<PAGE> 1
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
(Amendment No. _________)
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2)
[ ] Definitive Information Statement
SYNAGRO TECHNOLOGIES, INC.
--------------------------------------------------------------
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
--------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No:
3) Filing Party:
4) Date Filed:
<PAGE> 2
SYNAGRO TECHNOLOGIES, INC.
1800 Bering Drive, Suite 1000
Houston, Texas 77057
(713) 369-1700
February __, 2000
NOTICE OF TAKING OF CORPORATE ACTION
WITHOUT A MEETING BY WRITTEN CONSENT
To the Stockholders:
Notice is hereby given that the owners of approximately 51% percent of the
issued and outstanding shares of common stock of Synagro Technologies, Inc., a
Delaware corporation (referred to herein as the "Company" or "Synagro"), have
delivered to Synagro a written consent by which the stockholders have consented
to the following actions:
(1) Initial Financing
(A) the issuance of 20,358.824 shares of Series C Preferred Stock,
par value $.002 per share, of the Company ("Series C Preferred
Stock") and 2,641.76 shares of Series D Preferred Stock, par value
$.002 per share, of the Company ("Series D Preferred Stock"), to
GTCR Fund VII, L.P. and its affiliates pursuant to the terms of the
Purchase Agreement by and between the Company and GTCR Fund VII,
L.P. (the "Purchase Agreement");
(B) the conversion of all shares of Series C Preferred Stock into
shares of Series D Preferred Stock, in accordance with and subject
to the terms of the Certificate of Designation of the Series C
Preferred Stock;
(C) the issuance of an aggregate of 3,286 shares of Series D
Preferred Stock and/or Series C Preferred Stock upon the exercise of
the warrants initially issued to GTCR Capital Partners, L.P. and its
permitted transferees pursuant to the terms of the Warrant Agreement
by and between the Company and GTCR Capital Partners, L.P., an
affiliate of GTCR Fund VII, L.P. (the "Warrant Agreement"); and
(D) the issuance of up to 10,514,400 shares of Company's common
stock, par value $.002 per share (the "Common Stock") (plus any
shares of Common Stock issuable upon the conversion of accrued
dividends on the Preferred Stock), upon the conversion of shares of
Series D Preferred Stock pursuant to the terms of the Certificate of
Designation of the Series D Preferred Stock.
(2) Subsequent Financings
(A) the issuance of an additional 102,000 shares of convertible
preferred stock having terms substantially similar to the Series D
Preferred Stock ("Convertible Preferred Stock") to GTCR Fund VII,
L.P. and its affiliates, pursuant to the terms of the Purchase
Agreement, at a price of $1,000 per share of Convertible Preferred
Stock and convertible into Common Stock at a price to be determined
by the Company's Board of Directors; provided that such conversion
price is not anticipated to be less than $2.50 per share of Common
Stock;
(B) the issuance of up to 14,571 shares of Convertible Preferred
Stock upon the exercise of the warrants to be issued to GTCR Capital
Partners, L.P. or the potential transferees in connection with
subsequent loans pursuant to the terms of the Warrant Agreement; and
(C) the issuance of up to 46,628,400 shares of Common Stock, upon
the conversion of shares of Convertible Preferred Stock issued
pursuant to the terms of the Certificate of Designation of the
Convertible Preferred Stock (plus any shares of Common Stock
issuable upon conversion of accrued dividends on the Preferred
Stock).
<PAGE> 3
(3) Amendment to Certificate of Incorporation
The Amendment to the Certificate of Incorporation in accordance with
Section 242 of the General Corporation Law of the State of Delaware,
which consists of the amendment to Article Ninth thereof and other
related or conforming changes.
The actions taken by the Written Consent will be effective twenty-one (21)
days (approximately March __, 2000) after this Notice and attached Information
Statement are mailed to all stockholders of Synagro.
All necessary corporate approvals in connection with the matters referred
to herein have been obtained. The accompanying Information Statement is
furnished to all stockholders of record of Synagro pursuant to Section 14(c) of
the Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder solely for the purpose of informing the stockholders of these
corporate actions before they take effect.
Pursuant to Section 228 of the Delaware General Corporation Law,
stockholders of record of Synagro as of January 25, 2000, the date on or about
which the Written Consent was signed by the holders of not less than a majority
of the issued and outstanding shares of Synagro Common Stock, are entitled to
receive this Information Statement and Notice of Taking of Corporate Action
Without a Meeting by Written Consent.
By Order of the Board of Directors
Alvin L. Thomas II
Secretary
Houston, Texas
February __, 2000
<PAGE> 4
INFORMATION STATEMENT
SYNAGRO TECHNOLOGIES, INC.
1800 BERING DRIVE, SUITE 1000
HOUSTON, TEXAS 77057
(713) 369-1700
YOUR VOTE IS NOT REQUIRED
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
This Information Statement is being furnished to the stockholders of
record of Synagro Technologies, Inc., a Delaware corporation (referred to as the
"Company" or "Synagro"), of common stock, par value $.002 per share (the "Common
Stock"). This Information Statement is being furnished in order to notify the
stockholders that on January 25, 2000, Synagro received the written consent (the
"Written Consent") in lieu of a meeting of the stockholders of the holders of an
aggregate of approximately 8,949,176 shares of Common Stock representing 50.53%
of all the issued and outstanding Common Stock as of the record date approving
the following actions:
(1) Initial Financing
(A) the issuance of 20,358.824 shares of Series C Preferred Stock,
par value $.002 per share, of the Company ("Series C Preferred
Stock") and 2,641.76 shares of Series D Preferred Stock, par value
$.002 per share, of the Company ("Series D Preferred Stock"), to
GTCR Fund VII, L.P. and its affiliates pursuant to the terms of the
Purchase Agreement by and between the Company and GTCR Fund VII,
L.P. (the "Purchase Agreement");
(B) the conversion of all shares of Series C Preferred Stock into
shares of Series D Preferred Stock, in accordance with and subject
to the terms of the Certificate of Designation of the Series C
Preferred Stock;
(C) the issuance of an aggregate of 3,286 shares of Series D
Preferred Stock and/or Series C Preferred Stock upon the exercise of
the warrants initially issued to GTCR Capital Partners, L.P.
pursuant to the terms of the Warrant Agreement by and between the
Company and GTCR Capital Partners, L.P., an affiliate of GTCR Fund
VII, L.P. (the "Warrant Agreement"); and
(D) the issuance of up to 10,514,400 shares of Common Stock (plus
any shares of Common Stock issuable upon the conversion of accrued
dividends on the Preferred Stock) upon the conversion of shares of
Series D Preferred Stock pursuant to the terms of the Certificate of
Designation of the Series D Preferred Stock.
(2) Subsequent Financings
(A) the issuance of up to an additional 102,000 shares of
convertible preferred stock having terms substantially similar to
the Series D Preferred Stock ("Convertible Preferred Stock") to GTCR
Fund VII, L.P. and its affiliates, pursuant to the terms of the
Purchase Agreement, at a price of $1,000 per share of Convertible
Preferred Stock and convertible into Common Stock at a price to be
determined by the Company's Board of Directors; provided that such
conversion price is not anticipated to be less than $2.50 per share
of Common Stock;
(B) the issuance of up to 14,571 shares of Convertible Preferred
Stock upon the exercise of the warrants to be issued to GTCR Capital
Partners, L.P. or the permitted transferees in connection with
subsequent loans pursuant to the terms of the Warrant Agreement; and
(C) the issuance of up to 46,628,400 shares of Common Stock, upon
the conversion of shares of Convertible Preferred Stock issued
pursuant to the terms of the Certificate of Designation of the
<PAGE> 5
Convertible Preferred Stock (plus any shares of Common Stock
issuable upon conversion of accrued dividends on the Preferred
Stock).
(3) Amendment to Certificate of Incorporation
The Amendment to the Certificate of Incorporation in accordance with
Section 242 of the General Corporation Law of the State of Delaware,
which consists of the amendment to Article Ninth thereof and other
related or conforming changes.
A copy of the Written Consent is attached hereto as Exhibit A. This Information
Statement describing the Initial Financing, Subsequent Financings and Amendment
to Certificate of Incorporation is being mailed on or about February ___, 2000
to all stockholders of record at the close of business on January 25, 2000. As
of that date, there were 17,710,619 shares of Common Stock outstanding, each
entitled to one vote on each matter presented to the stockholders.
-ii-
<PAGE> 6
QUESTIONS AND ANSWERS ABOUT THIS INFORMATION STATEMENT
WHY AM I RECEIVING THIS INFORMATION STATEMENT?
This Information Statement provides notice to all stockholders of
Synagro Technologies of action taken by written consent by the owners of
a majority of the issued and outstanding shares of common stock.
WHAT ACTION DID THE MAJORITY STOCKHOLDERS APPROVE?
Two things. First, the stockholders approved issuance of shares of
convertible preferred stock and warrants to GTCR Fund and its
affiliates, and future issuances of convertible preferred stock and
warrants to GTCR Fund and its affiliates for uses approved by GTCR Fund
and its affiliates. GTCR Fund and its affiliates also loaned money to us
for use in current and future acquisitions. Second, as a condition to
receiving such loan, the stockholders approved an amendment to our
certificate of incorporation giving the holder of the debt the right to
elect an additional director upon an event of default.
WHAT PERCENTAGE OF SYNAGRO STOCK DOES GTCR FUND AND ITS AFFILIATES OWN?
GTCR Fund and its affiliates currently own 23,336.458 shares of
convertible preferred stock in Synagro. Following the expiration of 21
days from the date of this Information Statement, all of these shares of
convertible preferred stock will have voting rights, and will be
immediately convertible into 9,334,583 shares of Synagro common stock,
which represent approximately 32.9% of the total amount outstanding.
Also, GTCR Fund and its affiliates have appointed David A. Donnini to
the Board of Directors as their representative. There are currently five
directors. Following the expiration of 21 days from the date of this
Information Statement, GTCR Fund and its affiliates shall have the right
to appoint an additional director.
If Synagro desires to acquire additional companies in the future, GTCR
Fund and its affiliates will have the right to fund these acquisitions
by purchasing additional shares of convertible preferred stock, funding
debt and receiving warrants to purchase convertible preferred stock.
In the event of such future fundings, GTCR Fund and its affiliates could
eventually hold stock that is convertible into more than 50% of
Syangro's outstanding common stock.
WHAT DO I NEED TO DO?
Nothing. This Information Statement provides notice to all stockholders
of the actions taken. No vote or proxy is required and we are not
requesting you to send us a proxy.
WHAT HAS SYNAGRO DONE WITH THE MONEY INVESTED AND LOANED BY GTCR?
We have completed the acquisition of Residual Technologies, Limited
Partnership and its affiliates; Ecosystematics, Inc.; Davis Water
Analysis, Inc.; and AKH Water Management, Inc. We are also working to
complete acquisitions of Rehbein, Inc. and Whiteford Construction Co.,
Inc. These acquisitions expand our residuals management capabilities
and give our stockholders an interest in a larger, more diversified
corporation.
<PAGE> 7
TABLE OF CONTENTS
ACTION TAKEN.............................................................. 1
NO DISSENTERS' RIGHTS..................................................... 1
INTEREST OF CERTAIN PERSONS IN THE ACTIONS DESCRIBED HEREIN............... 1
FINANCING TRANSACTIONS.................................................... 2
Equity Financing..................................................... 2
Subordinated Debt Financing.......................................... 10
Senior Debt Financing................................................ 12
Fairness Opinion..................................................... 14
AMENDMENT TO CERTIFICATE OF INCORPORATION................................. 19
ACQUISITION OF RESTEC..................................................... 20
General Description of the Transaction............................... 20
The RESTEC Acquisition Agreements.................................... 21
Other Agreements..................................................... 22
ACQUISITION OF ECOSYSTEMATICS............................................. 22
General Description of the Transaction............................... 22
The Ecosystematics Purchase Agreement................................ 23
OTHER ACQUISITIONS........................................................ 24
Davis Water Analysis, Inc. .......................................... 24
AKH Water Management, Inc. .......................................... 24
PROPOSED ACQUISITION OF REHBEIN........................................... 24
PROPOSED ACQUISITION OF WHITEFORD......................................... 24
MATTERS RELATING TO ACQUISITIONS.......................................... 25
Reasons for the Transactions......................................... 25
Accounting Treatment................................................. 26
Regulatory Approvals................................................. 26
Restrictions on Resales by Affiliate................................. 26
MARKET PRICES AND DIVIDEND POLICY......................................... 27
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA............ 28
INFORMATION ABOUT SYNAGRO................................................. 34
History of Synagro................................................... 34
Business of Synagro.................................................. 34
Executive Offices.................................................... 34
SELECTED FINANCIAL DATA OF SYNAGRO........................................ 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF SYNAGRO..................................... 35
Results of Operations for the Nine Months Ended September 30, 1999
and 1998........................................................ 35
Results of Operations for the Year Ended December 31, 1998
and 1997........................................................ 37
Liquidity and Capital Resources...................................... 38
Quantitative and Qualitative Disclosures about Market Risk
of Synagro...................................................... 39
Interest Rate Risk................................................... 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SYNAGRO................................................ 41
INFORMATION ABOUT RESTEC.................................................. 42
SELECTED FINANCIAL DATA OF RESTEC......................................... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION OF RESTEC................................... 43
Results of Operations................................................ 43
Liquidity and Capital Resources...................................... 43
INFORMATION ABOUT ECOSYSTEMATICS, INC. ................................... 46
SELECTED FINANCIAL DATA OF ECOSYSTEMATICS................................. 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF ECOSYSTEMATICS.............................. 47
Results of Operations................................................ 47
Liquidity and Capital Resources...................................... 47
INFORMATION ABOUT REHBEIN................................................. 48
SELECTED FINANCIAL DATA OF REHBEIN........................................ 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF REHBEIN..................................... 49
Results of Operations................................................ 49
Liquidity and Capital Resources...................................... 49
INFORMATION ABOUT WHITEFORD CONSTRUCTION CO., INC. ....................... 50
SELECTED FINANCIAL DATA OF WHITEFORD...................................... 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF WHITEFORD................................... 51
Results of Operations................................................ 51
Liquidity and Capital Resources...................................... 51
INCORPORATION OF DOCUMENTS BY REFERENCE................................... 52
<PAGE> 8
ACTION TAKEN
On or about January 24, 2000, Synagro's Board of Directors approved the
transactions contemplated in the Initial Financing, Subsequent Financings and
Amendment to Certificate of Incorporation. The Board of Directors also approved
such transactions for purposes of Section 203 of the Delaware General
Corporation Law. On or about January 24, 2000, the Board of Directors amended
Synagro's Rights Plan to provide that the rights thereunder will not be
triggered by the Initial Financing or the Subsequent Financings.
Pursuant to Section 228 of Delaware General Corporation Law, the written
consent of the holders of outstanding shares of Synagro's outstanding capital
stock, having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted, may be substituted for such special
meeting. As a result of the Written Consent, stockholder approval of the
transactions contemplated in the Initial Financing, Subsequent Financings and
the Amendment to Certificate of Incorporation has been obtained. Accordingly,
all necessary corporate approvals in connection with the matters referred to
herein have been obtained and no further votes will be needed. The Written
Consent will become effective on or about March ____, 2000, but in no event less
than 21 days after Synagro has first mailed this Information Statement to the
stockholders of the Company. The Board of Directors of the Company does not
intend to solicit any proxies or consents in connection with the foregoing
actions.
This Information Statement is furnished solely for the purpose of
informing stockholders, and is being provided pursuant to the requirements of
Rule 14c-2 promulgated under Section 13 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), to inform holders of Common Stock in regard to
the Initial Financing, Subsequent Financings and Amendment to Certificate of
Incorporation of the action being taken.
NO DISSENTERS' RIGHTS
The corporate action described in this Information Statement will not
afford to stockholders the opportunity to dissent from the action described
herein or to receive an agreed or judicially appraised value for their shares.
INTEREST OF CERTAIN PERSONS IN THE ACTIONS DESCRIBED HEREIN
No person who has been an officer or director of Synagro since the
beginning of December 31, 1998 has any substantial interest by security holding
or otherwise, in the Financing Transactions. The employment agreements of
Messrs. Patten, Rome, Thomas and Withrow were amended in connection with the
Financing Transactions (defined below). See "Financing Transactions - Agreements
Concerning Employment Rights."
1
<PAGE> 9
FINANCING TRANSACTIONS
On January 27, 2000, Synagro entered into three related financing
transactions consisting of equity, subordinated indebtedness and senior secured
indebtedness (collectively, the "Financing Transactions"). The equity component
of the Financing Transactions ("Equity Financing") was entered into pursuant to
the terms of the Purchase Agreement ("Purchase Agreement") with GTCR Fund VII,
L.P. ("GTCR Fund"), a copy of which is attached hereto as Exhibit B. The
subordinated debt component of the Financing Transactions ("Subordinated Debt
Financing") was entered into pursuant to the terms of the Senior Subordinated
Loan Agreement ("Subordinated Loan Agreement") with GTCR Capital Partners, L.P.
("GTCR Capital"). The senior secured debt component of the Financing
Transactions ("Senior Debt Financing") was entered into pursuant to the terms of
the Amended and Restated Senior Credit Agreement with Bank of America, N.A.,
Canadian Imperial Bank of Commerce, and certain other lenders ("Senior Credit
Agreement").
The detailed terms of the Financing Transactions are contained in the
Purchase Agreement, the Subordinated Loan Agreement and the Senior Credit
Agreement. The Purchase Agreement is attached to this Information Statement and
is incorporated herein by reference. The Subordinated Loan Agreement and the
Senior Credit Agreement are attached as Exhibits to Synagro's Current Report of
Form 8-K filed February 17, 2000. The following discussion sets forth a
description of the material terms of the Purchase Agreement, the Subordinated
Loan Agreement and the Senior Credit Agreement. The description in this
Information Statement is qualified in its entirety by reference to such
agreements.
EQUITY FINANCING
Terms of Purchase Agreement
Pursuant to the terms of the Purchase Agreement, GTCR Fund agreed to
provide up to $125 million in equity financing to fund acquisitions and for
certain other uses, in each case as approved by the Board of Directors of
Synagro and GTCR Fund ("Approved Use"). Prior to the date of this Information
Statement, Synagro has issued 17,778.224 shares of Series C Preferred Stock
(valued at $17,778,224) and 2,641.176 shares of Series D Preferred Stock (valued
at $2,641,176) pursuant to the terms of the Purchase Agreement. Synagro may
issue up to an additional 104,580.6 shares of convertible preferred stock to
GTCR Fund for an Approved Use under the terms of the Purchase Agreement.
If Synagro desires additional funds from GTCR Fund under the terms of the
Purchase Agreement, Synagro shall submit a request to GTCR Fund specifying the
proposed use. GTCR Fund is under no obligation to approve the request, and if
it is denied, Synagro may proceed with an acquisition only if it is permitted
under the covenants discussed below. If, however, GTCR Fund approves the
request, Synagro may issue up to an additional 104,580.6 shares of convertible
preferred stock at a price of $1,000 per share (such amounts to be adjusted from
time to time as a result of stock dividends, stock splits, recapitalization and
similar events). In connection with each such purchase, Synagro's Board of
Directors shall designate a series of convertible preferred stock that shall
have identical terms as Series D Preferred Stock, but with a conversion price
mutually agreed upon by Synagro's Board of Directors and the majority holders of
outstanding preferred stock, taking into account, among other things, an assumed
equity value for Synagro equal to the result of (i) seven multiplied by
Synagro's earnings before interest, taxes and amortization minus (ii) Synagro's
outstanding indebtedness.
In order to consummate a subsequent purchase under the terms of the
Purchase Agreement, the representations and warranties of Synagro set forth in
the Purchase Agreement must be true and correct in all material respects.
Further, no default or event of default may exist as of the date of such
subsequent purchase or would result from the consummation of the borrowings by
Synagro under the Subordinated Loan Agreement. GTCR Capital shall have loaned
(or will loan concurrently with the funding of the subsequent purchase) to
Synagro pursuant to the Subordinated Loan Agreement an amount equal to the
purchase price for the convertible preferred stock being purchased by GTCR Fund.
Finally, the other conditions to closing set forth in the Purchase Agreement
must be satisfied.
2
<PAGE> 10
Covenants. The Purchase Agreement contains covenants of Synagro, which are
substantially similar to the covenants set forth in the Subordinated Loan
Agreement. Noncompliance with the terms of such covenants may result in a
default under the Subordinated Loan Agreement and may limit the ability of
Synagro to obtain funds from GTCR Fund or GTCR Capital in the future.
During the term of the Purchase Agreement, Synagro must provide certain
financial statements and other information to GTCR Fund, including (i) audit
reports, (ii) quarterly reports, (iii) monthly reports, (iv) copies of any
reports sent to the Securities and Exchange Commission (the "Commission") or
shareholders, (v) notices of defaults, litigation and certain ERISA matters,
(vi) management reports, (vii) projections, and (viii) certain other information
that GTCR Fund may reasonably request from time to time. Synagro must also allow
GTCR Fund (so long as it holds shares of preferred stock) to review properties,
financial statements and records of Synagro, and to hold discussions regarding
the affairs, finances and accounts of Synagro with officers and key employees.
Synagro must maintain the listing of its Common Stock on the Nasdaq Small Cap
Market System or similar exchange or system, and it must comply with its
reporting requirements under the Exchange Act. Synagro must also remain in
compliance with applicable laws.
So long as GTCR Fund holds preferred stock convertible into at least 15%
of the outstanding shares of Common Stock (after giving effect to such
conversion), the Purchase Agreement imposes negative covenants on Synagro, which
include limitations on or prohibitions of: (i) dividends on capital stock other
than the convertible preferred stock, (i) redemptions or purchases of
outstanding securities of Synagro, (iii) issuances of convertible or equity
securities, (iv) incurrence of indebtedness, (v) amendments to the Certificate
of Incorporation or Bylaws of Synagro in any way that would adversely affect the
rights of the holders of preferred stock, (vi) entering into or permitting any
subsidiary to enter into the ownership, active management or operation of any
business other than the management, processing, collection, handling and
disposal of non-hazardous bio-solid waste, animal manure, and green and other
organic waste or similar non-hazardous waste-related business activities, and
(vii) transactions outside the ordinary course of business. With respect to
acquisitions that do not constitute an Approved Use, Synagro may enter into such
acquisitions, provided that (A) Synagro is not in default under the Subordinated
Loan Agreement, (B) the entity or assets being acquired is in the same business
as permitted under clause (vi) above, (C) Synagro is in pro forma compliance
with all financial ratios and restrictions set forth in the Subordinated Loan
Agreement, (D) the proceeds from convertible preferred stock issued hereunder
are not used to finance such transaction, and (E) the aggregate purchase price
to be paid by Synagro or its subsidiaries (including assumed debt) is less than
$3 million for any single transaction or series of related transactions and $10
million in the aggregate for all transactions.
Representations. The Purchase Agreement contains representations of
Synagro for the benefit of GTCR Fund, which include representations regarding
the following: (i) shareholder consents, (ii) waiver of vesting of certain
rights upon a change in control, (iii) organization, corporate power and
licenses, (iv) capital stock and related matters, (v) subsidiaries and
investments, (vi) authorization, (vii) financial statements, (viii) absence of
undisclosed liabilities, (ix) no material adverse changes, (x) absence of
certain developments, (xi) assets, (xii) real property, (xiii) tax matters,
(xiv) contracts and commitments, (xv) intellectual property rights, (xvi)
litigation, (xvii) brokerage, (xviii) governmental consents, (xix) insurance,
(xx) employees, (xxi) employee benefit plans, (xxii) compliance with laws,
(xxiii) environmental and safety matters, (xxiv) affiliated transactions, (xxv)
real property holding corporation status, (xxvi) customers and suppliers,
(xxvii) reports with the Securities and Exchange Commission, (xxviii) investment
company status, (xxix) Antitakeover statutes, (xxx) Synagro's Rights Agreement,
(xxxi) general disclosure matters. Such representations were made by Synagro at
the initial closing on January 27, 2000, and will be reaffirmed at any
subsequent closing.
Indemnification. Pursuant to the terms of the Purchase Agreement, Synagro
will be required to indemnify GTCR Fund and its affiliates against any losses
incurred by them as a result of, or arising out of, or relating to (i) third
parties claims relating to (y) any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of the issuance of
the preferred stock or (z) the execution, delivery, performance or enforcement
of the Purchase Agreement and any other instrument, document or agreement
executed pursuant thereto by any of the Indemnitees, (ii) a breach of a
representation or warranty by Synagro or any subsidiary in any material respect,
or (iii) a breach of a covenant by Synagro or any subsidiary under the Purchase
Agreement or related documents. The Purchase Agreement also requires that
Synagro indemnify GTCR Fund and its affiliates for losses
3
<PAGE> 11
incurred with respect to certain environmental matters. Synagro, however, is not
required to indemnify GTCR Fund or its affiliates in connection with (a) any
violations of law or governmental regulations by GTCR Fund or its affiliates,
(b) any acts of willful misconduct or gross negligence by such GTCR Fund or its
affiliates or (c) any actions against GTCR Fund by its creditors or shareholders
or creditors of GTCR Fund's parent companies.
Terms of Preferred Stock
The following is a summary of the preferences, powers and rights of the
Series C Preferred Stock set forth in the Certificate of Designations,
Preferences and Rights of the Series C Preferred Stock, which was filed with the
Secretary of State of the State of Delaware on January 26, 2000 ("Series C
Certificate of Designation"), and the Series D Preferred Stock set forth in the
Certificate of Designations, Preferences and Rights of the Series D Preferred
Stock, which was filed with the Secretary of State of the State of Delaware on
January 26, 2000 ("Series D Certificate of Designation"). The summary is
qualified in its entirety by reference to the full text of the Series C
Certificate of Designation and the Series D Certificate of Designation, copies
of which are attached as Exhibits to Synagro's Current Report of Form 8-K filed
February 17, 2000.
As set forth below, the designations, preferences and rights of the Series
C Preferred Stock are identical to the Series D Preferred Stock with respect to
priority, liquidation, dividends, redemption and events of non-compliance. The
sole differences between Series C Preferred Stock and Series D Preferred Stock
relate to number of authorized shares, voting rights and conversion. Unless
otherwise indicated, Series C Preferred Stock and Series D Preferred Stock shall
be referred to collectively as "Preferred Stock."
Number of Authorized Shares. The number of authorized shares of Series C
Preferred Stock is 30,000. The number of authorized shares of Series D Preferred
Stock is 32,000.
Priority. With respect to dividends and distributions upon liquidation,
dissolution and winding-up of Synagro, the Preferred Stock is senior to the
Common Stock or any other equity securities of Synagro.
Liquidation. The liquidation value of each share of Preferred Stock is
$1,000 per share ("Liquidation Value"). Upon any liquidation, dissolution or
winding up of Synagro (whether voluntary or involuntary), each holder of
Preferred Stock shall be entitled to be paid, before any distribution or payment
is made upon any equity securities of Synagro other than Preferred Stock
("Junior Securities"), an amount in cash equal to the aggregate Liquidation
Value of all shares held by such holder (plus all accrued and unpaid dividends
thereon), and the holders of Preferred Stock shall not be entitled to any
further payment. If upon any such liquidation, dissolution or winding up of
Synagro, Synagro's assets to be distributed among the holders of the Preferred
Stock are insufficient to permit payment to such holders of the aggregate amount
which they are entitled to be paid, then the entire assets available to be
distributed to Synagro's stockholders shall be distributed pro rata among such
holders based upon the aggregate Liquidation Value (plus all accrued and unpaid
dividends) of the Preferred Stock held by each such holder.
Dividends. Dividends on each share of the Preferred Stock shall accrue on
a daily basis at the rate of 8% per annum on aggregate Liquidation Value of the
shares, plus all accumulated and unpaid dividends thereon from and including the
date of issuance of such share. Dividends shall continue to accrue until the
first to occur of (a) the date on which the Liquidation Value of such share
(plus all accrued and unpaid dividends thereon) is paid to the holder thereof in
connection with the liquidation of Synagro or the redemption of such share by
Synagro, (b) the date on which such share is converted (provided that accrued
and unpaid dividends on converted shares of Series C Preferred Stock will
continue to accrue with respect to the resulting shares of Series D Preferred
Stock), or (c) the date on which such share is otherwise acquired by Synagro.
Accrued and unpaid dividends shall accumulate on a quarterly basis. So long as
any shares of Preferred Stock remains outstanding, without the prior written
consent of the holders of a majority of the outstanding such shares, Synagro
shall not directly or indirectly pay or declare any dividend or make any
distribution upon any Junior Securities.
Voting Rights of Series C Preferred Stock. Except as otherwise required by
applicable law, the Series C Preferred Stock shall have no voting rights;
provided that each holder of Series C Preferred Stock shall be entitled to
4
<PAGE> 12
notice of all stockholders meetings at the same time and in the same manner as
notice is given to all stockholders entitled to vote at such meetings.
Voting Rights of Series D Preferred Stock. At any time that the holders of
the Series D Preferred Stock, together with any other series of convertible
preferred stock that may be subsequently issued under the Purchase Agreement
(collectively, "Convertible Preferred Stock") hold less than a majority of the
outstanding Common Stock (assuming conversion of the Convertible Preferred
Stock), or, if such holders own a majority of such shares, until the first
meeting following the attainment of majority ownership (a "Majority Ownership
Event"), such holders shall be entitled to vote separately as a single class to
the exclusion of all other classes of Synagro's capital stock, with each share
of Convertible Preferred Stock entitled to one vote, to elect a pro rata share
of Synagro's Board of Directors based on such holders' ownership percentage of
Common Stock (assuming conversion of the Convertible Preferred Stock, but
excluding Common Stock actually held by such holders), to serve on Synagro's
Board of Directors until their successors are duly elected by the holders of the
Convertible Preferred Stock or they are removed from office (with or without
cause) by the holders of the Convertible Preferred Stock. In determining such
pro rata share, fractional numbers of directors less than 0.5 shall be rounded
down and fractional numbers of directors in excess of 0.5 shall be rounded up to
the next whole director; provided that if such holders have the right to elect
in excess of two directors but less than three directors, fractional numbers of
directors less than 0.64 shall be rounded down and fractional numbers of
directors in excess of 0.64 shall be rounded up to the next whole director.
Furthermore, until the occurrence of a Majority Ownership Event, the holders of
the Convertible Preferred Stock shall be entitled to notice of all stockholders
meetings in accordance with Synagro's bylaws, and except in the election of
directors and as otherwise required by applicable law, the holders of the
Convertible Preferred Stock shall be entitled to vote together with the holders
of the Common Stock voting together as a single class on all matters (i)
submitted to the stockholders for a vote and (ii) to the extent and in the
manner permitted by applicable law, pursuant to a written consent in lieu of a
stockholders meeting, in each case with each share of Common Stock entitled to
one vote per share and each share of Convertible Preferred Stock entitled to one
vote for each share of Common Stock issuable upon conversion of the Convertible
Preferred Stock as of the record date for such vote or, if no record date is
specified, as of the date of such vote.
Following the occurrence of a Majority Ownership Event, the holders of
Convertible Preferred Stock shall be entitled to notice of all stockholders
meetings in accordance with Synagro's bylaws, and except as otherwise required
by applicable law, the holders of the Convertible Preferred Stock shall be
entitled to vote together with the holders of the Common Stock voting together
as a single class on all matters (including the election of directors) (i)
submitted to the stockholders for a vote and (ii) to the extent and in the
manner permitted by applicable law, pursuant to a written consent in lieu of a
stockholders meeting, in each case with each share of Common Stock entitled to
one vote per share and each share of Convertible Preferred Stock entitled to one
vote for each share of Common Stock issuable upon conversion of the Convertible
Preferred Stock as of the record date for such vote or, if no record date is
specified, as of the date of such vote.
Conversion of Series C Preferred Stock. A holder of Series C Preferred
Stock may convert all or any portion of the Series C Preferred Stock (including
any fraction of a share) held by such holder into an identical number of shares
of Series D Preferred Stock; provided that a conversion of shares of Series C
Preferred Stock cannot take place until the later of (a) the date that is 21
calendar days after the date that this Information Statement is delivered to the
stockholders of Synagro, and (b) the date upon which the waiting period for the
filing made by Synagro on February 15, 2000, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, expires or is terminated. All
accrued dividends which have not been paid prior to the conversion of shares of
Series C Preferred Stock shall continue to accrue and shall be obligations with
respect to the converted shares of Series D Preferred Stock. Synagro is required
to maintain a reserve of shares of Series D Preferred Stock for issuance upon
conversion of the Series C Preferred Stock.
In the event that there is a recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of
Synagro's assets or other transaction, in each case which is effected in such a
manner that the holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to or
in exchange for Common Stock ("Organic Change"), then prior to the consummation
of such transaction, Synagro must make appropriate provisions to insure that
each of the holders of Series C Preferred Stock shall thereafter have the right
to acquire and receive such shares of stock, securities or assets as such holder
5
<PAGE> 13
would have received in connection with such Organic Change if such holder had
converted its Series C Preferred Stock immediately prior to such Organic Change.
Synagro may not effect any such consolidation, merger or sale, unless prior to
the consummation of the transaction, the successor entity resulting from
consolidation or merger or the entity purchasing such assets assumes, in
writing, the obligation to deliver to each such holder such shares of stock,
securities or assets as such holder may be entitled to acquire.
Conversion of Series D Preferred Stock. At any time and from time to time,
any holder of Series D Preferred Stock may convert all or any portion of the
Series D Preferred Stock (including any fraction of a share) held by such
holder, and to the extent elected by such holder, any accrued and unpaid
dividends thereon, into a number of shares of Common Stock computed by dividing
(i) the sum of (a) the number of shares to be converted multiplied by the
Liquidation Value and (b) the amount of such accrued and unpaid dividends by
(ii) the Conversion Price (as defined below) then in effect. The initial
conversion price shall be $2.50 per share; provided that in order to prevent
dilution, the Conversion Price may be adjusted in accordance with the terms of
the Series D Certificate of Designation for certain issuances of Common Stock,
options, warrants, convertible securities or other equity securities at a price
less than the current market price (but excluding the issuances of Preferred
Stock or Warrants). The Series D Certificate of Designation provides for similar
conversion rights upon an Organic Change as the Series C Certificate of
Designation.
Redemption. Shares of Preferred Stock are subject to mandatory redemption
by Synagro on January 26, 2010, at a price per share equal to the Liquidation
Value thereof (plus accrued and unpaid dividends). Further, upon the consent of
the holders of a majority of the outstanding shares of Preferred Stock, Synagro
may redeem all or any portion of the shares of Preferred Stock at any time prior
to the mandatory redemption date at a price per share equal to the Liquidation
Value thereof (plus all accrued and unpaid dividends).
If a Change in Ownership (as defined below) has occurred, Synagro has
entered into a written agreement with respect to a Change in Ownership or
Synagro obtains a written proposal for a Change in Ownership, Synagro must give
prompt written notice of such Change in Ownership to each holder of Preferred
Stock, and Synagro shall give each holder of Preferred Stock prompt written
notice of any subsequent material change in the terms or timing of such
transaction. The holder or holders of a majority of the Preferred Stock then
outstanding may require Synagro to redeem all or any portion of the Preferred
Stock owned by such holders at a price per share equal to the Liquidation Value
thereof (plus all accrued and unpaid dividends) by giving written notice to
Synagro of such election prior to the later of (i) 10 days after receipt of
written notice from Synagro and (ii) 10 days prior to the consummation of the
Change in Ownership (the "Expiration Date"). Synagro shall give prompt written
notice of any such election to all other holders of Preferred Stock within five
days after the receipt thereof, and each such holder shall have until the later
of the Expiration Date or five days after receipt of such second notice to
request redemption hereunder (by giving written notice to Synagro) of all or any
portion of the Preferred Stock owned by such holder. Upon receipt of such
elections, Synagro shall be obligated to redeem the aggregate number of shares
specified therein on the later of (y) the occurrence of the Change in Ownership
or (z) five days after Synagro's receipt of such elections. If any proposed
Change in Ownership does not occur, all requests for redemption in connection
therewith shall be automatically rescinded and Synagro shall have no liability
in connection therewith. The term "Change in Ownership" means any sale, transfer
or issuance or series of sales, transfers and/or issuances of Common Stock by
Synagro or any holders thereof which results in any person or group of persons
(as the term "group" is used under the Exchange Act), other than the holders of
Common Stock and Preferred Stock as of January 27, 2000, owning more than 50% of
the Common Stock outstanding at the time of such sale, transfer or issuance or
series of sales, transfers and/or issuances.
If Synagro enters into a written agreement providing for a Fundamental
Change (as defined below), Synagro shall give written notice of such Fundamental
Change describing in reasonable detail the material terms and date of
consummation thereof to each holder of Preferred Stock, and Synagro shall give
each holder of Preferred Stock prompt written notice of any material change in
the terms or timing of such transaction. The holder or holders of a majority of
the shares then outstanding may require Synagro to redeem all or any portion of
the Preferred Stock owned by such holders at a price per share equal to the
Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by
giving written notice to Synagro of such election prior to the later of (a) ten
days prior to the consummation of the Fundamental Change or (b) ten days after
receipt of notice from Synagro. Synagro shall give prompt written notice of such
election to all other holders of Preferred Stock (but in any event within five
days prior
6
<PAGE> 14
to the consummation of the Fundamental Change), and each such holder shall have
until two days after the receipt of such notice to request redemption (by
written notice given to Synagro) of all or any portion of the Preferred Stock
owned by such holder. Upon receipt of such elections, Synagro shall be obligated
to redeem the aggregate number of shares specified therein upon the consummation
of such Fundamental Change. If any proposed Fundamental Change does not occur,
all requests for redemption in connection therewith shall be automatically
rescinded and the Corporation shall have no liability in connection therewith.
The term "Fundamental Change" means (a) any sale or transfer of more than 50% of
the assets of Synagro and its subsidiaries on a consolidated basis in any
transaction or series of transactions (other than sales in the ordinary course
of business consistent with past practice) and (b) any merger or consolidation
to which Synagro is a party, except for a merger in which Synagro is the
surviving corporation, the terms of the Preferred Stock are not changed and the
Preferred Stock is not exchanged for cash, securities or other property, and
after giving effect to such merger, the holders of Synagro's outstanding capital
stock possessing a majority of the voting power (under ordinary circumstances)
to elect a majority of Synagro's Board of Directors immediately prior to the
merger shall continue to own Synagro's outstanding capital stock possessing the
voting power (under ordinary circumstances) to elect a majority of Synagro's
Board of Directors.
Events of Noncompliance. The Series C and Series D Certificates of
Designation define an "Event of Noncompliance" as the following: (i) Synagro
fails to make any required redemption payment with respect to the Preferred
Stock, whether or not such payment is legally permissible or is prohibited by
any agreement to which Synagro is subject; (ii) Synagro breaches or otherwise
fails to perform or observe certain covenants or agreements set forth in the
respective Certificate of Designation or in the Purchase Agreement; (iii) any
representation or warranty contained in the Purchase Agreement or required to be
furnished to any holder of Preferred Stock pursuant to the Purchase Agreement,
or any information contained in writing required to be furnished by Synagro or
any subsidiary to any holder of Preferred Stock, is false or misleading; (iv)
Synagro or any subsidiary makes an assignment for the benefit of creditors or
admits in writing its inability to pay its debts generally as they become due or
is involved in certain bankruptcy or similar insolvency proceedings, as more
thoroughly discussed in the respective Certificates of Designation; (v) a
judgment in excess of $1,000,000 is rendered against Synagro or any subsidiary
and, within 60 days after entry thereof, such judgment is not discharged or
execution thereof stayed pending appeal, or within 60 days after the expiration
of any such stay, such judgment is not discharged; (vi) there is an acceleration
of the maturity of any debt for borrowed money of Synagro or any subsidiary
(whether by having become due and payable by its terms or by having been
declared due and payable prior to its stated maturity) or any payment default or
defaults aggregating more than $2,000,000 under the terms applicable to any debt
of Synagro or any subsidiary (subject to any applicable grace period), whether
by acceleration or otherwise; or (vii) Synagro or any of its subsidiaries is
enjoined, restrained or in any way prevented by the order of any court or any
administrative or regulatory agency from conducting all or any material part of
its business for more than 15 days.
If an Event of Noncompliance has occurred and is continuing and has not
been cured within 45 days after Synagro has received written notice thereof from
a majority of the holders of Preferred Stock, the dividend rate on the Preferred
Stock shall increase immediately by an increment of two percentage points. Any
such increase of the dividend rate shall terminate as of the close of business
on the date on which no Event of Noncompliance exists.
If an Event of Noncompliance (other than an Event of Noncompliance related
to bankruptcy or insolvency of Synagro) has occurred and is continuing, and has
not been cured within 45 days after Synagro has received written notice thereof
from a majority of the holders of Preferred Stock, the holder or holders of a
majority of the Preferred Stock then outstanding may demand (by written notice
delivered to Synagro) immediate redemption of all or any portion of the
Preferred Stock owned by such holder or holders at a price per share equal to
the Liquidation Value thereof (plus all accrued and unpaid dividends). Synagro
shall give prompt written notice of such election to the other holders of
Preferred Stock (but in any event within five days after receipt of the initial
demand for redemption), and each such other holder may demand immediate
redemption of all or any portion of such holder's Preferred Stock by giving
written notice thereof to Synagro within seven days after receipt of Synagro's
notice.
If an Event of Noncompliance related to the bankruptcy or insolvency of
the Company has occurred, all of the shares of Preferred Stock then outstanding
shall be subject to immediate redemption by Synagro (without any action on the
part of the holders) at a price per share equal to the Liquidation Value thereof
(plus all accrued and unpaid dividends). Synagro shall immediately redeem all
shares of Preferred Stock upon the occurrence of such Event of Noncompliance.
7
<PAGE> 15
If any Event of Noncompliance related to failure by Synagro to make a
required redemption payment has occurred and is continuing, and has not been
cured within 45 days after Synagro has received written notice thereof from a
majority of the holders of Preferred Stock, the number of directors constituting
Synagro's Board of Directors shall, at the request of a majority of the
Preferred Stock then outstanding, be increased by one member, and the holders of
Preferred Stock shall have the special right, voting together as a single class
(with each share being entitled to one vote) and to the exclusion of all other
classes of Synagro's stock, to elect an individual to fill such newly created
directorship, to fill any vacancy of such directorship and to remove any
individual elected to such directorship. The newly created directorship shall
constitute a separate class of directors, and the director elected by the
holders of the Preferred Stock shall be entitled to cast a number of votes on
each matter considered by Synagro's Board of Directors (including for purposes
of determining the existence of a quorum) equal to the sum of the number of
votes entitled to be cast by all of the other directors plus one. Such special
right shall continue until such time as there is no longer any Event of
Noncompliance in existence, at which time such special right shall terminate.
Registration Rights Agreement
In accordance with the Purchase Agreement and the Subordinated Loan
Agreement, Synagro entered into a Registration Rights Agreement with GTCR Fund
and GTCR Capital on January 27, 2000 ("Registration Rights Agreement"), a copy
of which is attached as an Exhibit to Synagro's Current Report on Form 8-K filed
February 17, 2000. For purposes of the Registration Rights Agreement, the term
"Registrable Securities" is defined as (i) any Common Stock issued or issuable
upon conversion of the Preferred Stock (A) issued pursuant to the Purchase
Agreement or (B) issued or issuable upon exercise of the Warrants, and (ii) any
other shares of Common Stock issued or issuable directly or indirectly with
respect to the securities referred to in clause (i) above by way of a stock
dividend or stock split or in connection with an exchange or combination of
shares, recapitalization, merger, consolidation, or other reorganization. The
Registration Rights Agreement also sets forth certain instances in which shares
will cease to be Registrable Securities.
Demand Registrations. Subject to restrictions set forth in the
Registration Rights Agreement, the holders of a majority of the Registrable
Securities may request registration under the Securities Act of all or any
portion of their Registrable Securities on Form S-1 or any similar long-form
registration ("Long-Form Registrations"), or on Form S-2 or S-3 (including
pursuant to Rule 415 under the Securities Act) or any similar short-form
registration ("Short-Form Registrations"), if available. All such registrations
are referred to as "Demand Registrations." Each request for a Demand
Registration shall specify the approximate number of Registerable Securities
requested to be registered and the anticipated per share price range for such
offering. Within ten days after receipt of any such request, Synagro shall give
written notice of such requested registration to all other holders of
Registerable Securities and shall include in such registration all Registerable
Securities with respect to which Synagro has received written requests for
inclusion therein within 15 days after the receipt of Synagro's notice. In the
case of an underwritten offering, Synagro shall have the right to select the
investment banker(s) and manager(s) to administer the offering, subject to the
approval of the holders of a majority of the Registerable Securities included in
such Demand Registration, which approval shall not be unreasonably withheld.
Pursuant to the terms of the Registration Rights Agreement, the holders of
Registerable Securities shall be entitled to request two Long-Form Registrations
plus one additional Long-Form Registration for each additional $25 million
invested in Synagro (either on one or multiple occasions) through the purchase
of Convertible Preferred Stock pursuant to the Purchase Agreement, in which
Synagro shall pay all Registration Expenses (as defined below). All Long-Form
Registrations shall be underwritten registrations.
In addition to the Long-Form Registrations, the holders of Registerable
Securities shall be entitled to request an unlimited number of Short-Form
Registrations in which Synagro shall pay all Registration Expenses; provided,
however, that all Short-Form Registrations shall be for a minimum of $10 million
of Registerable Securities, based on the anticipated per share price range for
such offering. Demand Registrations shall be Short-Form Registrations whenever
Synagro is permitted to use any applicable short form. Synagro shall use its
best efforts to make Short-Form Registrations on Form S-3 available for the sale
of Registerable Securities.
8
<PAGE> 16
Synagro shall not include in any Demand Registration any securities which
are not Registerable Securities without the prior written consent of the holders
of a majority of the Registerable Securities included in such registration. If a
Demand Registration is an underwritten offering and the managing underwriters
advise Synagro in writing that, in their opinion, the number of Registerable
Securities and, if permitted hereunder, other securities requested to be
included in such offering exceeds the number of Registerable Securities and
other securities, if any, which can be sold in an orderly manner in such
offering within a price range acceptable to the holders of a majority of the
Registerable Securities to be included in such registration, then Synagro shall
include in such registration, prior to the inclusion of any securities which are
not Registerable Securities, the number of Registerable Securities requested to
be included which, in the opinion of such underwriters, can be sold in an
orderly manner within the price range of such offering, pro rata among the
respective holders thereof on the basis of the amount of Registerable Securities
owned by each such holder.
