collective
bargaining agreements which relate to any Seller or Subsidiary or to which
Seller or any Subsidiary is a party or which cover one or more Employees.
2.18 Employees.
2.18.1 Schedule 2.18. to this Agreement contains a
complete and accurate list of the following information for each
Employee, including each Employee on leave of absence or layoff
status: (i) name; (ii) address; (iii) telephone number; (iv)
social security number; (v) date of birth; (vi) job title; (vii)
date of hire; (viii) hourly or weekly compensation rate in
effect on June 30, 1998, and a comparison of such rate to that
in effect on June 30, 1997; (ix) vacation accrued; and (x)
service credited for purposes of vesting and eligibility to
participate under any pension, retirement, profit-sharing,
thrift-savings, deferred compensation, stock bonus, stock
option, cash bonus, employee stock ownership (including
investment credit or payroll stock ownership), severance pay,
insurance, medical, welfare, or vacation plan, or any other
employee benefit plan. To the best of Seller's knowledge, during
the past four years neither Seller nor any Subsidiary has,
directly or indirectly, purchased, leased, acquired any property
or obtained any services from, or sold, leased, disposed of any
property or furnished any services to, or otherwise dealt with
any Employee or any Person, firm or corporation which, directly
or indirectly, alone or together with others, controls, is
controlled by or is under common control with any Employee,
except with respect to remuneration for services rendered as a
director, officer or employee of Seller or any Subsidiary.
2.18.2 To the best of Seller's knowledge, no part of
the property or assets of any Employee or any Person, individual
or organization directly or indirectly related to any Employee
is used by Seller or any Subsidiary.
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2.18.3 Neither Seller nor any Subsidiary has
encountered any actual or threatened Employee strike, work
stoppage, slowdown or lockout, or had any material change in its
relations with Employees, agents, customers or suppliers for the
three years prior to the date of this Agreement. No question
concerning representation has been raised or is threatened with
respect to the Employees.
2.18.4 No "leased employee", as that term is defined
within the meaning of Section 414(n) of the Code, performs
services for Seller or any Subsidiary other than temporary
employees.
2.18.5 The consummation of the transactions
contemplated by this Agreement will not (i) entitle any current
or former Employee or current or former officer or director of
Seller or any Subsidiary to severance pay, unemployment
compensation or any other payment, except as expressly provided
in this Agreement; (ii) accelerate the time or payment or
vesting, or increase the amount of compensation due any such
Employee, officer or director; or (iii) result in any prohibited
transaction described in Section 406 of ERISA or Section 4975 of
the Code for which an exemption is not available.
2.18.6 Seller and the Subsidiaries are currently and
have always been in compliance in all material respects with all
applicable laws respecting employment and employment practices,
terms and conditions of wages and hours, and are not engaged in
any unfair labor practice.
2.18.7 Neither Seller nor any Subsidiary (i) has taken
any action which, alone or in conjunction with actions committed
by Seller or such Subsidiary prior to the Closing Date to be
taken in the future, would constitute a "plant closing" or "mass
layoff" within the meaning of the Worker Adjustment and
Retraining Notification Act ("WARN") or applicable state law; or
(ii) has issued any notification of a "plant closing" or "mass
layoff" required by WARN or by applicable state law.
2.19 Other Contracts. Schedule 2.19 hereof sets forth all
contracts, understandings and commitments (including, without
limitation, mortgages, indentures and loan agreements) to which Seller
or any Subsidiary is a party, or to which it or any of its assets or
properties are subject, and which are not specifically referred to in
the other Schedules hereof other than those which are exempted by the
terms of Section 1.3(ii) hereof from being listed on Schedule 1.3B. True
and complete copies of all documents and complete descriptions of all
oral understandings, if any, referred to in the Schedules will be
provided or made available to Buyer and its counsel on or prior to the
Delivery Date.
2.20 No Breach or Default. Neither Seller nor any Subsidiary is
in material default under any contract to which it is a party or by
which it is bound, nor has any event occurred which, after the giving of
notice or the passage of time or both, would constitute a material
default under any such contract. Neither Seller nor any such Subsidiary
have any
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reason to believe that the parties to such contracts will not fulfill
their obligations under such contracts in all material respects or are
threatened with insolvency.
2.21 Litigation.
2.21.1 Schedule 2.21 hereof sets forth a list and a
summary description of all pending or Threatened Proceedings in
respect of Seller and the Subsidiaries, setting forth, with
respect to each action or suit, (i) the reserves reflected in
the most recent Financial Statements and (ii) the existence and
extent of insurance coverage.
2.21.2 Except as set forth in Schedule 2.21 hereof,
there are no claims or Proceedings pending or Threatened before
any Governmental Body or before any arbitrator of any nature,
brought by or against Seller or any of the Subsidiaries or any
of their respective officers, directors, Employees, agents or
affiliates involving, affecting or relating to any assets,
properties or operations of Seller or any of the Subsidiaries or
the transactions contemplated by this Agreement, nor does there
exist any fact which might reasonably be expected to give rise
to any such suit, Proceeding, dispute or investigation.
2.21.3 Neither Seller nor any of the Subsidiaries nor
any of their respective assets or properties is subject to any
Order of any Governmental Body or arbitrator, which adversely
affects or might reasonably be expected to affect their
respective assets, properties, business operation, prospects,
net income or financial condition or which would or might
reasonably be expected to interfere with the transactions
contemplated hereby.
2.21.4 Other than as provided in Section 1.4(iii),
Buyer is not assuming any liabilities or obligations of Seller
or the Subsidiaries set forth on Schedule 2.21. Schedule 2.21 is
provided to Buyer solely for informational purposes. Buyer does,
however, agree to cooperate, at Seller's expense, with the
reasonable requests of Seller to make available certain
witnesses and other evidence during the pendency of the matters
set forth in Schedule 2.21.
2.22 Accounts Receivable. All trade accounts receivable of
Seller and the Subsidiaries reflected in the Financial Statements and
all trade accounts receivable of Seller and the Subsidiaries arising
between June 30, 1998 and the Closing Date have arisen in the ordinary
course of business and represent bona fide, undisputed indebtedness
(subject to no counterclaim, right of setoff or warranty claim other
than as will be reserved against in the Closing Balance Sheet) incurred
by the applicable account debtor for goods held subject to delivery
instructions or shipped or delivered pursuant to a contract of sale or
for services performed by Seller or the Subsidiaries, as the case may
be.
2.23 Inventories and Supplies. The inventories and supplies of
Seller and the Subsidiaries reflected in the Financial Statements, or
acquired by Seller or the Subsidiaries between June 30, 1998, and the
date hereof, are carried at not in excess of the lower of cost
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or fair market value, and do not include any inventory which is not
usable or saleable in the ordinary course of business of Seller or of
the Subsidiaries as heretofore conducted, in each case net of reserves
provided therefor in such Financial Statements in accordance with GAAP.
2.24 Environmental Matters. Except as set forth in Schedule
2.24 hereof,
2.24.1 Seller and all Subsidiaries are in compliance
with and are not liable under any Environmental Law. Neither
Seller nor any Subsidiary has received any Order or written
notice from any Governmental Body or other Person alleging any
violation of or failure to comply with any Environmental Law, or
any actual or Threatened obligation to undertake or bear the
cost of any Environmental Liabilities with respect to any of the
Facilities, or with respect to any property at, to, or from
which Hazardous Materials were generated, manufactured, refined,
transferred, imported, used, processed, transported, treated,
stored, handled, disposed, recycled, or received by Seller or
any Subsidiary or any of their respective employees.
2.24.2 There are no Claims resulting from any
Environmental Liabilities that have been asserted with respect
to or affecting any of the Facilities or that relate to
ownership or operation by Seller or any Subsidiary.
2.24.3 There are no Hazardous Materials present on or
in the Environment at the Facilities, including any Hazardous
Materials contained in barrels, above or underground storage
tanks, landfills, land deposits, dumps, equipment (whether
moveable or fixed) or other containers, either temporary or
permanent, and deposited or located in land, water, sumps, or
any other part of the Facilities, or incorporated into any
structure therein or thereon except in compliance with
Environmental Laws and with regard to which no remedial action
would be required if brought to the attention of a Governmental
Body with jurisdiction.
2.24.4 Seller has delivered or made available to Buyer
true and complete copies and results of any reports, studies,
analyses, tests, or monitoring possessed by Seller or any
Subsidiary pertaining to Hazardous Materials in, on, or under,
or to Environmental issues relating to, the Facilities or Former
Facilities.
2.25 Customers and Suppliers. Except as set forth in Schedule
2.25 hereof,
(i) neither Seller nor any Subsidiary has received
notice that, nor does Seller or any Subsidiary have any
knowledge that, any customer of Seller or any Subsidiary has,
will or plans to discontinue doing business with Seller or any
Subsidiary;
(ii) neither Seller nor any Subsidiary has any
outstanding purchase contracts or commitments or unaccepted
purchase orders which are in excess of the normal, ordinary and
usual requirements;
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(iii) no supplier or subcontractor to Seller or any
Subsidiary has reduced its shipments of orders issued by Seller
or any Subsidiary, or threatened to discontinue, supplying such
items or services to Seller or any Subsidiary on reasonable
terms; and
(iv) neither Seller nor any Subsidiary has received
notice that, nor does Seller or any Subsidiary have any
knowledge that, any such supplier or subcontractor has, will or
plans to discontinue doing business with Seller or any
Subsidiary on substantially the same terms as are consistent
with its past practices.
2.26 No Brokers. Neither Seller nor any Subsidiary has entered
into any contract, arrangement or understanding with any Person or firm
which may result in the obligation of Buyer, Seller or any Subsidiary to
pay any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement
or the consummation of the transactions contemplated hereby, and neither
Seller nor any Subsidiary is aware of any claim or basis for any claim
for payment of any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
2.27 No Misrepresentation or Omission. No representation or
warranty by Seller in this Section 2 or in any other Section of this
Agreement, or in any certificate or other document furnished or to be
furnished by Seller pursuant hereto, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material
fact necessary to make the statements contained therein not misleading
or will omit to state a material fact necessary in order to provide
Buyer with accurate information as to Seller and the Subsidiaries.