Piggy-back Registrations. Whenever Synagro proposes to register any of its
securities under the Securities Act (other than (i) pursuant to a Demand
Registration, or (ii) in connection with registrations on Form S-4, S-8 or any
successor or similar forms) and the registration form to be used may be used for
the registration of Registerable Securities (a "Piggyback Registration"),
Synagro shall give prompt written notice to all holders of Registerable
Securities of its intention to effect such a registration and shall include in
such registration all Registerable Securities with respect to which Synagro has
received written requests for inclusion therein within 20 days after the receipt
of Synagro's notice. The Registration Expenses of the holders of Registerable
Securities shall be paid by Synagro in all Piggyback Registrations. If a
Piggyback Registration is an underwritten primary registration on behalf of
Synagro, and the managing underwriters advise Synagro in writing that, in their
opinion, the number of securities requested to be included in such registration
exceeds the number which can be sold in an orderly manner in such offering
within a price range acceptable to Synagro, then Synagro shall include in such
registration (i) first, the securities Synagro proposes to sell, and (ii)
second, all other securities (including the Registerable Securities) requested
to be included in such registration, pro rata among the holders of such
securities on the basis of the number of shares owned by each such holder. If a
Piggyback Registration is an underwritten secondary registration on behalf of
holders of Synagro's securities other than holders of Registerable Securities,
and the managing underwriters advise Synagro in writing that, in their opinion,
the number of securities requested to be included in such registration exceeds
the number which can be sold in an orderly manner in such offering within a
price range acceptable to the holders of a majority of the Registerable
Securities to be included in such registration, then Synagro shall include in
such registration (i) first, the securities requested to be included therein by
the holders requesting such registration and (ii) second, all other securities
(including Registerable Securities) requested to be included in such
registration, pro rata among the holders of such securities on the basis of the
number of shares owned by each such holder.
Professional Services Agreement
In connection with the transactions contemplated by the Purchase
Agreement, Synagro and GTCR Fund entered into a Professional Services Agreement
on January 27, 2000, whereby GTCR Fund agreed to provide certain management and
financial services for Synagro. As consideration for such services, Synagro
agreed that at the time of any purchase of convertible preferred stock under the
Purchase Agreement, Synagro will pay GTCR Fund a placement fee equal to 0.5% of
the amount paid to Synagro in connection with such purchase. The Professional
Services Agreement will continue in effect until such time as GTCR Fund ceases
to own at least 25% of the preferred stock issued under the Purchase Agreement.
Board of Directors Representation
In accordance with the terms the Purchase Agreement and the Series D
Certificate of Designation, Synagro increased the size of its board of directors
from 4 to 5 members on January 27, 2000, and appointed David A. Donnini to fill
such newly created directorship. At such time that GTCR Fund converts the shares
of Series C Preferred Stock which it currently holds, Synagro will be obligated
under the terms of the Purchase Agreement and the Series D Certificate of
Designation to increase the size of its board of directors from 5 to 6 members,
and GTCR Fund shall have the right to designate the person to fill such newly
created vacancy.
9
<PAGE> 17
Equity issued by Company under Financings
In connection with the financing on January 27, 2000, Synagro issued
17,358.824 shares of Series C Preferred Stock and 2,641.176 shares of Series D
Preferred Stock to GTCR Fund for an aggregate purchase price of $20 million.
Synagro also issued a Warrant (as defined below) for the purchase of 2,857.143
shares of Series D Preferred Stock to GTCR Capital in connection with the
borrowing of $20 million under the Subordinated Loan Agreement, which Warrant
was immediately exercised by GTCR Capital.
In connection with the financing on February 4, 2000, Synagro issued 419.4
shares of Series C Preferred Stock to GTCR Fund for an aggregate purchase price
of $419,400. Synagro also issued a Warrant for the purchase of 59.915 shares of
Series C Preferred Stock to GTCR Capital in connection with the borrowing of
$419,400 under the Subordinated Loan Agreement, which Warrant was immediately
exercised by GTCR Capital.
As of the date of this Information Statement, GTCR Fund owns 17,778.224
shares of Series C Preferred Stock and 2,641.176 shares of Series D Preferred
Stock, and GTCR Capital owns 59.915 shares of Series C Preferred Stock and
2,857.143 shares of Series D Preferred Stock. If all such shares of Series C
Preferred Stock were converted into Series D Preferred Stock, and then all
shares of Series D Preferred were subsequently converted, Synagro would be
required to issue 9,334,583 shares of Common Stock, which would represent
approximately 32.9% of the total outstanding shares of Synagro Common Stock.
Agreements Concerning Employment Rights
On January 27, 2000, the Company and each of Ross M. Patten, Mark A. Rome,
Alvin L. Thomas, II and J. Paul Withrow (collectively, the "Executives") entered
into an Agreement Concerning Employment Rights ("Employment Rights Agreements"),
copies of which are attached as Exhibits to Synagro's Current Report on Form 8-K
filed on February 17, 2000. Pursuant to the Employment Rights Agreements, each
of the Executives waived all rights to the acceleration of stock options and all
rights resulting from a change in control under their respective employment
contracts, which may arise now or in the future in connection with the
transactions contemplated by the Purchase Agreement, Subordinated Loan Agreement
and Warrant Agreement. The Employment Rights Agreements also amended the
employment contracts of each of the Executives to (i) increase the annual salary
payable to each Executive ($225,000 per year to Mr. Patten, and $175,000 per
year to Messrs. Rome, Thomas and Withrow), (ii) provide that each Executive
shall be entitled to participate in an annual bonus pool, which shall provide
for a bonus of up to 50% of base salary in the discretion of the board of
directors, (iii) extend the term of employment for Messrs. Rome, Thomas and
Withrow so that the remaining term is always 24 months, and (iv) amend the
definition of "Change of Control" to conform with the Purchase Agreement,
Subordinated Loan Agreement and Warrant Agreement and to exclude the
transactions contemplated by such agreements.
The Employment Rights Agreements provide that in the event that (i)
Executive's employment is terminated by the Company for any reason other than
Cause (as defined), death or disability, (ii) Executive terminates his
employment with the Company for Good Reason (as defined), or (iii) a Change in
Control occurs, then the Executive shall have the right to receive an option
payment from the Company. In satisfying this obligation, the Company shall at
its option (x) issue options to purchase a certain number registered shares of
the Company's common stock ("Base Option Amount") at an exercise price of $2.50
per share, which shall be fully vested and non-transferable, and shall expire 90
days from the date of issue, (y) issue registered shares of the Company's common
stock equal to the result of (A) the product of the Base Option Amount,
multiplied by the fair market value per share of the Company's common stock less
$2.50, divided by (B) the fair market value per share of the Company's common
stock, or (z) a cash payment equal to the product of the Base Option Amount,
multiplied by the fair market value per share of the Company's common stock less
$2.50. The Base Option Amount for Mr. Patten is 950,000 shares, and the Base
Option Amount for Messrs. Rome, Thomas and Withrow is 450,000 shares.
SUBORDINATED DEBT FINANCING
Terms of Subordinated Loan Agreement
Pursuant to the terms of the Subordinated Loan Agreement, GTCR Capital
agreed to provide up to $125 million in subordinated debt financing to fund
acquisitions and for certain other uses, in each case as approved by the Board
of Directors of Synagro and GTCR Capital. Prior to the date of this Information
Statement, Synagro has
10
<PAGE> 18
incurred $20,419,400 of indebtedness under the terms of the Subordinated Loan
Agreement. Synagro may incur an additional $104,580,600 in indebtedness under
the terms of the Subordinated Loan Agreement.
Subsequent Loans. If Synagro desires additional funds from GTCR Capital
under the terms of the Subordinated Loan Agreement, Synagro shall submit a
request to GTCR Capital specifying the proposed use. GTCR Capital is under no
obligation to approve the request, and if it is denied, Synagro may proceed with
an acquisition only if it is permitted under the covenants above (which also
apply to the Subordinated Loan Agreement) and no GTCR Capital loan funds will be
used for the acquisition. If, however, GTCR Capital approves the request,
Synagro may borrow up to an additional $104,580,600 in subordinated
indebtedness. In order to consummate a subsequent loan under the terms of the
Subordinated Loan Agreement, the representations and warranties of Synagro set
forth in the Subordinated Loan Agreement must be true and correct in all
material respects. Further, no default or event of default may exist as of the
date of such subsequent loan or would result from the consummation of the
borrowings by Synagro under the Subordinated Loan Agreement. GTCR Fund shall
have purchased (or will purchase concurrently with the funding of the subsequent
loan) Preferred Stock from Synagro pursuant to the Purchase Agreement in an
amount equal to the subsequent loan. Finally, GTCR Capital must receive standard
closing documents in form and substance acceptable to GTCR Capital.
Terms of Loans. The loans under the Subordinated Loan Agreement ("Loans")
shall bear interest at a rate equal to 12% per annum on the unpaid principal
amount thereof; provided, that upon an Event of Default (as defined below) and
for so long as it is continuing, the interest rate on the unpaid principal
amount of the Loans shall be 14%. Interest shall be payable with respect to the
Loans, in arrears, on the last day of each quarterly period ending on March 31,
June 30, September 30 and December 31, as applicable (provided that the initial
interest payment shall be payable upon the next succeeding date), upon
prepayment of the Loans and at the maturity of the Loans. The unpaid principal
amount of the Loans plus all accrued and unpaid interest must be paid in full on
January 27, 2008. The Subordinated Loan Agreement does permit Synagro to make
prepayments on the loan, in full or in part, upon 30 days prior written notice;
provided that any prepayment amount must be at least $1 million and in integrals
of $250,000. The Subordinated Loan Agreement also requires that Synagro use
certain proceeds from asset sales, debt issuances and equity issuances to prepay
the Loans. The Loans are guaranteed by substantially all of the subsidiaries of
Synagro. The Loans shall be evidenced by a promissory note.
Representations. The Subordinated Loan Agreement contains standard
representations of Synagro for the benefit of GTCR Capital, which include
representations regarding the following: (i) organization, corporate power and
licenses, (ii) capital stock and related matters, (iii) subsidiaries and
investments, (iv) authorization, (v) financial statements, (vi) absence of
undisclosed liabilities, (vii) no material adverse changes, (viii) absence of
certain developments, (ix) assets, (x) real property, (xi) tax matters, (xii)
contracts and commitments, (xiii) intellectual property rights, (xiv)
litigation, (xv) brokerage, (xvi) governmental consents, (xvii) insurance,
(xviii) employees, (xix) employee benefit plans, (xx) compliance with laws,
(xxi) environmental and safety matters, (xxii) affiliated transactions, (xxiii)
real property holding corporation status, (xxiv) customers and suppliers, (xxv)
reports with the Securities and Exchange Commission, (xxvi) investment company
status, (xxvii) Antitakeover statutes, (xxviii) the Public Utility Holding
Company Act, (xxix) Regulation U, (xxx) solvency, (xxxi) stockholder consents,
and (xxxii) general disclosure matters. Such representations were made by
Synagro at the initial closing on January 27, 2000, and will be reaffirmed at
any subsequent borrowing.
Covenants. The Subordinated Loan Agreement contains standard covenants of
Synagro, which are substantially similar to the covenants set forth in the
Purchase Agreement. In addition, the Subordinated Loan Agreement requires that
Synagro maintain its books and records, maintain certain levels of insurance,
and meet certain financial ratios.
Events of Default. Pursuant to the terms of the Subordinated Loan
Agreement, if any of the following events shall occur and be continuing, it
shall be constitute an event of default ("Event of Default"): (i) the failure by
Synagro to pay the principal of the Loans when the same becomes due and payable,
or to make any interest or other payment within 5 days after it becomes due and
payable, (ii) failure to pay certain other indebtedness of Synagro when due and
payable, (iii) failure to satisfy any other obligations of Synagro or any
subsidiary if such failure might be reasonably be expected to have a material
adverse effect on Synagro, (iv) failure of Synagro or any subsidiary to comply
with the terms of the Subordinated Loan Agreement, (v) a breach of a
representation or warranty by Synagro
11
<PAGE> 19
or any subsidiary in any material respect, (vi) involuntary or voluntary
bankruptcy, appointment of a receiver or insolvency of Synagro or any
subsidiary, (vii) a final judgment is rendered against Synagro or any subsidiary
in excess of $1 million, which is not paid, discharged, vacated or stayed
pending appeal within 30 days of filing of such judgment, (viii) an order for
the dissolution or split-up of Synagro or any subsidiary remains undischarged or
unstayed for a period of 30 days, (ix) Synagro or any subsidiary is enjoined,
restrained or in any way prevented by order of a court or regulatory agency from
conducting a material part of its business for more than 30 days, (x) the
institution of certain proceedings related to an employee benefit plan, and (xi)
certain changes in control of Synagro.
Upon an Event of Default (other than a default related to involuntary or
voluntary bankruptcy), GTCR Capital may (and shall upon 30 days prior written
notice by a majority of the holders of the Loans) upon written notice to Synagro
declare the Note to be due and payable, and the principal amount of the Note,
together with accrued interest, shall automatically become immediately due and
payable. Upon an Event of Default related to involuntary or voluntary bankruptcy
of Synagro, the principal amount of the Note, together with accrued interest,
shall automatically become immediately due and payable. Upon any Event of
Default, GTCR Capital may also exercise its rights granted under Article Ninth,
Part B of Synagro's Certificate of Incorporation to elect an additional member
of Synagro's Board of Directors.
Warrant Agreement
In connection with the Subordinated Loan Agreement, Synagro and GTCR
Capital entered into the Warrant Agreement dated January 27, 2000 ("Warrant
Agreement"). Under the terms of the Warrant Agreement, Synagro is required to
issue a warrant to purchase Preferred Stock ("Warrant") to GTCR in connection
with any loan under the Subordinated Loan Agreement. The number of shares
issuable upon the exercise of a Warrant is equal to the product of (A) the
result of the fraction, the numerator of which is the dollar amount of the loans
being made at the respective closing, and the denominator of which is the dollar
value of the Preferred Stock being issued pursuant to the Purchase Agreement at
such closing, and (B) the result of (i) the number of shares of Preferred Stock
being issued pursuant to the Purchase Agreement, divided by 0.875, minus (ii)
the number of shares of Preferred Stock being issued pursuant to the Purchase
Agreement. Each Warrant is fully vested upon issuance, and is exercisable for a
period of 10 years from the date of issuance. The exercise price is equal to
$.01 per share. For a description of the Warrants issued by Synagro pursuant to
the Warrant Agreement see the Section entitled "Equity Financing -- Equity
Issued by Company in Connection with Financings."
Monitoring Agreement
In connection with the transactions contemplated by the Subordinated Loan
Agreement, Synagro and GTCR Capital entered into a Monitoring Agreement on
January 27, 2000 ("Monitoring Agreement"). Under the Monitoring Agreement,
Synagro agreed that at the time of any financing under the Subordinated Loan
Agreement, Synagro will pay GTCR Capital a monitoring fee equal to 0.5% of the
aggregate amount of such financing. The Monitoring Agreement shall terminate
upon the sale of Synagro or at such time as all loan obligations under the
Subordinated Loan Agreement have been paid in full.
SENIOR DEBT FINANCING
Terms of Senior Credit Agreement
Pursuant to the terms of the Senior Credit Agreement, Bank of America,
N.A. and certain other lenders (the "Senior Lenders") agree to provide up to
$110,000,000 in senior debt financing to fund acquisitions permitted by the
Senior Credit Agreement, for working capital to refinance existing debt, for
capital expenditures and for other general corporate purposes. As of the date of
this Information Statement, Synagro has borrowed $47,500,000 of indebtedness
under the terms of the Senior Credit Agreement.
12
<PAGE> 20
Types of Loans and Availability. The loan commitments under the Senior
Credit Agreement are divided as follows:
(i) Revolving Loans up to $10,000,000 outstanding at any one time
available prior to July 27, 2006. Bank of America may make Swing Line Loans as a
utilization of part of the Revolving Loan commitment, to be repaid and shared
pro rata by all of the Senior Lenders.
(ii) Term A Loans (which once repaid may not be reborrowed) of up to
$40,000,000 available prior to April 27, 2000; provided, however, that Synagro
must reserve $13,500,000 of availability under this commitment until the RESTEC
(as defined herein) Bonds have been paid in full or defeased; and provided
further that if the RESTEC Bonds have not been paid or defeased prior to April
27, 2000, then the Term A Loans may only be used for such purpose up to June 26,
2000.
(iii) Term B Loan (which once repaid may not be reborrowed) of $30,000,000
made on the closing date.
(iv) Acquisition Loans up to $30,000,000 outstanding at any one time
available on a revolving basis prior to January 27, 2001; provided, however,
that lenders holding at least 66.6% of the total loan commitments must approve
the acquisitions made with proceeds from the Acquisition Loans, provided,
further, that certain financial ratios must be met before Synagro can borrow
Acquisition Loans.
(v) Synagro has the ability to obtain up to $5,000,000 in letters of
credit outstanding at any one time from the Senior Lenders as a subset of the
Revolving Loans.
In addition to the foregoing, the obligation of the Senior Lenders to make any
loan which would be used to finance the acquisition of Rehbein, Inc.,
Ecosystematics, Inc., AKH Water Management, Inc., Davis Water Analysis, Inc. or
Whiteford Environmental, Inc. (the "Secondary Acquired Companies") is subject to
the further condition that (1) Synagro has borrowed at least 15% of the total
funds required for the acquisition and any previous acquisitions of a Secondary
Acquired Company as subordinated loans pursuant to the Subordinated Loan
Agreement, (2) Synagro has issued Series C and D Preferred Stock to GTCR Fund
for a purchase price of at least 15% of the funds required for the acquisition
and any previous acquisitions of Secondary Acquired Companies, and (3) Synagro
meets certain financial ratios.
Any funding of Senior Loans after the closing date is subject, in addition
to the requirements set forth above, to the requirement that the representations
and warranties of Synagro set forth in the Senior Credit Agreement must be true
and correct in all material respects, that no default or event of default exists
as of the date of such loan, that no litigation or other proceeding shall be
pending or threatened which might have a material adverse effect, that no
development shall have occurred in any existing litigation or proceeding which
might have a material adverse effect, and that the Senior Lenders have received
certain confirmatory documents in form and substance acceptable to the Senior
Lenders confirming that Synagro is meeting all of its covenants, including
financial covenants under the Senior Credit Agreement.
Terms of Loans. The loans under the Senior Credit Agreement (the "Loans")
shall bear interest at a varying pricing schedule, as described in the Senior
Credit Agreement. Upon the occurrence of an event of default, the interest rate
applicable to each Loan shall be increased by 2%. Interest shall be payable with
respect to prime rate based loans on the last day of each calendar month and at
the maturity of the Loans. Interest shall be payable with respect to Eurodollar
Loans on the last day of each interest period, but no less than once every three
months, and at the maturity of the Loans. The unpaid principal balance of the
Loans (other than the Revolving Loans) shall be payable in amounts and on the
dates described in the Senior Credit Agreement. The Revolving Loans shall be
repaid in full on July 27, 2006. The Senior Credit Agreement does permit Synagro
to make prepayments on the Loans, in full or in part provided that each
prepayment of a Revolving Loan must be at least $100,000 or an integral thereof,
and prepayments of all other Loans must be of at least $300,000 and in $100,000
integrals. Prepayments of Eurodollar Loans prior to the end of an interest
period must be accompanied by payment of the losses to the Senior Lender caused
by the prepayment.
Security, Guaranties. The Loans are secured by all of the assets of
Synagro and all of its subsidiaries. The Loans are guaranteed by substantially
all of the subsidiaries of Synagro.
13
<PAGE> 21
Mandatory Prepayments. The Senior Credit Agreement requires that Synagro
prepay the Term A Loans and the Term B Loans based on certain calculations of
excess cash flow for each year, and based on proceeds received from asset sales,
debt issuances and equity issuances. The Revolving Loans and the Acquisition
Loans must also be prepaid with the proceeds of certain asset sales, and after
the receipt of $100,000 in proceeds of asset sales further payments of Revolving
Loans or Acquisition Loans required to be made from proceeds of asset sales
shall also reduce the available commitment for Revolving Loans and Acquisition
Loans.
Representations. The Senior Credit Agreement contains standard
representations of Synagro for the benefit of the Senior Lenders, which include
representations regarding the following: (i) organization, corporate power and
licenses, (ii) authorization, (iii) financial condition, (iv) no material
adverse changes, (v) litigation, (vi) ownership of assets and liens, (vii)
subsidiaries and investments, (viii) pension plans, (ix) taxes, (x) solvency,
(xi) environmental matters, and (xii) general disclosure matters. Such
representations were made by Synagro at the initial closing on January 27, 2000
and will be reaffirmed at any subsequent borrowing.
Covenants. The Senior Credit Agreement contains standard covenants of
Synagro, including that Synagro produce periodic financial statements and other
financial information, copies of its reports to the SEC and copies of management
reports; maintenance of books and records; maintenance of certain levels of
insurance; compliance with laws; maintenance and existence of Synagro and its
subsidiaries; compliance with certain financial covenants; limitations on
capital expenditures, debt and liens; restrictions on payments of dividends and
payments to affiliates; and limitations on mergers, consolidations and sales,
and investments.
Events of Default. Pursuant to the terms of the Senior Credit Agreement,
if any of the following events shall occur and be continuing, its shall
constitute an event of default ("Senior Event of Default") (i) the failure by
Synagro to pay the principal of the Loans when it becomes due and payable, or to
make any interest or other payment within 5 days after it becomes due and
payable, (ii) failure to pay certain other indebtedness of Synagro when due and
payable in excess of $500,000, (iii) failure to satisfy any other obligations of
Synagro or any subsidiary if such failure might be reasonably expected to have a
material adverse effect on Synagro, (iv) voluntary bankruptcy or insolvency of
Synagro or any subsidiary, or involuntary bankruptcy or insolvency of Synagro or
any subsidiary which is not discharged within 60 days, (v) failure of Synagro or
any subsidiary to comply with the terms of the Senior Credit Agreement, (vi)
breach of a representation or warranty by Synagro or any subsidiary in any
material respect (other than representations and warranties qualified by a
materiality standard, including, without limitation a material adverse change
qualifier, which must be true and correct in all respects), (vii) actions
affecting pension plans involving amounts in excess of $500,000, (viii) a final
judgment rendered against Synagro or subsidiary in excess of $500,000 which is
not paid, discharged, vacated or stayed pending appeal within 30 days of filing
of such judgment, and (ix) changes in control of Synagro.
Upon an Senior Event of Default the Senior Lender may declare the Loans
immediately due and payable and the principal amount of the Loans, together with
accrued interest, shall automatically become immediately due and payable. In
addition, all commitments to make Loans under the Senior Credit Agreement may be
immediately terminated.
FAIRNESS OPINION
Howard Frazier Barker Elliott, Inc. ("HFBE") acted as Synagro's financial
advisor in connection with the Initial Financing. HFBE has advised our Board of
Directors that, in its opinion, the terms of the Initial Financing are fair,
from a financial point of view, to Synagro's stockholders. The full text of the
HFBE opinion, which describes the procedures followed, assumptions made and
other matters considered in the opinion, is included in this document as Exhibit
C. You should read the full opinion.
HFBE'S OPINION ADDRESSES ONLY THE INITIAL FINANCING CONSIDERATION. IT DOES
NOT ADDRESS THE RELATIVE MERITS OF THE INITIAL FINANCING AND ANY OTHER
TRANSACTION OR BUSINESS STRATEGIES DISCUSSED BY THE COMPANY'S BOARD OF DIRECTORS
AS ALTERNATIVES TO THE INITIAL FINANCING OR THE DECISION OF THE COMPANY'S BOARD
OF DIRECTORS TO PROCEED WITH THE INITIAL FINANCING. TO THE EXTENT A VOTE OF THE
COMPANY'S STOCKHOLDERS IS REQUIRED OR SOUGHT, HFBE'S OPINION DOES NOT CONSTITUTE
14
<PAGE> 22
A RECOMMENDATION TO ANY STOCKHOLDER OF THE COMPANY AS TO HOW ANY SUCH
STOCKHOLDER SHOULD VOTE ON THE INITIAL FINANCING. HFBE HAS NOT BEEN REQUESTED TO
AND DID NOT SOLICIT THIRD PARTY INDICATIONS IN ACQUIRING ALL OR ANY PART OF
SYNAGRO.
In arriving at its written opinion, HFBE, among other things:
o reviewed Synagro's Annual Report on Form 10-K and related financial
information for the years ended December 31, 1994 through 1998, and
Quarterly Reports on Form 10-Q and related financial information for
the quarter ended September 30, 1999;
o reviewed certain information relating to the business, earnings,
cash flow, assets and prospects of Synagro furnished to HFBE by
Synagro;
o conducted discussions with members of senior management of Synagro
concerning Synagro's businesses and prospects;
o reviewed the historical market prices and trading activity for
Synagro's common stock;
o compared the results of operations of Synagro with those of certain
companies which HFBE deemed reasonably similar to Synagro;
o analyzed the nature and financial terms of certain business
combinations involving Synagro and companies in lines of business
HFBE believes to be generally comparable to those of Synagro;
o considered the pro forma effect of the Initial Financing on certain
of Synagro's income statement, balance sheet and cash flow statement
items based on projections for the years ending December 31, 1999
through December 31, 2004 as provided to HFBE by the Synagro;
o reviewed projected financial statements for the years ending
December 31, 1999 through December 31, 2004 of Synagro without the
Initial Financing as provided to HFBE by Synagro;
o reviewed documents related to the Initial Financing including; the
Senior Subordinated Loan Agreement between GTCR Capital and Synagro;
the Warrant Agreement between Synagro and GTCR Capital; the
Certificate of Designation, Preferences, and Rights of Series C
Convertible Preferred Stock; the Registration Agreement between
Synagro, GTCR Fund VII, L.P. ("GTCR Fund") and GTCR Capital; and the
Purchase Agreement between Synagro and GTCR Fund; and
o reviewed such other matters as HFBE deemed necessary, including an
assessment of general economic, market and monetary conditions.
In preparing its opinion, HFBE relied on the accuracy and completeness of
all information supplied or otherwise made available to it by Synagro. HFBE did
not independently verify the furnished information, or undertake an independent
appraisal of the assets of Synagro.
HFBE's opinion is based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of the opinion.
HFBE assumed that there had been no material change in Synagro's financial
condition, results of operations, business or prospects since the date of the
last financial statements made available to HFBE. HFBE relied on advice of
counsel to Synagro as to all legal matters with respect to Synagro, the Initial
Financing and documents related to the Initial Financing. In addition, HFBE did
not make an independent evaluation appraisal or physical inspection of the
assets or individual properties of Synagro, nor was it furnished with any such
appraisals.
15
<PAGE> 23
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to particular
circumstances. Therefore, the HFBE opinion is not readily susceptible to partial
analysis or summary description. Furthermore, in arriving at its opinion, HFBE
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgments as to the significance and relevance
of each analysis or factor. Accordingly, HFBE believes that its analysis must be
considered as a whole and that considering any portion of its analysis and the
factors considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, HFBE made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Synagro. Estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values.
In its effort to determine the fairness, from a financial point of view,
of the Initial Financing, HFBE considered several standards of fairness. The
Initial Financing was accretive to fully diluted cash flow and earnings per
share based on a comparison of the financial projections of Synagro with the
Initial Financing and without the Initial Financing as provided to HFBE by
Synagro. A private placement agent retained by Synagro contacted a substantial
number of institutions, Synagro management gave several formal presentations to
responding institutions; the GTCR offer was the most favorable to the
stockholders of Synagro. In addition, HFBE performed an internal rate of return
analysis on the Common Stock to determine if the return on investment received
by GTCR was reasonable in comparison to the private equity returns of other
financial buyers. HFBE determined that the internal rate of return on the Common
Stock was 25.7 percent, which HFBE believes is consistent with private equity
returns in the general market in which financial buyers typically require equity
returns of 25 percent to 30 percent.
The primary standard of fairness considered by HFBE was to determine if
the existing stockholders of Synagro gave a disproportionate equity
participation to GTCR in the Initial Financing based on the intrinsic value of
Synagro after the Financing. In order to determine the fairness of the Initial
Financing, from a financial point of view, to the existing shareholders of
Synagro, HFBE determined the equity value of Synagro post financing. The primary
valuation method used to determine the equity value of Synagro was the
discounted cash flow analysis based on a proforma cash flow analysis after the
Initial Financing, as provided to HFBE by Synagro. HFBE then compared the GTCR
initial equity contribution in the Initial Financing to GTCR's proportionate
share of the pro forma equity value of Synagro as determined by HFBE based on
the discounted cash flow analysis. The analysis was performed to determine
whether GTCR received a disproportionate share of the intrinsic value of Synagro
relative to GTCR's initial equity contribution.
Discounted Cash Flow Analysis.
Based on internal financial projections provided by Synagro, HFBE
performed a discounted cash flow analysis of Synagro. The estimated future
debt-free cash flows were based on the financial projections for Synagro after
the Initial Financing for the years 2000 through 2004. HFBE discounted the
stream of projected debt-free cash flows from 2000 to 2004 back to the present
date using discount rates of 15.25 percent and 16.25 percent. The terminal
values of Synagro were calculated based on EBITDA multiples for 2004 of 7.0x and
8.0x and were discounted back to the present date using discount rates of 15.25
percent and 16.25 percent. HFBE then aggregated the present values of the
debt-free cash flows and the present values of the terminal value to derive a
range of implied enterprise values for Synagro. Debt was subtracted from the
range of enterprise values to arrive at a range of equity values of Synagro.
Based on these parameters, HFBE calculated Synagro's equity value to range from
$57,349,000 to $81,663,000, and the value of the GTCR equity investment to range
from $20,406,000 to $29,057,000. Since the initial GTCR equity investment from
the Initial Financing of $23,000,000 falls within this range, the Initial
Financing appeared fair to HFBE.
The discount rates used were based on Synagro's current calculated
weighted average cost of capital ("WACC"). HFBE used both the build-up method
and the Capital Asset Pricing Model ("CAPM") to calculate Synagro's cost of
equity. To calculate the cost of equity using the build-up method, an equity
risk premium and specific company risk premium was added to the risk-free rate,
which resulted in an expected total rate of return of 26.75 percent. To
calculate the discount rate using CAPM, HFBE determined the specific risk
premium for Synagro by
16
<PAGE> 24
multiplying the historical equity risk premium by Synagro's beta. HFBE then
added the specific risk premium for Synagro to the risk-free rate to arrive at a
cost of equity of 29.0 percent. Based on Synagro's current cost of debt and an
average debt-to-capitalization ratio of 55.0 percent, the calculated WACC was
15.25 percent using the build-up method and 16.25 percent using the CAPM.
HFBE incorporated comparable public company analysis and comparable
transaction analysis in its determination of the multiple to apply to 2004
EBITDA to calculate the terminal value of Synagro. The following is a discussion
of the comparable public company and comparable transaction analysis.
Selected Comparable Public Company Analysis.
Using public information, HFBE compared selected historical financial data
and operating results of Synagro as well as projected financial data post
Initial Financing to the corresponding data of certain publicly traded companies
deemed to be similar with regard to their business and operations.
To measure Synagro's current operating performance and projected operating
performance in the first year following the Initial Financing against that of
certain comparable publicly-traded companies, HFBE, among other factors
considered for Synagro, and compared to similar data for comparable public
companies:
o total revenues,
o operating earnings (i.e., earnings before interest, taxes,
depreciation and amortization) margins,
o profit margins on net income, and
o cash flow.
This information was considered for the year ended December 31, 1998 or
the latest twelve months ended September 30, 1999 and the projected operating
results for the year ended December 31, 2000 for Synagro.
To measure Synagro's capital structures against those of the comparable
public companies, HFBE considered, among other factors, Synagro's (1) ratio of
total debt to total capital, and (2) ratio of total debt to total assets
compared to similar data for the comparable public companies. This information
was considered for the year ended December 31, 1998, the latest twelve months
ended September 30, 1999 and the projected year ending December 31, 2000 for
Synagro after the Initial Financing.
The following table shows the range of the selected multiple for the
comparable public companies:
<TABLE>
<CAPTION>
Median 75th Percentile 25th Percentile
------ --------------- ---------------
<S> <C> <C> <C>
Total market capitalization to LTM EBITDA 6.9x 7.0x 6.5x
</TABLE>
17
<PAGE> 25
Selected Comparable Transaction Analysis.
HFBE researched various merger and acquisition databases to review
transactions involving sales of companies comparable to Synagro within the past
two years. HFBE also included four transactions in which Synagro was involved in
its analysis. Financial disclosure was available for eight transactions of
comparable companies. The following transactions comprised the group
(buyer/seller): USA Waste Services, Inc./American Waste Services, Inc.;
International Technology, Inc./Fluor Daniel GTI, Inc.; Stericycle, Inc./Waste
Systems; An undisclosed investor group/GNI Group, Inc.; Synagro/A&J Cartage,
Inc.; Synagro/Recyc, Inc.; Synagro/Amsco, Inc.; and Synagro/Anti-Pollution
Associates, Inc. and D&D Pumping, Inc. The following table shows the range of
selected multiples for the comparable transactions:
<TABLE>
<CAPTION>
Median 75th Percentile 25th Percentile
------ --------------- ---------------
<S> <C> <C> <C>
Enterprise value to EBITDA 7.9x 8.4x 6.8x
</TABLE>
Based on the selected comparable public company analysis and selected
comparable transaction analysis, HFBE selected multiples of 7.0x and 8.0x to
apply to the projected 2004 EBITDA of Synagro, which resulted in terminal value
range of $257,454,000 to $294,234,000.
Value Ranges.
Based on the discounted cash flow valuation analysis described above, HFBE
estimated a range of values for the equity value of GTCR's equity investment in
Synagro shown in the following chart:
<TABLE>
($Millions) 10 15 20 25 30 35 40
<S> <C> <C> <C> <C> <C> <C> <C>
Value of GTCR Equity
Investment in Synagro
($20-$29)
GTCR initial equity
investment
($23)
</TABLE>
18
<PAGE> 26
AMENDMENT TO CERTIFICATE OF INCORPORATION
Pursuant to the Written Consent, the stockholders of the Company have
approved an Amendment to the Restated Certificate of Incorporation of the
Company (the "Amendment"), a copy of which is attached hereto as Exhibit D. The
detailed terms of the Amendment are set forth therein, and are incorporated
herein by reference. The following discussion sets forth a description of the
material terms of the Amendment, and is qualified in its entirety by reference
to the Amendment.
The primary purpose of the Amendment was to add Part B to Article Ninth of
the Restated Certificate of Incorporation, which gives the holder of Notes
issued under the Subordinated Loan Agreement the right to elect an additional
director upon an event of default. Pursuant to Part B to Article Ninth, if an
event of default has occurred and is continuing under the Notes, the number of
directors constituting the Board of Directors of the Company shall, at the
request of a majority in interest of an aggregate principal amount of the Notes
then outstanding, be increased by one member. The holders of the Notes shall
then have the special right, voting together as a single class (with each $1 of
principal amount of the Notes held by a Note holder entitled to one vote) and to
the exclusion of all other classes of the Company's capital stock, to elect an
individual to fill such newly created directorship, to fill any vacancy of such
directorship and to remove any individual elected to such directorship. The
newly created directorship shall constitute a separate class of directors. This
special right to elect an additional director shall continue until six months
after such event of default under the Notes no longer exists; provided, however,
that this special right shall vest upon any subsequent events of default under
the Notes. Any director elected by the Note holders pursuant to Part B of
Article Ninth shall continue to serve as a director until six months after such
event of default is no longer in existence, and on such date the number of
directors constituting the Board of Directors shall decrease to such number as
constituted the whole Board of Directors immediately prior to the occurrence of
the event or events of default giving rise to the special right.
The special right of the Note holders to elect a member of the Board of
Directors may be exercised at a special meeting called pursuant to the terms of
Part B of Article Ninth, at any annual or other special meeting of stockholders
and, to the extent and in the manner permitted by applicable law, pursuant to a
written consent in lieu of a meeting. At any time when such special right has
vested in the Note holders, a proper officer of the Company shall, upon the
written request of the holders of at least 10% in interest of the Notes then
outstanding, call a special meeting of the Note holders for the purpose of
electing a director. At any meeting or at any adjournment thereof at which the
Note holders have the special right to elect a director, the presence, in person
or by proxy, of the holders of a majority in interest of an aggregate principal
amount of the Notes then outstanding shall be required to constitute a quorum
for the election or removal of such director by the Note holders exercising such
special right. The vote of a majority of such quorum shall be required to elect
or remove any such director.
The Amendment also contains revisions to other Articles of the Restated
Certificate of Incorporation of the Company to provide necessary references to
Part B of Article Ninth consistent with the amendment to Article Ninth.
Pursuant to regulations promulgated by the Commission, the Written Consent
adopting the Amendment may become effective in no less than 20 days after the
date of mailing this Information Statement to all stockholders of record of the
Company. Synagro will file the Amendment with the Secretary of State of the
State of Delaware 21 days after this Information Statement is first delivered to
stockholders.
19
<PAGE> 27
ACQUISITION OF RESTEC
The detailed terms of the acquisition of Residual Technologies, Limited
Partnership and certain of its affiliates are contained in:
(i) that certain Purchase and Sale Agreement dated October 20, 1999, by
and among Synagro, Paul A. Toretta ("Mr. Toretta"), Eileen Toretta,
as Trustee of the Paul A. Toretta 1998 Grat, Frances A. Guerrera
("Mrs. Guerrera"), as Executrix of the Estate of Richard J. Guerrera
(the "Estate"), Mrs. Guerrera, individually, and Mrs. Guerrera and
Robert Dionne, as Co-Trustees of the Richard J. Guerrera Revocable
Trust under the Agreement dated November 2, 1998 (the "Trust") (each
of Mr. Toretta, the Grat and the Estate is a "Seller"), as amended
(the "Purchase and Sale Agreement"); and
(ii) that certain Agreement and Plan of Merger dated October 20, 1999, by
and among Synagro, RESTEC Acquisition Corp., a wholly-owned
subsidiary of Synagro ("Merger Sub"), New England Treatment Company,
Inc. ("NETCO"), Mr. Toretta, Mrs. Guerrera, the Estate and the Trust
(each of Mr. Toretta and the Estate is a "Shareholder"), as amended
(the "Merger Agreement") (collectively, the Purchase and Sale
Agreement and the Merger Agreement are the "Agreements").
Proceeds of $44,375,800 from the Financing Transactions together with
1,325,000 shares of Synagro Common Stock, were used to (a) finance the
acquisition of (i) all of the general and limited partnership interests in
Residual Technologies, Limited Partnership; Fairhaven Residuals, Limited
Partnership; NETCO-Waterbury, Limited Partnership; NETCO-Residuals Management,
Limited Partnership; and New Haven Residuals, Limited Partnership; (ii) all of
the ownership interests in Providence Soils, LLC; and (iii) all of the
outstanding capital stock of Fairhaven Residual Systems, Inc.;
NETCO-Connecticut, Inc.; NETCO-Residuals Management Systems, Inc.;
NETCO-Waterbury Systems, Inc.; New Haven Residual Systems, Inc.; Residual
Technologies Systems, Inc.; and NETCO (collectively, the foregoing limited
partnerships, limited liability company and corporations are referred to as
"RESTEC"); (b) satisfy indebtedness assumed in connection with the transaction
of $13,949,500 and (c) pay for related fees and expenses. In addition, pursuant
to the Purchase and Sale Agreement up to $12,000,000 payable, at Synagro's
election, either in cash or fifty percent in cash and fifty percent in shares of
Synagro Common Stock will be payable to Sellers if specified performance targets
are met.
GENERAL DESCRIPTION OF THE TRANSACTION
Pursuant to the Purchase and Sale Agreement, Synagro paid an aggregate of
$30,426,300 in cash (which is net of certain adjustments, including $2,258,104
of bonuses to certain RESTEC employees which Synagro agreed to pay after
Closing) to Sellers and assumed $13,949,500 of indebtedness of RESTEC (not
including NETCO) as a purchase price for all of Sellers' ownership interests in
RESTEC (not including NETCO). Additionally, pursuant to the Purchase and Sale
Agreement, Sellers can earn up to an additional $12,000,000 over the next eight
years if certain performance targets are met.
Pursuant to the terms of the Merger Agreement, Merger Sub was merged with
and into NETCO, whereupon the surviving NETCO entity became a wholly-owned
subsidiary of Synagro (the "Merger"). Immediately prior to the effective time of
the Merger, (i) all of the issued shares of NETCO stock were cancelled and
retired, (ii) each share of the common stock of Merger Sub was converted into
and exchanged for one share of common stock of the surviving NETCO entity, and
(iii) the Shareholders and certain key employees of NETCO holding NETCO common
stock received 1,325,000 shares of Synagro Common Stock.
20
<PAGE> 28
THE RESTEC ACQUISITION AGREEMENTS
The following summary of the terms of the Purchase and Sale Agreement and
the Merger Agreement is qualified in its entirety by reference to the
Purchase and Sale Agreement and the Merger Agreement, copies of which are
attached hereto as Exhibits E and F, respectively. Certain capitalized terms
used herein without definition have the respective meanings set forth in the
Agreements.
Closing of the Transactions
The sale of RESTEC (not including NETCO) closed on January 27, 2000. The
Merger became effective on January 27, 2000 (the "Effective Time"), when
Articles of Merger were filed with the Rhode Island Secretary of State in
accordance with the Rhode Island Business Corporation Act and a Certificate of
Merger was filed with the Delaware Secretary of State in accordance with the
Delaware General Corporation Law.
Purchase Price
At Closing, Synagro paid $30,426,300 in cash to Sellers and assumed
$13,949,500 of indebtedness of RESTEC (not including NETCO) as the purchase
price for RESTEC (not including NETCO). In addition, the Sellers are entitled to
receive up to an additional $12,000,000 over the next eight years if certain
performance targets are met.
Exchange Ratio
At the Effective Time of the Merger, each issued share of NETCO common
stock was automatically cancelled and retired and the Shareholders and certain
key employees holding NETCO common stock received shares of Synagro Common Stock
in a ratio (the "Exchange Ratio") equal to .00205. Each shareholder entitled to
a fractional shares was paid an amount in cash (without interest) equal to the
value of such fraction of a share.
Representations and Warranties
In the Agreements, Sellers and Shareholders make representations and
warranties relating to, among other things, ownership, authority, investment
representations, organization and qualification, capitalization, subsidiaries,
approvals, financial statements, taxes, brokers and finders, registrations
statements, books and records, the absence of changes or events, the absence of
undisclosed liabilities, supplies, litigation, tax matters, employee benefit
plans, employee and labor matters, contracts, compliance with laws, intellectual
property, environmental matters, title to assets, condition and sufficiency of
assets, relationships, Year 2000, and certain payments. In the Agreements,
Synagro and, in the Merger Agreement, Merger Sub make various representations
and warranties relating to, among other things, organization and qualification,
capitalization, authority, approvals, financial statements, brokers and finders,
SEC filings and registration statements. The representations and warranties of
each of the parties to the Agreements will expire two years after the Closing
Date except that representations and warranties made with respect to ownership,
authority, capitalization and taxes will survive until the later of two years
after the Closing Date or the expiration of the applicable statute of
limitations period.
Indemnification
Pursuant to the Agreements, Sellers and Shareholders agree to indemnify
Synagro and RESTEC, and each of Synagro's stockholders, Affiliates, officers,
directors, employees, and agents (Synagro, RESTEC and all such other Persons are
collectively referred to as the "Synagro Indemnified Persons") from and against
any Indemnified Amounts paid, imposed on or incurred by the Synagro Indemnified
Persons, directly or indirectly, relating to, resulting from or arising out of
(a) (i) any breach or misrepresentation by Sellers or Shareholders of or in any
of the representations and warranties made in the Agreements or any certificate
or instrument delivered in connection with the Agreements or (ii) any violation
or breach of or default by Sellers or Shareholders under the terms of the
Agreements or any certificate or instrument delivered in connection with the
Agreements, or (b) any allegation of a third party of the events described in
(a), above.
21
<PAGE> 29
Pursuant to the Agreements, Synagro agrees to indemnify Sellers and
Shareholders and their agents, representatives and Affiliates (each a
"Shareholder Indemnified Person") from and against any Indemnified Amounts paid,
imposed on or incurred by the Shareholder Indemnified Person, resulting from any
breach or misrepresentations in any of the representations or warranties of
Synagro under the Agreements or any certificate or instrument delivered in
connection with the Agreements, or any violation or breach by Synagro or Merger
Sub under the terms of the Agreements or any certificate delivered in connection
with the Agreements.
Until and including the first anniversary of the Closing Date, no Synagro
Indemnified Person shall be entitled to indemnification from Sellers or
Stockholders pursuant to the Agreements unless and until the amount of any
Indemnified Amount, individually or in the aggregate with all other Indemnified
Amounts under the Agreements, exceeds $250,000, and then only to the extent of
such excess. After the first anniversary of the Closing Date, no Synagro
Indemnified Person shall be entitled to indemnification from the Stockholders
pursuant to the Agreements unless and until the amount of any Indemnified
Amount, individually or in the aggregate with all other Indemnified Amounts
under the Agreements, exceeds $500,000, and then only to the extent of such
excess. In no event shall the aggregate liability of the Estate under the
Purchase and Sale Agreement exceed the cash portion of the Purchase Price
received by the Estate. In no event shall the aggregate liability of the Grat
and Mr. Toretta under the Purchase and Sale Agreement exceed the combined cash
portion of the Purchase Price received by the Grat and Mr. Toretta. In no event
shall the aggregate liability of either the Estate or of Mr. Toretta under the
Merger Agreement exceed $3,500,000.
Until and including the first anniversary of the Closing Date, no
Shareholder Indemnified Person shall be entitled to indemnification from Synagro
pursuant to the Agreements unless and until the amount of any Indemnified
Amount, individually or in the aggregate with all other Indemnified Amounts
under the Agreements, exceeds $250,000, and then only to the extent of such
excess. After the first anniversary of the Closing Date, no Shareholder
Indemnified Person shall be entitled to indemnification from Synagro pursuant to
the Agreements unless and until the amount of any Indemnified Amount,
individually or in the aggregate with all other Indemnified Amounts under the
Agreements, exceeds $500,000, and then only to the extent of such excess.
OTHER AGREEMENTS
Pursuant to the Agreements, Synagro entered into a Consulting Agreement
dated January 27, 2000, with Paul A. Toretta, a principal, director and
executive officer of RESTEC, and an Employment Agreement dated January 27, 2000,
with Mark McCormick, an executive officer of RESTEC. Also pursuant to the
Agreements, Synagro received Covenant Not to Compete Agreements dated January
27, 2000, from each of the Sellers and certain affiliates of one or more of the
Sellers.
ACQUISITION OF ECOSYSTEMATICS, INC.
The detailed terms of the acquisition activities of Synagro are contained
in that certain Stock Purchase Agreement (the "Ecosystematics Purchase
Agreement") dated October 20, 1999, by and among Synagro, Christopher J.
Schrader and Kathleen A. Schrader (collectively, the "Ecosystematics
Shareholders") is attached hereto as Exhibit G and incorporated herein by
reference.