2.28 Survival of Representations and Warranties. All
representations and warranties by Seller in this Section 2 or in any
other Section hereof, or in any certificate or other document furnished
or to be furnished by Seller pursuant hereto, shall survive delivery by
Buyer of the consideration to be given by it hereunder and delivery by
Seller of the consideration to be given by it hereunder, and shall
survive the execution hereof, the Closing hereunder and the Closing
Date; provided, however, that no claim based on any breach of any such
warranty or any misrepresentation may be made by any Buyer Indemnitee
unless written notice with respect thereto is given on or before the
third anniversary of the Closing Date.
3. Representations and Warranties of Buyer. Buyer hereby represents and
warrants to Seller as follows (Buyer reserving the right to attach at the
Delivery Date and update at and as of the Closing Date Schedules in addition to
those called for herein and to add references thereto in the following
warranties and representations as appropriate):
3.1 Existence; Good Standing; Corporate Authority; Compliance
With Law. Buyer (i) is a corporation duly incorporated, validly
existing in good standing under the laws
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of its jurisdiction of incorporation; (ii) is duly licensed or qualified
to do business as a foreign corporation and is in good standing under
the laws of all other jurisdictions in which the character of the
properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary except where the failure
to be so qualified would not be material; (iii) has all requisite
corporate power and authority to own its properties and carry on its
business as now conducted; (iv) is not in material default with respect
to any Order of any Governmental Body or arbitration board to which
Buyer is a party or is subject; (v) is not in material violation of any
laws, ordinances, governmental rules or regulations to which it is
subject; and (vi) has obtained all material licenses, permits and other
authorizations and has taken all actions required by applicable laws or
governmental regulations in connection with its business as now
conducted.
3.2 Authorization, Validity and Effect of Agreements.
3.2.1 The execution and delivery of this Agreement and
all agreements and documents contemplated hereby by Buyer, and
the consummation by it of the transactions contemplated hereby,
have been duly authorized by all requisite corporate action.
3.2.2 This Agreement constitutes, and all agreements
and documents contemplated hereby when executed and delivered
pursuant hereto for value received will constitute, the valid
and legally binding obligations of Buyer enforceable in
accordance with their terms, except that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
fraudulent transfer, moratorium, bulk sales, preference,
equitable subordination, marshalling or other similar laws of
general application now or hereafter in effect relating to the
enforcement of creditors' rights generally and except that the
remedies of specific performance, injunction and other forms of
equitable relief are subject to certain tests of equity
jurisdiction, equitable defenses and the discretion of the court
before which any proceeding therefor may be brought.
3.2.3 The execution and delivery of this Agreement by
Buyer does not, and the consummation of the transactions
contemplated hereby will not, (i) except as set forth on
Schedule 3.2 hereof, require the consent, approval or
authorization of, or declaration, filing or registration with,
any Governmental Body or any Third Party, (ii) result in the
breach of any term or provision of, or constitute a default
under, or result in the acceleration of or entitle any party to
accelerate (whether after the giving of notice or the lapse of
time or both) any obligation under, or result in the creation or
imposition of any Encumbrance upon any part of the property of
Buyer pursuant to any provision of, any Order, indenture,
mortgage, lease, license, lien, or other agreement or instrument
to which Buyer is a party or by which it is bound, and (iii)
violate or conflict with any provision of the bylaws or
Certificate of Incorporation of Buyer as amended to the date
hereof.
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3.3 Survival of Representations and Warranties. All
representations and warranties by Buyer in this Section 3 or in any
other Section hereof, or in any certificate or other document furnished
or to be furnished by Buyer pursuant hereto, shall survive delivery by
Buyer of the consideration to be given by it hereunder and delivery by
Seller of the consideration to be given by it hereunder, and shall
survive the execution hereof, the Closing hereunder and the Closing
Date; provided, however, that, other than as set forth in Section 4.2
hereof, no claim based on any breach of any such warranty or any
misrepresentation may be made by Seller unless written notice with
respect thereto is given on or before the third anniversary of the
Closing Date.
4. Indemnification.
4.1 Indemnification by Seller. Subject to the provisions of
Section 5.15 below and upon the terms and subject to the conditions set
forth in Sections 4.3 and 4.5 hereof and this Section 4.1, Seller agrees
to indemnify, defend, protect, save and hold harmless the Buyer
Indemnitees (or any Buyer Indemnitee) against, and will reimburse the
Buyer Indemnitees (or any Buyer Indemnitee) for, any and all Losses made
or incurred by or asserted against the Buyer Indemnitees (or any Buyer
Indemnitee), at any time after the Closing Date, directly or indirectly,
arising out of, related to, caused by, or resulting from any of the
following (in each case regardless of by whom asserted):
4.1.1 any and all liabilities or obligations of Seller
or claims against or imposed on the Buyer Indemnitees (or any
Buyer Indemnitee), of any nature, including, without limitation,
those relating to the respective business activities of Seller
and the Subsidiaries or to conditions existing on any of the
Facilities prior to the Closing Date (whether accrued, absolute,
contingent or otherwise and whether a contractual, tax,
statutory or other type of liability, obligation or claim) not
specifically assumed by Buyer pursuant hereto (including,
without limitation, those liabilities or obligations of Seller
specifically referred to in Section 1.4 hereof);
4.1.2 any inaccuracy, omission, misrepresentation,
breach of warranty or representation, or nonfulfillment of any
term, provision, covenant or agreement on the part of Seller
contained herein, or any inaccuracy or misrepresentation in, or
omission from, any certificate or other instrument furnished or
to be furnished by Seller to Buyer pursuant hereto;
4.1.3 Seller's failure to comply with any bulk transfer
provisions which may be in effect in the state or states in
which the Assets are located;
4.1.4 (i) any Breach by Seller of Seller's
environmental representation and warranty contained herein;
(this indemnity is intended to allocate responsibility between
Seller and Buyer and any other Indemnified Party as contemplated
by Section 107(e)(1) of CERCLA or similar law);
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4.1.5 any and all items listed on the Schedules
delivered subsequent to the Closing, objected to by Buyer and
determined in accordance with Section 5.15 hereof not to be
items assumed by Buyer pursuant hereto.
As used herein, the term "Losses" shall mean, with respect to
any Person or party, any payment, loss, liability, obligation, damage
(including, without limitation, consequential, punitive, special or
otherwise), deficiency, lien, claim, suit, cause of action, judgment,
cost or expense (including, without limitation, reasonable attorneys'
fees and court costs and costs of cleanup, containment, or other
remediation of the Environment) of any kind, nature or description.
As used herein, the term "Buyer Indemnitees" shall mean Buyer
and any affiliate of Buyer;
As used herein, the term "affiliate" shall mean, with respect to
any Person or party, (i) any Person or party controlling, controlled by
or under common control with any such Person or party or (ii) any
director or executive officer of any such Person or party or of any
Person or party referred to in clause (i) of this paragraph. As used
herein, the term "control" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of a Person or party, whether through the
ownership of voting securities or voting interests, by contract or
otherwise.
Notwithstanding anything to the contrary contained herein, the
parties agree that any Buyer Indemnitee's sole remedy for any claim for
damages (excluding equitable remedies and those resulting from fraud)
arising under this Agreement (including the Schedules) or any other
agreement between Buyer and Seller entered into in connection herewith
(including any claim based upon Seller's warranties, representations and
covenants contained herein) shall be limited to the remedies provided in
the indemnification provisions of this Section 4 and the Escrow
Agreement. Further, Buyer waives all other statutory or common law
rights to recover against Seller for any matter relating to
Environmental Contamination, Environmental Liabilities or Hazardous
Materials. There shall be no limit on Seller's obligation to indemnify
and hold harmless any Buyer Indemnitee from or against Losses resulting
from fraud.
4.2 Indemnification by Buyer. Upon the terms and subject to the
conditions set forth in Section 4.3 hereof and this Section 4.2, Buyer
agrees to indemnify, defend, protect, save and hold harmless Seller
against, and will reimburse Seller on demand for, any and all Losses
made or incurred by or asserted against Seller, at any time after the
Closing Date, directly or indirectly, arising out of, related to, caused
by, or resulting from (i) any inaccuracy, omission, misrepresentation,
breach of warranty, or nonfulfillment of any term, provision, covenant
or agreement on the part of Buyer contained herein, (ii) any inaccuracy
or misrepresentation in, or omission from, any certificate or other
instrument furnished or to be furnished by Buyer to Seller pursuant
hereto or (iii) operation of business activities of Buyer after the
Closing Date involving the Assets. Within 45 days following the first
anniversary of the Closing Date, Buyer shall deliver to Seller a
certificate of Buyer certifying
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which of those liabilities and obligations of Buyer assumed from Seller
pursuant to this Agreement and listed on Schedule 1.3A or Schedule 1.3B
(each as updated to Closing) had become due and payable but had not been
paid in full or resolved as of the first anniversary of the Closing
Date. With respect to the liabilities and obligations listed in such
certificate (or which were erroneously omitted from such certificate),
Buyer's obligations pursuant to this Section 4.2 shall terminate upon
the payment or resolution of such liability or obligation. With respect
to those liabilities and obligations of Buyer assumed from Seller
pursuant to this Agreement and listed on Schedule 1.3A or Schedule 1.3B
(each as updated to Closing) which by their respective terms in effect
at Closing will become due and payable later than the first anniversary
of the Closing Date, Buyer's obligations pursuant to this Section 4.2
shall terminate upon the payment or resolution of such liability or
obligation. In the event the certificate is not timely delivered,
Buyer's obligation pursuant to this Section 4.2 shall terminate upon the
payment or resolution of all liabilities assumed pursuant to Section
1.3. With respect to all other liabilities and obligations of Buyer
assumed from Seller pursuant to this Agreement, Buyer's obligations
pursuant to this Section 4.2 shall terminate upon the third anniversary
of the Closing Date. There shall be no limit on Buyer's obligation to
indemnify and hold harmless Seller from or against Losses resulting from
fraud.
4.3 Conditions of Indemnification. With respect to any actual or
potential claim, any written demand, the commencement of any action, or
the occurrence of any other event which involves any matter or related
series of matters (a "Claim") against which a party hereto is
indemnified (the "Indemnified Party") by the other party (the
"Indemnifying Party") under Section 4.1 or 4.2 hereof:
4.3.1 Promptly after the Indemnified Party first
receives written documents pertaining to the Claim, or if such
Claim does not involve a Third Party Claim (a "Third Party
Claim"), promptly after the Indemnified Party first has actual
knowledge of such Claim, the Indemnified Party shall give notice
to the Indemnifying Party of such Claim in reasonable detail and
stating the amount involved, if known, together with copies of
any such written documents.
4.3.2 The obligation of the Indemnifying Party to
indemnify the Indemnified Party with respect to any Claim shall
not be affected by the failure of the Indemnified Party to give
the notice with respect thereto in accordance with Section 4.3.1
hereof unless the Indemnifying Party shall establish that it has
been materially prejudiced thereby.
4.3.3 If the Claim involves a Third Party Claim, then
the Indemnifying Party shall, at its sole cost, expense and
ultimate liability regardless of the outcome, and through
counsel of its choice (which counsel shall be reasonably
satisfactory to the Indemnified Party), litigate, defend, settle
or otherwise attempt to resolve such Third Party Claim;
provided, however, that if in the Indemnified Party's reasonable
judgment a conflict of interest may exist with respect to the
Third Party Claim, then the Indemnified Party shall be entitled
to select counsel of its own choosing, reasonably satisfactory
to the Indemnifying Party, in which event the Indemnifying
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Party shall be obligated to pay the fees and expenses of such
counsel. Notwithstanding the preceding sentence, the Indemnified
Party may elect, at any time and at the Indemnified Party's sole
cost, expense and ultimate liability, regardless of the outcome
(in the case of reasons other than the Indemnifying Party's
failure or refusal to provide a defense to such Third Party
Claim), and through counsel of its choice, to litigate, defend,
settle or otherwise attempt to resolve such Third Party Claim.
If the Indemnified Party so elects (for reasons other than the
Indemnifying Party's failure or refusal to provide a defense to
such Third Party Claim), then the Indemnifying Party shall have
no obligation to indemnify the Indemnified Party with respect to
such Third Party Claim, but such disposition will be without
prejudice to any other right the Indemnified Party may have to
indemnification under Section 4.1 or 4.2 hereof, regardless of
the outcome of such Third Party Claim. If the Indemnifying Party
fails or refuses to provide a defense to any Third Party Claim,
then the Indemnified Party shall have the right to undertake the
defense, compromise or settlement of such Third Party Claim,
through counsel of its choice, on behalf of and for the account
and at the risk of the Indemnifying Party, and the Indemnifying
Party shall be obligated to pay the costs, expenses and
attorney's fees incurred by the Indemnified Party in connection
with such Third Party Claim. In any event, Seller and the Buyer
Indemnitees shall fully cooperate with each other and their
respective counsel in connection with any such litigation,
defense, settlement or other attempted resolution.
4.4 Monetary Limits of Indemnification.
4.4.1 Notwithstanding the provisions of Section 4.1
hereof, Seller will not be obligated to indemnify or hold
harmless any Buyer Indemnitee from or against Losses arising out
of or resulting from matters described in Section 4.1, (other
than Losses directly or indirectly arising out of, related to,
caused by, or resulting from any inaccuracy, omission or
misrepresentation contained in, or breach of warranty or
representation respecting, Section 2.22), until the amount of
such Losses individually or in the aggregate exceed the amount
of $200,000 (the "Floor Amount"). Upon reaching the Floor
Amount, Seller shall be required to indemnify the applicable
Buyer Indemnitee for Losses comprising the Floor Amount as well
as all Losses occurring thereafter only from the Escrow Fund and
only up to (except in the cases of Losses resulting from fraud)
an aggregate amount equal to the amount of the Escrow Fund then
outstanding (the "Seller's Ceiling Amount"). Seller will be
obligated to indemnify and hold harmless any Buyer Indemnitee
from or against Losses directly or indirectly arising out of,
related to, caused by, or resulting from any inaccuracy,
omission or misrepresentation contained in, or breach of
warranty or representation respecting, Section 2.22 up to the
Seller's Ceiling Amount without regard to the Floor Amount.
Seller will be obligated to indemnify and hold harmless any
Buyer Indemnitee from or against Losses directly or indirectly
arising out of, related to, caused by, or resulting from any
inaccuracy, omission or misrepresentation contained in, or
breach of warranty or representation respecting, Sections 2.12.2
or 2.20 without regard to the materiality of such inaccuracy,
omission,
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misrepresentation, or breach of warranty or representation.
Notwithstanding the provisions of Section 4.1 hereof and except
in the cases of Losses resulting from fraud, Seller will not be
obligated to indemnify or hold harmless any Buyer Indemnitee
from or against Losses to the extent such Losses are in excess
of the Seller's Ceiling Amount. There shall be no monetary limit
on Seller's obligation to indemnify and hold harmless any Buyer
Indemnitee from or against Losses resulting from fraud.
4.4.2 Notwithstanding the provisions of Section 4.2
hereof, Buyer will not be obligated to indemnify or hold
harmless Seller from or against Losses arising out of or
resulting from matters described in Section 4.2, (other than
Losses directly or indirectly arising out of, related to, caused
by, or resulting from any nonfulfillment of any covenant on the
part of Buyer contained in Section 1.3 hereof or any certificate
related thereto), until the amount of such Losses individually
or in the aggregate exceed the Floor Amount. Upon reaching the
Floor Amount, Buyer shall be required to indemnify Seller for
Losses comprising the Floor Amount as well as all Losses
occurring thereafter only up to (except in the cases of Losses
resulting from fraud) an aggregate amount equal to $12,000,000
(the "Buyer's Ceiling Amount"). Buyer will be obligated to
indemnify and hold harmless Seller from or against Losses
directly or indirectly arising out of, related to, caused by, or
resulting from any nonfulfillment of any covenant on the part of
Buyer contained in Section 1.3 hereof up to the Buyer's Ceiling
Amount without regard to the Floor Amount. Notwithstanding the
provisions of Section 4.2 hereof and except in the cases of
Losses resulting from fraud, Buyer will not be obligated to
indemnify or hold harmless Seller from or against Losses to the
extent such Losses are in excess of the Buyer's Ceiling Amount.
There shall be no monetary limit on Buyer's obligation to
indemnify and hold harmless Seller from or against Losses
resulting from fraud.
4.5 Environmental Remediation.
4.5.1. The term "Environmental Contamination" shall
mean the presence of Hazardous Materials at any of the
Facilities. Environmental Contamination is indemnifiable as a
Loss under Section 4.1 hereof if it has resulted in the issuance
of a final Order or legally enforceable directive by a
Governmental Body or if it triggers a Legal Requirement that
imposes an obligation to act, or, for Facilities on leased
property, when brought to the attention of the landlord as a
result of a legal requirement or a requirement under the lease
to so notify, results in a legally enforceable demand by the
landlord for remediation.
4.5.2 The addressing of Environmental Contamination,
(whether by assessment, negotiation, compromise, risk
assessment, cleanup or otherwise) (hereafter "Environmental
Remediation") identified by the Environmental Due Diligence
Review shall be performed by Seller, to the extent the cost of
the Environmental Remediation of such contamination does not
exceed the funds available in the Escrow Fund. If and when funds
from the Escrow fund are
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exhausted, Seller shall have no obligation to perform any
Environmental Remediation or otherwise address any Environmental
Contamination. The remediation of Environmental Contamination
identified after the Closing shall be the responsibility of
Buyer unless Buyer can establish that such contamination arose
prior to the Closing. Buyer acknowledges that Seller shall have
no obligation to perform Environmental Remediation unless
Environmental Contamination is discovered (i) during the
Environmental Due Diligence review set forth in Section 5.5.2;
or (ii) by, or as a result of a third party claim or demand; or
(iii) due to a Legal Requirement under any Environmental Law.
Notwithstanding any other provision of this Section 4.5.2, if,
after the Closing Date, Buyer is informed of, or inadvertently
discovers Environmental Contamination that does not require the
giving of notice to either a Governmental Body or, to the
landlord pursuant to the applicable lease, Buyer shall give
notice of same to Seller and Seller shall perform Environmental
Remediation to the standards set forth in Section 4.5.4.
4.5.3 Seller has the right to undertake any
Environmental Remediation for which it is responsible subject to
reasonable agreement of Buyer and Seller regarding access to,
and non-interference with activities of Buyer on, the
Facilities. Seller shall be entitled to receive monthly
reimbursement from the Escrow Fund for the costs of that
Environmental Remediation to the extent funds are available.
4.5.4 The extent to which Environmental Contamination
must be remediated, if at all, shall be to the highest levels
allowed by law that do not require the imposition of
institutional controls unless those controls would not impair
the value, or interfere with the reasonable use, of the
property, and, if the Facility is on leased property, to
whatever level the landlord ultimately agrees; provided however,
institutional controls that impair value may be allowed if
Seller pays Buyer for the diminution in value attributable to
that impairment.
5. Other Covenants and Agreements.
5.1 Guaranty of Receivables. At the Closing, Seller shall
execute and deliver to Buyer a Guaranty in the form set forth as Exhibit
"B" hereto (the "Receivables Guaranty"), under the terms of which Seller
shall unconditionally guarantee that all indebtedness represented by the
accounts receivable of Seller and the Subsidiaries as of the Closing
Date (less the reserve for doubtful accounts not to exceed $125,000)
will be received by Buyer. Within 160 days following the Closing Date,
Buyer shall prepare and deliver to Seller an accounting of collections
on such receivables on or before 150 days following the Closing Date,
certified as true and correct by the Chief Financial Officer of Buyer.