The following discussion sets forth a description of material terms of the
Ecosystematics Purchase Agreement. The description in this Information Statement
of the terms of the Ecosystematics Purchase Agreement is qualified in its
entirety by reference to the Ecosystematics Purchase Agreement, attached hereto
as Exhibit G. Certain capitalized terms used herein without definition have the
respective meanings set forth in the Ecosystematics Purchase Agreement.
GENERAL DESCRIPTION OF THE TRANSACTION
In consideration of all the issued and outstanding shares of
Ecosystematics, Inc. ("Ecosystematics") common stock, and the representations,
warranties, covenants and agreements of the Ecosystematics Shareholders, Synagro
paid an
22
<PAGE> 30
aggregate purchase price of $1,327,352 plus working capital in cash to the
Ecosystematics Shareholders. An adjustment amount to the purchase price shall be
calculated based on a Closing Date Balance Sheet.
THE ECOSYSTEMATICS PURCHASE AGREEMENT
Representations and Warranties
In the Ecosystematics Purchase Agreement, the Ecosystematics Shareholders
made various representations and warranties relating to, among other things,
organization and qualification, capitalization, approvals, subsidiaries,
financial statements, the absence of undisclosed liabilities, the absence of
certain changes or events, litigation, accounts receivable, compliance with
laws, insurance, employee benefit plans, employee and labor matters,
environmental matters, title to assets, contracts, supplies, brokers and
finders, intellectual property, certain relationships, certain payments, books
and records, and condition and sufficiency of the assets. In the Ecosystematics
Purchase Agreement, Synagro makes various representations and warranties
relating to, among other things, organization and qualification and authority.
The representations and warranties of each of the parties to the Ecosystematics
Purchase Agreement will expire two (2) years following the Closing Date.
Indemnification
Pursuant to the Ecosystematics Purchase Agreement, the Ecosystematics
Shareholders agreed to indemnify Synagro, Ecosystematics and each of Synagro's
subsidiaries (each a "Synagro Indemnified Party") from and against any
Indemnified Amounts paid, imposed on or incurred by a Synagro Indemnified Party,
directly or indirectly, (a) relating to, resulting from or arising out of (i)
any breach or misrepresentation in any of the representations and warranties
made by or on behalf of one or more of the Ecosystematics Shareholders in the
Ecosystematics Purchase Agreement or any certificate or instrument delivered in
connection with the Ecosystematics Purchase Agreement, (ii) any violation or
breach of or default by one or more of the Ecosystematics Shareholders under the
terms of the Ecosystematics Purchase Agreement or any certificate or instrument
delivered in connection with the Ecosystematics Purchase Agreement, (iii) any
Environmental Claim and/or any violation of any Requirements of Environmental
Law if it relates to events, conditions, operations, facts or circumstances
which occurred or began on or prior to the Closing Date and were the result of
an intentional or wrongful act of the Ecosystematics Shareholders, or (iv) any
Taxes incurred by the Ecosystematics Shareholders or Ecosystematics as a result
of the transactions contemplated in the Ecosystematics Purchase Agreement; or
(b) relating to, resulting from or arising out of any allegation of a third
party of the events described in (a), above.
Synagro agrees to indemnify the Ecosystematics Shareholders and their
agents, representatives and Affiliates (each a "Ecosystematics Shareholder
Indemnified Party") from and against any Indemnified Amounts paid, imposed on or
incurred by the Ecosystematics Shareholder Indemnified Party, resulting from
any breach or misrepresentation in any of the representations or warranties made
by or on behalf of Synagro in the Ecosystematics Purchase Agreement or any
certificate or instrument delivered in connection with the Ecosystematics
Purchase Agreement, or any violation, breach or default by Synagro under the
terms of the Ecosystematics Purchase Agreement or any certificate delivered in
connection with the Ecosystematics Purchase Agreement.
No Synagro Indemnified Party shall be entitled to indemnification from the
Ecosystematics Shareholders pursuant to the Ecosystematics Purchase Agreement
unless and until the amount of any Indemnified Amounts, individually or in the
aggregate, exceeds $15,000 and then to the full amount of such Indemnified
Amount. No Ecosystematics Shareholder Indemnified Party shall be entitled to
indemnification from Synagro pursuant to the Ecosystematics Purchase Agreement
unless and until the amount of any Indemnified Amounts, individually or in the
aggregate, exceeds $15,000 and then to the full amount of such Indemnification
Amount. In no event shall the aggregate liability of Synagro or the
Ecosystematics Shareholders exceed the Purchase Price. In all such cases,
Indemnified Amounts owed by either Synagro or the Ecosystematics Shareholders
shall be reduced by the amount of any mitigating recovery.
23
<PAGE> 31
OTHER ACQUISITIONS
Information regarding other acquisition activities of Synagro are
contained in:
(i) that certain Stock Purchase Agreement (the "Davis Water Purchase
Agreement"), dated as of September 30, 1999, by and among Synagro, Joseph H.
Davis and Mark A. Burkemper (collectively, the "Davis Water Shareholders); and
(ii) that certain Asset Purchase Agreement (the "AKH Purchase Agreement"),
dated as of October 19, 1999, by and among Synagro, AKH Water Management, Inc.,
a Florida corporation, Alexander Hansen and Judy E. Hansen
(collectively, the "AKH Shareholders").
The Davis Water Purchase Agreement and AKH Purchase Agreement contain
customary representations, warranties, and indemnities. The acquisitions of
Davis Water Analysis, Inc. and AKH Water Management, Inc. are not material, but
are referenced herein for information purposes.
DAVIS WATER ANALYSIS, INC.
In consideration of all the issued and outstanding shares of Davis Water
Analysis, Inc. common stock and the representations, warranties, covenants and
agreements of the Davis Water Shareholders, Synagro paid an aggregate purchase
price of $1,044,000 in cash plus working capital to the Davis Water
Shareholders. An adjustment amount to the purchase price shall be calculated
based on a Closing Date Balance Sheet.
AKH WATER MANAGEMENT, INC.
In consideration of the sale of assets of AKH Water Management, Inc.
common stock and the representations, warranties, covenants and agreements of
the AKH Shareholders, Synagro paid an aggregate purchase price of $435,000 in
cash to the AKH Shareholders.
PROPOSED ACQUISITION OF REHBEIN
Synagro entered into a Stock Purchase Agreement (the "Rehbein Purchase
Agreement") dated October 26, 1999, by and among Synagro, Gerald L. Rehbein and
Gordon W. Rehbein (collectively, the "Rehbein Shareholders"), whereby Synagro
agreed to purchase all the outstanding common stock of Rehbein, Inc., a
Minnesota corporation. The Rehbein Purchase Agreement contains customary
representations, warranties, covenants and indemnities.
The Rehbein Purchase Agreement was amended on December 23, 1999, to extend
the termination date to complete the transaction to February 4, 2000. As of
February 4, 2000, Synagro and the Rehbein Shareholders each have the right to
terminate the Rehbein Purchase Agreement because the transactions contemplated
thereby were not completed by such date. Synagro and the Rehbein Shareholders
are currently negotiating certain amendments to the Rehbein Purchase Agreement
including, without limitation, an amendment to extend the February 4, 2000
termination date, and an amendment to reduce the amount of cash payable to the
Rehbein Shareholders at closing to reflect an earnout payable to the Rehbein
Shareholders upon the satisfaction of financial targets.
PROPOSED ACQUISITION OF WHITEFORD
Synagro entered into an Asset Purchase Agreement (the "Whiteford Purchase
Agreement") dated October 26, 1999, by and between Synagro and Whiteford
Construction Co., Inc., a Maryland corporation ("Whiteford"), whereby Synagro
agreed to purchase substantially all of the assets and contract rights used by
Whiteford in connection with the operation of its biosolids division. The
Whiteford Purchase Agreement contains customary representations, warranties,
covenants and indemnities.
24
<PAGE> 32
The Whiteford Purchase Agreement was amended on December 23, 1999, to
extend the termination date to complete the transaction to February 4, 2000. As
of February 4, 2000, Synagro and Whiteford each have the right to terminate the
Whiteford Purchase Agreement because the transactions contemplated thereby were
not completed by such date. Synagro and Whiteford are currently negotiating
certain amendments to the Whiteford Purchase Agreement including, without
limitation, an amendment to extend the February 4, 2000 termination date, and an
amendment to reduce the amount of cash payable to Whiteford at closing to
reflect an earnout payable to Whiteford upon the satisfaction of financial
targets.
MATTERS RELATING TO ACQUISITIONS
REASONS FOR THE TRANSACTIONS
Synagro's Board of Directors believes that the acquisition of each of
RESTEC, Ecosystematics, Davis Water, AKH, Rehbein and Whiteford (collectively,
the "Acquisition Companies") are in the best interest of Synagro's shareholders
and that Synagro and each of the Acquisition Companies will mutually benefit
from these transactions. Synagro's Board of Directors considered a number of
factors, including among other things, the terms and conditions of the
transactions, information with respect to the financial condition, business
operations and prospects of each of Synagro and the Acquisition Companies on
both a historical and prospective basis, and the views and opinions of their
respective management and advisors.
The consummation of the acquisitions results in the combination of the
residuals management capabilities of Synagro and each of the Acquisition
Companies, which Synagro believes are complementary to its line of services and
will enhance Synagro's status as a national waste management company. In
general, Synagro and each of the Acquisition Companies serve distinct markets
resulting in minimal customer overlap. Anticipated benefits of these
transactions include the following:
Specialty Niche. RESTEC brings to Synagro an operating history and
expertise in the area of sewage sludge disposal in the northeastern United
States, including hauling, treatment and disposal of sewage sludge; providing
non-hazardous biosolids transportation, treatment and disposal services to
municipal wastewater treatment plants and commercial customers; and operating,
maintaining, repairing and managing sewage sludge treatment and incineration
facilities. Ecosystematics brings to Synagro an operating history and expertise
in the area of providing licensed wastewater treatment plant operators and
materials for the upkeep and maintenance of small wastewater treatment plants
near Key Largo, Florida. Rehbein would provide Synagro with an operating history
and expertise in Minnesota and would act as a complement to Synagro's Midwest
operations of A&J Cartage, Michigan Organics, and the recently acquired National
Resource Recovery, Inc. The acquisition of Whiteford would complement Synagro's
CDR Mid-Atlantic operation located in nearby Oxford, Pennsylvania.
Knowledgeable and experienced personnel. The consummation of the
acquisitions brings together a knowledgeable team of managers with many years of
experience in waste management.
Increased diversification of customer base and markets. Historically,
Synagro and each of the Acquisition Companies have served distinct markets and
have offered services which are not used in similar circumstances. The
acquisitions permit Synagro to offer a broader line of services to a wider range
of customers in more geographic areas, thereby increasing the diversity of its
business.
Cost savings. The combination of the businesses of Synagro and each the
Acquisition Companies results in the consolidation of certain support functions
creating cost savings. For example, sharing data and the use of server capacity
should yield minor savings.
Synagro's Board of Directors also believes that the consummation of the
acquisitions facilitates strategic objectives of Synagro and each of the
Acquisition Companies. For example, through the Merger, Synagro's aims to
increase revenues and operating results through strategic expansion and intends
to focus on offering a broader line of waste management services. Specifically,
Synagro seeks to increase the types and quantity of waste management services
being offered and to provide such services to customers in a broader geographic
market.
25
<PAGE> 33
In addition, Synagro's Board of Directors believes the consummation of the
acquisitions, among other things, gives holders of Synagro Common Stock an
equity interest in a larger, more diversified corporation.
ACCOUNTING TREATMENT
Each of the acquisitions of the Acquisition Companies will be accounted
for by Synagro under the "purchase method" of accounting in accordance with
generally accepted accounting principles. Accordingly, the aggregate
consideration paid by Synagro in connection with the Agreements, Ecosystematics
Purchase Agreement, Davis Water Purchase Agreement, AKH Purchase Agreement,
Rehbein Purchase Agreement and Whiteford Purchase Agreement will be allocated to
each of the Acquisition Companies' assets, respectively, based upon each of
their fair values. With respect to the Merger, the results of operations of
RESTEC AND Ecosystematics will be included in the results of operations of
Synagro only for periods subsequent to Closing and the Effective Time (as
defined in the Merger Agreement).
REGULATORY APPROVALS
Synagro does not believe that any governmental filings in the United
States, other than the filing of Articles of Merger with the Rhode Island
Secretary of State and the filing of a Certificate of Merger with the Delaware
Secretary of State, were required or will be required with respect to the
consummation of any of the acquisitions. See "The Agreements-Effective Time of
the Transaction."
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Synagro Common Stock issued in connection with the Merger
were issued in a transaction exempt from registration under the Securities Act
of 1933, as amended (the "Securities Act"), by reason of Section 3(a)(10)
thereof. The shares of Synagro Common Stock are not qualified under any
applicable state law.
The shares of Synagro Common Stock issued in the Merger and received by
persons who are deemed to be "affiliates" (as that term is defined in Rule 144
under the Securities Act) of NETCO prior to the Merger may be resold by them
only in transactions permitted by the resale provisions of Rule 145 under the
Securities Act (or, in the case of persons who become affiliates of Synagro,
Rule 144 under the Securities Act) or as otherwise permitted under the
Securities Act.
26
<PAGE> 34
MARKET PRICES AND DIVIDEND POLICY
Synagro Common Stock is traded on the Nasdaq Small-Cap Market under the
symbol "SYGR."
The following table sets forth for the periods indicated the high and low
sales prices for Synagro Common Stock reported through the Nasdaq Small-Cap
Market. The prices shown do not include retail mark-ups, mark-downs or
commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Synagro Common Stock
--------------------
Period High Low
------ ----- -----
<S> <C> <C>
Year Ended December 31, 1997
First Quarter $3.00 $1.88
Second Quarter $2.38 $1.50
Third Quarter $3.66 $1.94
Fourth Quarter $4.25 $2.50
Year Ended December 31, 1998
First Quarter $5.19 $2.41
Second Quarter $8.16 $5.06
Third Quarter $6.25 $2.75
Fourth Quarter $4.50 $2.56
Year Ended December 31, 1999
First Quarter $4.88 $2.97
Second Quarter $6.38 $3.13
Third Quarter $6.94 $4.75
Fourth Quarter $6.84 $3.50
</TABLE>
On January 25, 2000, the business day immediately preceding the
announcement of the execution of the Purchase Agreement, the last reported sale
price for Synagro Common Stock was $5.00. There is no assurance that such
transactions or those reflected in the table of actual high and low sales prices
represent all or a representative sample of the actual transactions which
occurred or that the high and low prices shown reflect the full ranges at which
transactions occurred during the period indicated.
Synagro has never declared a cash dividend on the Synagro Common Stock.
The convertible preferred stock dividend rate is 8.00% per annum and is
accumulated. The Board of Directors presently intends to retain all earnings for
use in Synagro's business, and therefore, does not anticipate paying any cash
dividends on the Synagro Common Stock in the foreseeable future. The declaration
of dividends, if any, in the future would be subject to the discretion of the
Board of Directors, which may consider factors such as Synagro's results of
operations, financial condition, payment of preferred stock dividends, capital
needs and acquisition strategy, among others. In addition, the Purchase
Agreement and the Subordinated Loan Agreement both impose restrictions on the
payment of dividends.
27
<PAGE> 35
SYNAGRO TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
During 1998, the Company purchased all the stock of A&J Cartage and related
companies, Recyc, Inc. and Environmental Waste Recycling, Inc. ("1998
Acquisitions"). The 1998 Acquisitions were accounted for using the purchase
method of accounting. The assets acquired and liabilities assumed relating to
these acquisitions are summarized as follows:
Common stock shares 4,152,981
Common stock issued $ 23,783,000
Notes payable 11,669,000
Cash 9,410,000
Less: Historical net assets
acquired 4,480,000
------------
Goodwill $ 40,382,000
------------
During 1999, the Company purchased Anti-Pollution Associates, Inc. and D&D
Pumping, Inc., Vital Cycle, Inc. and Amsco, Inc. ("1999 Acquisitions"). The 1999
Acquisitions were recorded using the purchase method of accounting. The Company
also completed a business combination with National Resource Recovery, Inc.
accounted for as a pooling-of-interests. The assets acquired and liabilities
assumed relating to the 1999 Acquisitions were as follows:
Common stock shares 3,044,784
Common stock issued $ 9,024,000
Cash 13,803,000
Less: Historical net assets
acquired 3,943,000
------------
Goodwill $ 18,884,000
------------
During 2000, the Company purchased Residual Technologies, Limited Partnership,
and certain of its affiliates, Ecosystematics, Inc., Davis Water Analysis, Inc.
and AKH Water Management, Inc. ("2000 Acquisitions"). The 2000 Acquisitions were
accounted for using the purchase method of accounting. The assets acquired and
liabilities assumed relating to these acquisitions are summarized as follows:
Common stock shares 1,325,000
Common stock issued $ 5,962,500
Cash 32,995,383
Less: Historical - net assets
acquired 1,428,201
Transactions costs 4,021,000
------------
Goodwill $ 41,550,682
------------
Additionally the Company has pending agreements to purchase a division of
Rehbein, Inc. and Whiteford Construction Co., Inc. ("2000 Pending
Acquisitions"). The Company expects the 2000 Pending Acquisitions to be
accounted for using the purchase method of accounting. The estimated assets
to be acquired and liabilities to be assumed relating to these acquisitions are
summarized as follows:
Cash $ 11,400,000
Notes payable to owners 3,200,000
Less: Historical - net assets
acquired 1,180,452
Transactions costs 1,000,000
------------
Goodwill $ 14,419,548
------------
The following unaudited pro forma combined financial statements include the
unaudited consolidated financial statements of the Company as of the nine months
ended September 30, 1999, of the Company and for the year ended December 31,
1998 included herein, combined with the historical financial data of the 1998
Acquisitions, the 1999 Acquisitions, the 2000 Acquisitions, and the 2000 Pending
Acquisitions as follows: (i) the unaudited pro forma combined balance sheet at
September 30, 1999, includes the historical consolidated balance sheet of
Synagro at September 30, 1999, combined with the the 2000 Acquisitions, and the
2000 Pending Acquisitions as if they had occurred on September 30, 1999, (ii)
the unaudited pro forma combined income statement for the nine month period
ended September 30, 1999, includes the historical combined income statement of
Synagro combined with the 1999 Acquisitions, the 2000 Acquisitions and the 2000
Pending Acquisitions as if they had occurred on January 1, 1999, (iii) the
unaudited pro forma combined income statement for the year ended December 31,
1998, includes the consolidated income statement of Synagro included herein,
combined with the 1998 Acquisitions, the 1999 Acquisitions, the 2000
Acquisitions and the 2000 Pending Acquisitions as if they had occurred on
January 1, 1998.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The pro forma financial statements do not purport to
represent what the Company's financial position or results of operations would
actually have been if such transactions in fact had occurred on those dates or
project the Company's financial position or results of operations for any future
period. Since the Company and the acquisitions were not under common control or
management for all periods, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Information Statement.
28
<PAGE> 36
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED BALANCE SHEETS--SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 PRO FORMA
2000 PENDING ------------------------------ PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ACQUISITIONS(a) FINANCING(b) COMBINED
------------- ------------ ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 337,261 $ 2,154,863 $ 36,248 $ -- $ -- $ 2,528,372
Restricted cash, current portion -- 2,286,137 -- -- (2,286,137) --
Accounts receivable, net 11,267,929 2,296,620 1,425,989 -- -- 14,990,538
Notes receivable 118,674 26,874 171,083 -- -- 316,631
Prepaid expenses and other
current assets 2,303,530 506,037 -- -- -- 2,809,567
------------- ------------- ------------- ------------- ------------- -------------
Total current assets 14,027,394 7,270,531 1,633,320 -- (2,286,137) 20,645,108
Property, machinery and
equipment, net 16,264,747 13,672,647 2,019,634 -- -- 31,957,028
Other assets:
Goodwill, net 61,999,721 -- -- 55,970,230 -- 117,969,951
Debt issuance cost and
other - net 1,594,366 2,545,595 556,000 -- 4,493,132 7,889,093
(1,300,000)
------------- ------------- ------------- ------------- ------------- -------------
Total other assets 63,594,087 2,545,595 556,000 55,970,230 3,193,132 125,859,044
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 93,886,228 $ 23,488,773 $ 4,208,954 $ 55,970,230 $ 906,995 $ 178,461,180
============= ============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $ 4,950,334 $ 1,967,554 $ 639,090 $ 2,300,000 $ -- $ 9,856,978
Current portion of long-term debt 2,818,504 13,042,249 1,078,002 -- (16,938,755) --
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities 7,768,838 15,009,803 1,717,092 2,300,000 (16,938,755) 9,856,978
Long-term debt:
Long-term debt, net 39,063,350 4,750,769 1,311,410 49,416,383 (24,601,298) 69,940,614
Note payable to prior owners 938,790 -- -- 3,200,000 (938,790) 3,200,000
Subordinated debt -- -- -- -- 22,609,400 22,609,400
Deferred income taxes -- -- 243,407 (243,407) -- --
------------- ------------- ------------- ------------- ------------- -------------
Total long-term debt $ 40,002,140 $ 4,750,769 $ 1,554,817 $ 52,372,976 $ (2,930,688) $ 95,750,014
Total Liabilities 47,770,978 19,760,572 3,271,909 54,672,976 (19,869,443) 105,606,992
Preferred stock -- -- -- -- 20,776,438 20,776,438
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Common stock 35,352 7,410 19,090 -- 61,852
Additional paid-in capital 66,370,366 281,488 238,037 5,416,475 -- 72,306,366
Accumulated income (deficit) (20,290,468) 3,439,303 699,008 (4,138,311) -- (20,290,468)
------------- ------------- ------------- ------------- ------------- -------------
Total stockholders' equity 46,115,250 3,728,201 937,045 1,297,254 -- 52,077,750
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity $ 93,886,228 $ 23,488,773 $ 4,208,954 $ 55,970,230 $ 906,995 $ 178,461,180
============= ============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
29
<PAGE> 37
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
2000
1999 2000 PENDING PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 39,834,873 $ 4,260,257 $19,812,682 $4,951,892 $ -- $ 68,859,704
Cost of services 29,785,853 2,893,875 14,202,375 3,632,359 (637,500)(c) 49,761,944
(115,018)(f)
------------ ----------- ----------- ---------- ----------- ------------
Gross profit 10,049,020 1,366,382 5,610,307 1,319,533 752,518 19,097,760
Selling, general and administrative expenses 4,952,622 492,586 2,763,034 730,410 (230,046)(e) 7,844,178
(864,428)(f)
Amortization of goodwill 1,101,876 -- -- -- 1,215,809 (g) 2,317,685
------------ ----------- ----------- ---------- ----------- ------------
Income from operations 3,994,522 873,796 2,847,273 589,123 631,183 8,935,897
------------ ----------- ----------- ---------- ----------- ------------
Other income (expense):
Interest (2,229,000) (18,193) (1,014,251) (84,533) (4,263,996)(h) (7,609,973)
Other income, net 219,651 -- 5,074 -- -- 224,725
------------ ----------- ----------- ---------- ----------- ------------
Net income before redeemable preferred
stock dividends and income taxes 1,985,173 855,603 1,838,096 504,590 (3,632,813) 1,550,649
Provision for income taxes 14,924 (14,924)(i) --
------------ ----------- ----------- ---------- ----------- ------------
Net income before redeemable preferred
stock dividends 1,985,173 855,603 1,823,172 504,590 (3,617,889) 1,550,649
Redeemable preferred stock dividends -- -- -- -- 1,736,276(k) 1,736,276
------------ ----------- ----------- ---------- ----------- ------------
Net income (loss) applicable to common stock $ 1,985,173 $ 855,603 $ 1,823,172 $ 504,590 $(5,354,165) $ (185,627)
============ =========== =========== ========== =========== ============
Income (loss) per common and common share
equivalent:
Net income (loss), basic $ 0.12 $ (.01)
============ ============
Net income (loss), diluted $ 0.12 $ (.01)
============ ============
Weighted average shares outstanding, basic 16,095,245 18,753,667
============ ============
Weighted average shares outstanding, diluted 17,073,245 18,753,667
============ ============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
30
<PAGE> 38
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
2000
1998 1999 2000 PENDING PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 33,564,831 $ 14,813,826 $ 14,549,234 $ 24,890,673 $ 7,791,798 $ (195,535)(a) $ 95,414,827
------------- ------------
Cost of services 28,116,069 11,994,218 9,629,439 18,322,388 5,819,889 (263,898)(a) 71,018,720
------------- ------------
(170,100)(b)
(1,415,238)(c)
(550,134)(d)
(3,737)(e)
(460,176)(f)
------------ ------------- ------------ ------------- ------------ ------------- ------------
Gross profit 5,448,762 2,819,608 4,919,795 6,568,285 1,971,909 2,667,748 24,396,107
Selling, general and (780,533)(a) 9,841,231
administrative (248,954)(e)
expenses 4,180,635 2,179,233 1,671,210 3,008,588 928,420 (1,097,368)(f)
Amortization of
goodwill 628,839 -- -- -- -- 2,422,393(g) 3,051,232
Other charges
(credits) (63,799) -- -- (91,495) -- -- (155,294)
------------ ------------- ------------ ------------- ------------ ------------- ------------
Income from
operations 703,087 640,375 3,248,585 3,651,192 1,043,489 2,372,210 11,658,938
------------ ------------- ------------ ------------- ------------ ------------- ------------
Other income
(expense):
Interest (1,558,219) (227,979) (156,123) (1,484,335) (132,913) (6,635,817)(h) (10,195,386)
Other income, net 317,714 (69,923) 17,544 -- 1,946 -- 267,281
------------ ------------- ------------ ------------- ------------ ------------- ------------
Net income (loss)
before redeemable
preferred stock
dividend and
income taxes (537,418) 342,473 3,110,006 2,166,857 912,522 (4,263,607) 1,730,833
Provision for income
taxes -- -- 19,650 -- -- (19,650)(i) --
------------ ------------- ------------ ------------- ------------ ------------- ------------
Net income (loss)
before redeemable
preferred stock
dividend (537,418) 342,473 3,090,356 2,166,857 912,522 (4,243,957) 1,730,833
Redeemable preferred
stock dividend 3,934,585 2,315,034(k) 6,249,619
------------ ------------- ------------ ------------- ------------ ------------- ------------
Net income (loss)
applicable to
common stock $ (4,472,003) $ 342,473 $ 3,090,356 $ 2,166,857 $ 912,522 $ (6,558,991) $ (4,518,786)
============ ============= ============ ============= ============ ============= ============
Net income (loss)
per common and
common share
equivalent:
Basic $ (.40) $ (.25)
============ ============
Diluted $ (.40) $ (.25)
============ ============
Weighted average
shares outstanding:
Basic 11,207,249 17,989,039 (j)
============ ============
Diluted 11,207,249 17,989,039 (j)
============ ============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
31
<PAGE> 39
SYNAGRO TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The unaudited pro forma combined balance sheet adjustments consist of the
following:
(a) To record the purchase of the 2000 Acquisitions and the 2000 Pending
Acquisitions. The purchase price and goodwill recorded is presented
as follows:
<TABLE>
<CAPTION>
2000 Pending
Acquisitions Acquisitions Total
----------- ------------ -----------
<S> <C> <C> <C>
Purchase Price
Common stock issued $ 5,962,500 $ -- $ 5,962,500
Notes payable to prior owners 3,200,000 3,200,000
Cash 32,995,383 11,400,000 44,395,383
Less: Historical net assets
acquired 1,428,201 1,180,452 2,608,653
Transaction costs 4,021,000 1,000,000 5,021,000
----------- ----------- -----------
Goodwill $41,550,682 $14,419,548 $55,970,230
</TABLE>
(b) To record the sources and uses of funds provided to repay and to refinance
certain outstanding indebtedness, to fund the cash portion of the purchase
price related to the 2000 Acquisitions and the 2000 Pending Acquisitions,
and to pay related transaction expenses in connection with the 2000
Acquisitions and the 2000 Pending Acquisitions, summarized as follows:
<TABLE>
<CAPTION>
2000 Pending
Synagro Acquisitions Sub - total Acquisitions Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Debt outstanding $ 42,820,644 $ -- $ 42,820,644 $ -- $ 42,820,644
Debt assumed, net
of restricted cash -- 14,206,881 14,206,881 2,389,412 16,596,293
Notes payable to
prior owners -- -- -- 3,200,000 3,200,000
Purchase price paid in cash -- 32,995,383 32,995,383 11,400,000 44,395,383
Debt issuance costs 3,300,000 1,077,581 4,377,581 115,551 4,493,132
Transaction costs -- 4,021,000 4,021,000 1,000,000 5,021,000
------------ ------------ ------------ ------------ ------------
$ 46,120,644 $ 52,300,845 $ 98,421,489 $ 18,104,963 $116,526,452
============ ============ ============ ============ ============
Senior debt $ 59,120,252 $ 10,820,362 $ 69,940,614
Subordinated debt 20,419,400 2,190,000 22,609,400
Notes payable to
Prior owners -- 3,200,000 3,200,000
Preferred stock, net
of issuance costs 18,881,837 1,894,601 20,776,438
------------ ------------ ------------
$ 98,421,489 $ 18,104,963 $116,526,452
============ ============ ============
</TABLE>
The Company entered into a $110.0 million Amended and Restated Senior
Credit Agreement by and among the Company, Bank of America, N.A. and
certain other lenders dated as of January 27, 2000, borrowed $20,419,000
($22,609,000 including the 2000 Pending Acquisitions) of subordinated
indebtedness from GTCR Capital Partners, L.P., a Delaware limited
partnership, pursuant to a subordinated loan agreement dated January 27,
2000, and sold 17,778.224 (19,968.224 including the 2000 Pending
Acquisitions) shares of Series C Convertible Preferred Stock, and 2,641.176
shares of Series D Convertible Preferred Stock to GTCR Fund VII, L.P., a
Delaware limited partnership for an aggregate purchase price of $20,419,000
($22,609,000 including the 2000 Pending Acquisitions) to refinance its
existing indebtedness and fund the 2000 Acquisitions and the 2000 Pending
Acquisitions. In connection with the borrowings under the subordinated
indebtedness of $20,419,000 ($20,609,000 including the 2000 Pending
Acquisitions), the Company issued warrants to GTCR Capital Partners L.P.,
which were simultaneously converted for $.01 per share into Preferred Stock
by GTCR Capital Partners L.P. Accordingly, GTCR Capital Partners L.P.
received upon conversion of the warrants an additional 2,917.058 shares of
Preferred Stock (3,229.858 including the 2000 Pending Acquisitions), for
normal consideration. The present value of the value received has been
reflected as additional debt issuance cost in the accompanying pro forma
balance sheet. Both the Preferred Stock and warrants that were
simultaneously converted to Preferred Stock have a beneficial conversion
feature to convert their holdings to Common Stock at a market price of
$2.50 per share. The market price per share of the Common Stock at date of
issuance was $5.16. The Company will recognize the value of the beneficial
conversion feature of approximately $27.5 million as a Preferred Stock
dividend. The value
32
<PAGE> 40
of such Preferred Stock dividend has no impact on the Company's cash flows,
but reduces basic and diluted earnings available to holders of Common
Stock. This transaction will be recorded in the first quarter of 2000.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
The unaudited pro forma combined statement of operations adjustments consist of
the following:
(a) To eliminate sales and related costs and expenses of certain operations not
retained by the Company.
(b) To adjust rental charge of a composting site as a result of a lease
agreement entered into in connection with a 1998 acquisition. The new lease
is for 30 years commencing July 1998. Rent is $36,000 per annum for the
first three years increasing to $192,000 per annum thereafter. Commencing
on the fifth anniversary and every five years anniversary thereafter, the
per annum rate is increased by 75% of the Consumer Price Index over the
preceding five year period. The Company has a five year purchase option
for $2,250,000.
(c) To adjust depreciation expense related to purchase price adjustments,
reevaluation of useful lives and conformity with Company depreciation
methods of property and equipment.
(d) To adjust certain transportation costs based on the transportation
agreement entered into in connection with a 1998 acquisition. The
transportation agreement is for two years commencing July 1998. The
agreement is for a fixed rate per mile for hauling up to 525,000 cubic
yards of materials.
(e) To eliminate certain nonrecurring expenses related to the acquisition,
including legal fees and certain accounting costs.
(f) To adjust expenses related to prior owners based on employment agreements
entered into in connection with acquisitions and salary costs attributable
to staff reductions.
(g) To reflect the amortization of goodwill to be recorded in connection with
the acquisitions over a 40-year estimated life.
(h) To record additional interest expense on the debt incurred in connection
with the acquisitions.
(i) To eliminate taxes as the Company has a net operating loss carryforward,
which can be utilized.
(j) Includes 11,207,249 and 16,095,245 basic shares outstanding for the year
ended December 31, 1998, and for the nine months ended September 30, 1999,
respectively; and an additional 6,781,790 shares and 2,658,422 shares for
the year ended December 31, 1998, and the nine months ended September 30,
1999, respectively issued in connection with acquisitions as if each
occurred at the beginning of each respective period. Includes 17,703,245
and 11,207,249 diluted shares for the year ended December 31, 1998, and the
nine months ended September 30, 1999 respectively; and an additional
6,781,790 shares and 1,680,422 shares for the year ended December 31, 1998
and the nine months ended September 30, 1999, reflecting the impact of the
acquisitions as if each occurred at the beginning of each respective
period.
(k) To record amortization of Preferred Stock issuance costs and the noncash
dividends associated with the Preferred Stock.
33
<PAGE> 41
INFORMATION ABOUT SYNAGRO
HISTORY OF SYNAGRO
Synagro was originally incorporated on May 9, 1986, as a Nevada
corporation under the name N-Viro Recovery, Inc. On October 28, 1994, Synagro
changed its name to "Synagro Technologies, Inc." to reflect the diversity of
biosolids treatment services provided by Synagro.
Synagro reincorporated in Delaware on August 16, 1996, by means of a
merger (the "Reincorporation Merger") of Synagro with and into a wholly-owned
subsidiary of Synagro in Delaware known as Synagro Technologies, Inc. ("Synagro
Delaware"). On the effective date of the Reincorporation Merger, each issued and
outstanding share of common stock of Synagro was converted into one share of
common stock of Synagro Delaware. Synagro Delaware succeeded to all of the
assets, liabilities and business of Synagro and possess all of the rights and
powers of Synagro. (Synagro Delaware and Synagro are collectively referred to
hereinafter as "Synagro" or the "Company").
BUSINESS OF SYNAGRO
Synagro engages in the business of biosolids management, primarily through
beneficial reuse programs. Synagro provides transportation, treatment, site
monitoring, land application and environmental regulatory compliance services
with respect to biosolids to local and state agencies, municipalities and
private companies. Synagro's services also include dredging, dewatering, and
cleaning out municipal and industrial lagoons and digesters. Synagro currently
operates under approximately 212 contracts. Pursuant to these contracts, Synagro
provides a variety of biosolids management options to prospective customers.
These options include land application, composting, lime stabilization, and
drying/pelletizing. These biosolids management services account for
substantially all of Synagro's revenues. There are two standards of pathogen
reduction--Class A and Class B. Synagro is able to treat biosolids with Class A
pathogen reduction and certain levels of vector attraction reduction (i.e.,
insects and rodents), to produce "Exceptional Quality Biosolids." Exceptional
Quality Biosolids can be beneficially used on the land without limitations or
site restrictions. Biosolids that are not Exceptional Quality Biosolids, also
known as Class B biosolids, while less expensive to process, are subject to
monitoring and detailed record keeping requirements. These alternative methods
provide choices to prospective customers who may prefer to use methods which
currently require lower initial cost, but which may require additional future
costs for monitoring of the related disposal sites.
EXECUTIVE OFFICES
Synagro's principal executive offices are located at 1800 Bering Drive,
Suite 1000, Houston, Texas 77057.
34
<PAGE> 42
SELECTED FINANCIAL DATA OF SYNAGRO
The following table sets forth selected financial data with respect to Synagro
and should be read in conjunction with the Consolidated Financial Statements:
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
---------------------------- ------------------------------
1998 1997 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 33,565,000 $ 28,036,000 $ 39,834,873 $ 22,505,130
Gross profit 5,449,000 4,797,000 10,049,020 3,036,379
Selling, general and administrative expenses 4,809,000 3,805,000 4,952,622 2,614,613
Other charges (credits), net (64,000) (721,000) -- 107,501
Interest expenses, net 1,558,000 1,007,000 (2,229,000) (1,023,925)
Net income (loss) before redeemable
Preferred stock dividend (537,000) 1,116,000 1,985,173 (724,656)
Redeemable preferred stock dividend 3,935,000 -- -- 3,934,588
Net income (loss) (4,472,000) 1,116,000 1,985,173 (4,659,244)
Net income (loss) per share
(basic and diluted) (.40) (.13) (.12) (.45)
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------- --------------------------
1998 1997 1999 1998
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Working capital (deficit) $ 5,692,000 (805,000) 6,258,556 5,691,506
Total assets 66,622,000 21,166,000 93,886,228 66,622,483
Total long-term debt, net 28,330,000 6,114,000 40,002,140 28,330,236
Stockholders' equity 34,249,000 7,727,000 46,115,250 34,248,735
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SYNAGRO
The following discussion should be read in conjunction with the
consolidated historical and pro forma combined financial statements of Synagro
and related notes thereto included elsewhere in this Information Statement. This
discussion contains forward-looking statements regarding the business and
industry of Synagro within the meaning of the Private Securities Litigation
Reform Act of 1995. These Statements are based on the current plans and
expectations of Synagro and involve risks and uncertainties that could cause
actual future activities and results of operations to be materially different
from those set forth in the forward-looking statements. Synagro is a national
provider of biosolids management. Synagro currently performs services for
municipalities, local agencies and private industry and plans to consolidate the
fragmented biosolids markets. The timing and magnitude of acquisitions and
assimilation costs may materially affect future operating results. Accordingly,
the operating results for any period may not necessarily be indicative of the
results that may be achieved for any subsequent period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the nine month period ended September 30, 1999, net sales increased
from approximately $22,505,000 to approximately $39,835,000 for the same period
in 1998. The increase for the quarter relates to sales from acquisitions made in
1998 and 1999 (approximately $5,436,000), an increase in volume relating to new
contracts and event work (approximately $1,211,000), partially offset by reduced
volume relating to non-renewal of certain low margin contracts (approximately
$640,000). The increase in sales year-to-date relates to sales from acquisitions
made in 1998 and 1999 (approximately $17,740,000), an increase in volume
relating to new contracts and event work (approximately $1,837,000), partially
offset by reduced volume relating to non-renewal of low margin contracts
(approximately $2,247,000).
35
<PAGE> 43
For the nine months ended September 30, 1999 cost of services and gross
profit were approximately $29,786,000 and $10,049,000, respectively, compared
with approximately $19,469,000 and $3,036,000, respectively, for the same period
in 1998, resulting in gross profit as a percentage of sales increasing to 25.2%
in 1999 from 13.5% in 1998. The increase in gross profit as a percentage of
sales relates to unusual weather conditions in the Mid-Atlantic Region and
unseasonably heavy rainfall in California in 1998, which caused (a) additional
expenses associated with transportation to land application sites unaffected by
the conditions and (b) increased land disposal costs which were incurred when
land application sites were not available. Landfill disposal costs and
transportation costs associated with these conditions totaled approximately
$1,500,000 for the nine month period ended September 30, 1998. Additionally,
Synagro did not renew certain low margin contracts during 1998. The remainder of
the increase is attributed to higher margin sales associated with certain
acquisitions completed during 1998 and 1999.
Selling general and administrative expenses were approximately $4,953,000
for the nine months ended September 30, 1999 compared to approximately
$2,615,000 for the nine months ended September 30, 1998, an increase of
approximately $2,338,000. The increase relates primarily to additional staffing
at the corporate level (approximately $802,000 for the nine month period ended
September 30, 1999) to implement Synagro's growth strategies. The remaining
difference relates primarily to selling general and administrative expenses
associated with 1998 and 1999 acquisitions and (approximately $1,536,000 for the
nine months ended September 30, 1999).
Other charges (credits), net were approximately $108,000 for the nine
month period ended September 30, 1998. These amounts relate to severance
payments to former executives partially offset by notes receivable collected
that were previously reserved. There were no such charges or credits in 1999.
Other income (expense), net was approximately $219,000 for the nine month
period ended September 30, 1999 compared to approximately $342,000 for the nine
month period ended September 30, 1998, a decrease of approximately $123,000. The
changes relate to gains or losses on the sale of assets.
As a result of the foregoing, net income of approximately $1,985,000
before preferred stock dividends, or $0.12 per share, was reported for the nine
month period ended September 30, 1999 compared to a net loss of approximately
$725,000, before preferred stock dividends, or $0.45 loss per share, for the
nine month period ended September 30, 1998.
During 1998, Synagro paid approximately $420,000 in dividends to preferred
stock holders. Additionally, Synagro recognized a preferred stock dividend of
approximately $3,934,588 related to redeemable preferred stock with a beneficial
conversion feature. See Note (3) to the notes to the financial statements
included herein for further discussion. There were no such dividends during
1999.
As a result of Synagro's cumulative operating losses, Synagro has not paid
federal income tax since inception. As of December 31, 1998, Synagro had net
operating loss carry forwards totaling approximately $11,690,000. Utilization of
Synagro's net operating losses may be subject to limitation under certain
circumstances.
36
<PAGE> 44
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997
For the year ended December 31, 1998, net sales were approximately
$33,565,000 compared to approximately $28,036,000 for the same period in 1997,
an increase of approximately $5,529,000 or 19.7%. The increase relates to the
acquisitions of A&J (approximately $4,378,000), Recyc, Inc. ("Recyc")
(approximately $2,713,000), Environmental Waste recycling, Inc. "(EWR")
(approximately $1,269,000), the purchase of certain revenue contracts from
Browning Ferris Industries, Inc ("BFI'") organics division (approximately
$2,119,000), increased volume in Michigan (approximately $856,000), partially
offset by the divestiture of Organi-Gro, Inc. (approximately $1,608,000),
reduced volume in Arkansas and Dallas (approximately $3,021,000) due to
non-renewal of certain low margin contracts, and lower volumes related to
operations in the Houston area (approximately $837,000).
Cost of operations and gross profit for the year ended December 31, 1998
were approximately $28,116,000 and $5,449,000 respectively, compared to
approximately $23,239,000 and $4,797,000 respectively for the year ended 1997,
resulting in a decrease in gross profit as a percentage of sales from 17.1% in
1997 to 16.2% in 1998. Gross profit increased by approximately $652,000 due
primarily to the increased net sales volume associated with businesses acquired.
The decrease in gross profit as a percentage of sales was primarily a result of
unusual weather conditions in the Mid-Atlantic Region, unseasonably heavy
rainfall in California, and a new biosolids land application restriction for
certain months of the year in one California county, which resulted in (a)
additional expenses incurred by Synagro to transport material to land
application sites unaffected by the conditions and (b) land disposal costs which
were incurred when land application sites were not available, Specifically,
landfill disposal costs increased by approximately $1,180,000 compared to 1997
levels. Additionally, costs associated with transporting material to alternate
land application sites increased by approximately $400,000 for the year ended
1998. These costs were partially offset by higher margins of the biosolids
composting operation obtained in the Recyc acquisition.
Selling, general and administrative expenses were approximately $4,809,000
for the year ended December 31, 1998 compared to approximately $3,805,000 for
1997, an increase of approximately $1,004,000, or 26.4%. The increase relates
primarily to increased corporate staffing (approximately $466,000) to implement
Synagro's acquisitions strategies, additional selling, general and
administrative costs associated with the businesses acquired (approximately
$938,000), partially offset by the divestiture of Organi-Gro (approximately
$164,000), staff reductions at the operational level implemented throughout 1997
(approximately $196,000), and a reduction of bonuses paid based upon operating
results (approximately $146,000).
Interest expense for the year ended December 31, 1998 was approximately
$1,558,000 compared to approximately $1,007,000 for the same period in 1997. The
increase in interest expense is related to the additional debt incurred to
finance acquisitions.
Other charges (credits) were ($63,799) for the year ended December 31,
1998, compared to ($721,268) for the same period 1997. The decrease resulted
from less income being recognized in 1998 related to notes receivable previously
reserved of approximately ($280,000), partially offset by current year severance
costs of approximately $220,000. See note (11) to the Notes to Consolidated
Financial Statements.
Other income for the year ended December 31, 1998 was approximately
$318,000 compared to approximately $409,000 for the same period in 1997. The
decrease relates primarily to a reduction in gains on sale of assets.
As a result of the foregoing, a net loss of approximately $537,000 before
redeemable preferred stock dividends, or $.05 per share, was reported at
December 31, 1998, compared to net income of approximately $1,116,000 before
redeemable preferred stock dividends, or $.13 per share, in 1997.
In the first quarter of 1998, Synagro recognized a redeemable preferred
stock dividend of approximately $3,514,000, related to redeemable Preferred
Stock issued with a beneficial conversion feature. The value of this Preferred
Stock dividend had no impact on Synagro's cash flows. See note (9) to the Notes
to Consolidated Financial Statements. During the second quarter of 1998, Synagro
paid $420,000 in cash dividends to holders of Series B Preferred Stock.
37
<PAGE> 45
Synagro has incurred substantial losses since inception and, therefore,
has not been subject to federal income taxes. As of December 31, 1998, Synagro
had generated net operating loss carryforwards for financial reporting purposes
of approximately $11.7 million. These carryforwards will begin to expire in the
year 2004 through 2018. Synagro's ability to utilize these carryforwards is
limited by a "change in ownership", as such term is defined by the federal
income tax laws and regulations. As Synagro has incurred losses in recent years
and the utilization of these carryforwards may be limited as discussed above, a
valuation allowance has been established to fully offset the deferred tax asset
at December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Synagro has historically financed its operations principally through the
sale of equity, bank credit facility arrangements or through funds provided by
operating activities.
Synagro purchased additional capital assets during the nine months ended
September 30, 1999, in the amount of approximately $3,240,000 and sold capital
assets with proceeds totaling approximately $835,000.
As of September 30, 1999, Synagro had current maturities of long-term debt
of approximately $2,818,000. Synagro's total debt was approximately $42,821,000
at September 30, 1999.
Synagro has a $40 million bank credit facility with Bank of America
National Trust and Savings Association, which has the right to add participants
to the credit facility. The credit facility bears interest at the bank
Eurodollar rate plus a margin based upon a pricing schedule in the credit
facility. The credit facility is secured by substantially all of Synagro's
assets. At September 30, 1999, Synagro had borrowings under this credit facility
of approximately $37,600,000 and amounts available under the credit facility of
approximately $1,772,000. Amounts under the credit facility are subject to a
borrowing base equal to 4.25 times earnings before interest, taxes, depreciation
and amortization ("EBITDA") based on a trailing twelve months calculation, as
defined in the credit facility less funded debt as defined, (which includes
notes payable to former owners, which can be refinanced through the credit
facility) until June 30, 1999, 4.00 until September 30, 1999, and 3.75 times
thereafter. The credit facility requires Synagro to meet certain loan covenants,
and Synagro was in compliance with those covenants as of September 30, 1999. The
credit facility expires in October 2001 and management anticipates that it will
renegotiate and/or refinance this credit facility prior to that time.