In the event such net indebtedness is not received by Buyer on or before
150 days after the Closing Date, Seller shall within ten business days
following receipt from Buyer of such accounting giving notice to such
effect cause the Escrow Agent to make payment from the Escrow Fund to
Buyer of an amount in cash equal to the difference between such net
indebtedness and the amount received by Buyer for such accounts
receivable, whereupon Buyer shall promptly
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assign or cause to be assigned to Seller all rights, claims, actions or
causes of action which Buyer may have relating to such unpaid
receivables. In the event that the amount received by Buyer for such
accounts receivable shall be in excess of such net indebtedness, the
amount of such excess will be paid by Buyer to Seller (from Buyer's own
funds and not from the Escrow Fund) within such ten business day period.
During the 150 days following the Closing Date, Buyer shall use
reasonable and customary efforts to collect such receivables (but shall
not be obligated to initiate litigation) and any amounts received by
Buyer in respect of such accounts receivable shall be applied first to
the oldest such account receivable of the respective account debtor
unless the account debtor specifically directs otherwise in writing
without any direction from Buyer.
5.2 Restrictive Covenants.
5.2.1 Customer Restriction. Seller covenants and agrees
that it shall not, for a period of five years from and after the
Closing Date, working alone or in conjunction with one or more
other Persons or entities, for compensation or not, (i) provide
or offer to provide to any Customer (as such term is hereinafter
defined) any product or service the same or similar to that
offered by Seller or any Subsidiary prior to the Closing, or
(ii) induce or attempt to induce any Customer to withdraw,
curtail or cancel its business with any Subsidiary or Buyer or
in any manner modify or fail to enter into any actual or
potential business relationship with Buyer or any Subsidiary. As
used herein, the term "Customer" means any Person or entity for
whom Seller or any Subsidiary provided services on or prior to
the Closing Date or to whom Seller or any Subsidiary provided a
product on or prior to the Closing Date.
5.2.2 Non-Raid. Seller covenants and agrees that it
shall not, for a period of five years from and after the Closing
Date, working alone or in conjunction with one or more other
Persons or entities, for compensation or not, (i) recruit or
otherwise solicit or induce any Person or entity who is, on the
Closing Date or thereafter, an employee or vendor of Seller or
any Subsidiary to terminate their employment with, or otherwise
cease their relationship with, Buyer or any of its subsidiaries
or affiliates, or (ii) hire, recruit or otherwise solicit any
Person or entity who, within the six months immediately
preceding the Closing Date, had been an employee or vendor of
Seller or any Subsidiary.
5.2.3 Noncompetition. Seller covenants and agrees that
it shall not, for a period of five years from and after the
Closing Date, working alone or in conjunction with one or more
other Persons or entities, for compensation or not, permit
Seller's name to be used by or engage in or carry on, directly
or indirectly, either for itself or as a member of a partnership
or as a stockholder, investor, agent, associate or consultant of
any Person, partnership or corporation (other than Buyer or a
subsidiary or affiliate of Buyer), any business in competition
with the business as carried on by Seller or any Subsidiary on
the Closing Date, but only for as long as such like business is
carried on by (i) Buyer or any subsidiary or affiliate of Buyer,
or (ii) any Person, corporation, partnership, trust or other
organization or entity deriving title
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from Buyer to the assets and goodwill of the business being
carried on by Seller or any Subsidiary on the Closing Date, in
any county in which Buyer or any subsidiary or affiliate of
Buyer conducts business, or in any other county in any state of
the United States, or in any country or political subdivision of
the world. The parties intend that the covenants contained in
this Section 5.2.3 shall be deemed to be a series of separate
covenants, one for each county in each state of the United
States and for each country and political subdivision of the
world and, except for geographic coverage, each such separate
covenant shall be identical in terms to the covenant contained
in this Section 5.2.3.
5.2.4 Tolling. The term of the covenants contained in
Section 5.2.1, 5.2.2 or 5.2.3 hereof shall be tolled for the
period commencing on the date any successful action is filed for
injunctive relief or damages arising out of a breach by Seller
of Section 5.2.1, 5.2.2 or 5.2.3 hereof and ending upon final
adjudication (including appeals) of such action.
5.2.5 Reformation. If, in any judicial proceeding, the
court shall refuse to enforce all of the separate covenants
contained in Section 5.2.1, 5.2.2 or 5.2.3 hereof because the
time limit is too long, it is expressly understood and agreed
between the parties hereto that for purposes of such proceeding
such time limitation shall be deemed reduced to the extent
necessary to permit enforcement of such covenants. If, in any
judicial proceeding, the court shall refuse to enforce all of
the separate covenants contained in Section 5.2.1, 5.2.2 or
5.2.3 hereof because it is more extensive (whether as to
geographic area, scope of business or otherwise) than necessary
to protect the business and goodwill of Buyer, it is expressly
understood and agreed between the parties hereto that for
purposes of such proceeding the geographic area, scope of
business or other aspect shall be deemed reduced to the extent
necessary to permit enforcement of such covenants.
5.2.6 Injunctive Relief. Seller acknowledges that a
breach of Section 5.2.1, 5.2.2 or 5.2.3 hereof would cause
irreparable damage to Buyer, and in the event of its actual or
threatened breach of the provisions of Section 5.2.1, 5.2.2 or
5.2.3 hereof, Buyer shall be entitled to a temporary restraining
order and an injunction restraining Seller from breaching such
covenants without the necessity of posting bond or proving
irreparable harm, such being conclusively admitted by Seller.
Nothing shall be construed as prohibiting Buyer from pursuing
any other available remedies for such breach or threatened
breach, including the recovery of damages from Seller. Seller
acknowledges that the restrictions set forth in Sections 5.2.1,
5.2.2 and 5.2.3 hereof are reasonable in scope and duration,
given the nature of the business of Buyer.
5.2.7 Use of Name. Seller shall discontinue all use of
the name "Valley Systems, Inc." and any and all derivations
thereof within 30 days after the Closing Date.
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5.2.8 No Liquidation or Dissolution. Seller shall not
liquidate or dissolve until the entire Escrow Fund has been
released pursuant to Section 5.3 hereof.
5.3 Escrow.
5.3.1 The Escrow Fund shall be the exclusive source of
recovery in respect of Seller's indemnification obligations
pursuant to Section 4 hereof or otherwise arising under this
Agreement (including the Schedules hereto) or any other
agreement between Buyer and Seller entered into in connection
herewith including any claim based upon Seller's warranties,
representations and covenants contained herein including those
contained in Section 5.1 hereof. The Escrow Fund shall be held
and distributed, with interest, by Bank One Texas, N.A. (the
"Escrow Agent"), pursuant to an Escrow Agreement in the form set
forth as Exhibit "C" hereto (the "Escrow Agreement"), which
shall be executed and delivered by Seller and Buyer at the
Closing.
5.3.2 Buyer shall be entitled to receive from the
Escrow Fund a payment equal to the amount, if any, provided for
in Section 5.1 hereof without regard to the Floor Amount.
5.3.3 Subject to Sections 4.5.2 and 5.3.6 hereof,
Seller shall be entitled to receive from the Escrow Fund the
costs of Environmental Remediation at all Facilities not
excluded by Buyer from the Assets pursuant to Section 5.5.2
hereof and in accordance with the terms of the Escrow Agreement.
5.3.4 In the event that any Buyer Indemnitee has any
claim for damages based upon Seller's warranties,
representations and covenants contained herein or otherwise
arising hereunder or any other agreement between Buyer and
Seller entered into in connection herewith (other than Seller's
obligations under Section 5.1 hereof), Buyer shall give written
notice of same to Seller and shall forward a copy of such notice
to the Escrow Agent. If Seller has not corrected or remedied
such failure of performance, representation, warranty or
covenant within 30 days following receipt of such notice, then
Seller acknowledges, subject to the provisions of Section 5.15
hereof, that Buyer shall be entitled to receive from the Escrow
Fund, in accordance with the terms of the Escrow Agreement, the
amount of indemnification that Buyer is due pursuant to this
Agreement.
5.3.5 Provided no dispute or disputes in excess of an
aggregate of $3,000,000 (or $2,000,000, if that part of the
Escrow Fund subject to Section 5.3.6 hereof has been released to
Seller), less the amount of any payments theretofore made in
satisfaction of Seller's indemnification and guaranty
obligations hereunder, exist as to any Claim or Claims by any
Buyer Indemnitee against all or a portion of the Escrow Fund on
the first anniversary of the Closing Date, then $1,000,000, less
the amount of any payments in satisfaction of Seller's
indemnification and guaranty obligations hereunder, will be
released to Seller on the first business day following
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such first anniversary of the Closing Date. To the extent such a
dispute or disputes do exist as to a Claim or Claims on the
first anniversary of the Closing Date, an amount equal to the
amount of such claim or claims will be withheld from such
partial release of the Escrow Fund and will continue to be held
in accordance with the provisions of the Escrow Agreement until
such claim or claims have been fully resolved. Provided no
dispute or disputes in excess of an aggregate of $2,000,000 (or
$1,000,000, if that part of the Escrow Fund subject to Section
5.3.6 hereof has been released to Seller), less the amount of
any payments theretofore made in satisfaction of Seller's
indemnification and guaranty obligations hereunder, exist as to
any Claim or Claims by any Buyer Indemnitee against all or a
portion of the Escrow Fund on the second anniversary of the
Closing Date, then an additional $1,000,000, less the amount of
any payments theretofore made in satisfaction of Seller's
indemnification and guaranty obligations hereunder, will be
released to Seller on the first business day following such
second anniversary of the Closing Date. To the extent such a
dispute or disputes do exist as to a Claim or Claims on the
second anniversary of the Closing Date, an amount equal to the
amount of such claim or claims will be withheld from such
partial release of the Escrow Fund and will continue to be held
in accordance with the provisions of the Escrow Agreement until
such claim or claims have been fully resolved. Provided no
dispute or disputes exist as to any Claim or Claims by any Buyer
Indemnitee against all or a portion of the Escrow Fund on the
third anniversary of the Closing Date, then the remainder of the
Escrow Fund will be released to Seller on the first business day
following such third anniversary of the Closing Date and the
Escrow Agreement shall thereupon terminate. To the extent a
dispute or disputes do exist as to a Claim or Claims on the
third anniversary of the Closing Date, an amount equal to the
amount of such claim or claims will be withheld from such
release of the Escrow Fund and will continue to be held in
accordance with the provisions of the Escrow Agreement until
such claim or claims have been fully resolved. Seller's
obligations hereunder shall not be affected by any termination
of the Escrow Agreement.