At September 30, 1999, Synagro had working capital of approximately
$6,259,000. Synagro evaluates the collectibility of its receivables based on a
specific account-by-account review. Synagro has an allowance of approximately
$197,000 at September 30, 1999. Accounts receivable increased by approximately
$4,744,000 from December 31, 1998, due primarily to 1999 acquisitions. Accounts
payable and accruals increased by approximately $907,000 due to payables and
accruals relating to 1999 acquisitions.
On March 31, 1998, Synagro issued Series B Preferred Stock for total cash
consideration of $3,500,004. This Series B Preferred Stock was convertible into
common stock on a 1:1 ratio at a conversion price of $2.40 per share. On June
10, 1998, a cash dividend of $420,000 was paid to the holders of Series B
Preferred Stock; concurrently, the holders converted the Preferred Shares into
1,458,335 shares of Common Stock.
During 1998, Synagro acquired A&J, EWR and Recyc for aggregate
consideration of approximately $45,517,000 including approximately $9,410,000 in
cash including acquisition costs. The preliminary allocations of the purchase
prices resulted in goodwill of approximately $39,426,000, that is being
amortized over 40 years.
Synagro purchased additional capital assets during 1998 in the amount of
approximately $2,558,000 and sold capital assets with proceeds totaling
approximately $2,081,000.
As of December 31, 1998, Synagro had current maturities on long-term debt
of approximately $4,130,000, as compared to approximately $3,177,000 in 1997.
Synagro currently has the intent and ability to refinance the current maturities
with its credit facility and has classified the 1998 portion of this debt as
long-term indebtedness in the consolidated balance sheet as of December 31,
1998. Synagro's long-term portion of debt was approximately $24,200,000 in 1998,
reflecting an increase of approximately $18,086,000 over 1997. This increase is
due primarily
38
<PAGE> 46
to the funding of the acquisitions of A&J, Recyc and EWR, and the assumption of
debt pursuant to such acquisitions.
In October 1998, Synagro obtained a new $40 million bank credit facility
with Bank of America National Trust and Savings Association ("Bank of America"),
which has the right to add participants to the credit facility. In November
1998, the credit facility was amended and in December 1998, Bank of America
assigned a portion of the credit facility to Union Bank of California. The
credit facility was used to retire certain debt payable to various individuals
and financial institutions and fund the acquisition of EWR. The credit facility
bears interest at the bank eurodollar rate plus a margin based upon a pricing
schedule in the credit facility. The weighted average interest rate in 1998 was
7.51%. The credit facility is secured by substantially all of Synagro's assets.
At December 31, 1998, Synagro had borrowings from this credit facility of
approximately $18,200,000 and amounts available under the credit facility of
approximately $2,579,000. Amounts under the credit facility are subject to a
borrowing base equal to 4.25 times earnings before interest, taxes, depreciation
and amortization ("EBITDA") based on a trailing twelve months calculation, as
defined in the credit facility less funded debt as defined, (which includes
notes payable to former owners, which can be refinanced through the credit
facility) until June 30 1999, and 4.0 times until September 30, 1999, and 3.75
thereafter. The credit facility requires Synagro to meet certain loan covenants,
and Synagro was in compliance with those covenants as of December 31, 1998. The
credit facility expires in October 2001 and management anticipates that it will
renegotiate and/or refinance this credit facility prior to that time. As of July
2, 1999, approximately $972,000 was available to Synagro for additional
borrowing under the facility. The decrease from December 31, 1998, primarily
relates to the funding of acquisitions during fiscal 1999.
At December 31, 1998, Synagro had working capital of approximately
$5,692,000. Accounts receivable and prepaid expenses and other currents assets
increased by approximately $2,418,539 and $328,000, respectively, primarily due
to the acquisitions of A&J, Recyc, and EWR. Synagro evaluates the collectibility
of its receivables based on a specific account-by-account review. Synagro had
allowances of approximately $197,000 and $190,000 at December 31, 1998 and 1997,
respectively, and writeoffs of approximately $13,000 and $98,000 in 1998 and
1997, respectively. Accounts payable and accrued expenses decreased by
approximately $104,000 as a result of (a) the reduction of legal accruals by
approximately $650,000 (Synagro had 5 significant legal matters open at the
close of 1997 and only 2 significant legal matters pending at December 31,
1998), (b) increased trade payables and other accruals of approximately
$325,000, of which $655,000 relates to additional trade payables relating to
acquisitions offset by $330,00 relating to reduced check processing time, and
(c) an increase in accrued interest of approximately $218,000 related to
additional debt incurred for the above acquisitions. Synagro believes its cash
requirements for 1999 can be met with existing cash, cash flows from operations
and its borrowing availability under its credit facility.
The increase in other assets as of December 31, 1998 related primarily to
an increase in deferred bank costs of approximately $360,000 associated with the
credit facility, and non-compete agreements of approximately $307,000 with
former owners of acquired companies.
Synagro has undergone significant restructuring throughout the last two
years, including changes in senior management and refinancing of its
indebtedness. As a result of these changes, management believes Synagro is
better positioned to respond to opportunities in the biosolids market and
aggressively pursue its goal of acquiring additional biosolids management
companies.
Subsequent to December 31, 1998, Synagro acquired all of the outstanding
stock of National Resource Recovery, Inc. ("NRR") in exchange for 1,000,001
shares of Synagro's Common Stock in a business transaction accounted for as a
"pooling-of-interests" transaction. NRR is a biosolids company with operations
in Michigan. Additionally, during 1999, Synagro acquired three other biosolids
management companies. The total purchase price was approximately $22,451,000.
These acquisitions were funded through the issuance of approximately 3,045,000
shares of common stock and $13,827,000 in cash. The cash was funded through
Synagro's credit facility. The transactions were recorded using the purchase
method of accounting.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OF SYNAGRO
Synagro utilizes financial instruments, which inherently have some degree
of market risk due to interest rate fluctuations. Management is actively
involved in monitoring exposure to market risk and continues to develop
39
<PAGE> 47
and utilize appropriate risk management techniques. Synagro is not exposed to
any other significant market risks, including commodity price risks, foreign
currency exchange risk or interest rate risks from the use of derivative
financial instruments for trading or to speculate in changes in interest rates
or on commodity prices.
INTEREST RATE RISK
Total debt at September 30, 1999, included approximately $37,600,000 in
floating rate debt attributed to the bank credit facility borrowings and a note
to another financial institution at an average interest rate of 7.98%. As a
result Synagro's annual interest rate cost in 1999 will fluctuate based on
short-term interest rates. The impact on annual cash flow of a ten-percent
change in the floating rate (approximately 50 basis points) would be
approximately $188,000. At September 30, 1999, Synagro's fixed rate debt had a
book value of $5,220,644, which approximates its fair value. The floating rate
debt will mature in October 2001.
40
<PAGE> 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 10, 1999, there were outstanding and entitled to vote
17,710,189 shares of Common Stock. The following table sets forth certain
information as of such date with respect to beneficial ownership of shares of
Common Stock by (i) each person known to Synagro to beneficially own more than
5% of the issued and outstanding shares of Synagro's Common Stock, (ii) all
directors, (iii) the chief executive officer and other executive officers at
December 10, 1999 ("Named Executives") and (iv) all directors and all executive
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME OF PERSON OR IDENTITY OF GROUP SHARES OF CLASS
- ----------------------------------- --------- --------
<S> <C> <C>
James A. Jalovec 1,911,527(1) 10.7%
2841 South 5th Court
Milwaukee, Wisconsin 53207
Randall S. Tuttle 1,657,377 9.4%
1900 Virginia Road
Winston-Salem, NC 27107
GroWest, Inc. 1,475,323 8.3%
114 Business Center Drive
Corona, CA 91720
James Rosendall 1,400,001 7.9%
323 Martindale Street
Sparta, MI 49345
Kenneth Ch'uan-k'ai Leung 1,292,079(1)(2)(3) 7.3%
126 E. 56th Street
New York, NY 10022
Bill E. Tuttle 1,194,668 6.7%
711 East Twain Avenue
Las Vegas, NV 89109
Ross M. Patten 373,445(3) 2.1%
Gene Meredith 41,968(3) *
Alfred Tyler 2nd 41,968(3) *
All directors and executive officers
as a group (11 persons) 2,423,680(3)(4) 12.8%
</TABLE>
- ------------------------
(1) Includes currently exercisable options.
(2) Includes 137,875 shares and 1,112,125 shares owned by Environmental
Opportunities Fund (Cayman), L.P. and Environmental Opportunities Fund,
L.P., respectively. Mr. Leung is the Chief Investment Officer of these
investment funds
* Less than 1% of outstanding shares.
(3) Includes shares underlying vested stock options, as follows: Mr.
Patten--373,445; Mr. Leung--42,079; Mr. Meredith --25,301; Mr.
Tyler--41,968, and 493,580 for all other executive officers.
(4) Includes (without duplication) all shares referred to above.
41
<PAGE> 49
INFORMATION ABOUT RESTEC
RESTEC provides nonhazardous sewage sludge ("residuals") transportation,
treatment and disposal services to municipal wastewater treatment plants and
commercial customers. RESTEC owns and operates three (3) sludge incineration
facilities in New England and employs approximately 80 people. RESTEC's sludge
processing operations provide an essential service for communities in the
region. RESTEC also engages in the contract management of municipal residuals in
New England handling an average of 165 dry tons per day of residuals from more
than 75 customers.
There is no active public trading market for RESTEC common stock, which is
traded infrequently in private transactions. RESTEC has no class of securities
registered under Section 12 of the Exchange Act of 1934, as amended, (the
"Exchange Act") and is not subject to the reporting requirements of Sections
13(a) or 15(d) of the Exchange Act. RESTEC has never declared a cash dividend on
the RESTEC common stock. The shares of Synagro Common Stock issued in connection
with the Merger Agreement were issued in a transaction exempt from registration
under the Securities Act of 1933, as amended, by reason of Section 3(a)(10)
thereof.
RESTEC's business is conducted primarily through five (5) operating
companies: Residual Technologies, Limited Partnership, a Delaware limited
partnership formed in 1995, NETCO-Waterbury, Limited Partnership, a Delaware
limited partnership formed in 1993, NETCO-Residuals Management, Limited
Partnership., a Delaware limited partnership formed in 1994, New Haven
Residuals, Limited Partnership, a Delaware limited partnership formed in 1995,
and New England Treatment Company, Inc., a Rhode Island corporation formed in
1987.
RESTEC's principal executive offices are located at 55 Old Field Point
Road, Greenwich, Connecticut 06830, and its phone number is (203) 622-9029.
SELECTED FINANCIAL DATA OF RESTEC
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
---------------------------- -------------------------------
1998 1997 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 22,249,285 $ 20,515,807 $ 17,822,528 $ 16,631,872
Cost of revenues 15,852,217 14,030,767 12,482,087 11,553,971
------------ ------------ ------------ ------------
Gross margin 6,397,068 6,485,040 5,340,441 5,077,901
Expenses:
General and administrative 3,008,588 2,773,129 2,718,995 2,208,314
------------ ------------ ------------ ------------
Income from operations 3,388,480 3,711,911 2,621,446 2,869,587
Interest expense, net 1,688,534 1,776,005 1,006,829 1,136,305
Other (income), expense, net (deficit) (294,316) (55,241) -- --
Cost of revenues ------------ ------------ ------------ ------------
Net Income Before Taxes $ 1,994,262 $ 1,991,147 $ 1,614,617 $ 1,733,282
============ ============ ============ ============
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------- ----------------------------
1998 1997 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Working capital (deficit) $ (9,797,813) $(10,015,049) $ (8,783,459) $(10,134,750)
Total assets 22,817,633 23,233,389 22,152,799 23,835,997
Total long-term obligations 4,335,745 6,811,597 4,350,709 4,759,494
Total shareholders' equity (deficit) 2,719,410 1,974,877 2,872,018 2,070,204
</TABLE>
42
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF RESTEC
The following discussion should be read in conjunction with the financial
statements of RESTEC and related notes, and the preceding "Selected Financial
Data of Restec."
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
For the nine months ended September 30, 1999 and 1998, revenues increased
by approximately $1.2 million. The increase in revenues relates to increased
volumes with existing customers (approximately $900,000) and one new customer
(approximately $300,000). Gross margin increased by approximately $262,000. The
increase relates to the increased volumes partially offset by higher costs of
disposal as some volumes have been diverted to alternative disposal sites.
General and administrative expenses increased due to an increase in officer
salaries of approximately $315,000 and legal expenses of approximately $110,000.
Interest expense decreased due to reduced debt balances. Based on the above, net
income decreased by approximately $119,000.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
For the years ended December 31, 1998 and 1997, revenues increased by
approximately $1.7 million which relates to two new contracts started in middle
to late 1997 with annual revenues totaling $2.7 million. Gross margin for the
same periods decreased by approximately $88,000 as these new contracts were
processed using outside parties. General and administrative expenses were 13.5%
of revenues for both periods. Interest expense did not materially change between
periods. Based on the above, net income did not materially change between
periods.
LIQUIDITY AND CAPITAL RESOURCES
NETCO maintained a line of credit with Webster Bank providing for maximum
borrowings of $500,000 until September 1998. Effective September 1998, NETCO
and RESTEC refinanced NETCO's existing line of credit whereby the line of credit
was increased to $1,000,000 (see further discussion below). The revolving line
of credit is secured by various equipment. Outstanding borrowings during 1997
through the refinancing date on the line of credit bear interest at prime rate
plus 1 percent. Subsequent to the refinancing date, NETCO's and RESTEC's
borrowings on the line of credit bear interest at LIBOR plus 2.15 percent. The
line of credit expires in July 2000.
Long-term debt consists of the following:
NETCO - Waterbury, $11,000,000 Sewage Sludge Disposal Facility Revenue Bonds
with the Connecticut Development Authority, secured by equipment, principal
payments due annually, increasing from $200,000 in 1997 to $600,000 in 2016,
bearing interest at 9.375%, maturing in June 2016.
NewHaven, $5,000,000 Sewage Sludge Disposal Facility Revenue Bonds with the
Connecticut Development Authority, secured by equipment, principal payments
due annually, increasing from $340,000 in 1997 to $695,000 in 2006, bearing
interest at 8.25%, maturing in December 2006.
NETCO and RESTEC, $3,000,000 note payable to Webster Bank, payable in monthly
principal installments of $35,714, bearing interest at 7.17%, maturing in
September 2005.
43
<PAGE> 51
NETCO, $2,500,000 note payable to Webster Bank, secured by equipment, payable in
monthly principal installments of $52,083, bearing interest at prime rate
plus 1%, (weighted average rate of 9.44% for 1997), maturing in December
2001, refinanced in 1998 with a new note with Webster Bank.
NETCO, $500,000 note payable to Webster Bank payable in monthly principal
installments of $10,417, secured by equipment, bearing interest at prime rate
plus 1.25% (weighted average rate of 9.69% for 1997), maturing in December
2001, refinanced in 1998 with a new note with Webster Bank.
NETCO - Waterbury, note payable to North America Bank, payable in monthly
principal installments of $10,000, bearing interest at prime rate plus 1.50%
(weighted average rate of 9.94% for 1997), repaid in 1998 with proceeds from
a new note with Webster Bank.
NETCO - RM, $250,000 subordinated note payable to a former owner, bearing
interest at 8%, total principal balance due in January 2000, guaranteed by
the Partnership's owners.
NETCO - RM, $150,000 subordinated note payable to a former owner, imputed
interest at 8%, total principal balance due in January 2001, guaranteed by
the Partnership's owners.
NETCO - Waterbury is required to maintain certain financial and other
covenants under the NETCO - Waterbury bond agreement. A trustee collects all
gross revenues on a monthly basis from NETCO - Waterbury. These funds are
allocated to the appropriate reserve fund to pay principal and interest payments
on the debt and fund other reserve requirements. In order to secure the bonds,
NETCO - Waterbury has granted to the Connecticut Development Authority ("CDA") a
security interest in the gross revenues and equipment of NETCO - Waterbury.
NETCO - Waterbury is out of compliance with its covenant to maintain a current
asset to current liability ratio of at least 2 to 1 and its covenant to fulfill
certain financial reporting requirements. NETCO - Waterbury has not obtained
waivers for the debt covenant violations. In the event of default, the trustee
or the CDA may cause all amounts payable under the NETCO - Waterbury bond
agreement to be immediately due and payable and may enforce the obligations of
NETCO - Waterbury under the NETCO - Waterbury bond agreement. As a result of the
covenant violations, all amounts due under the NETCO - Waterbury bond agreement
have been classified as current maturities of long-term debt.
The NETCO - Waterbury bond agreement covenants also place significant
restrictions on NETCO - Waterbury's ability to incur additional indebtedness or
to merge or consolidate with an unaffiliated entity. NETCO - Waterbury has the
option to prepay all or part of its loan obligation at any time that the bonds
are subject to redemption commencing on June 1, 2005, unless NETCO - Waterbury
is in default, whereby the prepayment balance could only be exercised in total.
The prepayment amount must be sufficient to pay the interest and redemption
price. Prepayment of the NETCO - Waterbury bonds is subject to a prepayment
redemption premium of 3 percent at June 1, 2005. No prepayment premium would
apply if the bonds were prepaid after June 1, 2008. The NETCO - Waterbury bonds
are subject to a mandatory prepayment with a penalty of 103 percent of the
aggregate amount of the loan under certain circumstances, as defined. In the
event of a defined change in control, the NETCO - Waterbury bond agreement may
be terminated with all amounts payable under the NETCO - Waterbury bond
agreement becoming immediately due and payable.
Under an agreement between the CDA and First Fidelity Bank, the trustee
under the NETCO - Waterbury bond agreement (the Waterbury Trustee), the NETCO -
Waterbury bonds may be redeemed prior to maturity or the redemption date. The
CDA must provide the Waterbury Trustee with a notice of redemption and shall
deposit with the Waterbury Trustee either monies or defeasance securities that
are sufficient to pay the principal and interest on the NETCO - Waterbury bonds.
Under the Sewage Sludge Disposal Facility Revenue Bond agreement between
the CDA and New Haven (the "New Haven Bond Agreement"), New Haven is subject to
certain financial and nonfinancial covenants. In order to secure the bonds, New
Haven has granted to the CDA a security interest in the gross revenues and
equipment of New Haven. New Haven pledges gross revenues to the appointed
trustee on a monthly basis. The trustee then allocates these funds to service
the principal and interest payments on the debt and fund other reserve
requirements.
44
<PAGE> 52
New Haven is in compliance with all covenants of the New Haven Bond Agreement.
In the event of default, the trustee or the CDA may cause all amounts payable
under the New Haven Bond Agreement to be immediately due and payable and may
enforce all obligations under the New Haven Bond Agreement.
The New Haven Bond Agreement covenants also place significant restrictions
on New Haven's ability to incur additional indebtedness or merge or consolidate
with an unaffiliated entity. The bonds also disallow any prepayment of the loan.
The New Haven bonds are subject to a mandatory prepayment with a penalty of 103
percent of the aggregate amount of the loan under certain circumstances, as
defined. In the event of a defined change in control, the New Haven Bond
Agreement may be terminated with all amounts payable under the New Haven Bond
Agreement becoming immediately due and payable.
Under an agreement between the CDA and State Street Bank and Trust Company
of Connecticut, National Association, trustee under the New Haven Bond Agreement
(the New Haven Trustee), the New Haven bonds may be redeemed prior to maturity
or the redemption date. The CDA must provide the New Haven Trustee with a notice
of redemption and shall deposit with the New Haven Trustee either monies or
defeasance securities that are sufficient to pay the principal and interest on
the New Haven bonds.
The NETCO - Waterbury bonds and New Haven bonds also require certain funds
to be maintained with a trustee, including a debt service fund. Such funds, on
deposit with the trustee, are invested in cash equivalents and U.S. Government
securities and are carried at cost plus accrued interest. The carrying value of
these funds is included in funds held in trust in the accompanying combined
balance sheets and approximates fair value. A debt service fund is used for the
payment of interest and principal.
NETCO and RESTEC refinanced NETCO's existing debt to Webster Bank in
September 1998, whereby the line of credit was increased to $1,000,000 (see
above for further discussion) and a facilities loan to fund equipment purchases
of up to $1,000,000 and a term loan of $3,000,000 were obtained. The facilities
loan is payable in 60 monthly payments of principal and interest commencing on
September 1, 1999. The facilities loan bears interest at LIBOR plus 2.15
percent. Beginning on September 1, 1999, interest is stated at the cost of funds
rate, as defined, plus 2.15 percent. NETCO and RESTEC can elect to fix the rate
over a designated period of time. At September 30, 2000, no balance was
outstanding under the facilities loan. The proceeds from the term loan of
$3,000,000 were used to pay NETCO's outstanding balance with Webster Bank and
NETCO - Waterbury's outstanding balance with North America Bank.
The Webster Bank note agreement requires, among other things, NETCO and
RESTEC to meet certain financial and nonfinancial covenants. NETCO and RESTEC
are out of compliance with their covenants to fulfill certain financial
reporting and nonfinancial requirements. NETCO and RESTEC have not obtained a
waiver for the debt covenant violation. In the event of default, the bank may
cause all amounts payable under the Webster Bank note agreement to be
immediately due and payable and may enforce all obligations of NETCO and RESTEC
under the Webster Bank note agreement. As a result of the covenant violation,
all amounts due under the Webster Bank note agreement have been classified as
current maturities of long-term debt.
The Webster Bank note agreement also places significant restrictions on
NETCO's and RESTEC's ability to incur additional indebtedness or to merge or
consolidate with an unaffiliated entity. In the event of a defined change in
control, the amount outstanding under the note agreement will be immediately due
and payable.
At September 30, 1999, the current portion of long-term debt is
approximately $13,042,000 which creates negative working capital of
approximately $8,783,000. The company is out of compliance with various
covenants on certain debt agreements, requiring approximately $11,607,000 of
debt to be classified as current. However, management believes the lenders will
continue to provide credit to the company through 2000. The company believes
that its cash requirements can be met with current cash flows from operations.
Beyond 2000, there can be no assurances that additional financing requirements
will not be required to maintain liquidity if the lenders should call the loans.
45
<PAGE> 53
INFORMATION ABOUT ECOSYSTEMATICS, INC.
Ecosystematics, Inc., a Florida corporation formed in 1985, operates and
maintains small volume waste water treatment facilities in a 50 mile radius of
Key Largo, Florida. Ecosystematics is best classified as a service organization
that supplies licensed wastewater treatment plant operators and materials
necessary for the upkeep and maintenance of the surrounding small treatment
plants. Per Florida requirements, a licensed wastewater treatment operator is
required to monitor and service a wastewater treatment facility based on the
number of gallons processed in the particular facility. Based on the number of
gallons, the operator could be required to visit the facility as little as 15
minutes a day, two times per week, to as much as 8 hours a day, 7 days per week.
There is no active public trading market for Ecosystematics Common Stock,
which is traded infrequently in private transactions. Ecosystematics has no
class of securities registered under Section 12 of the Exchange Act and is not
subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange
Act. Ecosystematics has never declared a cash dividend on the Ecosystematics
Common Stock.
Ecosystematics' principal executive offices are located at 203 Apache
Street, Tavernier, Florida 33070 and its phone number is (305) 852-5103.
SELECTED FINANCIAL DATA OF ECOSYSTEMATICS
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
Year Ended
December 31, Nine Months Ended September 30,
--------------- ---------------------------------
1998 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues $ 1,307,334 $ 1,083,232 $ 1,022,784
Cost of revenues 993,714 877,287 909,411
--------------- --------------- ---------------
Gross margin 313,620 205,945 113,373
Expenses:
General and administrative 274,913 39,662 33,658
--------------- --------------- ---------------
Income from operations 38,707 166,283 79,715
Other (income), expense, net (1,679) 3,724 (1,434)
--------------- --------------- ---------------
Net income $ 40,386 $ 162,559 $ 81,149
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: December 31, September 30,
--------------------- ----------------------
1998 1997 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Working capital 325,537 376,229 824,770 401,395
Total assets 491,802 507,375 968,407 519,882
Total long-term obligations -- -- -- --
Total shareholders' equity (deficit) 467,964 441,578 621,283 518,727
</TABLE>
46
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ECOSYSTEMATICS
The following discussion should be read in conjunction with the financial
statements of Ecosystematics and related notes, and the preceding "Selected
Financial Data of Ecosystematics"
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
For the nine months ended September 30, 1999 and 1998, revenues increased
by approximately $60,000 due to an increase in the customer base. Gross margin
increased by approximately $92,000 as the increased volume was added without
adding staff. Additionally, officers' compensation decreased by approximately
$18,000. General and administrative expense, and other income (expense)
did not materially change between periods. Based on the above, net income
increased by approximately $81,000 for the above periods.
LIQUIDITY AND CAPITAL RESOURCES
Ecosystematics has no debt and is funded through operations. At September
30, 1999, Ecosystematics had approximately $825,000 in working capital.
Ecosystematics believes that its cash requirements can be met with current cash
flows from operations.
47
<PAGE> 55
INFORMATION ABOUT REHBEIN
Rehbein, Inc., a Minnesota corporation formed in 1985, is a regional land
acquisition company primarily servicing sixteen medium to large municipalities
and industrial customers in Minnesota, Michigan and Wisconsin. Rehbein primarily
performs biosolids land application, reuse of lime treatment residuals, and the
blending of ash byproducts with biosolids for beneficial reuse.
There is no active public trading market for Rehbein common stock, which
is traded infrequently in private transactions. Rehbein has no class of
securities registered under Section 12 of the Exchange Act and is not subject to
the reporting requirements of Section 13(a) or 15(d) of the Exchange Act.
Rehbein has never declared a cash dividend on the Rehbein common stock.
Rehbein's principal executive offices are located at 6805 20th Avenue
South, Hugo, Minnesota 55038 and its phone number is (651) 426-1345.
SELECTED FINANCIAL DATA OF REHBEIN
(IN THOUSANDS)
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
Year Ended May 31, Five Months Ended October 31,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 5,318,320 $ 4,484,489 $ 2,001,793 $ 2,397,478
Cost of revenues 3,044,575 2,590,932 1,073,651 1,328,707
-------------- -------------- -------------- --------------
Gross margin 2,273,745 1,893,557 928,142 1,068,771
Expenses:
General and administrative 1,545,763 1,386,092 733,688 661,857
-------------- -------------- -------------- --------------
Income from operations 727,982 507,465 194,454 406,914
Interest expense, net 161,323 147,982 ---- 52,514
Other (income), expense, net (59,231) (62,956) ---- ----
-------------- -------------- -------------- --------------
Net Income $ 625,890 $ 422,439 $ 194,454 $ 354,400
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: May 31, October 31,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Working capital (deficit) $ (710,605) $ (903,472) $ (784,910) $ (625,511)
Total assets 3,160,689 3,432,158 3,238,856 3,481,443
Total long-term obligations 1,196,767 1,045,658 1,311,410 1,004,975
Total shareholders' equity (deficit) 238,037 826,804 3,198 739,328
</TABLE>
48
<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF REHBEIN
The following discussion should be read in conjunction with the financial
statements of Rehbein and related notes, and the preceding "Selected Financial
Data of Rehbein"
RESULTS OF OPERATIONS
Five Months Ended October 31, 1999 Compared to the Five Months Ended
October 31, 1998
For the five months ended October 31,1999 versus the five months ended
October 31, 1998, revenues decreased by approximately $395,000 due to the
completion of a one time lagoon dredging. Gross profit decreased by
approximately $140,000 due to the decrease in revenues addressed above. General
and administrative expenses increased by approximately $72,000 due to permitting
cost of approximately $43,000 and other administrative costs. Interest expense,
net decreased by approximately $52,000 due to offsetting interest income in the
current period from related party notes. Net income decreased by approximately
$160,000 based upon the above.
Year Ended May 31, 1999 Compared to Year Ended May 31, 1998
For the year ended May 31, 1999, revenues increased by approximately
$833,000 versus the year ended May 31, 1998 due to a one time lagoon dredging
project (approximately $500,000), and the award of five smaller contracts
(approximately $350,000). Gross margin increased by approximately $380,000 as a
direct result of the increase in revenues. General and administrative expenses
increased by approximately $159,000 due to increased depreciation expense
(approximately $81,000) and other administrative costs associated with the
increased sales volume. Interest and other expenses did not change materially
for the above periods. Net income increased by approximately $203,000 based upon
the above.
LIQUIDITY AND CAPITAL RESOURCES
On February 5, 1993, Rehbein entered a $350,000 revolving working capital
line of credit. The credit facility is secured by property of Rehbein. The
credit facility has been renewed each year and is scheduled to mature on
February 17, 2000. The interest rate was changed upon the renewal at February
1998 from a fixed rate of 10 percent to a variable rate of prime plus 0.5
percent. Amounts due under the line of credit as of September 30, 1999 are
$327,700.
On January 16, 1997, Rehbein obtained another revolving working capital
line of credit for $650,000. This credit facility is also secured by property of
Rehbein. The credit facility matured January 16, 1999, as a result of an
extension negotiated in January 1998 and bore interest at the prime rate plus
0.75 percent. Rehbein did not carry a balance against the line of credit as of
May 31, 1998.
At September 30, 1999, Rehbein had negative working capital of
approximately $784,000. Rehbein Biosolids is a division of Rehbein Inc. and all
inter-company transactions have been treated as distributions. Rehbein believes
that its cash requirements can be met with current cash flows from operations.
Beyond 1999, there can be no assurances that additional financing requirements
will not be required to maintain liquidity if the inter-company balances are not
collectable.
49
<PAGE> 57
INFORMATION ABOUT WHITEFORD CONSTRUCTION CO., INC.
Whiteford Construction Co., Inc., a Maryland corporation formed in 1977,
is a combination of a regional land application company and special projects
operation. Whiteford operates in Pennsylvania and Maryland and offers a variety
of services to customers including pumping, dredging, digester and lagoon
cleaning, dewatering and land application of biosolids. Whiteford emphasizes
high margin, specialized event projects such as lagoon cleanouts, dredging, and
digester cleaning for municipalities due to the more attractive margins.
There is no active public trading market for Whiteford common stock, which
is traded infrequently in private transactions. Whiteford has no class of
securities registered under Section 12 of the Exchange Act and is not subject to
the reporting requirements of Section 13(a) or 15(d) of the Exchange Act.
Whiteford has never declared a cash dividend on the Whiteford common stock.
Whiteford's principal executive offices are located at 1605 Dooley Road,
Whiteford, Maryland 21160 and its phone number is (800) 783-7867.
SELECTED FINANCIAL DATA OF WHITEFORD
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
Year Ended
December 31, Nine Months Ended September 30,
-------------- -------------------------------
1998 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 2,256,032 $ 1,712,999 $ 1,086,163
Cost of revenues 1,472,317 930,917 870,413
-------------- -------------- --------------
Gross margin 783,715 782,082 215,750
Expenses:
General and administrative 352,438 267,464 219,247
-------------- -------------- --------------
Income from operations 431,277 514,618 (3,497)
Interest expense, net --
-------------- -------------- --------------
Net loss $ 431,277 $ 514,618 $ (3,497)
============== ============== ==============
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -----------------------------
1998 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Working capital $ 642,171 $ 701,038 $ 395,479
Total assets 1,023,803 970,098 733,187
Divisional equity 947,480 933,747 705,851
</TABLE>
50
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF WHITEFORD
The following discussion should be read in conjunction with the financial
statements of Whiteford and related notes, and the preceding "Selected Financial
Data of Whiteford"
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
For the nine months ended September 30, 1999 and 1998 revenues increased
by approximately $626,000. Whiteford does a significant amount of one-time
projects and in 1999 the company had two large contracts totaling approximately
$770,000, which accounted for the increase. In 1997, Whiteford did not have any
large contracts. Gross margin for the related periods increased by $567,000.
This increase is directly related to the two large contracts mentioned above.
These one time projects have high margins as most of the costs are fixed.
General and administrative costs increased by approximately $48,000 relating to
bonuses paid. Based on the above, net income increased by approximately $518,000
for the above periods.
LIQUIDITY AND CAPITAL RESOURCES
Whiteford has no debt and is funded through operations and owner
contributions. At September 30, 1999, Whiteford had approximately $701,000 in
working capital.
51
<PAGE> 59
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company incorporates by reference the contents of the following
documents previously filed with the Commission:
1. Current Report on Form 8-K, dated February 11, 2000.
2. Current Report on Form 8-K, dated February 17, 2000.
These documents incorporated by reference and not presented herein or
delivered herewith are available without charge upon request to: Alvin Thomas,
Synagro Technologies, Inc., 1800 Bering Drive, Suite 1000, Houston, Texas 77057.
Telephone requests may be directed to Alvin Thomas at (713) 369-1700.
The Commission file number for the Company's documents filed with the
Commission is 0-21054. All documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Information Statement shall be deemed to be incorporated by reference herein and
to be a part hereof from the date of this filing. Any statement contained herein
shall be deemed to be modified or superceded for all purposes of this
Information Statement to the extent that a statement contained herein or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein modifies or supercedes such statement. Any such statement so
modified or superceded shall not be deemed, except as so modified or superceded
to constitute part of this Information Statement.
BY ORDER OF THE BOARD OF DIRECTORS
Alvin L. Thomas
Secretary
February __, 2000
Houston, Texas
52
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SYNAGRO
Report of Independent Public Accountants............................................................ F-2
Balance Sheets as of December 31, 1998 and 1997..................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.......... F-4
Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1998, 1997
and 1996........................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......... F-6
Notes to Consolidated Financial Statements.......................................................... F-8
Unaudited Balance Sheets as of September 30, 1999 and 1998.......................................... F-22
Unaudited Statements of Operations for the nine months ended September 30, 1999 and 1998............ F-23
Unaudited Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............ F-24
Notes to Unaudited Financial Statements............................................................. F-26
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP AND AFFILIATES
Report of Independent Public Accountants............................................................ F-32
Balance Sheets as of December 31, 1998 and 1997..................................................... F-33
Statements of Operations for the years ended December 31, 1998 and 1997............................. F-34
Statements of Owners' Equity for the years ended December 31, 1998 and 1997......................... F-35
Statements of Cash Flows for the years ended December 31, 1998 and 1997............................. F-36
Notes to Financial Statements....................................................................... F-37
Unaudited Balance Sheet as of September 30, 1999.................................................... F-47
Unaudited Statements of Operations for the nine months ended September 30, 1999 and 1998............ F-48
Unaudited Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............ F-49
Notes to Unaudited Financial Statements............................................................. F-50
ECOSYSTEMATICS, INC.
Report of Independent Public Accountants............................................................ F-54
Balance Sheet as of December 31, 1998............................................................... F-55
Statement of Operations for the year ended December 31, 1998........................................ F-56
Statements of Shareholder Equity for the year ended December 31, 1998............................... F-57
Statement of Cash Flows for the year ended December 31, 1998........................................ F-58
Notes to Financial Statements....................................................................... F-59
Unaudited Balance Sheet as of September 30, 1999.................................................... F-62
Unaudited Statements of Operations for the nine months ended September 30, 1999..................... F-63
Unaudited Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............ F-64
Notes to Unaudited Financial Statements............................................................. F-65
REHBEIN, INC.
Report of Independent Public Accountants............................................................ F-67
Balance Sheets as of May 31, 1999 and 1998.......................................................... F-68
Statements of Operations for the years ended May 31, 1999 and 1998.................................. F-69
Statement of Divisional Equity for years ended May 31, 1999 and 1998................................ F-70
Statements of Cash Flows for the years ended May 31, 1999 and 1998.................................. F-71
Notes to Financial Statements....................................................................... F-72
Unaudited Balance Sheet as of October 31, 1999...................................................... F-76
Unaudited Statements of Operations for the five months ended October 31, 1999 and 1998.............. F-77
Unaudited Statements of Cash Flows for the five months ended October 31, 1999 and 1998.............. F-78
Notes to Unaudited Financial Statements............................................................. F-79
WHITEFORD CONSTRUCTION COMPANY, INC.
Report of Independent Public Accountants............................................................ F-81
Balance Sheet as of December 31, 1998............................................................... F-82
Statement of Operations for the year ended December 31, 1998........................................ F-83
Statement of Divisional Equity for the year ended December 31, 1998................................. F-84
Statement of Cash Flows for the year ended December 31, 1998........................................ F-85
Notes to Financial Statements....................................................................... F-86
Unaudited Balance Sheet as of September 30, 1999.................................................... F-88
Unaudited Statements of Operations for the nine months ended September 30, 1999 and 1998............ F-89
Unaudited Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............ F-90
Notes to Unaudited Financial Statements............................................................. F-91
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Synagro Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Synagro
Technologies, Inc. (a Delaware corporation), and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Synagro
Technologies, Inc., and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis as restated for the effect of a
pooling-of-interests transaction completed in the first quarter of 1999.
ARTHUR ANDERSEN LLP
Houston, Texas
June 30, 1999
F-2
<PAGE> 62
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 414,712 $ 281,043
Short-term investments -- 64,504
Restricted cash, current portion 680,656 172,925
Accounts receivable, net 6,523,944 4,105,405
Note receivable, current portion 436,325 543,706
Prepaid expenses and other current assets 1,679,381 1,351,212
------------ ------------
Total current assets 9,735,018 6,518,795
Property, machinery & equipment, net 12,394,018 9,888,583
Other Assets:
Goodwill, net of accumulated amortization of $15,594,918 and $996,079 43,130,904 4,333,277
Restricted cash, long-term portion -- 173,387
Notes receivable, long-term portion 262,829 --
Other 1,099,714 251,594
------------ ------------
Total assets $ 66,622,483 $ 21,165,636
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 2,777,871
Notes payable to prior owners, current portion -- 398,890
Accounts payable and accrued expenses 4,043,512 4,147,377
------------ ------------
Total current liabilities 4,043,512 7,324,138
Long term liabilities:
Long-term debt 21,651,197 6,114,000
Notes payable to prior owners 6,679,039 --
------------ ------------
Total long term liabilities 28,330,236 6,114,000
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity:
Preferred stock, $.002 par value, 10,000,000 shares authorized,
none issued and outstanding -- --
Common Stock, $.002 par value, 100,000,000 shares authorized,
14,251,706, shares and 8,610,306 issued and outstanding 28,503 17,221
Additional paid in capital 56,495,873 25,513,915
Accumulated deficit (22,275,641) (17,803,638)
------------ ------------
Total stockholders' equity 34,248,735 7,727,498
------------ ------------
Total liabilities and stockholders' equity $ 66,622,483 $ 21,165,636
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 63
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 33,564,831 $ 28,036,056 $ 24,174,505
Cost of service 28,116,069 23,239,213 20,306,298
------------ ------------ ------------
Gross profit 5,448,762 4,796,843 3,868,207
Selling, general and administrative expenses 4,809,474 3,804,901 6,237,816
Other charges (credits):
Loss on assets held for sale and other special charges/(credits) (63,799) (721,286) 4,841,807
------------ ------------ ------------
Income (loss) from operations 703,087 1,713,228 (7,211,416)
------------ ------------ ------------
Other income (expense):
Other income, net 317,714 409,283 359,685
Interest (1,558,219) (1,006,790) (730,406)
------------ ------------ ------------
Total (1,240,505) (597,507) (370,721)
------------ ------------ ------------
Net income (loss) before redeemable preferred dividends and income taxes (537,418) 1,115,721 (7,582,137)
Provision for income taxes -- -- --
------------ ------------ ------------
Net income (loss) before redeemable preferred dividends (537,418) 1,115,721 (7,582,137)
Redeemable preferred stock dividends 3,934,585 -- --
------------ ------------ ------------
Net income (loss) applicable to common stock $ (4,472,003) $ 1,115,721 $(7,582,137)
============ ============ ============
Income per common and common share equivalent:
Net income (loss), basic $ (.40) $ .13 $ (1.04)
Net income (loss), diluted $ (.40) $ .13 $ (1.04)
Weighed average shares outstanding, basic 11,207,249 8,545,114 7,266,760
Weighed average shares outstanding, diluted 11,207,249 8,740,345 7,266,760
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 64
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- ------------
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.................. 6,952,758 $ 13,906 $ 22,215,785 $(11,337,222) $ 10,892,469
Additional shares issued ................ 100,000 $ 200 $ 134,800 -- $ 135,000
Shares issued in acquisition............. 155,000 310 222,425 -- 222,735
Conversion of long-term debt............. 144,344 289 189,711 -- 190,000
Exercise of options...................... 3,333 7 6,659 -- 6,666
Net loss................................. -- -- -- (7,582,137) (7,582,137)
---------- -------- ------------ ------------ ------------
BALANCE, December 31, 1996.................. 7,355,435 14,712 22,769,380 (18,919,359) 3,864,733
Redemption of warrants, net.............. 1,324,243 2,648 2,947,412 -- 2,950,060
Shares exchanged in repayment of
notes receivable........................ (74,372) (149) (212,867) -- (213,016)
Exercise of options...................... 5,000 10 9,990 -- 10,000
Net income............................... -- -- -- 1,115,721 1,115,721
---------- -------- ------------ ------------ ------------
BALANCE, December 31, 1997.................. 8,610,306 17,221 25,513,915 (17,803,638) 7,727,498
Shares issued in acquisitions............ 4,152,981 8,306 23,773,983 -- 23,782,289
Conversion of preferred stock............ 1,458,335 2,916 3,429,968 -- 3,432,884
Issuance of warrants..................... -- -- 200,000 -- 200,000
Exercise of options and warrants......... 30,084 60 63,422 -- 63,482
Preferred stock dividends................ -- -- 3,514,585 (3,934,585) (420,000)
Net loss................................. -- -- -- (537,418) (537,418)
---------- -------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998.................. 14,251,706 $ 28,503 $ 56,495,873 $(22,275,641) $ 34,248,735
========== ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 65
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred stock dividends .......... $ (537,418) $ 1,115,721 $ (7,582,137)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation ........................................... 1,856,866 1,610,268 2,022,203
Amortization ........................................... 667,845 228,895 255,690
Loss on assets held for sale and other special
charges (credits) ...................................... (251,476) (721,286) 4,841,807
Gain on sale of property, machinery and equipment ...... (145,333) (251,470) (261,319)
Other .................................................. -- (113,133) --
(Increase) decrease in the following, excluding
the effects of acquisitions-
Accounts receivable ............................... (596,818) (1,466,866) (669,516)
Inventory ......................................... -- -- 111,429
Prepaid expenses and other current assets ......... (161,355) (1,124,110) 757,382
Other assets ...................................... (338,832) (118,950) (21,952)
Increase (decrease) in the following, excluding
the effects of acquisitions-
Accounts payable and accrued expenses ............. (787,629) (9,482) 1,515,557
------------ ------------ ------------
Net cash provided by (used in) operating
activities ............................................. (294,150) (850,413) 969,144
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired ................ (9,411,182) -- (1,277,265)
Purchase of property, machinery and equipment ............... (2,557,826) (1,634,722) (1,643,928)
Proceeds from sale of property, machinery and equipment ..... 2,081,026 456,564 640,404
Sales of short-term investments, net ........................ 64,504 495,496 455,743
Proceeds from notes receivable .............................. 138,999 121,286 --
------------ ------------ ------------
Net cash used in investing activities .................. (9,684,479) (561,376) (1,825,046)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt .......................................... 8,419,768 1,360,945 5,829,103
Payments on debt ............................................ (1,049,492) (3,301,330) (7,135,023)
Increase in restricted cash ................................. (334,344) (950) (5,105)
Preferred stock dividend .................................... (420,000) -- --
Redemption of warrants, net ................................. -- 2,950,060 --
Issuance of preferred stock, net of offering costs .......... 3,432,884 -- --
Issuance of stock ........................................... -- -- 135,000
Exercise of options and warrants ............................ 63,482 10,000 6,666
------------ ------------ ------------
Net cash provided by (used in) financing
activities ............................................. 10,112,298 1,018,725 (1,169,359)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 133,669 (393,064) (2,025,261)
CASH AND CASH EQUIVALENTS, beginning of year .................... 281,043 674,107 2,699,368
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year .......................... $ 414,712 $ 281,043 $ 674,107
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 66
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................................ $ 1,008,430 $ 1,025,788 $ 818,039
Taxes paid................................................... -- -- --
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock, $.002 par value per share (the "Preferred Stock"), with a beneficial
conversion feature. The Company recognized the value of the beneficial
conversion feature of $3,514,585 as a preferred dividend.
On June 10, 1998, the Preferred Stock was converted into 1,458,335 shares of the
Company's Common Stock.
The Company sold the operations of a wholly-owned subsidiary in 1997. The net
assets and liabilities sold were approximately $978,000 net of a loss allowance
of approximately $2.4 million and assumed debt by the purchaser was
approximately $978,000 in exchange for a note receivable of approximately $1.4
million which was initially reserved at the date of sale. (NOTE 11)
In 1997, $946,000 of assets were purchased in accordance with a purchase and
sale agreement. The purchase was financed through debt.
In 1997, approximately $213,000 of notes receivable was repaid with 74,372
shares of Common Stock.
In 1996, $190,000 of debentures were converted into 144,344 shares of Common
Stock.
In 1996, $1,325,150 of machinery and equipment was acquired with debt.
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE> 67
SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
BUSINESS AND ORGANIZATION
Synagro Technologies, Inc., a Delaware corporation ("Synagro"), and collectively
with its subsidiaries (the "Company") is engaged in the biosolids management
business. The Company does this through beneficial reuse of organic materials,
transportation and monitoring of biosolids, and the marketing of end products
from the treatment of such materials. The Company is headquartered in Houston,
Texas and operates throughout the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synagro and its
wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated. As discussed further in Note 2, the Company acquired National
Resource Recovery, Inc., on March 1, 1999, in a transaction accounted for as a
pooling-of-interests. The historical consolidated financial statements of the
Company have been restated for all periods presented for the effect of the
pooling-of-interests transaction.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all investments with an original maturity of three months
or less when purchased to be cash equivalents. Short-term investments have
maturities greater than three months at the date of purchase. At December 31,
1997, short-term investments consisted of certificates of deposit. All
short-term investments have been classified as held-to-maturity at December 31,
1997. These investments have various maturity dates which do not exceed one
year. These securities are carried at cost, which approximates fair value.
PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment is stated at cost. Depreciation is being
provided using straight-line and accelerated methods over estimated useful lives
of three to twenty years. Leasehold improvements are capitalized and amortized
over the lesser of the life of the lease or the estimated useful life of the
asset.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property, machinery and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
In the second quarter of 1997, the Company changed the estimated useful lives of
certain fixed assets. The change which had an impact of less than one-half of
$0.01 on net income per share did not materially effect the Company's results of
operations.