5.3.6 On or before the first anniversary of the Closing
Date, Seller shall certify in writing to Buyer that Seller has
completed the Environmental Remediation of the Environmental
Contamination identified by the Environmental Due Diligence
Review as required by the terms of Section 4.5 hereof as to all
Facilities not excluded by Buyer pursuant to Section 5.5.2
hereof as well as any Environmental Contamination identified
during the Environmental Remediation (or, in the event that such
Environmental Remediation is not completed at the first
anniversary of the Closing Date, Seller shall deliver a
certificate of the environmental engineering and consulting firm
which is effecting such Environmental Remediation estimating the
additional time required for such completion and the additional
cost thereof ("Estimated Additional Remediation Cost"). Upon
delivery to Buyer of Seller's certificate or the certificate of
such firm, as the case may be, an amount equal to $1,000,000,
less the sum of (i) the aggregate cost of such Environmental
Remediation (including the Estimated Additional Remediation
Cost) and (ii) the aggregate amount of other Losses of all other
Buyer Indemnitees subject to
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indemnification pursuant to Section 4.1 hereof in excess of
$3,000,000, shall forthwith be released to Seller out of the
Escrow Fund. In the event that such Environmental Remediation
was not completed at the first anniversary of the Closing Date,
Seller shall deliver to Buyer a certificate of completion
thereof upon such completion containing a statement of the
aggregate cost of the Environmental Remediation effected
following such first anniversary, and Buyer shall immediately
release to Seller out of the Escrow Fund the amount, if any,
which would have been released to Seller under this Section
5.3.6 following such first anniversary had such actual cost,
rather than the Estimated Additional Remediation Cost, been used
in such calculation.
5.4 Conduct of the Business.
5.4.1 Affirmative Covenants. On and after the date
hereof and until the Closing Date or the date, if any, on which
this Agreement is earlier terminated and abandoned pursuant to
Section 7 hereof (the "Termination Date"), Seller shall, and
Seller shall cause each Subsidiary to:
(i) conduct its operations according to its
ordinary and usual course of business consistent with
past practice; and
(ii) use its reasonable best efforts to
preserve intact its business organization and goodwill,
to keep available the services of its officers and
directors, and to maintain satisfactory relationships
with suppliers, distributors, licensors, licensees,
customers, Employees and others having business
relationships with it.
5.4.2 Negative Covenants. Without limiting the
generality of the foregoing, and except for actions to be taken
in connection with any of the transactions contemplated hereby,
without Buyer's prior written consent, Seller shall not, and
Seller shall cause each Subsidiary not to, on or after the date
hereof and until the earlier of the Closing Date or the
Termination Date:
(i) other than dividends that would be paid to
the holders of the Series C Preferred Stock in the
ordinary course, declare or pay any cash dividends on
its outstanding shares of capital stock;
(ii) merge with, consolidate with, sell its
assets to or acquire substantially all the assets or
capital stock of, any other corporation or Person, or
enter into any other transaction not in the ordinary
and usual course of its business;
(iii) incur any indebtedness for borrowed
money or guarantee any such indebtedness or issue or
sell any debt securities or guarantee any debt
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securities of others, except that it may incur
indebtedness in the ordinary course of business
consistent with prior practice;
(iv) make any direct or indirect redemption,
purchase or other acquisition of any of its capital
stock;
(v) create or amend any pension or profit
sharing plan, bonus, deferred compensation, death
benefit, or retirement plan, or any other benefit plan
or program;
(vi) amend its Certificate of Incorporation
or Bylaws, as amended to the date hereof, except as
may be necessary to carry out this Agreement or as
required by law;
(vii) issue any shares of its capital stock,
effect any stock split or otherwise change its
capitalization as it exists on the date hereof;
(viii) grant, confer or award any options,
warrants, conversion rights or other rights, not
existing on the date hereof, to acquire any shares of
its capital stock;
(ix) enter into any agreement or make any
undertaking which could be violated, or create
obligations which could be accelerated, as a result of
changes or developments or the absence of changes or
developments in, the business, assets, earnings,
operations or condition, financial or otherwise, of any
other party hereto or any of its subsidiaries or
affiliates; or
(x) make any material changes in any of their
respective management employment arrangements.
5.5 Due Diligence; Access to Information and Customers.
5.5.1 General Due Diligence Review. From and
after the date hereof and throughout the period prior
to the earlier of the Closing Date or the Termination
Date, Buyer and its officers, employees, accountants,
counsel and other authorized representatives may
perform a due diligence review of Seller and the
Subsidiaries relating to matters other than
Environmental matters. In the event that the results
thereof are not reasonably satisfactory to Buyer, Buyer
may terminate this Agreement as provided in Section
7.1.4 hereof.
5.5.2 Environmental Due Diligence Review.
From and after the date hereof through the Closing
Date, Buyer and its officers, employees, accountants,
counsel and other authorized representatives will
perform a due diligence review of Seller and the
Subsidiaries relating to Environmental
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matters associated with the Facilities, and activities
of Seller or any Subsidiary (collectively, the
"Environmental Due Diligence Review"). Buyer shall
cause a qualified independent environmental engineering
and consulting firm reasonably acceptable to Seller to
perform such a review. Buyer shall not provide a copy
of any report resulting from the Environmental Due
Diligence to Seller, unless Seller specifically
requests otherwise. If the Environmental Due Diligence
Review reveals that one or more Facilities has one or
more problems relating to the Environment (including,
but not limited to, Environmental Liabilities) the
remedying of which is or are reasonably advisable, and
the aggregate estimated cost of such remedy as quoted
to Buyer is in excess of $1,000,000, then Buyer will
have the right to exclude any one or more of such
Facilities from the Assets so that the aggregate
estimated cost of the remedying the problems at the
remaining Facilities shall be as close to $1,000,000 as
practicable without exceeding $1,000,000.
5.5.3 Reimbursement for Environmental Due
Diligence Review. If, as a result of the Environmental
Due Diligence Review, Environmental Contamination is
discovered that is indemnifiable as a Loss under
Section 4.1 hereof pursuant to Section 4.5.1 hereof,
Seller shall reimburse Buyer from the Escrow Fund for
the total costs of the Environmental Due Diligence
Review of each property where such indemnifiable
Environmental Contamination is present.
5.5.4 Access. Seller shall, and Seller shall
cause each Subsidiary to, as soon as possible and in
any event no later than the Delivery Date, (i) afford
to Buyer and to its officers, employees, accountants,
counsel and other authorized representatives reasonable
access, throughout the period prior to the earlier of
the Closing Date or the Termination Date, to Seller's
and the Subsidiary's plants, properties, equipment,
personnel, books and records (including, but not
limited to, audit and tax work papers and surveys,
reports, studies, evaluations and the like pertaining
to the Environment at the Facilities or Former
Facilities (during the time of ownership or operation
by Seller or any Subsidiary, or to activities of Seller
or any Subsidiary); (ii) use its reasonable best
efforts to cause its representatives to furnish to
Buyer and to its authorized representatives such
additional financial and operating data and other
information as to its respective businesses and
properties as Buyer or its duly authorized
representatives may from time to time reasonably
request; (iii) provide all authorizations reasonably
necessary for Buyer to review records of any
Governmental Body with jurisdiction; and (iv) afford
Buyer and its representatives reasonable access,
throughout the period prior to the earlier of the
Closing Date or the Termination Date, to its present
and potential customers, and Buyer and its authorized
representatives shall have the right to contact such
customers and conduct such due diligence investigation
relating to customer relations as Buyer deems
reasonably necessary or appropriate. Buyer agrees to
perform all due diligence under
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this Section 5.5 using its reasonable best efforts to
minimize disruption to Seller's business. Buyer further
agrees to indemnify, defend and hold Seller harmless
for all losses resulting from physical damages caused
by Buyer or its agents in the course of Buyer's due
diligence, and to restore the Facilities to
substantially the same condition they were in prior
thereto. Buyer further agrees to dispose of any wastes
or materials it or its agents generated during the
Environmental Due Diligence Review, and to do so in
accordance with all applicable Legal Requirements.
5.5.5 Monthly Financial Statements and
Reports. Seller shall deliver to Buyer unaudited
financial statements (including a consolidated balance
sheet, consolidated statement of operations,
consolidated statement of cash flows, and consolidated
statement of stockholders' equity) and other operating
reports for each month beginning with July 1998 and
ending with the month preceding the month during which
the Closing occurs. Such financial statements and
operating reports shall be delivered to Buyer no later
than twenty business days after the end of the month
the subject thereof and shall be subject to no warranty
or representation of Seller.