GOODWILL
Goodwill represents the aggregate purchase price paid by the Company in
acquisitions accounted for as a purchase over the fair value of the net tangible
assets acquired. Goodwill is amortized on a straight-line basis over the
estimated period of benefit ranging from 20 to 40 years.
In the event that facts and circumstances indicate that goodwill may be
impaired, an evaluation of recoverability would be performed. If an evaluation
were required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value was necessary. The
Company believes the goodwill remaining as of December 31, 1998, is fully
realizable.
At December 31, 1998, goodwill of approximately $3,879,000 is being amortized
over a 20 year life. The Company's remaining goodwill is being amortized over a
40 year life. Goodwill amortization expense was $255,690, $228,895 and $628,839
for 1996, 1997 and 1998, respectively.
F-8
<PAGE> 68
OTHER ASSETS
Included in other assets are non-compete agreements. These agreements are valued
at cost and amortized on a straight-line basis over the term of the agreement,
which is generally for two to five years. Amortization expense was approximately
$40,000 in 1998 and -0- in 1997 and 1996, respectively. Additionally, the
Company had deferred financing costs in connection with the credit facility
disclosed in Note 6, the costs are being expensed over the term of the
agreement.
REVENUE RECOGNITION
Revenues are recognized as services are completed and provided.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's adoption of SFAS No. 121 did not have a material effect on the
Company's financial position or results of its operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the 1998 presentation.
CONCENTRATION OF CREDIT RISK
The Company provides services to a broad range of geographical regions. The
Company's credit risk primarily consists of receivables from a variety of
customers including, state and local agencies, municipalities and private
industries. The Company reviews its accounts receivable and provides allowances
as deemed necessary.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This standard provides the method for determining
the appropriate asset and liability for deferred taxes which are computed by
applying applicable tax rates to temporary (timing) differences. Therefore,
expenses recorded for financial statement purposes before they are deducted for
tax purposes create temporary differences which give rise to deferred tax
assets. Expenses deductible for tax purposes before they are recognized in the
financial statements create temporary differences which give rise to deferred
tax liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the display of comprehensive income and
its components in the financial statements. Comprehensive income represents all
non-stockholder related changes in equity of an entity during the reporting
period, including net income and charges directly to equity, which are excluded
from net income. For the three years ended December 31, 1998, there are no
material differences between the Company's "traditional" and "comprehensive"
net income.
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes new standards for segment reporting which are based on the way
management organizes segments within a company for making operating decisions
and assessing performance. Through December 31, 1998, the Company operated in
one segment namely, the biosolids management business segment.
In February 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits," which becomes effective for financial statements for the year ended
December 31, 1998. SFAS No. 132 requires revised disclosures about pensions and
other postretirement benefit plans. The Company has adopted the
F-9
<PAGE> 69
provisions of SFAS No. 132, and it does not have a material effect on the
Company's consolidated financial position or result of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for financial
statements beginning after June 15, 1999. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the FASB amended SFAS No. 133
to defer its effective date to all fiscal quarters and all fiscal years
beginning after June 15, 2000. The Company is evaluating SFAS No.133 and the
impact on existing accounting policies and financial reporting disclosures.
However, the Company has not historically engaged in activities or entered into
arrangements normally associated with derivative instruments.
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." The SOP provides guidance with
respect to accounting for the various types of costs incurred for computer
software developed or obtained for the Company's use. The Company adopted SOP
98-1 in the first quarter of fiscal 1999 which did not have a material effect on
its consolidated financial position or result of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities to be expensed as
incurred, and upon adoption, previously deferred costs should be charged as a
cumulative effect of a change in accounting principle. The statement is
effective for financial statements beginning after December 15, 1998. The
adoption of this standard is not expected to have a material effect on the
Company's consolidated financial position or result of operations.
(2) ACQUISITIONS -
ENVIRONMENTAL WASTE RECYCLING, INC.
On November 5, 1998, the Company acquired Environmental Waste Recycling Inc.
("EWR"), a biosolids management company for approximately $9,487,000. The
acquisition was financed through the issuance of 865,125 shares of Common Stock
with a market value of approximately $2,812,000, $200,000 in debt and
approximately $6,475,000 in cash and acquisition costs. The Common Stock was
valued in accordance with the provisions of Emerging Issues Task Force ("EITF")
95-19. The transaction was recorded using the purchase method of accounting. The
accompanying balance sheet as of December 31, 1998, includes a preliminary
allocation of the purchase price and is subject to final adjustments which
management believes will not be material. The preliminary allocation resulted in
approximately $7,091,000 of goodwill, that is being amortized over 40 years. The
purchase agreement provides for the payment of additional cash and stock
consideration in an aggregate amount not to exceed $2,956,216 in the event
certain financial targets are realized during the twelve-month period after
closing. The Company financed the cash portion of the merger consideration with
borrowings under its credit facility with Bank of America.
RECYC, INC.
On July 24, 1998, the Company acquired Recyc, Inc. ("Recyc"), a biosolids
composting company, for approximately $15,573,000. The acquisition was financed
through the issuance of 1,475,323 shares of Common Stock with a market trading
value of approximately $8,573,000, $5,646,000 in debt, and $1,354,000 in cash
and acquisition costs. The Common Stock issued was valued in accordance with the
provisions of EITF 95-19. The transaction was recorded using the purchase method
of accounting. The accompanying balance sheet as of December 31, 1998, includes
a preliminary allocation of the purchase price and is subject to final
adjustments which management believes will not be material. The accompanying
balance sheet as of December 31, 1998 includes a preliminary allocation
resulting in approximately $14,964,000 of goodwill that is being amortized over
40 years. An unsecured note in the approximate amount of $2,305,000 was issued
to the prior owner with principal due November 2000. The note bears annual
interest of 7% and is payable quarterly with the first payment made in November
1998. The note has no financial covenants. The principal owed under the
promissory note may be offset, and up to 375,000 of the shares issued to the
prior owners may be returned to the Company if certain postclosing conditions
are not met. In connection with the acquisition, the Company entered into a
lease agreement with an option to purchase with the prior owners, as trustees of
a family trust of said stockholders, providing for the lease by Recyc of a
composting facility. In addition, the Company entered into a transportation
agreement with an initial term of two years with Recyc Trucking, Inc., ("RTI"),
a company owned by the prior owners, for the provision by RTI of certain
transportation services relating to Recyc's operations.
F-10
<PAGE> 70
A&J CARTAGE AND RELATED COMPANIES
On June 23, 1998, the Company purchased the stock of A&J Cartage, Inc., a
Wisconsin company, Michigan Organic Resources, Inc., a Michigan company, and A&J
Cartage Southeast, Inc., a Florida company (collectively "A&J") all of which
provide biosolids management services, for approximately $19,802,000. The
acquisitions were financed through the issuance of 1,812,533 shares of Common
Stock with a market trading value of approximately $12,398,000, approximately
$5,823,000 in debt and $1,581,000 in cash and acquisition costs. The Common
Stock issued was valued in accordance with the provisions of EITF 95-19. The
transactions were recorded using the purchase method of accounting. The
accompanying balance sheet as of December 31, 1998, includes a preliminary
allocation of the purchase price and is subject to final adjustments which
management believes will not be material. The preliminary allocation resulted in
approximately $17,372,000 of goodwill that is being amortized over 40 years. The
unsecured notes issued to the prior owner are payable in quarterly installments
with the first installment due January 1, 1999. The notes bear annual interest
rate of 7%. The notes have no financial covenants.
The Company purchased all of the common stock of A&J, Recyc and EWR during 1998.
The assets acquired and liabilities assumed were as follows for the year ended
December 31, 1998.
<TABLE>
<S> <C>
Net cash paid including acquisition costs $ 9,410,000
Fair value of tangible assets acquired (6,091,000)
Liabilities assumed 655,000
Notes payable - Issued and Assumed 11,669,000
Common Stock issued 23,783,000
------------
Goodwill $ 39,426,000
============
</TABLE>
BFI ORGANICS DIVISION
Effective August 1, 1997, the Company purchased certain assets and revenue
contracts of the Organics Division of Browning Ferris Industries, Inc. in the
District of Columbia, Georgia, Maryland, Ohio, Pennsylvania, and Virginia for
approximately $946,000. The acquisition was financed through the issuance of
third-party debt. The debt bears an interest rate equal to 30 day commercial
paper plus 2.77%.
PIMA GRO SYSTEMS, INC.
Effective July 1, 1996, the Company acquired all the issued and outstanding
stock of Pima Gro Systems, Inc., and Pima Gro Systems 2, Inc. (collectively,
PimaGro), a company engaged in the business of recycling and transportation of
biosolids. The aggregate purchase price was approximately $3,096,000, consisting
of approximately $1,277,000 in cash, $1,595,000 in notes payable and 155,000
shares of the Company's Common Stock valued at approximately $223,000, subject
to an additional contingent sum on the purchase price of $5.20 for each dollar
by which the pretax earnings of PimaGro, for each of the fiscal years during
1996 through 1998, exceed the base amount of $380,000 in 1996 and, subject to
certain adjustments to the base amount, during the two following fiscal years.
The additional contingent sum may be payable by the Company, if at all, in cash,
Common Stock or promissory notes, or any combination thereof. Such amounts which
may be payable as contingent sum payments will be held in escrow until March 31,
1999, and subject to reduction based on amounts expended by the Company for
certain capital expenditures and costs reserved for the development of certain
business sites. As of December 31, 1998, there were no additional contingent
amounts payable by the Company. The acquisition has been accounted for under the
purchase method and, accordingly, the operating results of PimaGro have been
included in the operating results of the Company since the date of acquisition.
The excess of the total acquisition cost over the fair value of the net assets
acquired (goodwill) in the amount of $1,419,000 is being amortized on a
straight-line basis over 40 years.
The Company purchased all of the common stock of PimaGro during 1996. The assets
acquired and liabilities assumed were as follows for the year ended December 31,
1996:
<TABLE>
<S> <C>
Net cash paid $ 1,277,000
Fair value of tangible assets acquired (4,792,000)
Liabilities assumed 3,116,000
Notes payable - issued 1,595,000
Common Stock issued 223,000
------------
Goodwill $ 1,419,000
============
</TABLE>
The following unaudited pro forma information for the periods set forth below
gives effect to the acquisitions of A&J, Recyc and
F-11
<PAGE> 71
EWR as if they had occurred at the beginning of 1997. The unaudited pro forma
information is presented for information purposes only and is not necessarily
indicative of actual results which might have occurred if the acquisitions had
been made at the beginning of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 (UNAUDITED)
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 48,272,298 50,133,695
Net income (loss) before Preferred Stock Dividends 1,255,573 2,993,880
Net earnings (loss) applicable to Common Stock (2,679,012) 2,993,880
Net earnings (loss) per share
Basic (.20) .24
Diluted (.20) .23
</TABLE>
ACQUISITION OF NATIONAL RESOURCE RECYCLING, INC.
During March 1999, Synagro Technologies completed the acquisition of all the
common stock of National Resource Recycling, Inc. ("NRR"), in a business
combination accounted for as a "pooling-of-interests" transaction. NRR,
headquartered in Michigan, provides biosolids management services. Synagro
issued 1,000,001 shares of common stock in exchange for all of the common stock
of NRR. There were no transactions between Synagro and NRR during the periods
prior to the business combination.
The following table summarizes the restated revenues, net income and
per share data of Synagro after giving effect to the pooling transaction (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income-
As previously reported in 1998 Form 10-K/A $22,977 $(7,589) $25,303 $ 832 $29,967 $(4,672)
NRR ........................................... 1,198 5 2,733 284 3,598 200
------- ------- ------- ------- ------- -------
As restated ............................... $24,175 $(7,582) $28,036 $ 1,116 $33,565 $(4,472)
======= ======= ======= ======= ======= =======
Basic earnings per share-
As previously reported in 1998 Form 10-K/A $ (1.21) $ 0.11 $ (0.46)
NRR............................................ .17 0.02 0.06
------- ------- -------
As restated................................ $ (1.04) $ 0.13 $ (0.40)
======= ======= =======
Diluted earnings per share-
As previously reported in 1998 Form 10-K/A $ (1.21) $ 0.11 $ (0.46)
NRR............................................ .17 0.02 0.06
------- ------- -------
As restated................................ $ (1.04) $ 0.13 $ (0.40)
======= ======= =======
</TABLE>
(3) PROPERTY, MACHINERY AND EQUIPMENT --
Property, machinery and equipment consists of the following:
F-12
<PAGE> 72
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL --------------------------
LIVE-IN YEARS 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Land N/A $ 444,958 $ 576,884
Buildings 20 -- 252,093
Machinery and equipment 3-10 17,116,636 13,949,911
Office furniture and equipment 3-10 552,264 380,800
Leasehold improvements 7-20 197,265 106,100
Construction in process -- 225,644 116,725
----------- -----------
18,536,767 15,382,513
Less- Accumulated depreciation and amortization 6,142,749 5,493,930
----------- -----------
$12,394,018 $ 9,888,583
=========== ===========
</TABLE>
(4) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS --
Activity of the Company's allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Balance at beginning of year $ 189,862 $ 287,514
Deductions for recoveries and for uncollectible
receivables written off (13,092) (97,652)
Allowance for doubtful accounts of purchased companies
at acquisition date 20,000 --
--------- ---------
Balance at end of year $ 196,770 $ 189,862
========= =========
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable $2,790,668 $2,580,887
Accrued legal and other claims costs 287,378 937,065
Accrued salaries and benefits 102,808 84,495
Accrued interest 294,723 77,025
Other accrued expenses 567,935 467,905
---------- ----------
Total $4,043,512 $4,147,377
========== ==========
</TABLE>
(5) AGENCY RIGHTS --
The Company had the exclusive agency rights to market the "N-Viro Process" in
the southwestern United States. The "N-Viro Process" is a process to convert
biological organic waste into marketable products. The Company acted as the
agent to collect all of the fees from any licensees and to pay to N-Viro
International any amounts not payable to the Company as compensation pursuant
to the agency and license agreements.
In December 1996, the Company decided to wind down and discontinue its
operations relating to the N-Viro Process and accordingly determined that a
permanent impairment had occurred in the value of the agency rights. The
carrying value of the agency rights of approximately $1,178,000 was charged to
operations. In addition, the Company sold certain assets related to these
operations and recorded a charge to operations in the fourth quarter of 1996
amounting to approximately $1,200,000 to adjust the carrying values of these
assets to their estimated fair market values. These charges are included in
"loss on assets held for sale and other special charges (credits)" in the
accompanying consolidated statements of operations. The remaining assets in the
amount of approximately $397,000 in 1998 and 1997, respectively, have been
classified as property, machinery and equipment in the accompanying
consolidated balance sheet at December 31, 1998 and 1997.
F-13
<PAGE> 73
(6) LONG-TERM DEBT OBLIGATIONS --
Long-term debt obligations consist of the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Term loan with a bank, repaid with credit facility $ -- $ 4,000,000
Revolving credit facility with a bank 18,200,000 1,037,270
Economic development revenue bonds 630,000 945,000
Note payable to a financial institution, maturing in varying
Installments through the year 2002, secured by certain assets of the
Company, with an interest rate of 4% 245,757 300,000
Capital lease obligations 233,557 297,177
Notes payable to financial institution and individuals, maturing in varying
Installments through the year 2001, secured by equipment with
interest rates ranging from 8% to 11% 2,341,883 2,312,424
----------- -----------
Total debt 21,651,197 8,891,871
Less:
Current maturities -- 2,777,871
----------- -----------
Long-term debt, net of current maturities $21,651,197 $ 6,114,000
=========== ===========
</TABLE>
CREDIT FACILITY
On October 7, 1998, the Company obtained a $40 million bank credit facility
(the "Facility"). The Facility was used to retire certain debt payable to
various individuals and financial institutions. The Facility is secured by
substantially all of the Company's assets.
The Facility expires October 5, 2001, and bears interest at the bank eurodollar
rate plus a margin based upon a pricing schedule per the Facility agreement
(7.4% at December 31, 1998). The weighted average interest rate in 1998 was
7.51%. The Facility is subject to a borrowing base equal to 4.25 times earnings
before interest, taxes, depreciation and amortization ("EBITDA") based on a
trailing twelve months calculation, as defined in the Facility, less funded
debt as defined, (which includes notes payable to prior owners, which can be
refinanced through the Facility), until June 30, 1999, 4.00 until September 30,
1999, and 3.75 times EBITDA thereafter. Amounts available for additional
borrowing under the Facility at December 31, 1998 totaled approximately
$2,579,000.
The Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payments of cash dividends,
limits the issuance of indebtedness and requires the Company to comply with
certain financial covenants, including a minimum net worth requirement, maximum
senior and total debt to pro forma EBITDA and interest coverage ratio. The
Company was in compliance with all covenants as of December 31, 1998.
The Facility was used to payoff the Company's previous facility with LaSalle
National Bank ("LaSalle") which had been obtained through two of the Company's
subsidiaries. The previous facility consisted of a $5 million revolving line of
credit and a $5 million term loan. The amount under the line of credit was
subject to a borrowing base of 85% of eligible accounts receivable, as defined
in the agreement. The term loan required principal payments of $1 million a
year. The revolving line of credit required the Company to direct all its
account debtors to make all payments on the accounts to a lockbox designated
by, and under the control of, LaSalle. Additionally, the bank had the right to
accelerate borrowings outstanding in the event the bank reasonably felt
insecure for any material reason. As a result, in order to comply with EITF
Pronouncement 95-22, the Company classified the revolving line of credit
portion of the Facility as a current liability in the accompanying balance
sheet as of December 31, 1997. This previous facility was to expire in
September 1999.
REVENUE BONDS
The economic development revenue bonds are expected to be paid in September
1999. Interest was payable at 6.7 and 6.9 percent per annum in 1998 and 1997,
respectively. Included in the accompanying consolidated balance sheets as of
December 31, 1998 and 1997, is restricted cash of $680,656 and $346,312,
respectively, for future payment of principal and interest on the bonds.
NOTES PAYABLE TO PRIOR OWNERS
The Company issued notes in the amount of $8,050,311 to prior owners of certain
purchased companies as partial consideration of the acquisition price. These
notes had a balance of $6,361,822 and $398,890 at December 31, 1998 and 1997
respectively. The terms of
F-14
<PAGE> 74
the outstanding notes include varying principal installments starting August
1998 and continuing through November 2000 and annual interest rates of 7% to be
paid quarterly. The notes have no financial covenants. The note related to the
Recyc acquisition with a balance of approximately $2,212,000 at December 31,
1998 may be offset if certain postclosing conditions are not met. No adjustments
have been made as of December 31, 1998. Additionally, the Company has notes to
prior owners relating to non-compete agreements; these notes have a balance of
$317,217 at December 31, 1998. The notes are paid in varying installments
starting July 1998, and have an annual imputed interest rate of 9%. These notes
have no financial covenants.
At December 31, 1998, future principal payments of total long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING LONG-TERM PAYABLE TO
DECEMBER 31, DEBT AFFILIATE/STOCKHOLDER
----------- ----------- ---------------------
<S> <C> <C>
1999 $ 1,978,145 $ 2,151,768
2000 538,425 4,343,938
2001 18,662,199 100,000
2002 354,048 83,333
2003 and thereafter 118,380 --
----------- -----------
Total $21,651,197 $ 6,679,039
=========== ===========
</TABLE>
The Company had current maturities on total long-term debt of $4,129,913 at
December 31, 1998. The Company has the ability and intent to refinance such
maturities related to long term debt with the Facility and has therefore
classified such indebtedness as long-term in the consolidated balance sheet as
of December 31, 1998. The Company estimates the fair value of long-term debt as
of December 31, 1998 and 1997, to be approximately the same as the recorded
value.
CAPITAL LEASES
The Company operates under lease agreements which are accounted for as capital
leases. The capitalized costs and accumulated depreciation of equipment under
capital leases were as follows:
<TABLE>
<CAPTION>
ASSET BALANCES AT
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Equipment $391,370 $391,370
Less: Accumulated depreciation 61,844 22,707
-------- --------
$329,526 $368,663
======== ========
</TABLE>
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of present net minimum lease
payments as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1999 $ 93,122
2000 93,122
2001 93,122
--------
Total minimum lease payments 279,366
Less: Amount representing interest 45,809
--------
Present value of minimum lease payments $233,557
========
</TABLE>
F-15
<PAGE> 75
(7) INCOME TAXES --
Significant components of the Company's deferred tax liabilities and assets for
federal income taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets-
Net operating loss carryforwards $ 3,992,000 $ 3,785,000
Accrual not currently deductible for tax purposes 157,000 240,000
Allowance for bad debts 200,000 65,000
Write-off of assets not currently deductible for tax purposes 520,000 505,000
Other 1,000 1,000
----------- -----------
Total deferred tax assets 4,870,000 4,596,000
Valuation allowance for deferred tax assets (4,025,000) (4,079,000)
Deferred tax liability-
Differences between book and tax bases of fixed assets (845,000) (517,000)
----------- -----------
Net deferred tax liability $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1998, the Company has generated net operating loss ("NOL")
carryforwards of approximately $11,730,000 available to reduce future income
taxes. These carryforwards begin to expire in 2004 through 2018. A change in
ownership, as defined by federal income tax regulations, could significantly
limit the Company's ability to utilize its carryforwards. Accordingly, the
Company's ability to utilize its NOLs to reduce future taxable income and tax
liabilities may be limited. Additionally, because federal tax laws limit the
time during which these carryforwards may be applied against future taxes, the
Company may not be able to take full advantage of these attributes for federal
income tax purposes. As the Company has incurred losses in recent years and the
utilization of these carryforwards could be limited as discussed above, a
valuation allowance has been established to fully offset the net deferred tax
asset at December 31, 1998 and 1997. The valuation allowance decreased $54,000
and increased $253,000 for the year ended December 31, 1998 and 1997,
respectively, due to the Company's tax losses and changes in fixed asset basis
differences.
(8) COMMITMENTS AND CONTINGENCIES --
LEASES
The Company leases certain facilities for its corporate and operations offices
under non-cancelable long-term lease agreements. Minimum annual rental
commitments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999 $ 1,065,650
2000 733,206
2001 469,590
2002 415,137
2003 and thereafter 6,656,999
-----------
$ 9,340,582
===========
</TABLE>
Rental expense was $1,060,703, $530,685 and $633,751 for 1998, 1997 and 1996,
respectively.
Concurrent with certain acquisitions, the Company entered into various
agreements with prior owners to lease land and buildings used in the Company's
operations. The terms of these leases range from three years to thirty years
and provide for certain escalations in rental expense. One such lease which
expires in 2028 has an option to terminate upon 30 days notice in the event a
conditional use permit (as defined in the agreement) relating to the leased
land expires. Additionally the Company has a 5 year option to purchase such
leased property for $2,250,000 which expires in July 2003. Currently, the
Company pays rent in the amount of $36,000 per annum for the first three years
and $192,000 per annum thereafter on the lease. The charge for the lease costs
are being expensed on a straight-line basis. Included in 1998 rent expense
above is approximately $210,500 of rent paid to related parties.
LITIGATION
The Company is involved in litigation and claims arising in the ordinary course
of its business. Management believes, based on consultation with legal counsel
and accruals provided, that the ultimate outcome of these matters will not have
a material adverse
F-16
<PAGE> 76
impact on the Company's operations or financial position.
(9) STOCKHOLDERS' EQUITY --
COMMON STOCK AND WARRANTS
In October 1995, the Company completed a secondary public offering of its
Common Stock. The offering consisted of 500,000 units at $12.00 per unit, each
unit consisting of six shares of Common Stock and six redeemable Common Stock
purchase warrants. The 3,000,000 warrants have an exercise price of $2.40 per
share and expire in October 2000. These warrants are redeemable by the Company
at $0.10 per warrant, subject to certain events occurring. The underwriters
were issued a warrant which expires in October 2000 to purchase 50,000 units
(includes 300,000 warrants) at $16.20 per unit. During 1998 approximately 4,646
warrants were converted to Common Stock.
On December 23, 1996, the Company called the 3,000,000 warrants for redemption
on February 22, 1997. Prior to redemption, 1,324,243 warrants were converted
into Common Stock providing net proceeds to the Company of $3,117,636 in 1997.
In February 1997, the remaining 1,675,757 warrants were redeemed by the Company
for $167,576.
The Company had issued warrants to purchase 16,667 shares of Common Stock, which
were exercisable at $90.00 per share that expired December 1998.
On October 7, 1998 the Company issued warrants to purchase 170,000 shares of
Common Stock, in connection with the new Facility (Note 6). The warrants are
exercisable at $6.00 and expire October 2002. The Company estimated the fair
market value of the warrants to be approximately $200,000, which was recorded
as deferred loan costs and additional paid in capital. These deferred loan
costs are being amortized over the term of the credit facility.
PREFERRED STOCK -
The Company is authorized to issue up to 10,000,000 shares of Preferred Stock.
The Preferred Stock may be issued in one or more series or classes by the Board
of Directors of the Company prior to issuance of the shares. Each such series
or class shall have such powers, preferences, rights and restrictions as
determined by resolution of the Board of Directors. Series A Junior
Participating Preferred Stock will be issued upon exercise of the Stockholder
Rights described below.
SERIES B REDEEMABLE PREFERRED STOCK
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock for $3,500,004. The Series B Preferred Stock is convertible by the
holders to Common Stock at a rate of 1:1, with a beneficial conversion feature
permitting the shareholders to convert their holdings to Common Stock at $2.40.
The market price of the Common Stock at date of issuance was $4.81. The Company
recognized the value of the beneficial conversion feature of approximately $3.5
million as a Preferred Stock dividend. The value of such Preferred Stock
dividend had no impact on the Company's cash flows, but reduced basic and
diluted earnings available to holders of Common Stock.
On June 10, 1998, a cash dividend of $420,000 was paid to the holders of Series
B Preferred Stock as consideration for converting the shares of Series B
Preferred Stock held by them into 1,458,335 shares of Common Stock. All of the
shares of Series B Preferred Stock were converted to Common Stock at that time.
EARNINGS PER SHARE
The FASB issued SFAS No. 128, "Earnings Per Share" in February 1997.
Implementation of SFAS No. 128 is required for periods ending after December
15, 1997. SFAS No. 128 requires dual presentation of earnings per share
("EPS"); basic EPS and diluted EPS. Basic EPS excludes dilution and is computed
by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock. For purposes of the calculation,
outstanding stock options, warrants and redeemable preferred stock are
considered Common Stock equivalents. For the year ended December 31, 1997, the
difference in weighted average numbers of Common Stock between basic and
diluted earnings per share represents the impact of stock options. The adjusted
number of shares for the years ended December 31, 1998 and December 31, 1996
that would be increased related to stock options were approximately 990,772 and
- -0-, respectively; however, diluted per share amounts are not applicable for
loss periods. The following
F-17
<PAGE> 77
table summarizes the basic EPS and diluted EPS computations for the fiscal years
1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Net income (loss) before redeemable preferred stock dividends $ (537,418) $ 1,115,721 $ (7,582,137)
Redeemable preferred stock dividends (3,934,585) -- --
------------ ------------- ------------
Net earnings (loss) on common stock $ (4,472,003) $ 1,115,721 $ (7,582,137)
============ ============= ============
Basic earnings (loss) per share:
Earning per share prior to preferred dividends $ (.05) .13 $ (1.04)
Preferred stock dividends (.35) -- --
------------ ------------- ------------
Basic earnings (loss) per common share (.40) .13 $ (1.04)
Diluted earnings (loss) per share:
Earnings per share prior to preferred dividends (.05) .13 (1.04)
Preferred Stock Dividends (.35) -- --
------------ ------------- ------------
Diluted earning (loss) per common share (.40) .13 $ (1.04)
Weighted average number of common shares, basic $ 11,207,249 $ 8,545,114 $ 7,266,760
Weighted average shares outstanding, diluted 11,207,249 8,740,345 7,266,760
</TABLE>
STOCKHOLDERS' RIGHTS PLAN
In December 1996, the Company adopted a stockholders' rights plan (the "Rights
Plan"). The Rights Plan provides for a dividend distribution of one preferred
stock purchase right ("Right") for each outstanding share of the Company's
Common Stock, to stockholders of record at the close of business on January 10,
1997. The Rights Plan is designed to deter coercive takeover tactics and to
prevent an acquirer from gaining control of the Company without offering a fair
price to all of the Company's stockholders. The Rights will expire on December
31, 2006.
Each Right entitles stockholders to buy one one-thousandth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $10. The Rights are exercisable only if a person or group
acquires beneficial ownership of 15% or more of the Company's Common Stock or
commences a tender or exchange offer which, if consummated, would result in
that person or group owning 15% or more of the Common Stock of the Company.
However, the Rights will not become exercisable if Common Stock is acquired
pursuant to an offer for all shares which a majority of the Board of Directors
determines to be fair to and otherwise in the best interests of the Company and
its stockholders. If, following an acquisition of 15% or more of the Company's
Common Stock, the Company is acquired by that person or group in a merger or
other business combination transaction, each Right would then entitle its
holder to purchase common stock of the acquiring company having a value of
twice the exercise price. The effect will be to entitle the Company
stockholders to buy stock in the acquiring company at 50% of its market price.
The Company may redeem the Rights at $.001 per Right at any time on or prior to
the tenth business day following the acquisition of 15% or more of its Common
Stock by a person or group or commencement of a tender offer for such 15%
ownership.
(10) STOCK OPTION PLANS
At December 31, 1998, the Company had outstanding stock options granted under
the Amended and Restated 1993 Stock Option Plan ("the Plan") for officers,
directors and key employees of the Company.
Under the Plan, the Company has reserved 1,325,171 shares of Common Stock for
issuance. The exercise price of options granted shall be at least 100 percent
(110 percent for 10 percent or greater stockholders) of the fair value of
Common Stock on the date of grant. Options must be granted within 10 years from
the date of the Plan and become exercisable at such times as determined by the
Plan committee. Options are exercisable for no longer than five years for
certain 10 percent or greater stockholders and for no longer than 10 years for
others.
F-18
<PAGE> 78
A summary of the Company's stock option plans as of December 31, 1998, 1997 and
1996, and changes during those years is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISE
OPTION PRICE RANGE PRICE
------------ --------------- --------
<S> <C> <C> <C>
Options outstanding at December 31, 1995 91,928 $ 2.00 to 10.80 9.24
Granted 174,667 2.00 2.00
Canceled/expired (162,662) 2.00 to 10.80 5.12
Exercised (3,333) 2.00 2.00
---------
Options outstanding at December 31, 1996 100,600 2.00 to 10.80 3.57
Granted 206,000 2.00 to 3.50 2.13
Canceled/expired (29,000) 2.00 to 10.80 2.91
Exercised (5,000) 2.00 2.00
---------
Options outstanding at December 31, 1997 272,600 2.00 to 8.25 2.58
Granted 772,000 2.75 to 5.75 2.91
Canceled/expired (11,556) 2.00 2.00
Exercised (25,438) 2.00 2.00
---------
Options outstanding at December 31, 1998 1,007,606 2.00 - 8.25 2.85
=========
Exercisable at December 31, 1998 430,106 2.00 - 8.25 3.20
=========
</TABLE>
At December 31, 1998, there were 267,794 options for shares of Common Stock
reserved under the Plan for the future grants.
OTHER OPTIONS
In addition to options issuable under the Plan, the Company has other options
outstanding to employees and directors of the Company. The options were issued
at exercise prices equal to the fair market value at the grant date of the
options.
The following summarizes the stock option transactions of the "other" options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISE
OPTION PRICE RANGE PRICE
------------ --------------- --------
<S> <C> <C> <C>
Options outstanding at December 31, 1995 400,000 $ 2.00 $ 2.00
Granted 221,296 2.00 2.00
---------
Options outstanding at December 31, 1996 621,296 2.00 2.00
Granted 806,800 2.00 to 3.38 3.03
---------
Options outstanding at December 31, 1997 1,428,096 2.00 to 3.38 2.58
Granted 1,400,000 2.75 to 6.94 4.29
Canceled (162,163) 3.38 3.38
---------
Options outstanding at December 31, 1998 2,665,933 2.00 to 6.94 4.09
---------
Exercisable at December 31, 1998 1,662,602 $ 2.00 to 6.94 $ 4.06
=========
</TABLE>
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, which is effective for fiscal years beginning
after December 15, 1995, establishes financial accounting and reporting
standards for stock-based employee compensation plans and for transactions in
which an entity issues its equity instruments to acquire goods and services
from non-employees. SFAS No. 123 requires, among other things, that
compensation cost be calculated for fixed stock options at the grant date by
determining fair value using an option-pricing model. The Company has the
option of recognizing the compensation cost over the vesting period as an
expense in the income statement or making pro forma disclosures in the notes to
the financial statements for employee stock-based compensation.
The Company continues to apply APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
in the accompanying consolidated financial statements for its stock option
plans. Had the
F-19
<PAGE> 79
Company elected to apply SFAS No. 123, the Company's net loss and loss per share
would have approximated the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)
As reported....................... $(4,472,003) $ 1,115,721 $(7,582,137)
Pro forma for FAS No. 123......... $(5,743,474) (1,025,384) (7,774,558)
Diluted earnings (loss) per share-
As reported....................... $ (.40) $ .13 $ (1.04)
Pro forma for FAS No. 123......... (.51) (.12) (1.07)
</TABLE>
The following ranges of options were outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
SHARES UNDER EXERCISE PRICE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTION RANGE EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE
------------ -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
2,225,969 $2.00 - 3.00 $2.48 8.7 years 1,299,138
927,637 3.01 - 4.50 3.31 8.4 601,637
106,333 4.51 - 6.75 4.98 8.0 45,000
413,600 6.76 - 8.25 6.98 9.4 146,933
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model resulting in a weighted average fair value
of $3.59, $2.79, and $.78 per share for grants made during the years ended
December 31, 1998, 1997, and 1996, respectively. The following assumptions were
used for option grants in 1998, 1997, and 1996, respectively: expected
volatility of 92 percent, 70 percent, and 87 percent; risk-free interest rates
of 5.66 percent, 6.45 percent, and 6.47 percent; expected lives of up to 6.3
years and no expected dividends to be paid. The compensation expense included
in the above pro forma net income data, may not be indicative of amounts to be
included in future periods as the fair value of options granted prior to 1995
was not determined.
(11) OTHER CHARGES (CREDITS) TO OPERATIONS --
SALE OF ORGANI-GRO, INC.
In March 1997, the Company sold the operations of Organi-Gro, a wholly-owned
subsidiary, to its former owners. Consideration included two subordinated notes
of approximately $1.4 million, the assumption of approximately $978,000 in debt
and approximately $392,000 in trade payables for which the Company is not
contingently liable. As a result of the sale, the Company recorded a charge to
operations in the fourth quarter of 1996 amounting to approximately $2.5
million to adjust the carrying value of Organi-Gro's net assets to its
estimated fair market value. These charges (credits) are included in "losses on
assets held for sale and other special charges (credits)" for the year ended
December 31, 1996. The first note of approximately $1.152 million ("Note 1") is
to be repaid from the proceeds received from the sale of products by the
purchaser which is to be remitted on a monthly basis with a total amount of
approximately $604,000 due no later than September 16, 1998. The remaining
balance of approximately $548,000 is payable in equal monthly installments of
approximately $11,000 including interest for 59 months. Note 1 bears interest
at an annual rate of 6%. The second note of approximately $308,000 ("Note 2")
is payable in equal monthly installments of $3,700 including interest for 48
months following the first anniversary date of Note 2 with the unpaid balance
due March 31, 2002 and bears interest at an annual rate of 6%. The notes were
reserved at the date of sale due to considerable doubt relative to realization.
In December 1997, Note 2 was substantially paid off. The Company received
Common Stock held by former owners with a market trading value of approximately
$213,000, and charged against the reserve approximately $45,000. The remaining
balance of $50,000 is to be paid off by providing repair services on equipment
in the amount of $1,000 per month with $41,000 remaining outstanding as of
December 31, 1998. Additionally, the Company has received approximately
$332,000 in cash since inception on Note 1. The monthly installments of $11,000
relating to Note 1 have been received on a timely basis and are current,
resulting in a $375,000 balance outstanding as of December 31, 1998. The
portion of Note 1 which had a remaining balance of approximately $445,000,
which was due no later than September 16, 1998, was not paid when due. The
former owners were unable to pay the remainder without liquidating some of the
assets securing the note. The Company agreed to accept $265,000 in cash in full
payment of the installment due, which was received in January 1999. The
remaining balance of the installment due was charged against the allowance.
F-20
<PAGE> 80
The Company has recognized special credits related to such notes of
approximately $721,000 in 1997 and $380,000 in 1998. Based upon historical
collections, the financial condition of the obligor to meet future debt
installments and the underlying value of the assets securing the loan, the
Company expects the unreserved amount of approximately $641,000 at December 31,
1998 to be realizable. Subsequent to year-end through February 26, 1999, the
Company has collected approximately $287,000 on the notes.
SEVERANCE CHARGES
During 1998, the Company recorded a charge of approximately $320,000 related to
severance costs of two former officers. The charge is included in "Other
Charges (credits)" for the year ended December 31, 1998.
(12) EMPLOYEE BENEFIT PLANS --
Certain of the Company's subsidiaries sponsor various defined contribution
retirement plans for full time and some part-time employees. The plans cover
employees at all of the Company's operating locations. The defined contribution
plans provide for contributions ranging from 1% to 15% of covered employees'
salaries or wages. The Company may make a matching contribution as a percentage
set at the end of each plan year. The matching contributions totaled
approximately $46,000 for 1998, approximately $28,000 for 1997 and
approximately $22,000 for 1996.
(13) SUBSEQUENT EVENTS --
Subsequent to December 31, 1998 and through June 30, 1999, the Company acquired
three biosolids management companies for a total purchase price of
approximately $22,451,000. These acquisitions were funded through the issuance
of approximately 3,045,000 shares of Common Stock and $13,427,000 in cash. The
cash was funded through the Company's credit facility. The transactions were
accounted for using the purchase method of accounting.
(14) EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED) --
The Company entered into a $110.0 million Amended and Restated Senior Credit
Agreement by and among the Company, Bank of America, N.A. and certain other
lenders dated as of January 27, 2000, borrowed $20,419,000 of subordinated
indebtedness from GTCR Capital Partners, L.P., a Delaware Limited Partnership,
pursuant to a subordinated loan agreement dated January 27, 2000, and sold
17,778.224 shares of Series C Convertible Preferred Stock, and 2,641.176 shares
of Series D Convertible Preferred Stock to GTCR Fund VII, L.P., a Delaware
Limited Partnership for an aggregate purchase price of $20,419,000 to refinance
its existing indebtedness and fund the 2000 Acquisitions and Pending
Acquisitions. In connection with the borrowings under the subordinated
indebtedness of $20,419,000 ($20,609,000 including the Pending Acquisitions),
the Company issued warrants to GTCR Capital Partners L.P., which were
simultaneously converted for $.01 per share into Preferred Stock by to GTCR
Capital Partners L.P., accordingly GTCR Capital Partners L.P. received an
additional 2,917.058 shares of Preferred Stock, for normal consideration. The
present value of the value received has been reflected as additional debt
issuance cost in the accompanying pro forma balance sheet. Both the Preferred
Stock and warrants that were simultaneously converted to Preferred Stock have a
beneficial conversion feature to convert their holdings to Common Stock at a
market price of $2.50. The market price of the Common Stock at date of issuance
was $5.16. The Company recognized the value of the beneficial conversion feature
of approximately $27.5 million as a Preferred Stock dividend. The value of such
Preferred Stock dividend has no impact on the Company's cash flows, but reduces
basic and diluted earnings available to holders of Common Stock. This
transaction will be recorded in the first quarter of 2000.
During 2000, the Company purchased Residual Technologies, Limited Partnership,
and certain of its affiliates, Ecosystematics, Inc., Davis Water Management,
Inc. and AKH Water Management, Inc., the transactions were accounted for using
the purchase method of accounting.
Common stock shares 1,325,000
Common stock issued $ 5,962,500
Cash 32,995,383
Less: Historical - net assets
acquired 1,428,201
Transactions Costs 4,021,000
------------
Goodwill $ 41,550,682
------------
F-21
<PAGE> 81
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 337,261 $ 414,712
Restricted cash, current portion -- 680,656
Accounts receivable, net 11,267,929 6,523,944
Note receivable 118,674 436,325
Prepaid expenses and other current assets 2,303,530 1,679,381
------------ ------------
Total current assets 14,027,394 9,735,018
Property, machinery & equipment, net 16,264,747 12,394,018
Other Assets:
Goodwill, net 61,999,721 43,130,904
Notes Receivable, long-term portion 183,396 262,829
Other assets 1,410,970 1,099,714
------------ ------------
Total assets $ 93,886,228 $ 66,622,483
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,950,334 $ 4,043,512
Current portion of notes payable to prior owners 2,062,178 --
Current portion of long-term debt 756,326 --
----------- ------------
Total current liabilities 7,768,838 4,043,512
Long term liabilities:
Long term debt - net 39,063,350 21,651,197
Notes payable to prior owners 938,790 6,679,039
------------ ------------
Total long term liabilities 40,002,140 28,330,236
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.002 par value, 10,000,000 shares
authorized, none issued and outstanding -- --
Common Stock, $.002 par value, 100,000,000 shares authorized,
17,692,489 and 13,384,138 issued and outstanding 35,352 28,503
Additional and paid in capital 66,370,366 56,495,873
Accumulated deficit (20,290,468) (22,275,641)
------------ ------------
Total stockholders' equity 46,115,250 34,248,735
------------ ------------
Total liabilities and stockholders' equity $ 93,886,228 $ 66,622,483
============ ============
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
F-22
<PAGE> 82
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales................................... $ 15,856,641 $ 9,849,430 $ 39,834,873 $ 22,505,130
Cost of services............................ 11,271,832 8,053,428 29,785,853 19,468,751
---------------- ---------------- ---------------- ----------------
Gross profit................................ 4,584,809 1,796,002 10,049,020 3,036,379
Selling, general and administrative......... 1,732,170 1,194,806 4,952,622 2,614,613
expenses
Amortization of goodwill.................... 433,848 242,696 1,101,876 357,140
Special charges (credits), net.............. -- 256,511 -- 107,501
---------------- ---------------- ---------------- ----------------
Income (loss) from operations............... 2,418,791 101,989 3,994,522 (42,875)
Other income (expense), net............... 168,619 79,144 219,651 342,144
Interest expense.......................... (913,014) (500,889) (2,229,000) (1,023,925)
---------------- ---------------- ---------------- ----------------
Income (loss) before provision for
income taxes................................ 1,674,396 (319,756) 1,985,173 (724,656)
Provision for income taxes -- -- -- --
---------------- ---------------- ---------------- ----------------
Net income (loss) before redeemable
preferred stock dividends................. 1,674,396 (319,756) 1,985,173 (724,656)
Redeemable preferred stock dividends........ -- -- -- 3,934,588
---------------- ---------------- ---------------- ----------------
Net earnings (loss) on common stock......... $ 1,674,396 $ (319,756) $ 1,985,173 $ (4,659,244)
================ ================ ================ ================
Income (loss) per common share equivalent:
Net income (loss), basic.................. $ 0.09 $ (0.02) $ 0.12 $ (0.45)
Net income (loss), diluted................ $ 0.09 $ (0.02) $ 0.12 $ (0.45)
Weighted average shares outstanding,
basic....................................... 17,641,495 13,030,373 16,095,245 10,295,891
Weighted average shares outstanding,
diluted..................................... 18,997,522 13,030,373 17,073,245 10,295,891
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
F-23
<PAGE> 83
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) before redeemable preferred stock
dividends............................................... $ 1,985,173 $ (724,656)
Adjustments to reconcile net income (loss)
provided by operating activities
Depreciation and amortization......................... 3,202,631 1,544,618
Gain on sale of equipment............................. (126,531) (174,111)
Special charges (credits), net........................ -- 29,351
Change in operating assets and liabilities,
net of effects of acquired businesses:
Accounts receivable................................... (3,151,020) (752,240)
Prepaid expenses and other............................ (782,048) 516,896
Other assets.......................................... -- 98,122
Accounts payable and accrued expenses................. 285,069 1,448,560
------------ ------------
Net cash provided by operating activities.................... 1,413,274 1,986,540
Cash flows from investing activities:
Additions to property, machinery & equipment.......... (3,240,064) (1,698,578)
Proceeds from sale of equipment....................... 835,087 953,456
Cash paid for acquired business, net of cash acquired. (13,802,090) (2,807,119)
Proceeds from notes receivable........................ 397,084 --
Sales (purchases) of short-term investments, net...... -- 172,925
------------ ------------
Net cash used in investing activities........................ (15,809,983) (3,379,316)
Cash flows from financing activities:
Proceeds from debt.................................... 18,568,188 2,019,743
Payments on debt...................................... (5,786,715) (2,973,992)
Decrease in restricted cash........................... 680,656 69,346
Sale of redeemable preferred stock.................... -- 3,480,432
Preferred stock dividends............................. -- (420,001)
Exercise of options and warrants...................... 857,129 58,537
------------ ------------
Net cash provided by financing activities.................... 14,319,258 2,234,065
------------ ------------
Net increase (decrease) in cash and cash equivalents......... (77,451) 841,289
Cash and cash equivalents, beginning of period............... 414,712 281,043
------------ ------------
Cash and cash equivalents, end of period..................... $ 337,261 $ 1,122,332
============ ============
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
F-24
<PAGE> 84
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
SEPTEMBER 30,
---------------------
1999 1998
---------- ---------
(UNAUDITED)
<S> <C> <C>
Supplemental Cash Flow Information......
Interest paid during the period........ $2,089,185 $ 822,047
Taxes paid during the period........... -- --
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock ("Preferred Stock") with a beneficial conversion feature. The Company
recognized the value of the beneficial conversion feature of $3,514,587 as a
preferred dividend. On September 10, 1998, the Preferred Stock was converted to
1,458,335 shares of common stock.
On July 9, 1999, the Company entered into a lease agreement to purchase ten
trucks with a purchase price of approximately $630,000. The transaction was
treated as a non-cash transaction.
F-25
<PAGE> 85
SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
General
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Registrant ("Synagro Technologies, Inc." or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission.
These condensed consolidated financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for the fair
presentation of such financial statements for the periods indicated. Certain
information relating to the Company's organization and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles has been condensed or omitted in this Form 10-Q
pursuant to Rule 10-01 of Regulation S-X for interim financial statements
required to be filed with the Securities and Exchange Commission. However, the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. The results for the nine months ended
September 30, 1999, are not necessarily indicative of future operating results.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K, as amended, for the year ended December 31, 1998, and the
Company's current report on Form 8-K/A filed on July 7, 1999.
The accounting policies followed by the Company in preparing interim
consolidated financial statements are consistent with those described in the
"Notes to Consolidated Financial Statements" in the Company's Form 10-K, as
amended, for the year ended December 31, 1998, and the Company's current report
on Form 8-K/A filed on July 7, 1999.
The Company is engaged in the biosolids management business throughout the
United States. The Company does this through beneficial reuse of organic
materials, transportation and monitoring of biosolids, and the marketing of end
products from the treatment of such materials.
ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about segments of an
enterprise and related information." SFAS No. 131 establishes new standards for
segment reporting which are based on the way management organizes segments
within a Company for making operating decisions and assessing performance.
Through September 30, 1999, the Company operated in one segment, namely, the
biosolids management business segment.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." The
SOP provides guidance with respect to accounting for the various types of costs
incurred for computer software developed or obtained for the Company's use. The
Company adopted SOP 98-1 in the first quarter of fiscal 1999 and it had no
effect on the Company's consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." At adoption, SOP 98-5 requires the Company to write-off any
unamortized start-up costs as a cumulative change in accounting principle and,
going forward, expense all start-up activity costs as they are incurred. The
Company adopted SOP 98-5 in the first quarter of fiscal 1999 and it had no
effect on the Company's consolidated financial statements.
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which becomes effective for financial
statements beginning January 1, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivatives fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company is evaluating SFAS No. 133 and the
impact on existing accounting policies and financial disclosures. However, the
Company has not to date engaged in activities or entered into arrangements
normally associated with derivative instruments. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - -
Deferral of the effective date of FASB statement No. 133 - - An amendment of
FASB statement No. 133". SFAS No. 137 delayed the effective date of the
requirements of SFAS No. 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000.
F-26
<PAGE> 86
(2) ACQUISITIONS AND DISPOSITIONS
1999 Acquisitions
AMSCO, INC.
On May 3, 1999, the Company acquired AMSCO, Inc., a provider of residuals
management, recycling, and land application services in the Southeastern United
States for approximately $19,655,000. The acquisition was financed through the
issuance of 2,851,946 shares of common stock with a market trading value of
approximately $8,419,000 and approximately $11,236,000 in cash and acquisition
costs. The common stock was valued in accordance with the provisions of Emerging
Issues Task Force 95-19. The cash portion was funded through the Company's
credit facility. The transaction was recorded using the purchase method of
accounting. The accompanying balance sheet as of September 30, 1999, includes a
preliminary allocation of the purchase price and is subject to final adjustments
which management believes will not be material. The preliminary allocation
resulted in approximately $16,679,000 of goodwill that is being amortized over
40 years.
ANTI POLLUTION ASSOCIATES, INC. AND D&D PUMPING, INC.
On April 23, 1999, the Company acquired two companies located in the Florida
Keys, Anti-Pollution Associates, Inc. and D&D Pumping, Inc. (collectively,
"Anti-Pollution") for approximately $1,330,000. Anti-Pollution Associates,
Inc.'s core business is the operation and maintenance of small wastewater
treatment plants and lift stations. D&D Pumping, Inc. hauls the residuals
produced at these plants to transfer stations. The acquisition was financed
through the issuance of 192,838 shares of common stock with a market trading
value of approximately $605,000 and approximately $725,000 in cash and
acquisition costs. The common stock was valued in accordance with the provisions
of Emerging Issues Task Force 95-19. The cash portion was funded through the
Company's credit facility. The transaction was recorded using the purchase
method of accounting. The accompanying balance sheet as of September 30, 1999,
includes a preliminary allocation of the purchase price and is subject to final
adjustments which management believes will not be material. The preliminary
allocation resulted in approximately $1,136,000 of goodwill that is being
amortized over 40 years.
VITAL CYCLE, INC.
On April 8, 1999, the Company acquired Vital-Cycle, Inc. ("Vital-Cycle"), a
national marketer of heat dried biosolids to the fertilizer industry, for
approximately $1,842,000 in cash and acquisition costs. The cash was funded
through the Company's credit facility. The transaction was recorded using the
purchase method of accounting. The accompanying balance sheet as of September
30, 1999, includes a preliminary allocation of the purchase price and is subject
to final adjustments which management believes will not be material. The
preliminary allocation resulted in approximately $1,069,000 of goodwill that is
being amortized over 40 years.
NATIONAL RESOURCE RECOVERY, INC.
During March 1999, the Company completed the acquisition of all the common stock
of National Resource Recovery, Inc. ("NRR"), in a business transaction
accounted for as a "pooling-of-interests" transaction. NRR, headquartered in
Michigan, provides biosolids management services. The Company issued 1,000,001
shares of common stock in exchange for all the common stock of NRR. There
F-27
<PAGE> 87
were no transactions between the Company and NRR during the periods prior to the
business combination.
The Company's historical financial statements have been restated to reflect the
NRR pooling transaction.
The following table summarizes the unaudited restated revenues, net income and
per share data of Synagro after giving effect to the NRR pooling transaction (in
thousands except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Revenues and net income (loss)- Revenues Net income (loss) Revenues Net income (loss)
As reported $ 8,552 $ (560) $ 20,062 $ (4,897)
NRR 1,297 240 2,443 238
-------------- -------------- -------------- --------------
As restated $ 9,849 $ (320) $ 22,505 $ (4,659)
============== ============== ============== ==============
Basic earnings (loss) per share-
As reported $ (0.05) $ (0.53)
NRR 0.03 0.08
-------------- --------------
As restated $ (0.02) $ (0.45)
============== ==============
Diluted earnings (loss) per share-
As reported $ (0.05) $ (0.53)
NRR 0.03 0.08
-------------- --------------
As restated $ (0.02) $ (0.45)
============== ==============
</TABLE>
1998 ACQUISITIONS
During 1998, the Company purchased all the stock of A&J Cartage and related
companies ("A&J"), Recyc, Inc. ("Recyc") and Environmental Waste Recycling, Inc.
("EWR"). The assets acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Common stock issues $ 23,783,000
Notes payable 11,669,000
Cash 9,410,000
Less: Historical net assets acquired 4,480,000
------------
Goodwill $ 40,382,000
------------
</TABLE>
The transactions were recorded using the purchase method of accounting. The
allocation of the purchase prices resulted in approximately $40,382,000 of
goodwill that is being amortized over 40 years. The common stock issued to
former owners was valued in accordance with the provisions of EITF 95-19.
Unsecured notes were issued to prior owners totaling approximately $8,128,000
with principal due in varying installments with final payment due November 2000.
The notes bear interest of 7% and have no financial covenants. The cash portions
of the purchases were financed through the Company's credit facility. The
payment agreement with EWR provided for additional cash and stock consideration
in an aggregate amount not to exceed $ 2,956,216 in the event certain financial
targets are realized during the twelve-month period after closing. In connection
with the acquisition of Recyc, the Company entered into a lease agreement with
an option to purchase with the prior owners, as trustees of a family trust of
said stockholders, providing for a lease by Recyc of a composting facility. In
addition, the Company entered into a transportation agreement with an initial
term of two years with Recyc Trucking, Inc. ("RTI"), a company owned by the
prior owners, for the provision by RTI of certain transportation services
relating to Recyc's operations.
The following unaudited pro forma information for the periods set forth below
gives effect to the acquisitions of A&J, Recyc, EWR, Amsco, Anti Pollution and
Vital Cycle as if they had occurred at the beginning of 1998. The unaudited pro
forma information is presented for information purposes only and is not
necessarily indicative of actual results, which may have occurred if the
acquisitions had been made at the beginning of the periods represented, or
future operating results.
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30
(UNAUDITED)
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net sales............................................. $ 44,046,215 $ 46,428,228
Net income (loss) before Preferred Stock Dividends.... 2,465,075 970,257
Net earnings (loss) applicable to Common Stock........ 2,465,075 (2,964,331)
Net earnings (loss) per share.........................
Basic............................................ 0.14 (0.18)
Diluted.......................................... 0.13 (0.18)
</TABLE>
(3) PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of preferred stock.
The stock may be issued in one or more series or classes by the Board of
Directors of the Company prior to issuance of the shares. Each such series or
class shall have such powers, preferences, rights and restrictions as determined
by resolution by the Board of Directors. Series A Junior Participating Preferred
Stock will be issued upon exercise of the Stockholder Rights described below.
SERIES B REDEEMABLE PREFERRED STOCK
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock for $3,500,004. The Series B Preferred Stock was convertible by the
holders to Common Stock at a conversion rate of 1:1, with a beneficial
conversion feature permitting the
F-28
<PAGE> 88
shareholders to convert their holdings to Common Stock at $2.40. The market
price of the Common Stock at date of issuance was $4.81. The Company recognized
the value of the beneficial conversion feature of approximately $3.5 million as
a preferred stock dividend. The value of such preferred stock dividend had no
impact on the Company's cash flows, but reduced basic and diluted earnings
available to holders of Common Stock.
On June 10, 1998, a cash dividend of $420,000 was paid to the holders of the
Series B Preferred Stock in connection with their conversion of the shares of
Series B Preferred Stock into 1,458,335 shares of Common Stock. All of the
shares of Series B Preferred Stock were converted to common stock at that time.
(4) STOCKHOLDERS' RIGHTS PLAN
In December 1996, the Company adopted a stockholders' rights plan (the "Rights
Plan"). The Rights Plan provides for a dividend distribution of one preferred
stock purchase right ("Right") for each outstanding share of the Company's
common stock, to stockholders of record at the close of business on January 10,
1997. The Rights Plan is designed to deter coercive takeover tactics and to
prevent an acquirer from gaining control of the Company without offering a fair
price to all of the Company's stockholders. The Rights will expire on December
31, 2006.
Each Right entitles stockholders to buy one one-thousandth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $10. The Rights are exercisable only if a person or group
acquires beneficial ownership of 15 percent or more of the Company's common
stock or commences a tender or exchange offer which, if consummated, would
result in that person or group owning 15 percent or more of the common stock of
the Company. However, the Rights will not become exercisable if common stock is
acquired pursuant to an offer for all shares which a majority of the board of
directors determines to be fair to and otherwise in the best interests of the
Company and its stockholders. If, following an acquisition of 15 percent or more
of the Company's common stock, the Company is acquired by that person or group
in a merger or other business combination transaction, each Right would then
entitle its holder to purchase common stock of the acquiring company having a
value of twice the exercise price. The effect will be to entitle the Company
stockholder to buy stock in the acquiring company at 50 percent of its market
price.
The Company may redeem the Rights at $.001 per Right at any time on or prior to
the tenth business day following the acquisition of 15 percent or more of its
common stock by a person or group or commencement of a tender offer for such 15
percent ownership.
(5) CREDIT FACILITY
The Company has a $40 million bank credit facility with Bank of America National
Trust and Savings Association, which has the right to add participants to the
credit facility. The credit facility bears interest (which was approximately
7.98% at September 30, 1999) at the bank Eurodollar rate plus a margin based
upon a pricing schedule in the credit facility. The credit facility is secured
by substantially all of the Company's assets. At September 30, 1999, the Company
had borrowings under this credit facility of approximately $37,600,000 and
amounts available under the credit facility of approximately $1,772,000. Amounts
under the credit facility are subject to a borrowing base equal to 4.25 times
earnings before interest, taxes, depreciation and amortization ("EBITDA") based
on a trailing twelve months calculation, as defined in the credit facility less
funded debt as defined, (which includes notes payable to former owners, which
can be refinanced through the credit facility) until June 30, 1999, 4.00
until September 30, 1999, and 3.75 times thereafter. The credit facility
requires the Company to meet certain loan covenants, and the Company was in
compliance with those covenants as of September 30, 1999. The credit facility
expires in October 2001.
(6) SPECIAL CHARGES - (CREDITS)
Special charges (credits), net were approximately $257,000 for the quarter ended
September 30, 1998 and approximately $107,000 for the nine month period ended
September 30, 1998 which were related to severance payments for two former
officers of the Company partially offset by notes receivable previously
reserved. There were no such items during the three months and nine months ended
September 30, 1999.
F-29
<PAGE> 89
(7) COMMITMENTS AND CONTINGENCIES
LITIGATION
AZURIX, CORP.
On November 1, 1999, Synagro was granted a temporary restraining order requiring
that Azurix return certain confidential and proprietary information to Synagro
and prohibiting Azurix, Corp. ("Azurix") from entering into any acquisition
agreement with respect to Wheelabrator Water Technologies, Inc. and Residual
Processing, Inc. (collectively, "BioGro") pending a hearing (tentatively
scheduled for November 19, 1999) for a preliminary injunction to prevent Azurix
from entering into a transaction to acquire BioGro. The lawsuit is pending in
state district court in Harris County, Texas. The lawsuit seeks a permanent
restraining order against Azurix, prohibiting it from negotiating, pursuing or
consummating the acquisition by Azurix of BioGro. The lawsuit also seeks damages
from Azurix.
The events giving rise to the lawsuit began when Synagro and Azurix entered into
a confidentiality agreement, giving Azurix access to confidential and
proprietary information about Synagro for purposes of evaluating potential
transactions between the parties, including an equity investment by Azurix in
Synagro to provide the equity capital for pending acquisitions and a possible
merger between the two companies. Subsequently, Synagro and Azurix supplemented
the confidentiality agreement by mutually consenting to the terms and conditions
of a standstill agreement under which Azurix agreed, among other things, not to
pursue, for a specified period and in the absence of Synagro's consent, the
acquisition of companies that Synagro had targeted for acquisition, including
BioGro. Synagro believes that Azurix has breached its obligations to Synagro
under the confidentiality and standstill agreements. Azurix claims Synagro
waived the standstill agreement. While Synagro believes that its claims in the
lawsuit have substantial merit, the litigation is in the early stages, making
the outcome difficult to predict.
In a related matter, Azurix has filed a petition against Synagro in the Delaware
Chancery Court for a declaratory judgment that Synagro is tortiously interfering
in its negotiations with BioGro. This litigation is also in the early stages,
which makes it difficult to assess the merits of Azurix's claims or how it will
affect Synagro's lawsuit against Azurix.
The extent of damages, if any, in either action has not yet been determined, and
the ultimate outcome of the foregoing matter can not be determined at this time.
COUNTY OF RIVERSIDE
The Company operates a composting facility in Riverside County, California under
a conditional use permit ("CUP"), which expires December 31, 2009. The permit
conditions allow for a reduction in material intake and the permit life in the
event of noncompliance with permit terms and conditions. On September 15, 1999,
the Company received a preliminary injunction restraining and enjoining the
County of Riverside from restricting intake of biosolids at the Company's
Riverside compost facility based upon a June 22, 1999, order of the Board of
Supervisors.
Synagro has complained that its due process rights were being affected because
the County was improperly administering the odor protocol in the conditional use
permit. Among its complaints, the Company pointed out that the County was using
untrained observers to detect odor violations and that those observers were not
using scientific methods to distinguish among different sources of odors and the
levels of odor magnitude. The Court elected not to grant the Company's request
for a preliminary injunction on those issues. Rather, those issues will be
addressed during the underlying lawsuit that is still pending against the County
of Riverside.
However, the Company did later obtain a temporary restraining order on September
29,1999, restraining and enjoining the County of Riverside from restricting
intake of biosolids at the composting facility where such action is based upon
unsigned complaints, or complaints not identifying odor intensity levels. The
Company is waiting for the Judge's decision from the preliminary injunction
hearing on these issues.
OTHER
The Company currently and from time to time is subject to other claims and
lawsuits arising in the ordinary course of business. In the opinion of
management, the outcome of such proceedings will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
F-30
<PAGE> 90
(8) EARNINGS (LOSS) PER COMMON SHARE
SFAS No. 128, "Earnings Per Share" requires dual presentation of earnings per
share (EPS): basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. For purposes of the calculation,
outstanding stock options, warrants and redeemable preferred stock are
considered common stock equivalents. Diluted per common share amounts are not
applicable for loss periods. For the nine months ended September 30, 1999, and
the quarter ended September 30, 1999, the difference in weighted average numbers
of Common Shares between basic and diluted earnings per share of 978,000 and
1,356,047 respectively, represents the impact of stock options. The adjusted
number of shares for the nine months ended September 30, 1998 and the quarter
ended September 30, 1998, that would be increased related to stock options were
approximately 1,065,621 and 1,073,915, respectively; however, diluted per share
amounts are not applicable for loss periods. The following table summarizes the
basic EPS and diluted EPS computations for the quarter and nine months ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Net income before redeemable preferred stock
dividends ................................... $ 1,674,396 $ (319,756) $ 1,985,173 $ (724,656)
Redeemable preferred stock dividends .......... -- -- -- 3,934,588
-------------- -------------- -------------- --------------
Net earnings (loss) on common stock ........... $ 1,674,396 $ (319,756) $ 1,985,173 $ (4,659,244)
============== ============== ============== ==============
Basic earnings (loss) per share:
Earnings per share prior to preferred
dividend ................................. $ 0.09 $ (0.02) $ 0.12 $ (0.07)
Preferred stock dividend .................... -- -- -- (0.38)
-------------- -------------- -------------- --------------
Basic earnings (loss) per common share ...... $ 0.09 $ (0.02) $ 0.12 $ (0.45)
============== ============== ============== ==============
Diluted earnings (loss) per share:
Earnings per share prior to preferred
dividend ................................. $ 0.09 $ (0.02) $ 0.12 $ (0.07)
Preferred stock dividend .................... -- -- -- (0.38)
-------------- -------------- -------------- --------------
Diluted earnings (loss) per common share .... $ 0.09 $ (0.02) $ 0.12 $ (0.45)
============== ============== ============== ==============
Weighted average shares outstanding, basic .... 17,641,475 13,030,373 16,095,245 10,295,891
Weighted average shares outstanding, diluted .. 18,997,522 13,030,373 17,073,245 10,295,891
</TABLE>
(9) PROPOSED ACQUISITIONS
Synagro has signed definitive purchase agreements to acquire seven businesses
with unaudited combined revenues of approximately $39 million. Upon the closing
of these acquisitions, Synagro's annual run rate revenue will be approximately
$100 million. The aggregate purchase price of these proposed acquisitions is
approximately $71 million. To fund these acquisitions and refinance the
Company's existing debt, Synagro currently has loan commitments from a bank
group totaling in excess of $140 million of debt financing, which currently
expire on November 15, 1999. In addition, Synagro is pursuing an additional $16
million in private equity financing to conclude the capital needed to close
these proposed acquisitions. The Company expects that the closing of these
acquisitions will not occur prior to November 15, 1999 and is working with the
bank group to obtain commitments on similar debt financing upon the private
equity closing. The closing of these acquisitions is subject to the completion
of this debt and equity financing, which cannot be assured.
F-31
<PAGE> 91
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Residual Technologies,
Limited Partnership, and Affiliates:
We have audited the accompanying combined balance sheets of Residual
Technologies, Limited Partnership (a Delaware limited partnership), and
affiliates (collectively, the Partnership) as of December 31, 1998 and 1997, and
the related combined statements of operations, owners' equity and cash flows for
the years then ended. These combined financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Residual
Technologies, Limited Partnership, and affiliates as of December 31, 1998 and
1997, and the combined results of their operations, changes in their owners'
equity and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the accompanying combined financial statements, the
Partnership was not in compliance with certain debt covenants related to the
NETCO - Waterbury bond agreement and the Webster note agreement. As a result of
this, the lenders have the right and ability to demand payment of the notes. The
notes have been classified as a current liability in the accompanying financial
statements as of December 31, 1998, and, as a result, the Partnership has a
significant working capital deficit. The foregoing matter raises substantial
doubt about the Partnership's ability to continue as a going concern.
Furthermore, the Partnership does not have alternative financing arranged;
however, as also discussed in Note 1, management does not believe such financing
will be required. The combined financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Houston, Texas
October 8, 1999
F-32
<PAGE> 92
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
COMBINED BALANCE SHEETS--DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
ASSETS
Current assets:
<S> <C> <C>
Cash $ 767,684 $ 348,123
Funds held in trust 1,713,416 1,785,181
Accounts and other receivables, net of allowance for doubtful accounts of $64,701
and $- as of December 31, 1998 and 1997, respectively 3,411,894 2,210,710
Prepaid expenses and other current assets 71,671 87,852
------------ ------------
Total current assets 5,964,665 4,431,866
Property and equipment 22,226,070 22,071,100
Less- Accumulated depreciation (8,348,442) (6,387,864)
------------ ------------
Property and equipment, net 13,877,628 15,683,236
OTHER ASSETS:
Debt issuance costs 1,352,962 1,342,466
Funds held in trust 1,435,256 1,464,712
Other 595,386 594,425
------------ ------------
3,383,604 3,401,603
Less- Accumulated amortization (408,264) (283,316)
------------ ------------
Other assets, net 2,975,340 3,118,287
------------ ------------
Total assets $ 22,817,633 $ 23,233,389
============ ============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,998,800 $ 2,093,780
Revolving line of credit -- 250,000
Current maturities of long-term debt 13,763,678 12,103,135
------------ ------------
Total current liabilities 15,762,478 14,446,915
Long-term debt, less current maturities 4,335,745 6,811,597
COMMITMENTS AND CONTINGENCIES
Owners' equity:
Common stock 6,750 6,750
Additional paid-in capital 270,664 270,664
Retained earnings 2,576,195 3,063,781
Partners' capital 1,818,100 585,981
------------ ------------
4,671,709 3,927,176
Less- Treasury stock (1,952,299) (1,952,299)
------------ ------------
Total owners' equity 2,719,410 1,974,877
------------ ------------
Total liabilities and owners' equity $ 22,817,633 $ 23,233,389
============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-33
<PAGE> 93
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUES $ 22,249,285 $ 20,515,807
COST OF REVENUES 15,852,217 14,030,767
------------ ------------
Gross profit 6,397,068 6,485,040
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,008,588 2,773,129
------------ ------------
Income from operations 3,388,480 3,711,911
OTHER (INCOME) EXPENSE:
Interest expense 1,688,534 1,776,005
Interest income (207,105) (45,341)
Other (income) expense, net (87,211) (9,900)
------------ ------------
INCOME BEFORE STATE INCOME TAXES 1,994,262 1,991,147
STATE INCOME TAXES 6,483 6,188
------------ ------------
NET INCOME $ 1,987,779 $ 1,984,959
============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-34
<PAGE> 94
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------------- Paid-In Treasury Retained Partners' Owners'
Shares Amount Capital Stock Earnings Capital Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996 6,750 $ 6,750 $ 230,768 $ (1,952,299) $ 3,138,609 $ (1,400,122) $ 23,706
Net income -- -- -- -- 384,124 1,600,835 1,984,959
Contributions -- -- 39,896 -- -- 719,228 759,124
Distributions -- -- -- -- (458,952) (333,960) (792,912)
------------ ------------ ------------ ------------ ------------ ------------ ------------
DECEMBER 31, 1997 6,750 6,750 270,664 (1,952,299) 3,063,781 585,981 1,974,877
Net income -- -- -- -- 99,517 1,888,262 1,987,779
Contributions -- -- -- -- -- 2,800 2,800
Distributions -- -- -- -- (587,103) (658,943) (1,246,046)
------------ ------------ ------------ ------------ ------------ ------------ ------------
DECEMBER 31, 1998 6,750 $ 6,750 $ 270,664 $ (1,952,299) $ 2,576,195 $ 1,818,100 $ 2,719,410
============ ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-35
<PAGE> 95
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,987,779 $ 1,984,959
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 2,334,731 1,848,687
Changes in operating assets and liabilities-
Funds held in trust 71,765 (827,651)
Accounts and other receivables (1,201,184) 1,271,359
Prepaid expenses and other current assets 16,181 (18,966)
Accounts payable and accrued expenses (94,980) (2,653,389)
Other assets 25,210 204,068
------------ ------------
Net cash provided by operating activities 3,139,502 1,809,067
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment (411,386) (1,266,316)
------------ ------------
Net cash used in investing activities (411,386) (1,266,316)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 3,250,000 64,548
Net payment on revolving line of credit (250,000) --
Payment on long-term debt (4,065,309) (1,661,175)
Contributions 2,800 759,124
Distributions (1,246,046) (792,912)
------------ ------------
Net cash used in financing activities (2,308,555) (1,630,415)
------------ ------------
NET INCREASE (DECREASE) IN CASH 419,561 (1,087,664)
CASH AT BEGINNING OF YEAR 348,123 1,435,787
------------ ------------
CASH AT END OF YEAR $ 767,684 $ 348,123
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 1,673,421 $ 1,756,989
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-36
<PAGE> 96
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. NATURE OF PARTNERSHIP'S BUSINESS:
Basis of Presentation and Nature of Business
The accompanying combined financial statements of Residual Technologies, Limited
Partnership, and affiliates (the Partnership) include the accounts and
operations of the entities described below which are under common ownership and
control of one individual and the estate of an individual. All significant
intercompany balances and transactions have been eliminated in combination.
The Partnership manages the treatment and disposal of biosolids materials
primarily on behalf of municipalities. The Partnership currently operates three
sewage sludge facilities used in the treatment and disposal of biosolids
materials. The Partnership has contracts to operate sludge processing facilities
on behalf of the city of Waterbury, Connecticut (Waterbury), the Woonsocket
Regional Wastewater Commission (WRWC) and the city of Woonsocket, Rhode Island
(Woonsocket), and the Water Pollution Control Authority of New Haven,
Connecticut (WPCA) (collectively, the host municipalities).
Residual Technologies, Limited Partnership (L.P.)
Residual Technologies, L.P. (RESTEC), is a Delaware limited partnership that is
owned by its general partner, Residual Technologies Systems, Inc., and two
limited partners. Residual Technologies Systems, Inc., is a Delaware S
Corporation.
New Haven Residuals, L.P.
New Haven Residuals, L.P. (New Haven), is a Delaware limited partnership that is
owned by its general partner, New Haven Residuals Systems, Inc., and an
affiliated limited partner, RESTEC. New Haven Residuals Systems, Inc., is a
Delaware S Corporation.
New Haven operates a sewage sludge incineration facility in New Haven,
Connecticut. Under a sludge agreement (the New Haven Agreement) between New
Haven and an affiliate, NETCO - Connecticut, Inc., with the WPCA, the host
municipality, New Haven provides sludge disposal services to the WPCA. The New
Haven Agreement expires 10 years from the date of receipt by the WPCA of final
permits from the State of Connecticut Department of Environmental Protection.
Under the terms of the New Haven Agreement, New Haven processes and disposes
sludge for the WPCA for an annual fixed operating fee paid in equal monthly
installments. For each dry ton of sludge processed at the facility in excess of
26 dry tons per day, the WPCA will pay New Haven a contractually designated rate
per dry ton of sludge. In addition, New Haven provides sludge disposal services
to surrounding municipalities and pays royalty fees to the WPCA for outside
sludge processed at the facility. The ownership of the facility will pass to the
WPCA at the expiration of the New Haven Agreement. Under certain conditions, New
Haven can cease operating the facility. Under these conditions, the WPCA would
be required to repay New Haven the greater of New Haven's outstanding
indebtedness, plus any applicable redemption costs, or unamortized capital
costs.
In June 1996, New Haven sold $5,000,000 of Sewage Sludge Disposal Facility
Revenue Bonds (the New Haven bonds) through the Connecticut Development
Authority (CDA) to fund the purchase of certain assets used in the sludge
incineration facility (see Note 5). The CDA is a political subdivision of the
state of Connecticut authorized by the State Commerce Act to issue bonds for the
purpose of constructing and developing projects such as above or assisting
directly or indirectly in their financing.
F-37
<PAGE> 97
New England Treatment Company, Inc.
New England Treatment Company, Inc. (NETCO), is a Rhode Island S Corporation
that is owned by one individual and the estate of an individual.
NETCO operates a sludge incineration facility under an agreement, as amended
(the NETCO Agreement), which expires November 27, 2007, with the WRWC and
Woonsocket. Under the terms of the NETCO Agreement, NETCO processes and disposes
of up to seven dry tons of sludge a day for Woonsocket at no cost in exchange
for the use of the city's facilities. The accompanying financial statements
reflect revenues based on the estimated fair value of such processing and
disposal services and a like amount in cost of revenues for use of the
facilities. For each dry ton of sludge processed in excess of seven dry tons per
day, Woonsocket shall pay NETCO a contractually designated rate per dry ton of
sludge. The NETCO Agreement stipulates that capital improvements made to the
incineration facility by NETCO become the property of the WRWC and/or Woonsocket
at the expiration of the NETCO Agreement. Under certain conditions, NETCO can
cease operating the facility. Under these conditions, Woonsocket would be
required to repay NETCO for unamortized capital costs. In order to fund the
capital improvements to the existing sludge incineration facility, NETCO entered
into a $2,500,000 note with Webster Bank (see Note 5).
On December 31, 1997, NETCO purchased the assets, equity and existing contract
of NETCO - Energy Recovery Limited Partnership (NETCO - ER), a related entity.
In accordance with the provisions of the Accounting Principles Board Opinion No.
16, for entities under common control, the acquisition was accounted for in a
manner similar to a pooling of interests and, therefore, all financial
information has been adjusted to include NETCO - ER as if it were owned by the
Partnership for the periods presented.
NETCO - Waterbury, L.P.
NETCO - Waterbury, L.P. (NETCO - Waterbury), is a Delaware limited partnership
that is owned by its general partner, NETCO - Waterbury Systems, Inc., and three
limited partners. The limited partners consist of one individual, the estate of
an individual and NETCO - Residuals Management, L.P., an affiliated entity.
NETCO - Waterbury Systems, Inc., is a Delaware S Corporation.
NETCO - Waterbury operates a sludge incineration facility under an agreement
(the Waterbury Agreement) which expires December 2016 with Waterbury. Under the
terms of the Waterbury Agreement, NETCO - Waterbury processes and disposes
sludge for Waterbury for an annual fixed operating fee paid in equal monthly
installments. For each dry ton of sludge processed at the facility in excess of
5,720 dry tons per year, Waterbury shall pay NETCO - Waterbury a contractually
designated rate per dry ton of sludge. In addition, NETCO - Waterbury provides
sludge disposal services to surrounding municipalities and pays royalty fees to
Waterbury for outside sludge processed at the facility. The Waterbury Agreement
stipulates that all capital improvements made by NETCO - Waterbury to the sludge
facility will be purchased by Waterbury for one dollar at the completion of the
Waterbury Agreement. Under certain conditions, NETCO - Waterbury can cease
operating the facility. Under these conditions, Waterbury would be required to
repay NETCO - Waterbury for unamortized capital costs.
In 1995, NETCO - Waterbury sold $11,000,000 of Sewage Sludge Disposal Facility
Revenue Bonds (the NETCO - Waterbury bonds) with the CDA to fund construction of
the sludge incineration facility (see Note 5).
As discussed further in Note 5, NETCO - Waterbury is not in compliance with
certain debt covenants related to the NETCO - Waterbury bonds agreement as of
December 31, 1998 and 1997. In addition, NETCO and RESTEC were not in compliance
with a debt covenant related to the Webster note agreement as of December 31,
1998. As a result, the lenders have the right and ability to demand full payment
of the notes. Therefore, all amounts under the loan agreements have been
classified as current maturities of long-term debt as of December 31, 1998. At
December 31, 1997, the NETCO - Waterbury bonds have been classified as a current
liability. At December 31, 1998 and 1997, the Partnership had a working capital
deficit of $9,797,813 and $10,015,049, respectively. Although the Partnership
does not have alternative financing arranged, management believes that the
Partnership will be able to achieve a satisfactory level of liquidity to
maintain its operations and capital needs through December 31, 1999. Management
does not believe that the lenders will require that the notes be repaid during
1999. However, there can be no assurance that the lenders will not demand the
notes during 1999. The foregoing matter raises substantial doubt about the
Partnership's ability to continue as a going concern. The accompanying combined
financial statements do not include any adjustments related to the
recoverability and classification of recorded assets or other adjustments should
the Partnership be unable to continue as a going concern.
F-38
<PAGE> 98
NETCO - Residuals Management, L.P.
NETCO - Residuals Management, L.P. (NETCO - RM), is a Delaware limited
partnership that is owned by its general partner, NETCO - Residuals Management
Systems, Inc., and two limited partners, an individual and the estate of an
individual. NETCO - Residuals Management Systems, Inc., is a Delaware S
Corporation.
NETCO - RM is a marketing entity for sludge processing capacity at NETCO -
Waterbury. NETCO - RM sells its services to municipalities located in the
northeastern United States. As defined under an agreement with NETCO -
Waterbury, NETCO - RM is required to utilize NETCO - Waterbury's excess sludge
disposal capacity for processing sludge it receives under eligible contracts
with its customers. This agreement grants a security interest in certain of
NETCO - RM's assets, revenues and contracts to NETCO - Waterbury, serving, in
part, as collateral for the NETCO - Waterbury bonds.
Fairhaven Residuals, L.P
Fairhaven Residuals, L.P. (Fairhaven), is a Delaware limited partnership that is
owned by its general partner, Fairhaven Residuals Systems, Inc., and an
affiliated limited partner, Residual Technologies, L.P. Fairhaven Residuals
Systems, Inc., is a Delaware S Corporation.
Fairhaven is developing plans for a sewage sludge disposal facility in
Fairhaven, Massachusetts, and has obtained a 20-year lease, contingent upon
obtaining the required approvals for the construction of the facility. In the
event the lease is terminated, Fairhaven is obligated to provide the city of
Fairhaven, Massachusetts, free disposal of biosolids for 12 months from the date
of termination.
NETCO - Connecticut, Inc.
NETCO - Connecticut, Inc. (NETCO - CT), is a Delaware S Corporation owned by one
individual and the estate of an individual. NETCO - CT is a party to the New
Haven Agreement and is otherwise currently an inactive corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Funds Held in Trust
Funds held in trust represent monies held by First Fidelity Bank and State
Street Bank and Trust Company of Connecticut, National Association (the
Trustees) for the loan agreements between the CDA and Waterbury and New Haven,
respectively. As a requirement of the loan agreements, the partnerships, on a
stand-alone basis, must meet the requirements stipulated per the respective
agreements dated June 1, 1995, and June 1, 1996. The loans, depending on the
terms of the related indenture, require that certain monies be placed in
restricted fund accounts to be used for various designated purposes (i.e., debt
service funds, repair and replacement funds, etc.). Such restricted fund
accounts have been presented separately in the accompanying combined balance
sheets. Monies in the funds will remain restricted until such time as the
related loans mature or are paid off, whichever occurs first. The Partnership
was in compliance with the reserve requirements as of December 31, 1998 and
1997.
Revenue Recognition
Revenues under the New Haven Agreement and the Waterbury Agreement are
recognized based on a fixed operating fee paid as services are provided. If
sludge exceeds a defined amount per the applicable operating agreement,
additional fees are charged to the host municipality as services are rendered
based upon a contractually determined rate. Revenues under the NETCO Agreement
are recognized based upon tons hauled, at a fixed fee per ton hauled, subject to
adjustment, as services are rendered.
Revenues may also be earned on sludge processed for outside customers. Such
revenues are recognized as services are provided. Under the agreements with the
host municipalities, the host municipalities are entitled to a royalty for
outside sludge processed at the facility.
F-39
<PAGE> 99
Debt Issuance Costs
The Partnership has deferred certain loan costs incurred in connection with the
issuance of its indebtedness. These debt issuance costs are stated at cost, less
accumulated amortization and are being amortized on the straight-line method
over the term of the related debt.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Accordingly,
actual results could differ from those estimates.
Start-Up Activities
The Partnership expenses start-up activities related to the facilities as
incurred.
Property and Equipment
Property and equipment are recorded at cost. Expenditures in the nature of
normal repairs and maintenance are charged to operations as incurred.
Expenditures for major renewals and betterments which extend useful lives of
existing equipment are capitalized and depreciated. Upon disposition or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts, and the resulting gain
or loss is included in the combined statement of operations.
Interest is capitalized in connection with the construction of major facilities.
The capitalized interest is recorded as part of the asset to which it relates
and is amortized over the asset's estimated useful life. As all operating
facilities were built prior to 1997, there was no interest capitalized for the
years ended December 31, 1998 and 1997.
Depreciation is computed by the straight-line method over the shorter of the
estimated useful lives of the assets or the term of the operating agreements
with the host municipalities.
Realization of Long-Lived Assets
The Partnership follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if an impairment
of such property is necessary.
Income Taxes
No provision for federal income taxes is made in the accounts of the Partnership
since such taxes are liabilities of the partners and depend upon their
respective tax situations. Further, partner capital accounts reflected in the
accompanying financial statements differ from amounts reported in the
Partnership's federal income tax returns because of differences in accounting
policies adopted for financial and tax reporting purposes.
Corporate entities within the Partnership structure, as defined above, have
elected to be treated as S Corporations for income tax reporting purposes. For
these companies, no provision for federal income taxes is presented in the
combined financial statements since such taxes are liabilities of the
shareholders and depend upon their respective tax situations. Certain entities
are subject to state income taxes, and provisions thereon are reflected in the
combined statements of operations. A provision is made for current and deferred
state income taxes, as applicable. Deferred state income taxes are provided on
temporary differences between the financial and tax bases of assets and
liabilities relating primarily to property and equipment.
F-40
<PAGE> 100
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Property and equipment at December 31, 1998 and 1997, consist of the following
(in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Lives
in Years 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Machinery and equipment 5-20 $ 18,500 $ 18,423
Transportation equipment 5 2,144 2,302
Leasehold improvements 5-20 1,295 1,112
Office equipment, furniture and fixtures 3-7 287 234
-------- --------
22,226 22,071
Less- Accumulated depreciation (8,348) (6,388)
-------- --------
Total $ 13,878 $ 15,683
======== ========
</TABLE>
Accounts payable and accrued liabilities at December 31, 1998 and 1997, consist
of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Accounts payable, trade $ 804 $ 1,328
Accrued compensation and benefits 91 37
Other accrued liabilities 1,104 729
-------- --------
$ 1,999 $ 2,094
======== ========
</TABLE>
F-41
<PAGE> 101
4. OWNERS' EQUITY:
Partners' capital by legal entities organized as partnerships as of December 31,
1998 and 1997, is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- --------------------------------------------
Limited General Limited General Limited
Partnership Partners Partners Total Partners Partners Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
RESTEC $ 14,263 $ 1,412,010 $ 1,426,273 $ 8,219 $ 813,689 $ 821,908
New Haven 9,464 936,930 946,394 8,738 865,101 873,839
NETCO - RM 5,204 515,189 520,393 878 86,884 87,762
NETCO 183,376 (354,243)
Waterbury 1,852 185,228 (3,578) (357,821)
Fairhaven (198) (19,554) (19,752) (65) (6,451) (6,516)
------------ ------------ ------------ ------------ ------------ ------------
Subtotal 30,585 3,027,951 3,058,536 14,192 1,404,980 1,419,172
Eliminations (30,585) (1,209,851) (1,240,436) (14,192) (818,999) (833,191)
------------ ------------ ------------ ------------ ------------ ------------
Total $ -- $ 1,818,100 $ 1,818,100 $ -- $ 585,981 $ 585,981
============ ============ ============ ============ ============ ============
</TABLE>
Owners' equity by legal entities incorporated as S Corporations as of December
31, 1998 and 1997, is comprised of the following:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Additional Retained
Common Paid-In Treasury Earnings
Stock Capital Stock (Deficit)
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Residual Technologies Systems, Inc., common stock,
$1 par value, 1,000 shares authorized,
1,000 shares issued $ 1,000 $ 250 $ -- $ 6,949
New England Treatment Company, common stock, $1 par
value, 8,000 shares authorized, 750 shares
issued, 500 shares held in treasury 750 228,768 (1,588,539) 2,179,370
NETCO - Connecticut, Inc., common stock, $1 par
value, 20,000 shares authorized, 1,000 shares
issued, 250 shares held in treasury 1,000 -- (363,759) 369,549
New Haven Residuals Systems, Inc., common stock,
$1 par value, 1,000 shares authorized,
1,000 shares issued 1,000 2,250 -- 13,981
Fairhaven Residual Systems, Inc., common stock, $1
par value, 20,000 shares authorized, 1,000 shares
issued 1,000 -- -- (2,178)
NETCO - Waterbury Systems, Inc., common stock,
$1 par value, 1,000 shares authorized,
1,000 shares issued, 333-1/3 shares held in
treasury 1,000 2,250 (1) 6,245
NETCO - RM Systems, Inc., common stock, $1 par
value, 1,000 shares authorized, 1,000 shares
issued 1,000 37,146 -- 2,279
------------ ------------ ------------ ------------
Total $ 6,750 $ 270,664 $ (1,952,299) $ 2,576,195
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Additional Retained
Common Paid-In Treasury Earnings
Stock Capital Stock (Deficit)
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Residual Technologies Systems, Inc., common stock,
$1 par value, 1,000 shares authorized,
1,000 shares issued $ 1,000 $ 250 $ -- $ 7,964
New England Treatment Company, common stock, $1 par
value, 8,000 shares authorized, 750 shares
issued, 500 shares held in treasury 750 228,768 (1,588,539) 2,688,267
NETCO - Connecticut, Inc., common stock, $1 par
value, 20,000 shares authorized, 1,000 shares
issued, 250 shares held in treasury 1,000 -- (363,759) 369,976
New Haven Residuals Systems, Inc., common stock,
$1 par value, 1,000 shares authorized,
1,000 shares issued 1,000 2,250 -- 5,628
Fairhaven Residual Systems, Inc., common stock, $1
par value, 20,000 shares authorized, 1,000 shares
issued 1,000 -- -- (765)
NETCO - Waterbury Systems, Inc., common stock,
$1 par value, 1,000 shares authorized,
1,000 shares issued, 333-1/3 shares held in
treasury 1,000 2,250 (1) (840)
NETCO - RM Systems, Inc., common stock, $1 par
value, 1,000 shares authorized, 1,000 shares
issued 1,000 37,146 -- (6,449)
------------ ------------ ------------ ------------
Total $ 6,750 $ 270,664 $ (1,952,299) $ 3,063,781
============ ============ ============ ============
</TABLE>
F-42
<PAGE> 102
5. LINE OF CREDIT AND LONG-TERM DEBT:
NETCO maintained a line of credit with Webster Bank providing for maximum
borrowings of $500,000 until September 1998. Effective September 1998, NETCO and
RESTEC refinanced NETCO's existing line of credit whereby the line of credit was
increased to $1,000,000 (see further discussion below). The revolving line of
credit is secured by various equipment. Outstanding borrowings during 1997
through the refinancing date on the line of credit bear interest at prime plus 1
percent (9.5 percent at December 31, 1997). Subsequent to the refinancing date,
NETCO's and RESTEC's borrowings on the line of credit bear interest at LIBOR
plus 2.15 percent. The balance outstanding under the line of credit was $- and
$250,000 as of December 31, 1998 and 1997, respectively. The line of credit
expires in July 2000.
Long-term debt at December 31, 1998 and 1997, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
NETCO - Waterbury, $11,000,000 Sewage Sludge Disposal Facility Revenue Bonds with the
Connecticut Development Authority, secured by equipment, principal payments due annually
increasing from $200,000 in 1997 to $600,000 in 2016, bearing interest at 9.375%,
maturing in June 2016 $ 10,500 $ 11,000
New Haven, $5,000,000 Sewage Sludge Disposal Facility Revenue Bonds with the Connecticut
Development Authority, secured by equipment, principal payments due annually increasing
from $340,000 in 1997 to $695,000 in 2006, bearing interest at 8.25%, maturing in
December 2006 4,290 4,660
NETCO and RESTEC, $3,000,000 note payable to Webster Bank, payable in monthly principal
installments of $35,714, bearing interest at 7.17%, maturing in September 2005 2,857 --
NETCO, $2,500,000 note payable to Webster Bank, secured by equipment, payable in monthly
principal installments of $52,083, bearing interest at prime plus 1% (weighted average
rate of 9.44% for 1997), maturing in December 2001, refinanced in 1998 with a new note
with Webster Bank -- 1,875
NETCO, $500,000 note payable to Webster Bank payable in monthly principal installments of
$10,417, secured by equipment, bearing interest at prime plus 1.25% (weighted average rate
of 9.69% for 1997), maturing in December 2001, refinanced in 1998 with a new note with
Webster Bank -- 313
NETCO - Waterbury, note payable to North America Bank, payable in monthly principal
installments of $10,000, bearing interest at prime plus 1.50% (weighted average rate of
9.94% for 1997), repaid in 1998 with proceeds from a new note with Webster Bank -- 600
NETCO - RM, $250,000 subordinated note payable to a former owner, bearing interest at 8%,
total principal balance due in January 2000, guaranteed by the Partnership's owners 250 250
NETCO - RM, $150,000 subordinated note payable to a former owner, imputed interest at 8%,
total principal balance due in January 2001, guaranteed by the Partnership's owners 150 150
Other 52 67
--------- ----------
Total 18,099 18,915
Less- Current maturities of long-term debt (13,764) (12,103)
--------- ----------
Total long-term debt $ 4,335 $ 6,812
========= ==========
</TABLE>
NETCO - Waterbury is required to maintain certain financial and other covenants
under the NETCO - Waterbury bond agreement. A trustee collects all gross
revenues on a monthly basis from NETCO - Waterbury. These funds are allocated to
the appropriate reserve fund to pay principal and interest payments on the debt
and fund other reserve requirements. In order to secure the bonds, NETCO -
Waterbury has granted to the CDA a security interest in the gross revenues and
equipment of NETCO - Waterbury. At December 31, 1998 and 1997, NETCO - Waterbury
was out of compliance with its covenant to maintain a current asset to current
liability ratio of at least 2 to 1 and its covenant to fulfill certain financial
reporting requirements. NETCO - Waterbury has not obtained waivers for the debt
covenant violations. In the event of default, the trustee or the CDA may cause
all amounts payable under the NETCO - Waterbury bond agreement to be immediately
due and payable and may enforce the obligations of NETCO - Waterbury under the
NETCO - Waterbury bond agreement. As a result of the covenant violations, all
amounts due under
F-43
<PAGE> 103
the NETCO - Waterbury bond agreement have been classified as current maturities
of long-term debt as of December 31, 1998 and 1997, in the accompanying combined
balance sheets.
The NETCO - Waterbury bond agreement covenants also place significant
restrictions on NETCO - Waterbury's ability to incur additional indebtedness or
to merge or consolidate with an unaffiliated entity. NETCO - Waterbury has the
option to prepay all or part of its loan obligation at any time that the bonds
are subject to redemption commencing on June 1, 2005, unless NETCO - Waterbury
is in default, whereby the prepayment balance could only be exercised in total.
The prepayment amount must be sufficient to pay the interest and redemption
price. Prepayment of the NETCO - Waterbury bonds is subject to a prepayment
redemption premium of 3 percent at June 1, 2005. No prepayment premium would
apply if the bonds were prepaid after June 1, 2008. The NETCO - Waterbury bonds
are subject to a mandatory prepayment with a penalty of 103 percent of the
aggregate amount of the loan under certain circumstances, as defined. In the
event of a defined change in control, the NETCO - Waterbury bond agreement may
be terminated with all amounts payable under the NETCO - Waterbury bond
agreement becoming immediately due and payable.