5.6 Acquisition Proposals. Neither Seller nor any Subsidiary
shall, directly or indirectly, through any officer, director, agent,
affiliate, representative (including, without limitation, investment
bankers, attorneys and accountants) or otherwise, (i) solicit, initiate
or encourage submission of inquiries, proposals or offers from any
Person, corporation, partnership or other entity or group (as such term
is used in Section 13(d)(3) of the Exchange Act) other than Buyer (a
"Third Party"), relating to any acquisition or purchase of all or a
portion of the assets of, or any equity interest in, Seller or any
Subsidiary; or (ii) unless the Board has determined that such Third
Party has made a Superior Takeover Proposal, participate in any
discussions or negotiations regarding, or furnish to any Third Party any
information with respect to, or otherwise cooperate in any way with, or
assist or participate in, facilitate or encourage, any effort or attempt
by any Third Party to do or seek any of the foregoing. Seller and the
Subsidiaries shall promptly notify Buyer if any such proposal or offer,
or any inquiry or contact with any Third Party with respect thereto, is
made, and shall in any such notice set forth in reasonable detail the
identity of the Third Party and the terms and conditions of such
inquiry, proposal or offer. In the event that (a) the Closing shall fail
to occur as the result of Seller or any Subsidiary violating the terms
of this Section 5.6 or (b) Seller or any Subsidiary shall have
determined that a Superior Takeover Proposal exists, shall have elected
to accept such Superior Takeover Proposal and either the transaction
contemplated thereby is consummated or Seller terminates this Agreement
as a result of such election, Seller shall promptly, but in no event
later than one day after the first of such events shall occur, pay Buyer
a fee of $2,000,000, which amount shall be payable in same day funds,
plus all Expenses. A "Superior Takeover Proposal" means any bona fide
(w) tender or exchange offer; (x) proposal for a merger to which Seller
or any Subsidiary would be a party; (y) consolidation or other business
combination involving Seller and or any Subsidiary; or (z) any other
arrangement to acquire, directly or indirectly, for consideration
consisting of cash, securities or a combination thereof, all of the
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common stock of Seller or a Subsidiary then outstanding or all or
substantially all of the assets of Seller or a Subsidiary on terms that
the Board determines in its good faith reasonable judgment (after
consultation with a financial advisor of nationally recognized
reputation) to be more favorable to the stockholders of Seller than the
transactions contemplated by this Agreement.
5.7 Public Announcements. On or after the date hereof, and until
the earlier of the Closing Date or the Termination Date, neither Seller
nor any Subsidiary shall furnish any written communication (other than
the Proxy Materials) to its stockholders, customers, creditors or to the
public generally if the subject matter thereof relates to the
transactions contemplated hereby without the prior approval of Buyer as
to the content thereof; provided, however, that the foregoing shall not
be deemed to prohibit any disclosure required by any applicable law or
by any Governmental Body having jurisdiction over such matters.
5.8 Notification of Certain Matters. Seller and the Subsidiaries
shall give prompt notice to Buyer, and Buyer shall give prompt notice to
Seller, of (i) the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or
warranty of such party contained herein to be untrue or inaccurate in
any material respect at any time from the date hereof to the Closing
Date; and (ii) any material failure of Seller, of any Subsidiary or of
Buyer, as the case may be, or of any officer, director, employee or
agent thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder.
5.9 Best Efforts. Seller agrees to use its best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated hereby, including, without
limitation, obtaining all authorizations, consents, waivers and
approvals as may be required in connection with the assignment of those
contracts, agreements, licenses, leases, sales orders, purchase orders
and other commitments to be assumed by Buyer pursuant hereto; provided
that Seller shall not be obligated to make any payments in order to
obtain any such authorizations, consents, waivers or approvals.
5.10 Execution of Additional Documents. Each party hereto will
at any time, and from time to time after the Closing Date, upon request
of the other party hereto, execute, acknowledge and deliver all such
further deeds, assignments, transfers, conveyances, powers of attorney
and assurances, and take all such further action, as may be reasonably
required to carry out the intent of this Agreement, and to transfer and
vest title to any Asset being transferred hereunder, and to protect the
right, title and interest in and enjoyment of all of the Assets sold,
granted, assigned, transferred, delivered and conveyed pursuant hereto;
provided, however, that this Agreement shall be effective regardless of
whether any such additional documents are executed.
5.11 Fees and Expenses.
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5.11.1 Expense Reimbursement. If this Agreement is
terminated by Seller for any reason whatsoever other than a
failure of any condition set forth in Section 6.2 hereof and
Buyer is not in material breach of its material covenants and
agreements hereunder, then Seller shall, whether or not any
payment is made pursuant to Section 5.11.2 hereof, reimburse
each of Buyer and its stockholders and affiliates (not later
than one day after submission of statements therefor) for all
reasonable out-of-pocket expenses and fees actually incurred by
it or on its behalf in connection with the negotiation,
preparation, execution and performance of this Agreement and the
transactions contemplated hereby, or reasonably and actually
incurred by banks and other financial institutions and assumed
by Buyer or its stockholders or affiliates in connection with
the negotiation, preparation, execution and performance of this
Agreement, any financing related hereto and any definitive
financing agreements relating thereto (all of the foregoing
being referred to herein collectively as the "Expenses").
5.11.2 Other Costs and Expenses. Except as otherwise
provided herein, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such costs and expenses.
5.12 Limitation of Liability. Notwithstanding any other
provision hereof, no shareholder, officer, director, employee, agent,
attorney, affiliate, servant, successor, assign or representative of
either party hereto or of any affiliate thereof shall have any personal,
partnership, corporate or other liability or obligation whatsoever in
respect of or relating to the covenants, obligations, indemnities,
representations or warranties of Buyer or Seller under or by reason
hereof or in respect of any certificate or other document delivered with
respect hereto.
5.13 HSR Act Filings. Each of Seller and Buyer shall as soon as
practicable after the date of this Agreement file their respective
notification and report forms with the Federal Trade Commission and the
United States Department of Justice as required under the HSR Act. Each
of Seller and Buyer agree to use their respective good faith efforts to
eliminate any concern on the part of any Governmental Body regarding the
legality of the transactions contemplated under this Agreement.
5.14 Employees. Buyer shall, effective as of Closing, offer
employment to all Employees of Seller (subject to satisfaction of
Buyer's standard conditions to employment) other than as otherwise
reasonably determined by Buyer (but in no event shall Buyer terminate
such number of former employees of Seller during such time periods as
would require any action on the part of Seller under WARN). Seller and
each Subsidiary shall fully cooperate with Buyer and lend all assistance
reasonably requested by Buyer for the purpose of facilitating Buyer's
employment of and communication with Employees of Seller, including, but
not limited to, allowing access to the Facilities and any Employees and
payroll and other Employee records requested by Buyer.
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5.15 Dispute Resolution. Other than as provided in Section 1.9.2
hereof and notwithstanding any provision of this Agreement to the
contrary, all disputes, controversies or claims arising out of or
relating to this Agreement and the transactions contemplated hereby
shall be resolved by agreement among the parties, or, if not so resolved
within forty five (45) days following written notice of dispute given by
either party hereto to the other, and if written notice is given by
either of the parties as provided below and the matter is not otherwise
resolved by the parties hereto, by resort to arbitration in accordance
with Title 9 of the United States Code (the United States Arbitration
Act) and the Commercial Arbitration Rules, as amended from time to time
(the "Rules") by the American Arbitration Association and the following
provisions; provided, however, that the provisions of this Section shall
prevail in the event of any conflict with such Rules. Within thirty (30)
days after the giving of notice by a party to the other parties of its
desire to refer the matter in dispute to arbitration, the parties agree
that the matter shall be presented to a panel of three arbitrators at
least one of whom shall have at least ten years of industry experience
relating to the subject matter of the dispute. Such selection of
arbitrators shall be made in accordance with the Rules. Any such
arbitration proceeding shall be held at a location to be determined by
the arbitrators. Any provisional remedy that would be available from a
court of law shall be available from the arbitrator to the parties to
this Agreement pending arbitration. The written decisions and
conclusions of a majority of the arbitration panel with respect to the
matters referred to them pursuant hereto shall be final and binding upon
the parties to the dispute, and confirmation and enforcement thereof may
be rendered thereon by any court having jurisdiction upon application of
any person who is a party to the arbitration proceeding. The costs and
expenses incurred in the course of such arbitration shall be borne by
the party against whose favor the decisions and conclusions of the
arbitration panel are rendered; provided, however, that if the
arbitration panel determines that its decisions are not rendered wholly
against the favor of one party or the other, the arbitration panel shall
be authorized to apportion such costs and expenses in the manner that it
deems fair and just in light of the merits of the dispute and its
resolution. The arbitration panel shall have no power or authority under
this Agreement or otherwise to award or provide for the award of
punitive or consequential damages against any party. In any arbitration
relating to whether Buyer has "reasonably concluded" (for purposes of
Section 6.1.16) that there has been no material breach of the warranties
in Section 2.24, the burden of establishing reasonableness shall be on
Buyer.
6. Conditions of Closing.
6.1 Buyer's Conditions to Closing. The obligation of Buyer to
purchase and pay for the Assets and to assume the specified liabilities
and obligations set forth herein shall be subject to and conditioned
upon, at Buyer's option, the satisfaction at the Closing of each of the
following conditions:
6.1.1 The holders of shares of the issued and
outstanding capital stock of Seller shall have duly adopted and
approved this Agreement and all transactions contemplated hereby
in accordance with the requirements of Delaware law and the
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Certificate of Incorporation and Bylaws, as amended to the date
of such adoption and approval, of Seller.
6.1.2 All representations and warranties of Seller
contained herein shall be true and correct in all material
respects at and as of the Closing Date (provided however that in
respect of the warranties and representations contained in
Section 2.24 hereof Section 6.1.16 shall apply) and Seller shall
have performed all agreements and covenants in all material
respects and satisfied all conditions on its part to be
performed or satisfied by the Closing Date pursuant to the terms
hereof, and Buyer shall have received a certificate of Seller,
signed by its President and dated the Closing Date, to both such
effects.
6.1.3 As of the Closing, there shall have been no
material change since the date of the most recent Financial
Statements in the Seller or any Subsidiary, and neither Seller
nor any Subsidiary shall have suffered any material loss
(whether or not insured) by reason of physical damage caused by
fire, earthquake, accident or other calamity which substantially
affects the value of their respective assets, properties or
business, and Buyer shall have received a certificate of Seller,
signed by its principal financial officer and dated the Closing
Date, to such effect.
6.1.4 Seller shall have executed and delivered the
Receivables Guaranty.
6.1.5 Seller shall have delivered to Buyer a
Certificate of the Secretary of State (or other authorized
public official) of Seller's and each Subsidiary's respective
jurisdiction of incorporation (and each other jurisdiction
listed in Schedule 2.5 hereof) certifying as of a date
reasonably close to the Closing Date that Seller or such
Subsidiary, as the case may be, has filed all required reports,
paid all required fees and taxes, and is, as of such date, in
good standing and authorized to transact business as a domestic
or foreign corporation, as the case may be.
6.1.6 Seller shall have executed and delivered the
Escrow Agreement.
6.1.7 The Escrow Agent shall have acknowledged
receipt of the Escrow Fund and accepted the same subject to
the terms and conditions of the Escrow Agreement.
6.1.8 Buyer shall have received from Arnall Golden &
Gregory, LLP, counsel for Seller, an opinion, dated the
Closing Date, in the form attached hereto as Exhibit "D".
6.1.9 Seller shall have obtained all authorizations,
consents, waivers and approvals as may be required in
connection with the assignment of those contracts, agreements,
licenses, leases, sales orders, purchase orders and other
commitments to be assigned to Buyer pursuant hereto.
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6.1.10 Seller shall have executed and delivered the
Bill of Sale, Assignment and Assumption Agreement.
6.1.11 Seller shall have delivered to Buyer a
certificate, dated the Closing Date, of Seller's corporate
Secretary certifying:
(i) Resolutions of the Board and Seller's
stockholders approving and adopting this Agreement
and all transactions contemplated hereby and
authorizing execution of this Agreement and the
execution, performance and delivery of all
agreements, documents and transactions contemplated
hereby; and
(ii) The incumbency of its officers
executing this Agreement and all agreements and
documents contemplated hereby.
6.1.12 The approval and all consents from any Third
Party or Governmental Body required to consummate the
transactions contemplated hereby shall have been obtained and
the waiting period and any statutory extension thereof
applicable to the consummation of the transactions
contemplated by this Agreement under the HSR Act shall have
expired or been terminated.
6.1.13 No Proceeding shall have been instituted or
threatened which questions the validity or legality of the
transactions contemplated hereby or any governmental consent,
approval or authorization necessary for the consummation of the
transactions of the transactions contemplated by this Agreement.
6.1.14 As of the Closing, there shall be no effective
injunction, writ, preliminary restraining order or any order of
any nature issued by a court of competent jurisdiction directing
that the transactions provided for herein or any of them not be
consummated as so provided or imposing any conditions on the
consummation of the transactions contemplated hereby, which is
unduly burdensome on Buyer.
6.1.15 Buyer shall have received from each of LOR,
Inc., Rollins Investment Fund and Rollins Holding Company, Inc.,
an executed agreement whereby each of them, on their own behalf
and on behalf of their respective affiliates, agrees to be bound
by certain restrictive covenants substantially similar to those
imposed on Seller pursuant to Section 5.2 of this Agreement;
provided, however, that no such provision shall prohibit an
investment in any publicly-traded entity that does not require
the filing of a Schedule 13D nor Schedule 13G under the Exchange
Act.
6.1.16 Buyer shall have reasonably concluded, following
the Environmental Due Diligence Review, that there are no
material breaches in the warranties in Section 2.24; provided,
however, that such conclusion shall not preclude the remedies of
Buyer provided for herein. For purposes of this Section 6.1.16
only, "material
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breaches" shall be defined as those matters, which in the
opinion of the environmental consultant retained as provided in
Section 5.5.2, are reasonably likely to cost in the aggregate in
excess of $1,000,000 to remedy (excluding the cost of addressing
any environmental issues on Facilities that Buyer elects to
exclude from the purchase pursuant to Section 5.5.2). If Buyer's
consultant so concludes, then Buyer shall promptly so inform
Seller of the consultant's opinion. At such time, Seller may ask
Buyer for the information and data upon which Buyer's consultant
bases his or her opinion. If Seller does not agree that it is
reasonably likely to cost in excess of $1,000,000 to remedy the
environmental problems, then Seller shall promptly inform Buyer
of its belief. If the parties cannot resolve this issue within
fifteen days after Seller so informs Buyer, then the matter
shall be submitted to arbitration in accordance with Section
5.15 and the Closing shall be delayed pending the resolution of
such arbitration. If the transaction closes, then Seller's
obligation to perform any Environmental Remediation shall be
governed by the provisions and standards set forth in Section
4.5
6.2 Seller's Conditions to Closing. The obligation of Seller to
sell, grant, convey, assign, transfer and deliver the Assets shall be
subject to and conditioned upon, at Seller's option, the satisfaction at
the Closing of each of the following conditions:
6.2.1 The holders of shares of the issued and
outstanding capital stock of Seller shall have duly adopted and
approved this Agreement and all transactions contemplated hereby
in accordance with the requirements of Delaware law and the
Certificate of Incorporation and Bylaws, as amended to the date
of such adoption, of Seller.
6.2.2 All representations and warranties of Buyer
contained herein shall be true and correct at and as of the
Closing Date in all material respects and Buyer shall have
performed all agreements and covenants in all material respects
and satisfied all conditions on its part to be performed or
satisfied by the Closing Date pursuant to the terms hereof, and
Seller shall have received a certificate of Buyer, signed by its
Chief Executive Officer and dated the Closing Date, to both such
effects.
6.2.3 Buyer shall have effected payment of the Purchase
Price (less the Escrow Fund) in accordance with the prior
written instructions of Seller.
6.2.4 Buyer shall have executed and delivered the
Escrow Agreement.
6.2.5 Buyer shall have effected payment of the Escrow
Fund.
6.2.6 The Escrow Agent shall have acknowledged receipt
of the Escrow Fund and accepted the same subject to the terms
and conditions of the Escrow Agreement.
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6.2.7 Buyer shall have executed and delivered the Bill
of Sale, Assignment and Assumption Agreement.
6.2.8 Buyer shall have delivered to Seller a
certificate, dated the Closing Date, of Buyer's corporate
Secretary certifying:
(i) Resolutions of its Board of Directors
adopting and approving this Agreement and all
transactions contemplated hereby and authorizing
execution of this Agreement and the execution,
performance and delivery of all agreements, documents
and transactions contemplated hereby; and
(ii) The incumbency of its officers executing
this Agreement and all agreements and documents
contemplated hereby.
6.2.9 Seller shall have received from Haynes and Boone,
LLP, counsel for Buyer, an opinion, dated the Closing Date, in
the form attached hereto as Exhibit "E".
6.2.10 The approval and all consents from any Third
Party or Governmental Body required to consummate the
transactions contemplated hereby shall have been obtained and
the waiting period and any statutory extension thereof
applicable to the consummation of the transactions contemplated
by this Agreement under the HSR Act shall have expired or been
terminated.
6.2.11 No Proceeding shall have been instituted or
threatened which questions the validity or legality of the
transactions contemplated hereby or any governmental consent,
approval or authorization necessary for the consummation of the
transactions of the transactions contemplated by this Agreement
6.2.12 As of the Closing, there shall be no effective
injunction, writ, preliminary restraining order or any order of
any nature issued by a court of competent jurisdiction directing
that the transactions provided for herein or any of them not be
consummated as so provided or imposing any conditions on the
consummation of the transactions contemplated hereby, which is
unduly burdensome on Seller.
6.2.13 Seller and all guarantors of any bank
indebtedness of Seller shall have received a written release
therefrom in form and substance satisfactory to Seller and such
guarantors.
7. Termination and Abandonment.
7.1 Reasons for Termination. Anything herein or elsewhere to the
contrary notwithstanding, this Agreement may be terminated and abandoned
at any time after the date hereof but not later than the Closing:
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7.1.1 by the mutual consent of Seller and Buyer;
7.1.2 by Buyer at any time after December 31, 1998, if,
by that date, the conditions set forth in Section 6.1 hereof
shall not have been fulfilled or waived;
7.1.3 by Seller at any time after December 31, 1998,
if, by that date, the conditions set forth in Section 6.2 hereof
shall not have been fulfilled or waived;
7.1.4 by Buyer at any time prior to the later of (i)
the fifteenth business day after the Delivery Date and (ii) the
fifteenth business day after such later date as Buyer actually
receives the Preliminary Schedules required by Section 1.7
hereof, if the general due diligence investigation of Seller or
of any Subsidiary by Buyer pursuant to Section 5.5.1 hereof, or
any Schedule hereto or any other document delivered to Buyer as
contemplated hereby, shall have revealed any facts or
circumstances which, in the reasonable judgment of Buyer and
regardless of the cause thereof, reflect in a material way on
Seller or any Subsidiary;
7.1.5 by Buyer at any time if there has been a
material change in Seller or any Subsidiary after the date
hereof;
7.1.6 by Buyer or by Seller at any time if there has
been a material breach of any representation or warranty made by
the other party herein or in any certificate or other document
delivered pursuant hereto or if there has been any failure by
the other party to perform in all material respects all
obligations or to comply with all covenants on its part to be
performed hereunder; or
7.1.7 by Buyer or by Seller if there shall have been
any statute, rule or regulation enacted or promulgated or deemed
applicable to the transactions contemplated hereby by any
Governmental Body that, in the reasonable judgment of Buyer or
of Seller, as the case may be, might (i) result in a significant
delay in the ability of the parties to consummate the
transactions contemplated hereby; (ii) render the parties unable
to consummate the transactions contemplated hereby; (iii) make
such consummation illegal; or (iv) otherwise materially
adversely affect Seller or any Subsidiary.