Under an agreement between the CDA and First Fidelity Bank, the trustee under
the NETCO - Waterbury bond agreement (the Waterbury Trustee), the NETCO -
Waterbury bonds may be redeemed prior to maturity or the redemption date. The
CDA must provide the Waterbury Trustee with a notice of redemption and shall
deposit with the Waterbury Trustee either monies or defeasance securities that
are sufficient to pay the principal and interest on the NETCO - Waterbury bonds.
Under the Sewage Sludge Disposal Facility Revenue Bond agreement between the CDA
and New Haven (the New Haven bond agreement), New Haven is subject to certain
financial and nonfinancial covenants. In order to secure the bonds, New Haven
has granted to the CDA a security interest in the gross revenues and equipment
of New Haven. New Haven pledges gross revenues to the appointed trustee on a
monthly basis. The trustee then allocates these funds to service the principal
and interest payments on the debt and fund other reserve requirements. At
December 31, 1998 and 1997, New Haven was in compliance with all covenants of
the New Haven bond agreement. In the event of default, the trustee or the CDA
may cause all amounts payable under the New Haven bond agreement to be
immediately due and payable and may enforce all obligations under the New Haven
bond agreement.
The New Haven bond agreement covenants also place significant restrictions on
New Haven's ability to incur additional indebtedness or merge or consolidate
with an unaffiliated entity. The bonds also disallow any prepayment of the loan.
The New Haven bonds are subject to a mandatory prepayment with a penalty of 103
percent of the aggregate amount of the loan under certain circumstances, as
defined. In the event of a defined change in control, the New Haven bond
agreement may be terminated with all amounts payable under the New Haven bond
agreement becoming immediately due and payable.
Under an agreement between the CDA and State Street Bank and Trust Company of
Connecticut, National Association, trustee under the New Haven bond agreement
(the New Haven Trustee), the New Haven bonds may be redeemed prior to maturity
or the redemption date. The CDA must provide the New Haven Trustee with a notice
of redemption and shall deposit with the New Haven Trustee either monies or
defeasance securities that are sufficient to pay the principal and interest on
the New Haven bonds.
The NETCO - Waterbury bonds and New Haven bonds also require certain funds to be
maintained with a trustee, including a debt service fund. Such funds, on deposit
with the trustee, are invested in cash equivalents and U.S. Government
securities and are carried at cost plus accrued interest. The carrying value of
these funds is included in funds held in trust in the accompanying combined
balance sheets and approximates fair value. A debt service fund is used for the
payment of interest and principal.
NETCO and RESTEC refinanced NETCO's existing debt to Webster Bank in September
1998, whereby the line of credit was increased to $1,000,000 (see above for
further discussion) and a facilities loan to fund equipment purchases of up to
$1,000,000 and a term loan of $3,000,000 were obtained. The facilities loan is
payable in 60 monthly payments of principal and interest commencing on September
1, 1999. The facilities loan bears interest at LIBOR plus 2.15 percent.
Beginning on September 1, 1999, interest is stated at the cost of funds rate, as
defined, plus 2.15 percent. NETCO and RESTEC can elect to fix the rate over a
designated period of time. At December 31, 1998, no balance was outstanding
under the facilities loan. The proceeds from the term loan of $3,000,000 were
used to pay NETCO's outstanding balance with Webster Bank and NETCO -
Waterbury's outstanding balance with North America Bank.
The Webster Bank note agreement requires, among other things, NETCO and RESTEC
to meet certain financial and nonfinancial covenants. At December 31, 1998,
NETCO and RESTEC were out of compliance with their covenants to fulfill certain
financial reporting and nonfinancial requirements. NETCO and RESTEC have not
obtained a waiver for the debt covenant violation. In the event of default, the
bank may cause all amounts payable under the Webster Bank note agreement to be
immediately due and payable and may enforce all obligations of NETCO and RESTEC
under the Webster Bank note agreement. As a result of the covenant
F-44
<PAGE> 104
violation, all amounts due under the Webster Bank note agreement have been
classified as current maturities of long-term debt in the accompanying combined
balance sheets as of December 31, 1998.
The Webster Bank note agreement also places significant restrictions on NETCO's
and RESTEC's ability to incur additional indebtedness or to merge or consolidate
with an unaffiliated entity. In the event of a defined change in control, the
amount outstanding under the note agreement will be immediately due and payable.
At December 31, 1998, future principal payments of long-term debt are as follows
(in thousands):
<TABLE>
<S> <C>
For the fiscal year ending December 31-
1999 $ 13,764
2000 687
2001 626
2002 512
2003 557
Thereafter 1,953
---------
$ 18,099
=========
</TABLE>
6. DEFINED CONTRIBUTION PLAN:
Certain entities in the Partnership maintain a 401(k) plan for eligible
employees. The entities contribute an employer profit-sharing contribution equal
to 50 percent of the employee's contribution, up to a maximum of 4 percent of
the eligible participant's compensation, as defined. The contribution expense
for 1998 and 1997 was $47,828 and $46,539, respectively.
7. RELATED-PARTY TRANSACTIONS:
The Partnership has transactions with a transportation company, wholly owned by
one of its owners, to which it paid $566,590 and $507,017 for trucking services
for the years ended December 31, 1998 and 1997, respectively. Included in
accounts payable is an amount due to this transportation company of $34,695 and
$43,089 at December 31, 1998 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES:
Litigation
The Partnership is involved in disputes, claims and legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
matters will have a material adverse effect on the Partnership's financial
position or results of operations.
Environmental and Regulatory Risk
The Partnership is subject to federal, state and local laws and regulations
adopted for the protection of the environment. The laws and regulations
primarily applicable to the Partnership are those related to air emissions and
treatment and disposal of biosolids materials. Noncompliance with environmental
laws and regulations can result in the imposition of civil or criminal fines or
penalties. Management believes that it is in material compliance with
environmental laws relating to the Partnership's operations.
F-45
<PAGE> 105
Leases
The Partnership has entered into several long-term lease agreements for office
space and equipment. Rent expense under operating leases was approximately
$282,285 and $344,528 for the years ended December 31, 1998 and 1997,
respectively. Minimum annual rental commitments under these leases are as
follows (in thousands):
<TABLE>
<S> <C>
For the fiscal year ending December 31-
1999 $ 138
2000 86
2001 80
2002 16
2003 --
-----
$ 320
=====
</TABLE>
9. SIGNIFICANT CUSTOMERS:
Significant customers are defined as those that account for greater than 10
percent of the Partnership's revenues. One customer accounted for approximately
16 percent of the Partnership's revenues for the years ending December 31, 1998
and 1997.
10. SUBSEQUENT EVENT:
Under the bylaws of NETCO and NETCO - CT, in the event of a shareholder's death,
NETCO and NETCO - CT shall pay the estate of the deceased shareholder an amount
equal to the established value of the stock, as defined. This provision in the
bylaws was triggered as a result of a shareholder's death subsequent to
year-end. This provision has been delayed by management as a result of the
proposed transaction with Synagro described above.
Subsequent to December 31, 1998, the Partnership entered into two commitments to
purchase certain incineration equipment for a value of approximately $1,047,000.
11. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED):
On January 27, 2000, Synagro Technologies, Inc. (Synagro) closed the acquisition
of RESTEC. The aggregate purchase price consisted of $30.4 million in cash
(which is net of certain adjustments, including approximately $2.3 million in
bonuses to certain RESTEC employees which Synagro agreed to pay after closing)
and assumed indebtedness and 1,325,000 shares of Synagro common stock.
Additional purchase price of up to $12 million will be payable to the RESTEC
shareholders and key employees if certain performance targets are met. The
acquisition will be accounted for as a purchase; accordingly, the purchase price
will be allocated to the underlying assets and liabilities based on their
respective estimated fair values at the date of the acquisition. Synagro
estimates that approximately $36 million will be recorded as goodwill.
F-46
<PAGE> 106
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
UNAUDITED COMBINED BALANCE SHEETS--SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
1999
------------
<S> <C>
ASSETS
Current assets:
Cash $ 1,461,954
Funds held in trust 2,286,137
Accounts and other receivables, net 1,929,050
Prepaid expenses and other current assets 469,472
------------
Total current assets 6,146,613
Property and equipment, net 13,460,591
Other assets-net 2,545,595
------------
Total Assets $ 22,152,799
============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,887,823
Revolving line of credit --
Current maturities of long-term debt 13,042,249
------------
Total current liabilities 14,930,072
Long-term debt, less current maturities 4,350,709
COMMITMENTS AND CONTINGENCIES
Owners' equity: 2,872,018
------------
Total liabilities and owners' equity $ 22,152,799
============
</TABLE>
See accompanying notes.
F-47
<PAGE> 107
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 17,822,528 $ 16,631,872
COST OF REVENUES 12,482,087 11,553,971
------------ ------------
Gross profit 5,340,441 5,077,901
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,718,995 2,208,314
------------ ------------
Income from operations 2,621,446 2,869,587
OTHER (INCOME) EXPENSE:
Interest expense 1,006,829 1,136,305
Other (income) expense, net
------------ ------------
NET INCOME $ 1,614,617 $ 1,733,282
============ ============
</TABLE>
See accompanying notes.
F-48
<PAGE> 108
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
FOR THE MONTHS ENDED SEPTEMBER 3O, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,614,617 $ 1,733,282
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 1,474,380 1,497,473
Changes in operating assets and liabilities-
Funds held in trust (437,465) (347,268)
Accounts and other receivables 1,482,844 (1,027,233)
Prepaid expenses and other current assets (397,801) (371,879)
Accounts payable and accrued expenses (110,977) 943,546
Other assets 270,314 378,603
------------ ------------
Net cash provided by operating activities 3,895,912 2,806,524
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment (1,033,168) (39,004)
------------ ------------
Net cash used in investing activities (1,033,168) (39,004)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt-net 14,964 --
Net payment on revolving line of credit (721,429) (436,268)
Net Distributions (1,462,009) (1,637,955)
------------ ------------
Net cash used in financing activities (2,168,474) (2,074,223)
------------ ------------
NET INCREASE IN CASH 694,272 693,297
CASH AT BEGINNING OF PERIOD 767,684 348,123
------------ ------------
CASH AT END OF PERIOD $ 1,461,954 $ 1,041,423
============ ============
</TABLE>
See accompanying notes.
F-49
<PAGE> 109
RESIDUAL TECHNOLOGIES, LIMITED PARTNERSHIP, AND AFFILIATES
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. NATURE OF PARTNERSHIP'S BUSINESS:
Basis of Presentation and Nature of Business
The accompanying combined financial statements of Residual Technologies, Limited
Partnership, and affiliates (the Partnership) include the accounts and
operations of the entities described below which are under common ownership and
control of one individual and the estate of an individual. All significant
intercompany balances and transactions have been eliminated in combination.
The Partnership manages the treatment and disposal of biosolids materials
primarily on behalf of municipalities. The Partnership currently operates three
sewage sludge facilities used in the treatment and disposal of biosolids
materials. The Partnership has contracts to operate sludge processing facilities
on behalf of the city of Waterbury, Connecticut (Waterbury), the Woonsocket
Regional Wastewater Commission (WRWC) and the city of Woonsocket, Rhode Island
(Woonsocket), and the Water Pollution Control Authority of New Haven,
Connecticut (WPCA) (collectively, the host municipalities).
Residual Technologies, Limited Partnership (L.P.)
Residual Technologies, L.P. (RESTEC), is a Delaware limited partnership that is
owned by its general partner, Residual Technologies Systems, Inc., and two
limited partners. Residual Technologies Systems, Inc., is a Delaware S
Corporation.
New Haven Residuals, L.P.
New Haven Residuals, L.P. (New Haven), is a Delaware limited partnership that is
owned by its general partner, New Haven Residuals Systems, Inc., and an
affiliated limited partner, RESTEC. New Haven Residuals Systems, Inc., is a
Delaware S Corporation.
New Haven operates a sewage sludge incineration facility in New Haven,
Connecticut. Under a sludge agreement (the New Haven Agreement) between New
Haven and an affiliate, NETCO - Connecticut, Inc., with the WPCA, the host
municipality, New Haven provides sludge disposal services to the WPCA. The New
Haven Agreement expires 10 years from the date of receipt by the WPCA of final
permits from the State of Connecticut Department of Environmental Protection.
Under the terms of the New Haven Agreement, New Haven processes and disposes
sludge for the WPCA for an annual fixed operating fee paid in equal monthly
installments. For each dry ton of sludge processed at the facility in excess of
26 dry tons per day, the WPCA will pay New Haven a contractually designated rate
per dry ton of sludge. In addition, New Haven provides sludge disposal services
to surrounding municipalities and pays royalty fees to the WPCA for outside
sludge processed at the facility. The ownership of the facility will pass to the
WPCA at the expiration of the New Haven Agreement. Under certain conditions, New
Haven can cease operating the facility. Under these conditions, the WPCA would
be required to repay New Haven the greater of New Haven's outstanding
indebtedness, plus any applicable redemption costs, or unamortized capital
costs.
New England Treatment Company, Inc.
New England Treatment Company, Inc. (NETCO), is a Rhode Island S Corporation
that is owned by one individual and the estate of an individual.
NETCO operates a sludge incineration facility under an agreement, as amended
(the NETCO Agreement), which expires November 27, 2007, with the WRWC and
Woonsocket. Under the terms of the NETCO Agreement, NETCO processes and disposes
of up to seven dry tons of sludge a day for Woonsocket at no cost in exchange
for the use of the city's facilities. The accompanying financial statements
reflect revenues based on the estimated fair value of such processing and
disposal services and a like amount in cost of revenues for use of the
facilities. For each dry ton of sludge processed in excess of seven dry tons per
day, Woonsocket shall
F-50
<PAGE> 110
pay NETCO a contractually designated rate per dry ton of sludge. The NETCO
Agreement stipulates that capital improvements made to the incineration facility
by NETCO become the property of the WRWC and/or Woonsocket at the expiration of
the NETCO Agreement. Under certain conditions, NETCO can cease operating the
facility. Under these conditions, Woonsocket would be required to repay NETCO
for unamortized capital costs.
NETCO - Waterbury, L.P.
NETCO - Waterbury, L.P. (NETCO - Waterbury), is a Delaware limited partnership
that is owned by its general partner, NETCO - Waterbury Systems, Inc., and three
limited partners. The limited partners consist of one individual, the estate of
an individual and NETCO - Residuals Management, L.P., an affiliated entity.
NETCO - Waterbury Systems, Inc., is a Delaware S Corporation.
NETCO - Waterbury operates a sludge incineration facility under an agreement
(the Waterbury Agreement) which expires December 2016 with Waterbury. Under the
terms of the Waterbury Agreement, NETCO - Waterbury processes and disposes
sludge for Waterbury for an annual fixed operating fee paid in equal monthly
installments. For each dry ton of sludge processed at the facility in excess of
5,720 dry tons per year, Waterbury shall pay NETCO - Waterbury a contractually
designated rate per dry ton of sludge. In addition, NETCO - Waterbury provides
sludge disposal services to surrounding municipalities and pays royalty fees to
Waterbury for outside sludge processed at the facility. The Waterbury Agreement
stipulates that all capital improvements made by NETCO - Waterbury to the sludge
facility will be purchased by Waterbury for one dollar at the completion of the
Waterbury Agreement. Under certain conditions, NETCO - Waterbury can cease
operating the facility. Under these conditions, Waterbury would be required to
repay NETCO - Waterbury for unamortized capital costs.
NETCO - Residuals Management, L.P.
NETCO - Residuals Management, L.P. (NETCO - RM), is a Delaware limited
partnership that is owned by its general partner, NETCO - Residuals Management
Systems, Inc., and two limited partners, an individual and the estate of an
individual. NETCO - Residuals Management Systems, Inc., is a Delaware S
Corporation.
NETCO - RM is a marketing entity for sludge processing capacity at NETCO -
Waterbury. NETCO - RM sells its services to municipalities located in the
northeastern United States. As defined under an agreement with NETCO -
Waterbury, NETCO - RM is required to utilize NETCO - Waterbury's excess sludge
disposal capacity for processing sludge it receives under eligible contracts
with its customers. This agreement grants a security interest in certain of
NETCO - RM's assets, revenues and contracts to NETCO - Waterbury, serving, in
part, as collateral for the NETCO - Waterbury bonds.
Fairhaven Residuals, L.P
Fairhaven Residuals, L.P. (Fairhaven), is a Delaware limited partnership that is
owned by its general partner, Fairhaven Residuals Systems, Inc., and an
affiliated limited partner, Residual Technologies, L.P. Fairhaven Residuals
Systems, Inc., is a Delaware S Corporation.
Fairhaven is developing plans for a sewage sludge disposal facility in
Fairhaven, Massachusetts, and has obtained a 20-year lease, contingent upon
obtaining the required approvals for the construction of the facility. In the
event the lease is terminated, Fairhaven is obligated to provide the city of
Fairhaven, Massachusetts, free disposal of biosolids for 12 months from the date
of termination.
NETCO - Connecticut, Inc.
NETCO - Connecticut, Inc. (NETCO - CT), is a Delaware S Corporation owned by one
individual and the estate of an individual. NETCO - CT is a party to the New
Haven Agreement and is otherwise currently an inactive corporation.
Interim Financial Information
The interim financial statements for the nine months ended September 30, 1999,
and 1998, are unaudited, and certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. In the opinion of management
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations with respect to the interim financial
statements have been included. The result of operations for the interim period
are not necessarily indicative of the results for the entire fiscal year.
F-51
<PAGE> 111
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Funds Held in Trust
Funds held in trust represent monies held by First Fidelity Bank and State
Street Bank and Trust Company of Connecticut, National Association (the
Trustees) for the loan agreements between the CDA and Waterbury and New Haven,
respectively. As a requirement of the loan agreements, the partnerships, on a
stand-alone basis, must meet the requirements stipulated per the respective
agreements dated June 1, 1995, and June 1, 1996. The loans, depending on the
terms of the related indenture, require that certain monies be placed in
restricted fund accounts to be used for various designated purposes (i.e., debt
service funds, repair and replacement funds, etc.). Such restricted fund
accounts have been presented separately in the accompanying combined balance
sheets. Monies in the funds will remain restricted until such time as the
related loans mature or are paid off, whichever occurs first.
Revenue Recognition
Revenues under the New Haven Agreement and the Waterbury Agreement are
recognized based on a fixed operating fee paid as services are provided. If
sludge exceeds a defined amount per the applicable operating agreement,
additional fees are charged to the host municipality as services are rendered
based upon a contractually determined rate. Revenues under the NETCO Agreement
are recognized based upon tons hauled, at a fixed fee per ton hauled, subject to
adjustment, as services are rendered.
Revenues may also be earned on sludge processed for outside customers. Such
revenues are recognized as services are provided. Under the agreements with the
host municipalities, the host municipalities are entitled to a royalty for
outside sludge processed at the facility.
Debt Issuance Costs
The Partnership has deferred certain loan costs incurred in connection with the
issuance of its indebtedness. These debt issuance costs are stated at cost, less
accumulated amortization and are being amortized on the straight-line method
over the term of the related debt.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Accordingly,
actual results could differ from those estimates.
F-52
<PAGE> 112
Start-Up Activities
The Partnership expenses start-up activities related to the facilities as
incurred.
Property and Equipment
Property and equipment are recorded at cost. Expenditures in the nature of
normal repairs and maintenance are charged to operations as incurred.
Expenditures for major renewals and betterments which extend useful lives of
existing equipment are capitalized and depreciated. Upon disposition or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts, and the resulting gain
or loss is included in the combined statement of operations.
Interest is capitalized in connection with the construction of major facilities.
The capitalized interest is recorded as part of the asset to which it relates
and is amortized over the asset's estimated useful life.
Depreciation is computed by the straight-line method over the shorter of the
estimated useful lives of the assets or the term of the operating agreements
with the host municipalities.
Realization of Long-Lived Assets
The Partnership follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if an impairment
of such property is necessary.
Income Taxes
No provision for federal income taxes is made in the accounts of the Partnership
since such taxes are liabilities of the partners and depend upon their
respective tax situations. Further, partner capital accounts reflected in the
accompanying financial statements differ from amounts reported in the
Partnership's federal income tax returns because of differences in accounting
policies adopted for financial and tax reporting purposes.
Corporate entities within the Partnership structure, as defined above, have
elected to be treated as S Corporations for income tax reporting purposes. For
these companies, no provision for federal income taxes is presented in the
combined financial statements since such taxes are liabilities of the
shareholders and depend upon their respective tax situations. Certain entities
are subject to state income taxes, and provisions thereon are reflected in the
combined statements of operations. A provision is made for current and deferred
state income taxes, as applicable. Deferred state income taxes are provided on
temporary differences between the financial and tax bases of assets and
liabilities relating primarily to property and equipment.
F-53
<PAGE> 113
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ecosystematics, Inc.:
We have audited the accompanying balance sheet of Ecosystematics, Inc. (the
Company), as of December 31, 1998, and the related statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ecosystematics, Inc., as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 28, 1999
F-54
<PAGE> 114
ECOSYSTEMATICS, INC.
BALANCE SHEET--DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 26,960
Accounts receivable, net of allowance of $15,847 309,175
Employee receivables 5,023
Prepaid expenses 8,217
----------
Total current assets 349,375
Property and equipment, net 142,427
----------
Total assets $ 491,802
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 23,838
----------
Total current liabilities 23,838
COMMITMENTS AND CONTINGENCIES
Shareholders' equity:
Common stock 100
Additional paid-in capital 5,824
Retained earnings 462,040
----------
Total shareholders' equity 467,964
----------
Total liabilities and shareholders' equity $ 491,802
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 115
ECOSYSTEMATICS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES $ 1,307,334
COST OF REVENUES 993,714
-----------
Gross profit 313,620
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 274,913
-----------
Income from operations 38,707
OTHER INCOME 1,679
-----------
NET INCOME $ 40,386
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 116
ECOSYSTEMATICS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------ Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 100 $ 100 $5,824 $ 435,654 $ 441,578
Distributions - - - (14,000) (14,000)
Net income - - - 40,386 40,386
--- ----- ------ --------- ---------
BALANCE, December 31, 1998 100 $ 100 $5,824 $ 462,040 $ 467,964
=== ===== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 117
ECOSYSTEMATICS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,386
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 34,837
Changes in operating assets and liabilities-
Decrease in-
Accounts receivable 9,499
Related-party receivables 5,620
Prepaid expenses 6,531
Increase in-
Accounts payable and accrued expenses 4,755
----------
Net cash provided by operating activities 101,628
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (65,202)
----------
Net cash used in investing activities (65,202)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to shareholders (14,000)
----------
Net cash used in financing activities (14,000)
----------
NET INCREASE IN CASH 22,426
CASH, beginning of year 4,534
----------
CASH, end of year $ 26,960
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 118
ECOSYSTEMATICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS AND ORGANIZATION:
Ecosystematics, Inc. (the Company), a Florida corporation, is engaged in the
biosolids management business. The Company operates and provides maintenance
for sanitary sewage disposal systems and waste water treatment plants. The
Company serves customers in the Florida Keys.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the specific
identification of accounts receivable where collection is no longer deemed
probable.
Property and Equipment
Property and equipment are stated at cost. Depreciation is being provided using
the straight-line method over estimated useful lives of five to 10 years.
Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments, which extend useful lives of
existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
Related-Party Receivables
Related-party receivables consisted of loans due from employees of $5,023.
Shareholders' Equity
The Company had 100 shares of common stock authorized and 100 shares issued and
outstanding as of December 31, 1998.
Revenue Recognition
The Company recognizes revenue when services are provided.
Income Taxes
The Company is an S Corporation, as defined by the Internal Revenue Code
whereby the Company is not subject to taxation for federal purposes. Under S
Corporation status, each shareholder reports his share of the Company's taxable
earnings or losses in his personal federal and state tax returns.
Fair Values
The carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of their fair values due to the short-term
maturities of these instruments.
F-59
<PAGE> 119
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Realization of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if an impairment
of such property is necessary.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1998:
<TABLE>
<CAPTION>
Estimated
Useful Lives
in Years
-----------
<S> <C> <C>
Transportation equipment 5 $ 172,327
Machinery and equipment 5-7 50,679
Furniture and fixtures 5-10 52,608
----------
275,614
Less- Accumulated depreciation (133,187)
----------
Property and equipment, net $ 142,427
==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable for the
year ended December 31, 1998, consists of the following:
Balance at beginning of year $ 12,298
Additions to costs and expenses 3,549
---------
Balance at end of year $ 15,847
========
5. RELATED-PARTY TRANSACTIONS:
The Company leases office space from its two shareholders on a month-to-month
basis. Total rent expense for the office space was $12,019 for the year ended
December 31, 1998.
6. EMPLOYEE BENEFIT PLAN:
The Company maintains a simplified employee pension (SEP) plan. An SEP plan is
a pension plan that meets certain minimum qualifications regarding eligibility
and employer contributions. The plan allows all employees who have worked
during two preceding calendar years and earn a minimum of $5,000 annually to
contribute a maximum of $6,000 per year. The Company makes matching
contributions up to 3 percent of an employee's wages each year. The
contributions made by the Company were $8,039 for the year ended December 31,
1998.
F-60
<PAGE> 120
7. COMMITMENTS AND CONTINGENCIES:
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
8. SUBSEQUENT EVENT:
In February 1999, the Company entered into a loan agreement in the amount of
$322,800 with the U.S. Small Business Administration. The loan bears interest
at 4 percent and matures February 2029.
9. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED):
On February 4, 2000, Synagro closed the acquisition of Ecosystematics for cash
consideration of approximately $1.6 million. The acquisition will be accounted
for as a purchase; accordingly, the purchase price will be allocated to the
underlying assets and liabilities based on their respective estimated fair
values at the date of acquisition. Synagro estimates that approximately $383,000
will be recorded as goodwill.
F-61
<PAGE> 121
ECOSYSTEMATICS, INC.
UNAUDITED BALANCE SHEET--SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 590,770
Accounts receivable, net 224,794
Other current assets 33,530
----------
Total current assets 849,094
Property and equipment, net 119,313
----------
Total assets $ 968,407
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 24,324
----------
Total current liabilities 24,324
COMMITMENTS AND CONTINGENCIES
Long term debt 322,800
Shareholders' equity:
Common stock 100
Additional paid-in capital 5,824
Retained earnings 615,359
----------
Total shareholders' equity 621,283
----------
Total liabilities and shareholders' equity $ 968,407
==========
See accompanying notes.
</TABLE>
F-62
<PAGE> 122
ECOSYSTEMATICS, INC.
UNAUDITED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
REVENUES $ 1,083,232 $ 1,022,784
COST OF REVENUES 877,287 909,411
----------- ----------
Gross profit 205,945 113,373
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 39,662 33,658
----------- ----------
Income from operations 166,283 79,715
OTHER INTEREST EXPENSE (INCOME) 3,724 (1,434)
----------- ----------
NET INCOME $ 162,559 $ 81,149
=========== ==========
</TABLE>
See accompanying notes.
F-63
<PAGE> 123
ECOSYSTEMATICS, INC.
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 162,559 $ 81,149
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 26,128 26,128
Changes in operating assets and liabilities-
Decrease in-
Accounts receivable 62,529 12,012
Prepaid expenses and other 1,562 6,269
(Decrease) in-
Accounts payable and accrued expenses 485 (17,928)
--------- ---------
Net cash provided by operating activities 253,263 107,630
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment-net (3,014) (31,399)
--------- ---------
Net cash used in investing activities (3,014) (31,399)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable-net 322,800 --
Distribution to shareholders (9,239) (4,000)
--------- ---------
Net cash used in financing activities 313,561 (4,000)
--------- ---------
NET CHANGE IN CASH 563,810 72,231
BEGINNING OF PERIOD 26,960 4,534
--------- ---------
END OF PERIOD $ 590,770 $ 76,765
========= =========
</TABLE>
See accompanying notes.
F-64
<PAGE> 124
ECOSYSTEMATICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Ecosystematics, Inc. (the Company), a Florida corporation, is engaged in the
biosolids management business. The Company operates and provides maintenance
for sanitary sewage disposal systems and waste water treatment plants. The
Company serves customers in the Florida Keys.
Interim Financial Information
The interim financial statements for the nine months ended September 30, 1999,
and 1998, are unaudited, and certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. In the opinion of management
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations with respect to the interim financial
statements have been included. The result of operations for the interim period
are not necessarily indicative of the results for the entire fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the specific
identification of accounts receivable where collection is no longer deemed
probable.
Property and Equipment
Property and equipment are stated at cost. Depreciation is being provided using
the straight-line method over estimated useful lives of five to 10 years.
Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments, which extend useful lives of
existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
Revenue Recognition
The Company recognizes revenue when services are provided.
Income Taxes
The Company is an S Corporation, as defined by the Internal Revenue Code
whereby the Company is not subject to taxation for federal purposes. Under S
Corporation status, each shareholder reports his share of the Company's taxable
earnings or losses in his personal federal and state tax returns.
Fair Values
The carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of their fair values due to the short-term
maturities of these instruments.
F-65
<PAGE> 125
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Realization of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if an impairment
of such property is necessary.
F-66
<PAGE> 126
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rehbein, Inc.:
We have audited the accompanying combined balance sheets of the Biosolids
Division of Rehbein, Inc., and affiliates, as defined in Note 1 (the Biosolids
Division), as of May 31, 1999 and 1998, and the related combined statements of
operations, divisional equity and cash flows for the years then ended. These
financial statements are the responsibility of the management of the Biosolids
Division. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Biosolids Division as of May 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
October 28, 1999
F-67
<PAGE> 127
BIOSOLIDS DIVISION OF REHBEIN, INC., AND AFFILIATES
COMBINED BALANCE SHEETS--MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 46,092 $ --
Accounts receivable 554,698 537,732
Related-party receivables, current, including accrued interest 171,083 98,583
Prepaid expenses and other -- 19,909
------------ ------------
Total current assets 771,873 656,224
Related-party receivables, long-term 556,000 343,500
Property, plant and equipment, net 1,832,816 2,432,434
------------ ------------
Total assets $ 3,160,689 $ 3,432,158
============ ============
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 520,108 $ 515,526
Current maturities of long-term debt 962,370 1,044,170
------------ ------------
Total current liabilities 1,482,478 1,559,696
Deferred credit 243,407 --
LONG-TERM DEBT, less current maturities 1,196,767 1,045,658
COMMITMENTS AND CONTINGENCIES
DIVISIONAL EQUITY 238,037 826,804
------------ ------------
Total liabilities and divisional equity $ 3,160,689 $ 3,432,158
============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-68
<PAGE> 128
BIOSOLIDS DIVISION OF REHBEIN, INC., AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 5,318,320 $ 4,484,489
COST OF REVENUES 3,044,575 2,590,932
------------ ------------
Gross profit 2,273,745 1,893,557
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,545,763 1,386,092
OTHER INCOME (EXPENSE):
Interest expense (161,323) (147,982)
Interest income, related-party receivables 41,600 70,000
Other, net 17,631 (7,044)
------------ ------------
NET INCOME $ 625,890 $ 422,439
============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-69
<PAGE> 129
BIOSOLIDS DIVISION OF REHBEIN, INC., AND AFFILIATES
COMBINED STATEMENTS OF DIVISIONAL EQUITY
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C>
BALANCE, May 31, 1997 $ 2,053,795
Net income 422,439
Distributions (1,715,669)
Contributions 66,239
------------
BALANCE, May 31, 1998 826,804
Net income 625,890
Distributions (1,681,341)
Contributions 466,684
------------
BALANCE, May 31, 1999 $ 238,037
============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-70
<PAGE> 130
BIOSOLIDS DIVISION OF REHBEIN, INC., AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 625,890 $ 422,439
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation 957,418 876,279
Changes in operating accounts-
Accounts receivable (16,966) (22,549)
Prepaid expenses and other 19,909 67,753
Accounts payable and accrued liabilities 4,582 40,462
------------ ------------
Net cash provided by operating activities 1,590,833 1,384,384
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (399,393) (1,049,883)
------------ ------------
Net cash used in investing activities (399,393) (1,049,883)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (1,044,170) (1,168,906)
Principal payments on related-party receivables -- 656,500
Borrowings of notes payable 1,113,479 1,650,959
Contributions 466,684 66,239
Distributions (1,681,341) (1,715,669)
------------ ------------
Net cash used in financing activities (1,145,348) (510,877)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46,092 (176,376)
Cash and cash equivalents, beginning of year -- 176,376
------------ ------------
Cash and cash equivalents, end of year $ 46,092 $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 167,519 $ 151,119
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-71
<PAGE> 131
BIOSOLIDS DIVISION OF REHBEIN, INC., AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Rehbein, Inc., a closely held Minnesota C Corporation, together with certain
affiliated entities under common ownership, R&R Leasing, Inc. (R&R), a Minnesota
S Corporation and Gordon Rehbein Farms (Rehbein Farms), a Minnesota sole
proprietorship, operate, among other things, a business that primarily
transports and disposes biosolids and other waste materials. These companies
serve municipalities and other customers primarily in the metropolitan areas of
Minneapolis, St. Paul, Duluth, International Falls, other towns in Minnesota and
the upper Michigan peninsula, Wisconsin and Wisconsin's surrounding rural areas.
Such business is hereafter referred to as "the Biosolids Division" or "the
Company."
The accompanying combined financial statements have been prepared in
consideration of the possible sale of the Biosolids Division to Synagro
Technologies, Inc. (Synagro) (see Note 7). The accompanying combined financial
statements include the accounts of the entities described in the preceding
paragraph that are attributable to the Biosolids Division. In preparing the
combined statements of operations, certain expenses incurred by affiliated
entities have been charged directly to or allocated to the operations of the
Biosolids Division. Direct expenses such as labor costs have been recorded by
the Company as incurred. Certain indirect and other expenses for which there is
a measurable basis for allocation, such as rent and office expense, trucking and
related costs and expenses, officer salaries, and general insurance have been
allocated using various measurable bases. The patterns of usage related to these
costs and expenses by the Company were used primarily as a basis of allocation
of such costs. Management considers its methodologies for specifically
identifying or allocating costs and expenses to the Company to be reasonable and
to present fairly the costs and expenses of the Company. No provisions for
income taxes have been provided in the accompanying combined financial
statements since the Biosolids Division as presented herein is not a separate
legal entity subject to income taxes. Such financial statements do not purport
to represent the financial position or operations of Rehbein, Inc., and certain
affiliates as a whole.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Major Customer and Risk Concentration
Significant customers are those that account for greater than 10 percent of the
Company's revenues. During the year ended May 31, 1999, four customers accounted
for 25 percent, 16 percent, 10 percent and 10 percent, respectively, of the
Company's combined revenues. During the year ended May 31, 1998, three customers
accounted for 29 percent, 16 percent and 11 percent, respectively, of the
Company's combined revenues.
In addition, the Company grants credit, without collateral, to its customers.
Consequently, the Company is subject to potential credit risk related to changes
in business and economic factors within its markets. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
F-72
<PAGE> 132
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation of assets is
computed primarily using the straight-line method over lives ranging from three
years to 20 years. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant renewals
and betterments are capitalized.
Realization of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts
and circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
assets are compared to the asset's carrying amount to determine if an impairment
of such property is necessary.
Revenue Recognition
The Company recognizes revenues when services are provided.
2. PROPERTY AND EQUIPMENT:
-
Property and equipment as of May 31, 1999 and 1998, consists of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives in
Years 1999 1998
------------------ ------------- -----------
<S> <C> <C> <C>
Machinery and equipment 3-7 $ 3,102,196 $ 2,701,893
Transportation equipment 3-7 3,428,251 3,269,749
Furniture and fixtures 3-7 58,744 54,195
Buildings 20 -- 201,779
Land N/A -- 37,337
------------ ------------
6,589,191 6,264,953
Less- Accumulated depreciation (4,756,375) (3,832,519)
------------ ------------
Property and equipment, net $ 1,832,816 $ 2,432,434
============ ============
</TABLE>
Depreciation expense for the years ended May 31, 1999 and 1998, was $957,418 and
$876,279, respectively.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses as of May 31, 1999 and 1998, consist of
the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Accounts payable, trade $ 153,852 $ 200,039
Accrued compensation and benefits 272,530 268,096
Other accrued expenses 93,726 47,391
---------- ----------
$ 520,108 $ 515,526
========= =========
</TABLE>
F-73
<PAGE> 133
4. DEBT:
As of May 31, 1999 and 1998, debt consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Revolving working capital line of credit, interest at prime plus .5%,
collateralized by real estate $ 327,700 $ 227,700
Equipment notes due in monthly installments of principal and
interest, maturing from October through November 2003, interest
rates ranging from 6% through 9%, collateralized by equipment 1,831,437 1,862,128
------------ -------------
Total 2,159,137 2,089,828
Less- Current maturities of long-term debt (962,370) (1,044,170)
------------ -------------
Long-term debt, less current maturities $ 1,196,767 $ 1,045,658
============ =============
</TABLE>
On February 5, 1993, the Company entered a $350,000 revolving working capital
line of credit. The credit facility is secured by property of the Company. The
credit facility has been renewed each year and is scheduled to mature on
February 17, 2000. The interest rate was changed upon the renewal at February
1998 from a fixed rate of 10 percent to a variable rate of prime plus .5 percent
(a weighted average of 8.25 percent for fiscal year ended May 31, 1999). Amounts
due under the line of credit as of May 31, 1999 and 1998, were $327,700 and
$227,700, respectively.
On January 16, 1997, the Company obtained another revolving working capital line
of credit for $650,000. This credit facility is also secured by property of the
Company. The credit facility matured January 16, 1999, as a result of an
extension negotiated in January 1998 and bore interest at the prime rate plus
.75 percent (a weighted average of 9.25 percent for fiscal year ended May 31,
1998). The Company did not carry a balance against the line of credit as of May
31, 1998.
The aggregate annual maturities of long-term debt during the five years
following May 31, 1999, and thereafter are as follows:
<TABLE>
<S> <C>
2000 $ 962,370
2001 433,545
2002 449,089
2003 290,242
2004 23,891
Thereafter --
-----------
$ 2,159,137
===========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Legal Matters
The Company is involved in disputes or legal actions arising in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's combined
financial position or results of operations.
Labor Matters
The Company is party to a collective bargaining agreement (the Agreement) with a
union. The Agreement expires on May 31, 2001. In connection with the Company's
collective bargaining agreements with its union, the Company participates with
other companies in the union's multiemployer pension and welfare plans (the
Plans). The Plans cover all of the Company's union employees. The Employee
Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension
Plan Act of 1980, imposes certain liabilities upon employers who are
contributors to a multiemployer plan in the event of the employer's withdrawal
from, or upon termination of, such plan. The Company has no plans to withdraw
from the Plans. The Plans do not maintain information on net
F-74
<PAGE> 134
assets and actuarial present value of the accumulated share of the Plans'
unfunded vested benefits allocable to the Company, and amounts, if any, for
which the Company may be contingently liable are not ascertainable at this time.
The Company is obligated to fund certain pension and welfare benefits in
accordance with rate scales as defined in the Agreement. Contributions made
pursuant to the Agreement were $127,313 and $114,005 for the years ended May 31,
1999 and 1998, respectively.
Profit-Sharing Plan
Effective June 1, 1991, the Company adopted a profit-sharing retirement plan
(the Plan) for its nonunion employees. An employee with a minimum age of 21
becomes eligible to participate in the Plan after one year of service and after
having worked for more than 1,000 hours. Vesting begins after one year of
service, and an employee is fully vested after six years. Contributions to the
Plan are at the discretion of the Company. No contributions were made to the
Plan for the years ended May 31, 1999 and 1998.
6. RELATED-PARTY TRANSACTIONS:
Related-Party Receivables
As of May 31, 1999 and 1998, the Company had a receivable of $343,500 and
$343,500, respectively, due from an owner relating to a prior-period sale of
property. Interest accrues on the note at a rate of 7 percent per annum. Accrued
interest on the receivable as of May 31, 1999 and 1998, was $123,083 and
$98,583, respectively. The receivable calls for quarterly payments of principal
of $30,000 plus interest and matures on January 1, 2002. Interest income for the
years ended May 31, 1999 and 1998, included $24,500 and $70,000, respectively.
During June 1998, the Company sold the land and office building in which it
currently operates, with a net book value of approximately $42,000, to a related
entity for $285,000. The "contract for deed" calls for an annual principal
payment of $48,000 and an annual payment of interest equal to 7 percent of the
unpaid balance. The purchase price of the property of $243,407 in excess of the
net book value of the property sold has been recognized as a deferred credit in
the accompanying combined balance sheet. The deferred credit will be recognized
as a credit to equity as the related note receivable is collected. Interest
income for the year ended May 31, 1999, included $17,100 of interest income
related to the note receivable. As of May 31, 1999, the balance was $260,500,
including accrued interest. Simultaneously with the sale of the building, the
Company entered into an operating lease with the related entity to lease the
office building on a month-to-month basis. Rent expense during 1999 under this
related-party lease was $48,000.
The Company uses certain land owned by the owners for land application purposes
in disposing of volumes of biosolids waste materials transported by the Company.
The use of such land for biosolids land application is provided to the Company
at no cost. Management believes such arrangement mutually benefits the Company
and the owners.
7. SUBSEQUENT EVENTS:
On August 4, 1999, the Company's owners entered into a letter of intent to sell
the Biosolids Division to Synagro Technologies, Inc., a biosolids management
company located in Houston, Texas. Pursuant to the proposed sale, Synagro will
purchase the stock of Rehbein, Inc., and certain assets of R&R and Rehbein
Farms. As such, Synagro will assume certain income tax liabilities of Rehbein,
Inc. As discussed in Note 1, no provisions for income taxes have been provided
in the accompanying combined financial statements of the Biosolids Division.
Also, pursuant to the proposed sale, related-party receivables will be paid and
substantially all outstanding liabilities will be settled prior to the
consummation of the sale to Synagro.
As of May 31, 1999 and 1998, the stockholders' equity of Rehbein, Inc., was as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Common stock, $1 par value, 25,000 shares authorized,
10,000 shares issued and outstanding $ 10,000 $ 10,000
Additional paid-in capital 435,832 435,832
Retained earnings 151,634 616,643
------------ ------------
Total stockholders' equity $ 597,466 $ 1,062,475
============ ============
</TABLE>
As of May 31, 1999 and 1998, Rehbein, Inc., has recorded a tax liability of
$723,395 and $490,154, respectively.
F-75
<PAGE> 135
BIOSOLIDS DIVISION OF REHBEIN, INC., AND AFFILIATES
UNAUDITED COMBINED BALANCE SHEET--OCTOBER 31, 1999
<TABLE>
<CAPTION>
1999
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,248
Accounts receivable 688,600
Related-party receivables, current, including accrued interest 171,083
Prepaid expenses and other --
------------
Total current assets 895,931
Related-party receivables, long-term 556,000
Property, plant and equipment, net 1,786,925
------------
Total assets $ 3,238,856
============
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 602,839
Current maturities of long-term debt 1,078,002
------------
Total current liabilities 1,680,841
Deferred credit 243,407
LONG-TERM DEBT, less current maturities 1,311,410
COMMITMENTS AND CONTINGENCIES
DIVISIONAL EQUITY 3,198
------------
Total liabilities and divisional equity $ 3,238,856
============
</TABLE>
See accompanying notes.
F-76
<PAGE> 136
BIOSOLIDS DIVISION OF REHBEIN, INC., AND AFFILIATES
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
FOR THE FIVE MONTHS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 2,001,793 $ 2,397,478
COST OF REVENUES 1,073,651 1,328,707
------------ ------------
Gross profit 928,142 1,068,771
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 733,688 661,857
OTHER INCOME (EXPENSE):
Interest expense -- (52,514)
------------ ------------
NET INCOME $ 194,454 $ 354,400
============ ============
</TABLE>
See accompanying notes.
F-77
<PAGE> 137
BIOSOLIDS DIVISION OF REHBEIN, INC., AND AFFILIATES
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 194,454 $ 354,400
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation 437,884 437,884
Changes in operating accounts-
Accounts receivable (133,902) (369,680)
Accounts payable and accrued liabilities 82,731 177,445
------------ ------------
Net cash provided by operating activities 581,167 600,049
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (391,993) (31,763)
------------ ------------
Net cash used in investing activities (391,993) (31,763)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable - net 230,275 (40,683)
Distributions (429,293) (441,876)
------------ ------------
Net cash used in financing activities (199,018) (482,559)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,844) 85,727
Cash and cash equivalents, beginning of period 46,092 --
------------ ------------
Cash and cash equivalents, end of period $ 36,248 $ 85,727
============ ============
</TABLE>
See accompanying notes.
F-78
<PAGE> 138
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Rehbein, Inc., a closely held Minnesota C Corporation, together with certain
affiliated entities under common ownership, R&R Leasing, Inc. (R&R), a Minnesota
S Corporation and Gordon Rehbein Farms (Rehbein Farms), a Minnesota sole
proprietorship, operate, among other things, a business that primarily
transports and disposes biosolids and other waste materials. These companies
serve municipalities and other customers primarily in the metropolitan areas of
Minneapolis, St. Paul, Duluth, International Falls, other towns in Minnesota and
the upper Michigan peninsula, Wisconsin and Wisconsin's surrounding rural areas.
Such business is hereafter referred to as "the Biosolids Division" or "the
Company."
The accompanying combined financial statements have been prepared in
consideration of the possible sale of the Biosolids Division to Synagro
Technologies, Inc. (Synagro) (see Note 7). The accompanying combined financial
statements include the accounts of the entities described in the preceding
paragraph that are attributable to the Biosolids Division. In preparing the
combined statements of operations, certain expenses incurred by affiliated
entities have been charged directly to or allocated to the operations of the
Biosolids Division. Direct expenses such as labor costs have been recorded by
the Company as incurred. Certain indirect and other expenses for which there is
a measurable basis for allocation, such as rent and office expense, trucking and
related costs and expenses, officer salaries, and general insurance have been
allocated using various measurable bases. The patterns of usage related to these
costs and expenses by the Company were used primarily as a basis of allocation
of such costs. Management considers its methodologies for specifically
identifying or allocating costs and expenses to the Company to be reasonable and
to present fairly the costs and expenses of the Company. No provisions for
income taxes have been provided in the accompanying combined financial
statements since the Biosolids Division as presented herein is not a separate
legal entity subject to income taxes. Such financial statements do not purport
to represent the financial position or operations of Rehbein, Inc., and certain
affiliates as a whole.
Interim Financial Information
The interim financial statements for the five months ended October 31, 1999, and
1998, are unaudited, and certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. In the opinion of management all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations with respect to the interim financial
statements have been included. The result of operations for the interim period
are not necessarily indicative of the results for the entire fiscal year.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation of assets is
computed primarily using the straight-line method over lives ranging from three
years to 20 years. When assets are retired or otherwise disposed of, the cost
and related accumulated
F-79
<PAGE> 139
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income for the period. The cost of maintenance and repairs is
charged to income as incurred; significant renewals and betterments are
capitalized.