7.1.8 by Buyer if Seller shall fail to deliver one or
more of the Preliminary Schedules to this Agreement in
accordance with Section 1.7 hereof or if one or more of the
Preliminary Schedules, as delivered, differs materially from the
information concerning Seller and the Subsidiaries provided by
Seller to Buyer prior to the execution of this Agreement
7.2 Procedure Upon and Effect of Termination. In the event of
any termination and abandonment pursuant to Section 7.1 hereof, written
notice thereof shall forthwith be given to the other party and the
transactions contemplated hereby shall
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thereupon be terminated and abandoned, without further action by Buyer
or by Seller (except for the provisions of Sections 5.6, 5.11 and 5.12
hereof), and there shall be no liability on the part of either Seller or
Buyer or their respective officers, directors or stockholders, except
for the provisions of Sections 5.6, 5.11 and 5.12 hereof or except for
the material breach of any representation, warranty or covenant
contained herein that is within the reasonable control of the party in
breach.
8. Miscellaneous.
8.1 Notices. Any notice, consent, approval, request, demand or
other communication required or permitted hereunder must be in writing
to be effective and shall be deemed delivered and received (i) if
personally delivered or delivered by telecopy with electronic
confirmation, when actually received by the party to whom sent, or (ii)
if delivered by mail (whether actually received or not), at the close of
business on the third business day next following the day when placed in
the federal mail, postage prepaid, certified or registered mail, return
receipt requested, addressed as follows:
If to Buyer:
HydroChem Industrial Services, Inc.
5956 Sherry Lane, Suite 930
Dallas, Texas 75225
Attention: Chief Executive Officer
Facsimile No.: (214) 361-4715
with a copy to:
Haynes and Boone, LLP
600 Congress Avenue, Suite 1600
Austin, Texas 78701
Attention: Dennis R. Cassell
Facsimile No.: (512) 867-8470
If to Seller:
Valley Systems, Inc.
11580 Lafayette Drive, NW
Canal Fulton, Ohio 44614
Attention: Chief Executive Officer
Facsimile #: (330) 854-3444
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with a copy to:
Arnall Golden & Gregory, LLP
2800 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: Jonathan Golden
Facsimile #: (404) 873-8701
(or to such other address as any party shall specify by written notice
so given).
8.2 Binding Effect; Benefits. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Notwithstanding anything
contained herein to the contrary, nothing in this Agreement, expressed
or implied, is intended to confer on any Person (other than the parties
hereto, the Buyer Indemnitees (but only with respect to Section 4
hereof), or their respective successors and permitted assigns) any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
8.3 Entire Agreement. This Agreement, together with the
Exhibits, Schedules and other documents contemplated hereby, constitute
the final written expression of all of the agreements between the
parties, and is a complete and exclusive statement of those terms.
Except as specifically included or referred to herein, this Agreement
and the Exhibits, Schedules and other documents contemplated hereby
supersede all understandings and negotiations concerning the matters
specified herein. Any representations, promises, warranties or
statements made by any party that differ in any way from the terms of
this written Agreement, and the Exhibits, Schedules and other documents
contemplated hereby, shall be given no force or effect (except as
specifically included or referred to herein). The parties specifically
represent, each to the other, that there are no additional or
supplemental agreements between them related in any way to the matters
herein contained unless specifically included or referred to herein. No
addition to or modification of any provision hereof shall be binding
upon any party unless made in writing and signed by all parties.
8.4 Governing Law. THIS AGREEMENT, AND ALL QUESTIONS RELATING TO
ITS VALIDITY, INTERPRETATION, PERFORMANCE AND ENFORCEMENT (INCLUDING,
WITHOUT LIMITATION, PROVISIONS CONCERNING LIMITATIONS OF ACTION, BUT
EXCLUDING THE PROVISIONS OF SECTION 5.2 HEREOF), SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE
(EXCLUSIVE OF THE CONFLICT OF LAW PROVISIONS THEREOF) APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. THE
PROVISIONS OF SECTION 5.2 HEREOF SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF THE
CONFLICT OF LAW PROVISIONS THEREOF)
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APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY
WITHIN SUCH STATE.
8.5 Survival. All of the terms, conditions, covenants,
agreements, warranties and representations contained herein shall
survive, in accordance with their terms, the execution hereof, the
Closing hereunder and the Closing Date.
8.6 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original but all of
which shall constitute one and the same instrument; but in making proof
of this Agreement, it shall not be necessary to produce or account for
more than one such counterpart. It is not necessary that each party
hereto execute the same counterpart, so long as identical counterparts
are executed by all parties.
8.7 Headings. Headings of the Sections of this Agreement are
for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
8.8 Waivers. Any party hereto may, by written notice to the
other party hereto, (i) extend the time for the performance of any of
the obligations or other actions of the other party hereunder; (ii)
waive any inaccuracies in the representations or warranties of the other
party contained herein or in any document delivered pursuant hereto;
(iii) waive compliance with any of the conditions or covenants of the
other party contained herein; or (iv) waive performance of any of the
obligations of the other party hereunder. Except as provided in the
preceding sentence, no action taken pursuant hereto, including without
limitation any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained herein. The waiver by any party hereto of a breach of any
provision hereunder shall not operate or be construed as a waiver of any
prior or subsequent breach of the same or any other provision hereunder.
8.9 Incorporation of Exhibits and Schedules. All Exhibits and
Schedules attached hereto are by this reference incorporated herein and
made a part hereof for all purposes as if fully set forth herein.
8.10 Severability. If for any reason whatsoever, any one or more
of the provisions hereof shall be held or deemed to be illegal,
inoperative, unenforceable or invalid as applied to any particular case
or in all cases, such circumstances shall not have the effect of
rendering such provision illegal, inoperative, unenforceable or invalid
in any other case or of rendering any of the other provisions hereof
illegal, inoperative, unenforceable or invalid. Furthermore, in lieu of
each illegal, invalid, unenforceable or inoperative provision, there
shall be added automatically, as part of this Agreement, a provision
similar in terms of such illegal, invalid, unenforceable or inoperative
provision as may be possible and as shall be legal, valid, enforceable
and operative.
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8.11 Assignability. Neither this Agreement nor any of the
parties' rights hereunder shall be assignable by any party hereto
without the prior written consent of the other parties hereto; provided,
however, that Buyer's or its successors' or assigns' rights hereunder
may be assigned or otherwise transferred, in whole or in part, without
any other party's consent (i) to any successor by merger or
consolidation or (ii) to any individual, partnership, corporation or
other entity deriving title from Buyer or its successors or assigns to
all or substantially all of the assets as constituted on the date of any
such transfer, provided that no such assignment shall effect a release
of Buyer or its successors or assigns from any liabilities or
obligations hereunder.
8.12 Drafting. The parties acknowledge and confirm that each of
their respective attorneys have participated jointly in the review and
revision of this Agreement and that it has not been written solely by
counsel for one party. The parties hereto therefore stipulate and agree
that the rule of construction to the effect that any ambiguities are to
be or may be resolved against the drafting party shall not be employed
in the interpretation of this Agreement to favor any party against
another.
8.13 References. The use of the words "hereof," "herein,"
"hereunder," "herewith," "hereto," "hereby," and words of similar import
shall refer to this entire Agreement, and not to any particular article,
section, subsection, clause, or paragraph of this Agreement, unless the
context clearly indicates otherwise.
8.14 Calendar Days, Weeks and Months. Unless otherwise
specified herein, any reference to "day", "week", or "month" herein
shall mean a calendar day, week or month.
8.15 Gender; Plural and Singular. Where the context hereof so
requires, the masculine gender shall include the feminine or neuter,
and the singular shall include the plural and the plural the singular.
8.16 Cumulative Rights. All rights and remedies specified
herein are cumulative and are in addition to, not in limitation of, any
rights or remedies the parties may have at law or in equity, and all
such rights and remedies may be exercised singularly or concurrently.
8.17 No Implied Covenants. Each party, against the other, waives
and relinquishes any right to assert, either as a claim or as a defense,
that the other party is bound to perform or liable for the
nonperformance of any implied covenant or implied duty or implied
obligation.
8.18 Attorneys' Fees. The prevailing party in any dispute
between the parties arising out of the interpretation, application or
enforcement of any provision hereof shall be entitled to recover all of
its reasonable attorney's fees and costs whether suit be filed or not,
including without limitation costs and attorneys' fees related to or
arising out of any trial or appellate proceedings.
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8.19 Indirect Action. Where any provision hereof refers to
action to be taken by any Person or party, or which such Person or party
is prohibited from taking, such provision shall be applicable whether
the action in question is taken directly or indirectly by such Person or
party.
* * * * * *
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year hereinabove
first set forth.
SELLER:
VALLEY SYSTEMS, INC.
By:
Ed Strickland
President and
Chief Executive Officer
BUYER:
HYDROCHEM INDUSTRIAL SERVICES, INC.
By:
B. Tom Carter, Jr.
Chairman of the Board and
Chief Executive Officer
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SCHEDULES
SCHEDULE TITLE
- -------- -----
1.1.1............................... Fixed Assets
1.3A................................ Assumed Liabilities
1.3B................................ Material Contacts, Leases, etc.
2.2................................. Required Consents, Approvals, etc.
2.4................................. Affiliated Entities, etc.
2.5................................. Jurisdictions
2.7................................. Officers, Directors, Banks, etc.
2.9................................. Certain Liabilities
2.12A............................... Owned Realty
2.12B............................... Leases, etc.
2.14................................ Encumbrances
2.15................................ Insurance Matters
2.16................................ Intellectual Property
2.18................................ Employee Matters
2.19................................ Other Contracts
2.21................................ Litigation
2.24................................ Environmental Matters
2.25................................ Customers/Suppliers
3.2................................. Buyer's Required Consent
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EXHIBITS
EXHIBIT TITLE
"A".................................. Bill of Sale, Assignment and Assumption
Agreement
"B".................................. Receivables Guaranty
"C".................................. Escrow Agreement
"D".................................. Opinion of Arnall Golden & Gregory, LLP
"E".................................. Opinion of Haynes and Boone, LLP
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