Realization of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts
and circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
assets are compared to the asset's carrying amount to determine if an impairment
of such property is necessary.
Revenue Recognition
The Company recognizes revenues when services are provided.
F-80
<PAGE> 140
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Whiteford Construction Company, Inc.:
We have audited the accompanying balance sheet of Whiteford Environmental, a
division of Whiteford Construction Company, Inc., as of December 31, 1998, and
the related statements of operations, divisional equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Whiteford Environmental, a
division of Whiteford Construction Company, Inc., as of December 31, 1998, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 24, 1999
F-81
<PAGE> 141
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
BALANCE SHEET--DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable $ 715,724
Prepaid expenses 2,770
----------
Total current assets 718,494
Property and equipment, net 305,309
----------
Total assets $1,023,803
==========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 76,323
----------
Total current liabilities 76,323
COMMITMENTS AND CONTINGENCIES
DIVISIONAL EQUITY 947,480
----------
Total liabilities and divisional equity $1,023,803
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE> 142
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES $2,256,032
COST OF REVENUES 1,472,317
----------
Gross profit 783,715
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 352,438
----------
Net income $ 431,277
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE> 143
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
STATEMENT OF DIVISIONAL EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
BALANCE, December 31, 1997 $ 443,417
Net income 431,277
Contribution from other divisions 72,786
---------
BALANCE, December 31, 1998 $ 947,480
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE> 144
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 431,277
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 116,858
Changes in operating assets and liabilities-
Increase in accounts receivable (575,123)
Decrease in prepaid expenses 230
Increase in accounts payable and accrued liabilities 26,958
---------
Net cash provided by operating activities 200
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (200)
---------
Net cash used in investing activities (200)
---------
NET CHANGE IN CASH --
CASH:
Beginning of year --
---------
End of year $ --
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE> 145
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Whiteford Environmental (the Company) is a division of Whiteford Construction
Company, Inc. (Whiteford), a closely held S Corporation incorporated in the
state of Maryland and established in 1977. The Company provides biosolid
material handling services to municipalities and other customers located in New
York, Pennsylvania, New Jersey, Delaware, Virginia, North Carolina, Florida,
Tennessee, Kentucky, Missouri, Ohio, Minnesota and Maryland.
The accompanying statement of operations includes revenues directly attributable
to the operations of the Company and costs and expenses both directly
attributable to the Company as well as certain costs of Whiteford that have been
allocated to the Company as further discussed below. Direct expenses, such as
components of cost of sales and certain salaries, are recorded to the
appropriate division of Whiteford as incurred. Certain indirect and other
expenses for which there is a measurable basis for allocation, such as rent and
office expense, officer salaries and general insurance, are allocated between
the divisions of Whiteford using various measurable bases. The patterns of usage
related to these costs and expenses by the Company were used primarily as a
basis of allocation of such costs. Management considers its methodologies for
specifically identifying or allocating costs and expenses to the Company to be
reasonable and to present fairly the costs and expenses of the Company.
Revenue Recognition
The Company recognizes revenue at the time the services are provided. During
1998, three customers accounted for approximately 25 percent, 20 percent and 15
percent, respectively, of the Company's revenues. Any significant change in the
Company's relationship with these customers could have a material adverse effect
on the Company's operations.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates
Property and Equipment
Property and equipment are recorded at cost and includes those assets owned by
Whiteford that are utilized in the operations of the Company. Depreciation of
property and equipment and amortization of leasehold improvements are accounted
for on a straight-line method over the estimated useful lives of the assets of
three to seven years. Expenditures for repairs and maintenance are charged to
expense as incurred. Expenditures for major renewals and betterments, which
extend useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any related gain or
loss is recognized.
Realization of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is
F-86
<PAGE> 146
required, the estimated future undiscounted cash flows associated with the asset
are compared the asset's carrying amount to determine if an impairment of such
property is necessary.
Income Taxes
Whiteford is an S Corporation, as defined by the Internal Revenue Code whereby
Whiteford is not subject to taxation for federal purposes. Under S Corporation
status, each stockholder reports his share of Whiteford's taxable earnings or
loss in his personal federal and state tax returns. Thus, there is no income tax
shown on the statement of operations of the Company.
2. PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, 1998, consists of the following:
<TABLE>
<CAPTION>
Estimated Useful
Lives in Years
----------------
<S> <C> <C>
Machinery and equipment 5-7 620,128
Transportation equipment 3-7 441,229
Furniture and fixtures 3-7 10,211
Leasehold improvements 7 5,040
---------
Total 1,076,608
Less- Accumulated depreciation and amortization 771,299
---------
Property and equipment, net 305,309
=========
</TABLE>
3. NONCASH FINANCING ACTIVITIES:
During 1998, Whiteford's other divisions contributed property and equipment to
the Company. This contribution was recorded as contributed capital at the basis
of $72,786 and is reflected as part of divisional equity in the accompanying
financial statements of the Company.
4. RELATED-PARTY TRANSACTIONS:
The Company leases office space from the shareholder of Whiteford. The lease is
currently on a month-to-month basis. Rent paid to the shareholder under this
related-party lease was $22,850 for the year ended December 31, 1998.
5. COMMITMENTS AND CONTINGENCIES:
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
6. SUBSEQUENT EVENT:
In July 1999, Whiteford entered into a letter of intent to sell the Company to
Synagro Technologies, Inc., a biosolids management company located in Houston,
Texas.
F-87
<PAGE> 147
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
UNAUDITED BALANCE SHEET--SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable $737,389
--------
Total current assets 737,389
Property and equipment, net 232,709
--------
Total assets $970,098
========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 36,351
--------
Total current liabilities 36,351
COMMITMENTS AND CONTINGENCIES
DIVISIONAL EQUITY 933,747
--------
Total liabilities and divisional equity $970,098
========
</TABLE>
See accompanying notes.
F-88
<PAGE> 148
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
UNAUDITED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
REVENUES $1,712,999 $1,086,163
COST OF REVENUES 930,917 870,413
---------- ----------
Gross profit 782,082 215,750
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 267,464 219,247
---------- ----------
Net income $ 514,618 $ (3,497)
========== ==========
</TABLE>
See accompanying notes.
F-89
<PAGE> 149
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 514,618 $ (3,497)
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization -- --
Changes in operating assets and liabilities-
Increase in accounts receivable (21,665) (282,214)
Decrease in prepaid expenses 2770 3,000
Increase in accounts payable and accrued liabilities 39,972 22,029
--------- ---------
Net cash provided by operating activities 455,751 (304,740)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment 72,600 38,809
--------- ---------
Net cash (used) provided in investing activities 72,600 38,809
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Distributions (528,351) 265,931
--------- ---------
Net cash (used) in financial activities (528,351) 265,931
--------- ---------
NET CHANGE IN CASH -- --
CASH:
Beginning of period -- --
--------- ---------
End of period $ -- $ --
========= =========
</TABLE>
See accompanying notes.
F-90
<PAGE> 150
WHITEFORD ENVIRONMENTAL
(A DIVISION OF WHITEFORD CONSTRUCTION COMPANY, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Whiteford Environmental (the Company) is a division of Whiteford Construction
Company, Inc. (Whiteford), a closely held S Corporation incorporated in the
state of Maryland and established in 1977. The Company provides biosolid
material handling services to municipalities and other customers located in New
York, Pennsylvania, New Jersey, Delaware, Virginia, North Carolina, Florida,
Tennessee, Kentucky, Missouri, Ohio, Minnesota and Maryland.
The accompanying statement of operations includes revenues directly attributable
to the operations of the Company and costs and expenses both directly
attributable to the Company as well as certain costs of Whiteford that have been
allocated to the Company as further discussed below. Direct expenses, such as
components of cost of sales and certain salaries, are recorded to the
appropriate division of Whiteford as incurred. Certain indirect and other
expenses for which there is a measurable basis for allocation, such as rent and
office expense, officer salaries and general insurance, are allocated between
the divisions of Whiteford using various measurable bases. The patterns of usage
related to these costs and expenses by the Company were used primarily as a
basis of allocation of such costs. Management considers its methodologies for
specifically identifying or allocating costs and expenses to the Company to be
reasonable and to present fairly the costs and expenses of the Company.
Interim Financial Information
The interim financial statements for the nine months ended September 30, 1999,
and 1998, are unaudited, and certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. In the opinion of management
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations with respect to the interim financial
statements have been included. The result of operations for the interim period
are not necessarily indicative of the results for the entire fiscal year.
Revenue Recognition
The Company recognizes revenue at the time the services are provided
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-91
<PAGE> 151
Property and Equipment
Property and equipment are recorded at cost and includes those assets owned by
Whiteford that are utilized in the operations of the Company. Depreciation of
property and equipment and amortization of leasehold improvements are accounted
for on a straight-line method over the estimated useful lives of the assets of
three to seven years. Expenditures for repairs and maintenance are charged to
expense as incurred. Expenditures for major renewals and betterments, which
extend useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any related gain or
loss is recognized.
Realization of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared the asset's carrying amount to determine if an impairment of
such property is necessary.
Income Taxes
Whiteford is an S Corporation, as defined by the Internal Revenue Code whereby
Whiteford is not subject to taxation for federal purposes. Under S Corporation
status, each stockholder reports his share of Whiteford's taxable earnings or
loss in his personal federal and state tax returns. Thus, there is no income tax
shown on the statement of operations of the Company.
F-92
<PAGE> 152
List of Exhibits
Exhibit A - Form of Synagro Technologies, Inc. Written Consent.
B - Purchase Agreement by and between Synagro and GTCR Fund VII, L.P.,
dated as of January 27, 2000.
C - Fairness Opinion of Howard Frazier Barker Elliott, Inc. dated
January 21, 2000.
D - Amendment to Certificate of Incorporation.
E - Purchase and Sale Agreement dated October 20, 1999, by and among
Synagro, Paul A. Toretta, Eileen Toretta as Trustee of the Paul A.
Toretta 1998 Grat, Frances A. Guerrera ("Mrs. Guerrera"), as
Executrix of the Estate of Richard J. Guerrera, Mrs. Guerrera,
individually, and Mrs. Guerrera and Robert Dionne, as Co-Trustees of
the Richard J. Guerrera Revocable Trust under the Agreement dated
November 2, 1998, as amended.
F - Agreement and Plan of Merger dated October 20, 1999, by and among
Synagro, RESTEC Acquisition Corp., New England Treatment Company,
Inc., Paul A. Toretta, Frances A. Guerrera ("Mrs. Guerrera"), Mrs.
Guerrera, as Executrix of the Estate of Richard A. Guerrera, Mrs.
Guerrera, individually, and Mrs. Guerrera and Robert Dionne, as
Co-Trustees of the Richard J. Guerrera Revocable Trust under the
Agreement dated November 2, 1998, as amended.
G - Stock Purchase Agreement dated October 20, 1999, by and among
Synagro, Christopher J. Schrader and Kathleen A. Schrader.
<PAGE> 153
EXHIBIT A
SYNAGRO TECHNOLOGIES, INC.
WRITTEN CONSENT
By execution of this Written Consent, the undersigned, a holder of
record of shares of Common Stock, par value $.002 per share ("Common Stock"), of
Synagro Technologies, Inc. a Delaware corporation (the "Corporation"), hereby
waives notice of a special meeting of the stockholders of the Corporation, and
with respect to all shares of Common Stock listed below opposite the name of the
undersigned, hereby irrevocably consents to the following action:
(1) INITIAL TRANCHE
AUTHORIZATION AND APPROVAL OF:
(A) THE ISSUANCE OF 20,358.824 SHARES OF SERIES C PREFERRED STOCK, PAR
VALUE $.002 PER SHARE, OF THE CORPORATION ("SERIES C PREFERRED
STOCK") AND 2,641.176 SHARES OF SERIES D PREFERRED STOCK, PAR VALUE
$.002 PER SHARE, OF THE CORPORATION ("SERIES D PREFERRED STOCK"), TO
GTCR FUND VII, L.P. AND ITS AFFILIATES PURSUANT TO THE TERMS OF THE
PURCHASE AGREEMENT, BY AND BETWEEN THE CORPORATION AND GTCR FUND
VII, L.P. (THE "PURCHASE AGREEMENT");
(B) THE CONVERSION OF ALL SHARES OF SERIES C PREFERRED STOCK INTO
SHARES OF SERIES D PREFERRED STOCK, IN ACCORDANCE WITH AND SUBJECT TO
THE TERMS OF THE CERTIFICATE OF DESIGNATION OF THE SERIES C
PREFERRED STOCK;
(C) THE ISSUANCE OF AN AGGREGATE OF 3,286 SHARES OF SERIES D PREFERRED
STOCK AND/OR SERIES C PREFERRED STOCK UPON THE EXERCISE OF THE
WARRANTS INITIALLY ISSUED TO GTCR CAPITAL PARTNERS, L.P. AND ITS
PERMITTED TRANSFEREES PURSUANT TO THE TERMS OF THE WARRANT
AGREEMENT BY AND BETWEEN THE CORPORATION AND GTCR CAPITAL PARTNERS,
L.P., AN AFFILIATE OF GTCR FUND VII, L.P. (THE "WARRANT
AGREEMENT"); AND
(D) THE ISSUANCE OF UP TO 10,514,400 SHARES OF COMMON STOCK (PLUS ANY
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF ACCRUED
DIVIDENDS ON THE PREFERRED STOCK), UPON THE CONVERSION OF SHARES OF
SERIES D PREFERRED STOCK PURSUANT TO THE TERMS OF THE CERTIFICATE OF
DESIGNATION OF THE SERIES D PREFERRED STOCK.
(2) SUBSEQUENT FINANCINGS
AUTHORIZATION AND APPROVAL OF:
(A) THE ISSUANCE OF AN ADDITIONAL 102,000 SHARES OF CONVERTIBLE
PREFERRED STOCK HAVING TERMS SUBSTANTIALLY SIMILAR TO THE SERIES D
PREFERRED ("CONVERTIBLE PREFERRED STOCK") TO GTCR FUND VII, L.P. AND
ITS AFFILIATES, PURSUANT TO THE TERMS OF THE PURCHASE
AGREEMENT, AT A PRICE OF $1,000 PER SHARE OF CONVERTIBLE PREFERRED
STOCK AND CONVERTIBLE INTO COMMON STOCK AT A PRICE TO BE DETERMINED BY
THE CORPORATION'S BOARD OF DIRECTORS; PROVIDED THAT SUCH
CONVERSION PRICE IS NOT ANTICIPATED TO BE LESS THAN $2.50 PER SHARE OF
COMMON STOCK;
(B) THE ISSUANCE OF UP TO 14,571 SHARES OF CONVERTIBLE PREFERRED STOCK
UPON THE EXERCISE OF THE WARRANTS TO BE ISSUED TO GTCR CAPITAL
PARTNERS, L.P. OR THE POTENTIAL TRANSFEREES IN CONNECTION WITH
SUBSEQUENT LOANS PURSUANT TO THE TERMS OF THE WARRANT AGREEMENT.
(C) THE ISSUANCE OF UP TO 46,628,400 SHARES OF COMMON STOCK, UPON THE
CONVERSION OF SHARES OF CONVERTIBLE PREFERRED STOCK PURSUANT TO THE
TERMS OF THE CERTIFICATES OF DESIGNATION OF THE CONVERTIBLE
PREFERRED STOCK (PLUS ANY SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF ACCRUED DIVIDENDS ON THE PREFERRED STOCK).
(3) AMENDMENT TO CERTIFICATE OF INCORPORATION
AUTHORIZATION AND APPROVAL OF THE AMENDMENT OF THE CERTIFICATE OF
INCORPORATION IN ACCORDANCE WITH SECTION 242 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE, WHICH CONSISTS OF THE
AMENDMENT TO ARTICLE NINTH THEREOF ON EXHIBIT A ATTACHED HERETO.
The record date for this action by written consent shall be January 17,
2000. Approval of the above-referenced proposal requires the affirmative vote of
a majority of the shares of Common Stock outstanding as of the record date. To
the extent that the requisite approval by written consent has been obtained,
this action by written consent shall be deemed effective after the expiration of
twenty-one (21) calendar days from the date on which an Information Statement
describing such action is delivered to the stockholders of the Corporation.
Shares of Common Stock: ___________ _____________________________________
Name: _______________________________
Dated: January __, 2000
A-1
<PAGE> 154
EXHIBIT B
PURCHASE AGREEMENT
B-1
<PAGE> 155
EXECUTION
- --------------------------------------------------------------------------------
PURCHASE AGREEMENT
Dated as of January 27, 2000
Between
SYNAGRO TECHNOLOGIES, INC.
and
GTCR FUND VII, L.P.
- --------------------------------------------------------------------------------
<PAGE> 156
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 1. Authorization and Closing...........................................................................-1-
1A. Authorization of the Stock....................................................................-1-
1B. Purchase and Sale of the Stock................................................................-1-
1C. The Closing...................................................................................-2-
Section 2. Conditions of Purchaser's Obligation at the Closing.................................................-2-
2A. Representations and Warranties; Covenants.....................................................-2-
2B. Certificates of Designation...................................................................-2-
2C. Professional Services Agreement...............................................................-2-
2D. Registration Agreement........................................................................-3-
2E. Other Documents...............................................................................-3-
2F. Authorization; Listing........................................................................-3-
2G. Amendment of Rights Agreement.................................................................-3-
2H. Shareholder Consent...........................................................................-3-
2I. Waiver of Vesting Upon Change in Control......................................................-3-
2J. Increase in Board Size; Appointment of Director...............................................-4-
2K. Closing Documents.............................................................................-4-
2L. Opinion of the Company's Counsel..............................................................-4-
2M. Opinion of Company General Counsel............................................................-4-
2N. Restec Acquisition Opinions...................................................................-5-
2O. Fees and Expenses.............................................................................-5-
2P. Compliance with Applicable Laws...............................................................-5-
2Q. Waiver........................................................................................-5-
Section 3. Conditions to Purchaser's Obligation to Make Subsequent Purchases After the Closing Date............-5-
3A. Representations and Warranties................................................................-5-
3B. No Default....................................................................................-5-
3C. Approved Use..................................................................................-6-
3D. Acquisitions..................................................................................-6-
3E. Subordinated Debt Financing...................................................................-6-
3F. Certificates of Designation...................................................................-6-
3G. Opinion of Counsel to the Company.............................................................-6-
3H. Opinion of Company General Counsel............................................................-6-
3I. Acquisition Opinions..........................................................................-7-
3J. Closing Documents.............................................................................-7-
3K. Compliance with Applicable Laws...............................................................-7-
</TABLE>
-i-
<PAGE> 157
<TABLE>
<S> <C>
Section 4. Covenants...........................................................................................-7-
4A. Financial Statements and Other Information....................................................-7-
(i) Audit Report.........................................................................-7-
(ii) Quarterly Reports....................................................................-8-
(iii) Monthly Reports......................................................................-8-
(iv) Reports to SEC and to Shareholders...................................................-8-
(v) Notice of Default, Litigation and ERISA Matters......................................-8-
(vi) Management Reports...................................................................-9-
(vii) Projections.........................................................................-10-
(viii) Other Information...................................................................-10-
4B. Inspection of Property.......................................................................-10-
4C. Listing......................................................................................-10-
4D. Section 203 of the DGCL......................................................................-10-
4E. Conversion of Series C Preferred.............................................................-11-
4F. Restrictions.................................................................................-11-
4G. Affirmative Covenants........................................................................-15-
4H. Current Public Information...................................................................-16-
4I. Public Disclosures...........................................................................-16-
4J. Unrelated Business Taxable Income............................................................-16-
4K. Hart-Scott-Rodino Compliance.................................................................-16-
4L. Rights Agreement.............................................................................-17-
4M. Filing of Information Statement..............................................................-17-
4N. Filing of Charter Amendment..................................................................-17-
4O. Board of Director Nominations................................................................-17-
4P. Authorization of Sixth Director..............................................................-17-
Section 5. Transfer of Restricted Securities..................................................................-18-
Section 6. Representations and Warranties of the Company......................................................-18-
6A. Shareholders Consent.........................................................................-18-
6B. Waiver of Vesting Upon Change in Control.....................................................-19-
6C. Organization, Corporate Power and Licenses...................................................-19-
6D. Capital Stock and Related Matters............................................................-19-
6E. Subsidiaries; Investments....................................................................-21-
6F. Authorization; No Breach.....................................................................-21-
6G. Financial Statements.........................................................................-22-
6H. Absence of Undisclosed Liabilities...........................................................-22-
6I. No Material Adverse Change...................................................................-23-
6J. Absence of Certain Developments..............................................................-23-
6K. Assets.......................................................................................-24-
6L. Real Property................................................................................-25-
(a) Owned Properties........................................................................-25-
(b) Leased Properties.......................................................................-25-
(c) Real Property Disclosure................................................................-25-
</TABLE>
-ii-
<PAGE> 158
<TABLE>
<S> <C>
6M. Tax Matters..................................................................................-26-
6N. Contracts and Commitments....................................................................-27-
6O. Intellectual Property Rights.................................................................-29-
6P. Litigation, etc..............................................................................-30-
6Q. Brokerage....................................................................................-30-
6R. Governmental Consent, etc....................................................................-30-
6S. Insurance....................................................................................-31-
6T. Employees....................................................................................-31-
6U. Employee Benefit Plans.......................................................................-31-
6V. Compliance with Laws.........................................................................-33-
6W. Environmental and Safety Matters.............................................................-33-
6X. Affiliated Transactions......................................................................-34-
6Y. Real Property Holding Corporation Status.....................................................-34-
6Z. Customers and Suppliers......................................................................-35-
6AA. Reports with the Securities and Exchange Commission..........................................-35-
6BB. Investment Company...........................................................................-35-
6CC. Section 203 of the DGCL; Takeover Statute....................................................-35-
6DD. Rights Agreement.............................................................................-36-
6EE. Disclosure...................................................................................-36-
Section 7. Definitions........................................................................................-37-
Section 8. Miscellaneous......................................................................................-48-
8A. Expenses.....................................................................................-48-
8B. Remedies.....................................................................................-48-
8C. Purchaser's Investment Representations.......................................................-49-
8D. Consent to Amendments........................................................................-49-
8E. Survival of Representations and Warranties...................................................-49-
8F. Successors and Assigns.......................................................................-50-
8G. Generally Accepted Accounting Principles.....................................................-50-
8H. Severability.................................................................................-50-
8I. Counterparts.................................................................................-50-
8J. Entire Agreement.............................................................................-50-
8K. Descriptive Headings; Interpretation.........................................................-50-
8L. Governing Law................................................................................-51-
8M. Notices......................................................................................-51-
8N. Indemnification..............................................................................-52-
(a) General.............................................................................-52-
(b) Environmental Liabilities...........................................................-53-
8O. Standstill...................................................................................-53-
</TABLE>
-iii-
<PAGE> 159
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is made as of
January 27, 2000, between Synagro Technologies, Inc., a Delaware corporation
(the "Company") and GTCR Fund VII, L.P., a Delaware limited partnership ("GTCR
Fund VII" or the "Purchaser"). Except as otherwise indicated herein, capitalized
terms used herein are defined in Section 7 hereof.
The parties hereto agree as follows:
Section 1. Authorization and Closing.
1A. Authorization of the Stock. The Company shall authorize
the issuance and sale to the Purchaser of 17,358.824 shares of its Series C
Convertible Preferred Stock, par value $.002 per share (the "Series C
Preferred"), having the rights and preferences set forth in Exhibit A attached
hereto, and up to 2,641.176 shares of its Series D Convertible Preferred Stock,
par value $.002 per share (the "Series D Preferred"), having the rights and
preferences set forth in Exhibit B attached hereto. The Series C Preferred and
the Series D Preferred are collectively referred to herein as the "Closing
Preferred Stock." The Series D Preferred is convertible into shares of the
Company's Common Stock, par value $0.002 per share (the "Common Stock").
1B. Purchase and Sale of the Stock.
(a) At the Closing (as defined in Section 1C below), subject
to the terms and conditions set forth herein, the Company shall sell to the
Purchaser and the Purchaser shall purchase from the Company, 17,358.824 shares
of Series C Preferred and 2,641.176 shares of Series D Preferred, at a price of
$1,000.00 per share.
(b) The Company engages in the biosolids management business
and from time to time undertakes acquisitions which are synergistic with or
otherwise complementary to its business. The Purchaser intends to provide up to
$125 million in equity financing to the Company as the equity portion of the
debt and equity financing necessary to fund such acquisitions (the "Future
Acquisitions") and for certain other uses, in each case as approved by the Board
of Directors of the Company (the "Board") and the Purchaser (an "Approved Use").
In order to implement the foregoing, the Purchaser may purchase from time to
time after the Closing, upon the written request of the Board in connection with
an Approved Use, up to an additional 105,000 shares of one or more series of
Future Convertible Preferred Stock at a price of $1,000 per share (such amounts
to be adjusted from time to time as a result of stock dividends, stock splits,
recapitalization and similar events). In connection with each such purchase, the
Board shall designate a series of Future Convertible Preferred Stock with a
conversion price mutually agreed upon by the Board and the
<PAGE> 160
Majority Holders (a "New Series"), taking into account, among other things, an
assumed equity value for the Company equal to the result of (i) seven multiplied
by the Company's earnings before interest, taxes and amortization minus (ii) the
Company's outstanding indebtedness.
1C. The Closing. The closing of the purchase and sale of the
Closing Preferred Stock to be purchased pursuant to Section 1B(a) (the
"Closing") shall take place at the offices of Kirkland & Ellis, 200 East
Randolph Drive, Chicago, Illinois 60601 at 10:00 a.m. on January 27, 2000, or at
such other place or on such other date as may be mutually agreeable to the
Company and the Purchaser. At the Closing, the Company shall deliver to the
Purchaser stock certificates evidencing the Closing Preferred Stock to be
purchased by the Purchaser, registered in the Purchaser's name, upon payment of
the purchase price thereof by a cashier's or certified check, or by wire
transfer of immediately available funds to such account as designated by the
Company.
Section 2. Conditions of Purchaser's Obligation at the
Closing. The obligation of the Purchaser to purchase and pay for the Closing
Preferred Stock to be purchased by it at the Closing is subject to the
satisfaction as of the Closing of the following conditions:
2A. Representations and Warranties; Covenants. The
representations and warranties contained in Section 6 hereof shall be true and
correct in all material respects (other than representations and warranties
qualified by a materiality standard including, without limitation, a Material
Adverse Effect qualifier, which shall be true and correct in all respects) at
and as of the Closing as though then made, except to the extent of changes
caused by the transactions expressly contemplated herein, and the Company shall
have performed in all material respects all of the covenants required to be
performed by it hereunder prior to the Closing.
2B. Certificates of Designation. The Company shall have duly
adopted, executed and filed with the Secretary of State of Delaware a
Certificate of Designation of Rights and Preferences establishing the terms and
the relative rights and preferences of the Series C Preferred and the Series D
Preferred in the form set forth in Exhibits A and B hereto, respectively, (the
"Closing Certificates of Designation"), and the Company shall not have adopted
or filed any other document designating terms, relative rights or preferences of
its preferred stock, other than the certificates of designation establishing the
terms of the Series A Preferred and Series B Preferred. The Closing Certificates
of Designation shall be in full force and effect as of the Closing under the
laws of Delaware and shall not have been amended or modified.
2C. Professional Services Agreement. The Company shall have
entered into the Professional Services Agreement in form and substance
substantially similar to Exhibit C attached hereto and the Professional Services
Agreement shall be in full force and effect as of the Closing.
-2-
<PAGE> 161
2D. Registration Agreement. The Company and the Purchaser
shall have entered into a registration agreement in form and substance
substantially similar to Exhibit D attached hereto (the "Registration
Agreement"), and the Registration Agreement shall be in full force and effect as
of the Closing.
2E. Other Documents. Each of the other Documents shall have
been duly executed and delivered by the respective parties thereto and shall be
in full force and effect.
2F. Authorization; Listing. The Common Stock issuable upon
conversion of the Series D Preferred shall have been duly authorized and
reserved for issuance and such Common Stock shall have been approved for listing
on the NASDAQ SmallCap Market ("Nasdaq"), subject to official notice of
issuance.
2G. Amendment of Rights Agreement. The Company shall have
amended its Rights Agreement to the extent set forth in the representation in
Section 6DD.
2H. Shareholder Consent. A majority of the Company's
shareholders shall have executed an action on written consent (the "Shareholders
Consent") approving (a) the conversion of Series C Preferred to Series D
Preferred, (b) the issuance of the Common Stock issuable upon conversion of all
of the shares of Preferred Stock (including the Series D Preferred issuable upon
conversion of the Series C Preferred) and all of the Warrant Shares, in each
case whether issued on the date hereof or in the future and (c) the amendment to
Company's Restated Certificate of Incorporation as set forth in Exhibit E (the
"Charter Amendment"), and the Company shall have delivered such executed consent
to the Purchaser.
2I. Waiver of Vesting Upon Change in Control. Each employee
and director of the Company who has the right (whether granted in an agreement,
by action of the Board or otherwise) to have his or her options to purchase the
Company's stock vest upon a "change in control" shall have executed a waiver
providing that the Purchaser's and Lender's investment in the Company pursuant
to the Purchase Agreement, the Subordinated Loan Agreement and the Warrant
Agreement, whether on the date hereof or in the future, shall not be considered
a "change in control" and shall not trigger vesting of such person's options. In
addition, each employee who has an agreement with the Company that contains
provisions allowing such agreement to be terminated upon a "change in control"
or requiring the payment of severance upon a "change in control" shall have
executed a waiver providing that the Purchaser's and Lender's investment in the
Company pursuant to the Purchase Agreement, the Subordinated Loan Agreement and
the Warrant Agreement, whether on the date hereof or in the future, shall not be
considered a "change in control" for purposes of such agreement.
-3-
<PAGE> 162
2J. Increase in Board Size; Appointment of Director. The Board
shall have authorized an increase in the number of persons constituting the
entire Board from four to five directors, and the Board shall have elected David
A. Donnini to fill such newly created vacancy and to serve as a director of the
Company.
2K. Closing Documents. The Company shall have delivered to the
Purchaser all of the following documents:
(a) an Officer's Certificate, dated the date of the
Closing, stating that the conditions specified in Section 1 and
Sections 2A through 2J, inclusive, have been fully satisfied;
(b) certified copies of the resolutions duly adopted
by the Board authorizing the execution, delivery and performance of
this Agreement and the other Documents, the issuance and sale of the
Closing Preferred Stock and the consummation of all other transactions
contemplated by this Agreement; authorizing the execution and filing of
the Closing Certificates of Designation; exempting GTCR Fund VII, GTCR
Capital Partners, L.P. and their affiliates and associates from Section
203 of the Delaware General Corporate Law; authorizing the amendment to
the Rights Agreement; and authorizing the Charter Amendment.
(c) certified copies of the Closing Certificates of
Designation and the Company's bylaws, each as in effect at the Closing;
and
(d) copies of all third party and governmental
consents, approvals and filings required in connection with the
consummation of the transactions hereunder (including, without
limitation, all blue sky law filings and waivers of all preemptive
rights and rights of first refusal).
2L. Opinion of the Company's Counsel. The Purchaser shall have
received an opinion from Locke, Liddell & Sapp LLP special counsel for the
Company, which shall be addressed to the Purchaser, dated the Closing Date and
in form and substance reasonably satisfactory to the Purchaser.
2M. Opinion of Company General Counsel. The Purchaser shall
have received an opinion from Alvin L. Thomas II, general counsel for the
Company, which shall be addressed to the Purchaser, dated the Closing Date and
in form and substance reasonably satisfactory to the Purchaser.
-4-
<PAGE> 163
2N. Restec Acquisition Opinions. The Purchaser shall have
received an opinion (or permission to rely on an opinion) from each of the
special counsels to the sellers in the Acquisition, relating to the transactions
consummating the Acquisition, dated the Closing Date and in form and substance
reasonably satisfactory to the Purchaser.
2O. Fees and Expenses. The Company shall have reimbursed each
Purchaser for its fees and expenses as provided in Section 8A hereof.
2P. Compliance with Applicable Laws. The purchase of Closing
Preferred Stock by the Purchaser hereunder shall not be prohibited by any
applicable law or governmental regulation, shall not subject the Purchaser to
any penalty or liability under or pursuant to any applicable law or governmental
regulation, and shall be permitted by laws and regulations of the jurisdictions
to which the Purchaser is subject.
2Q. Waiver. Any condition specified in this Section 2 may be
waived only if such waiver is set forth in a writing executed by the Purchaser.
Section 3. Conditions to Purchaser's Obligation to Make
Subsequent Purchases After the Closing Date. The Purchaser's obligation to
purchase any Future Convertible Preferred Stock of the Company pursuant to
Section 1B(b) after the Closing Date is subject to the satisfaction of the
following conditions, each as of the date of each such subsequent purchase:
3A. Representations and Warranties. All representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects (other than representations and warranties qualified by
a materiality standard including, without limitation, a Material Adverse Effect
qualifier, which shall be true and correct in all respects) as of the making of
such subsequent purchase, before and after giving effect to such purchase and to
the application of the proceeds therefrom, with the same effect as though such
representations and warranties had been made on and as of such date, except that
(a) references to financial statements and the Latest Balance Sheet in such
representations and warranties shall be deemed to refer for this purpose to the
financial statements required to be provided to the Purchaser pursuant to
Section 4A hereof and the latest consolidated balance sheet of the Company
required to be provided to the Purchaser pursuant to Section 4A hereof,
respectively, and (b) references to the date of this Agreement, the Closing Date
and the like shall be deemed to refer to the date of the making of such
subsequent purchase.
3B. No Default. No Default or Event of Default (as such terms
are defined in the Subordinated Loan Agreement) shall exist as of the date of
such subsequent purchase or would result from the consummation of the borrowings
by the Company under the Subordinated Loan Agreement made concurrently with such
purchase of Future Convertible Preferred Stock.
-5-
<PAGE> 164
3C. Approved Use. The Purchaser shall have received evidence
satisfactory to it that the proceeds of such subsequent purchase will be used
for the Approved Use. The Purchaser shall have approved the respective Future
Acquisition or other Approved Use being financed therewith and the Purchaser
shall have received such documents and deliveries in connection therewith as
reasonably requested by the Purchaser.
3D. Acquisitions. No default or material breach of performance
shall have occurred under the agreements related to the Future Acquisition, if
any, for which the Future Convertible Preferred Stock is being purchased, and
all of the buyers' material conditions to closing thereunder shall have been
satisfied and not waived (except with the Purchaser's consent).
3E. Subordinated Debt Financing. The Lender shall have loaned
(or will loan concurrently with the funding of the subsequent purchase) to the
Company pursuant to the Subordinated Loan Agreement an amount equal to the
purchase price for the Future Convertible Preferred Stock being purchased by the
Purchaser.
3F. Certificates of Designation. The Company shall have duly
adopted, executed and filed with the Secretary of State of Delaware a
Certificate of Designation of Rights and Preferences establishing the terms and
the relative rights and preferences of the New Series, which shall be identical
in all respects the Series D Preferred Certificate of Designation set forth in
Exhibit B hereto except with respect to the conversion price as agreed to by the
Board and the Majority Holders pursuant to Section 1B(b) hereof (the "Future
Certificate of Designation"), and the Company shall not have adopted or filed
any other document designating terms, relative rights or preferences of its
preferred stock, other than the certificates of designation establishing the
terms of the Series A, Series B, Series C and Series D Preferred Stock and any
other previously issued New Series. The Future Certificate of Designation shall
be in full force and effect as of such Subsequent Closing under the laws of
Delaware and shall not have been amended or modified.
3G. Opinion of Counsel to the Company. The Purchaser shall
have received an opinion from the special counsel for the Company, which shall
be addressed to the Purchaser, dated the date of the Subsequent Closing and in
form and substance reasonably satisfactory to the Purchaser.
3H. Opinion of Company General Counsel. The Purchaser shall
have received an opinion from Alvin L. Thomas II, general counsel for the
Company, or his successor, if any, which shall be addressed to the Purchaser,
dated the Subsequent Closing Date and in form and substance reasonably
satisfactory to the Purchaser.
-6-
<PAGE> 165
3I. Acquisition Opinions. To the extent the Company or any of
its Subsidiaries receives (or is otherwise entitled to rely on) an opinion of
counsel in connection with any Future Acquisition, such opinion shall also be
addressed to the Purchaser or the Purchaser shall otherwise be entitled to rely
thereon.
3J. Closing Documents. The Company shall have delivered to the
Purchaser all of the following documents:
(a) an Officer's Certificate, dated the date of the
purchase of the Future Convertible Preferred Stock (each a "Subsequent
Closing"), stating that the conditions specified in Sections 3A through
3F, inclusive, have been fully satisfied;
(b) certified copies of the resolutions duly adopted
by the Board authorizing the issuance and sale of the Future
Convertible Preferred Stock and the filing of a Future Certificate of
Designation to create the New Series.
(c) certified copies of the Company's certificate of
incorporation and all of its certificates of designation and the
Company's bylaws, each as in effect at the Subsequent Closing; and
(d) copies of all third party and governmental
consents, approvals and filings required in connection with the
consummation of the transactions hereunder (including, without
limitation, all blue sky law filings and waivers of all preemptive
rights and rights of first refusal).
3K. Compliance with Applicable Laws. The purchase of Future
Convertible Preferred Stock by the Purchaser hereunder shall not be prohibited
by any applicable law or governmental regulation, shall not subject the
Purchaser to any penalty or liability under or pursuant to any applicable law or
governmental regulation, and shall be permitted by laws and regulations of the
jurisdictions to which the Purchaser is subject.
Section 4. Covenants.
4A. Financial Statements and Other Information. The Company
shall deliver to the Purchaser (so long as the Purchaser holds any Preferred
Stock) and to each holder of at least 15% of the Investor Preferred:
(i) Audit Report. Promptly when available and in any
event within 90 days after the close of each Fiscal Year: (a) a copy of the
annual audit report of the Company and
-7-
<PAGE> 166
its Subsidiaries for such Fiscal Year, including therein consolidated balance
sheets of the Company and its Subsidiaries as of the end of such Fiscal Year and
consolidated statements of earnings and cash flow of the Company and its
Subsidiaries for such Fiscal Year certified without qualification by Arthur
Andersen LLP or other independent auditors of recognized standing selected by
the Company and reasonably acceptable to the Purchaser, together with a written
statement from such accountants to the effect that in making the examination
necessary for the signing of such annual audit report by such accountants, they
have not become aware of any Event of Default or Default that has occurred and
is continuing or, if they have become aware of any such event, describing it in
reasonable detail and (b) consolidating balance sheets of the Company and its
Subsidiaries as of the end of such Fiscal Year and consolidating statements of
earnings for the Company and its Subsidiaries for such Fiscal Year, certified by
the chief financial officer of the Company.
(ii) Quarterly Reports. Promptly when available and
in any event within 45 days after the end of each Fiscal Quarter (except the
last Fiscal Quarter) of each Fiscal Year, consolidated and consolidating balance
sheets of the Company and its Subsidiaries as of the end of such Fiscal Quarter,
together with consolidated and consolidating statements of earnings and
consolidated statements of cash flow for such Fiscal Quarter and for the period
beginning with the first day of such Fiscal Year and ending on the last day of
such Fiscal Quarter, certified by the chief financial officer of the Company.
(iii) Monthly Reports. Promptly when available and in
any event within 30 days after the end of each of the first two months of each
Fiscal Quarter, consolidated and consolidating balance sheets of the Company and
its Subsidiaries as of the end of such month, together with consolidated and
consolidating statements of earnings for such month and for the period beginning
with the first day of the applicable Fiscal Year and ending on the last day of
such month, certified by the chief financial officer of the Company.
(iv) Reports to SEC and to Shareholders. Promptly
upon the filing or sending thereof, copies of all regular, periodic or special
reports of the Company or any Subsidiary filed with the SEC (excluding exhibits
thereto, provided that the Company shall promptly deliver any such exhibit to
the Purchaser upon request therefor); copies of all registration statements of
the Company or any Subsidiary filed with the SEC (other than on Form S-8); and
copies of all proxy statements or other communications made to shareholders
generally concerning material developments in the business of the Company or any
of its Subsidiaries.
(v) Notice of Default, Litigation and ERISA Matters.
Promptly upon becoming aware of any of the following, written notice describing
the same and the steps being taken by the Company or the Subsidiary affected
thereby with respect thereto:
-8-
<PAGE> 167
(a) the occurrence of an Event of Default or a
Default under the Subordinated Loan Agreement or an Event of Noncompliance;
(b) any litigation, arbitration or governmental
investigation or proceeding not previously disclosed by the Company to the
Purchaser which has been instituted or, to the knowledge of the Company, is
threatened against the Company or any of its Subsidiaries or to which any of the
properties of any thereof is subject which, if adversely determined, might
reasonably be expected to have a Material Adverse Effect;
(c) the institution of any steps by any member of the
Controlled Group or any other Person to terminate any Pension Plan, or the
failure of any member of the Controlled Group to make a required contribution to
any Pension Plan (if such failure is sufficient to give rise to a lien under
Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of
any action with respect to a Pension Plan which could result in the requirement
that the Company furnish a bond or other security to the PBGC or such Pension
Plan, or the occurrence of any event with respect to any Pension Plan or
Multiemployer Pension Plan which could result in the incurrence by any member of
the Controlled Group of any material liability, fine or penalty (including any
claim or demand for withdrawal liability or partial withdrawal from any
Multiemployer Pension Plan), or any notice that any Multiemployer Pension Plan
is in reorganization, that increased contributions may be required to avoid a
reduction in plan benefits or the imposition of an excise tax, that any such
plan is or has been funded at a rate less than that required under Section 412
of the Code, that any such plan is or may be terminated, or that any such plan
is or may become insolvent; provided that such matter would reasonably be
expected to have a Material Adverse Effect.
(d) any cancellation (without replacement) or
material change in any insurance maintained by the Company or any Subsidiary
thereof, which would reasonably be expected to have a Material Adverse Effect;
(e) any event (including any violation of any
Environmental Law or the assertion of any Environmental Claim) which would
reasonably be expected to have a Material Adverse Effect;
(f) any event or circumstance which requires the
Company to give notice to the Senior Lenders under the Credit Documents; or
(g) any notice of default received by it under any
Credit Document.
(vi) Management Reports. Promptly upon the request of
the Purchaser, copies of all detailed financial and management reports submitted
to the Company by independent
-9-
<PAGE> 168
auditors in connection with each annual or interim audit made by such auditors
of the books of the Company.
(vii) Projections. As soon as practicable and in any
event within 60 days after the commencement of each Fiscal Year, financial
projections for the Company and its Subsidiaries for such Fiscal Year prepared
in a manner consistent with those projections delivered by the Company to the
Purchaser prior to the Closing Date.
(viii) Other Information. From time to time such
other information concerning the Company and its Subsidiaries as the Purchaser
may reasonably request.
4B. Inspection of Property. The Company shall permit any
representatives designated by the Purchaser (so long as the Purchaser holds any
Preferred Stock) or any holder of at least 15% of the outstanding Investor
Preferred, upon reasonable notice and during normal business hours and such
other times as any such holder may reasonably request, to (i) visit and inspect
any of the properties of the Company and its Subsidiaries, (ii) examine the
corporate and financial records of the Company and its Subsidiaries and make
copies thereof or extracts therefrom and (iii) discuss the affairs, finances and
accounts of any such corporations with the directors, officers, key employees
and independent accountants of the Company and its Subsidiaries; provided that
the Company shall have the right to have its chief financial officer present at
any meetings with the Company's independent accountants.
4C. Listing. The Company shall use its reasonable best efforts
to continue to have its Common Stock listed on Nasdaq or a national securities
exchange for so long as any Preferred Shares are outstanding. Prior to the
Closing, the Company shall prepare and submit to Nasdaq a listing application
covering the shares of Common Stock issuable upon conversion of the Closing
Preferred Stock (including the Series D Preferred issuable upon conversion of
the Series C Preferred) and shall obtain approval for the listing of such
shares, subject to official notice of issuance. Prior to each Subsequent
Closing, the Company shall prepare and submit to Nasdaq a listing application
covering the shares of Common Stock issuable upon conversion of the series of
Future Convertible Preferred Stock to be purchased in connection with such
Subsequent Closing and shall obtain approval for the listing of such shares,
subject to official notice of issuance.
4D. Section 203 of the DGCL. The Board shall not adopt any
resolution containing any provisions, relating to the exemption from Section 203
of the DGCL granted to the Purchaser or its Affiliates which would adversely
affect or otherwise impair the rights of the Purchaser or its Affiliates
thereunder.
-10-
<PAGE> 169
4E. Conversion of Series C Preferred. The Company shall not
take any action that would adversely affect or limit the rights of the Purchaser
or its Affiliates to convert the Series C Preferred into Series D Preferred, in
accordance with the terms thereof.
4F. Restrictions. For so long as the Purchaser holds shares of
Investor Preferred convertible into at least 15% of the outstanding shares of
Common Stock (after giving effect to such conversion), the Company shall not,
without the prior written consent of the Majority Holders:
(a) directly or indirectly declare or pay any
dividends or make any distributions upon any of its equity securities,
other than payments of dividends on, or redemption payments in respect
of, the Preferred Stock pursuant to the Certificates of Designation;
(b) directly or indirectly redeem, purchase or
otherwise acquire, or permit any Subsidiary to redeem, purchase or
otherwise acquire, any of the Company's equity securities (including,
without limitation, warrants, options and other rights to acquire
equity securities) other than redemptions of Preferred Stock pursuant
to the Certificates of Designation;
(c) except as expressly contemplated by this
Agreement or pursuant to obligations currently in effect, authorize,
issue, sell or enter into any agreement providing for the issuance
(contingent or otherwise), or permit any Subsidiary to authorize,
issue, sell or enter into any agreement providing for the issuance
(contingent or otherwise) of, (i) any notes or debt securities
containing equity features (including, without limitation, any notes or
debt securities convertible into or exchangeable for equity securities,
issued in connection with the issuance of equity securities or
containing profit participation features) or (ii) any equity securities
(or any securities convertible into or exchangeable for any equity
securities) or rights to acquire any equity securities, other than the
issuance of equity securities by a Subsidiary to the Company or another
Subsidiary; provided, that, this Section 4F(c) shall not prevent the
Company from (x) authorizing or issuing options to its employees and
directors in an amount representing not more than 15% of the
then-outstanding Common Stock (assuming exercise of the Warrants and
conversion of all Preferred Stock) or (y) issuing equity securities in
connection with an acquisition approved by the Purchaser;
(d) make, or permit any Subsidiary to, make, incur,
assume or suffer to exist any Investment in any other Person, except
(without duplication) the following:
(i) equity Investments existing on the Closing Date
in wholly-owned Subsidiaries identified on the
Subsidiaries Schedule;
-11-
<PAGE> 170
(ii) equity Investments in Subsidiaries acquired
after the Closing Date in transactions approved by
the Purchaser including approved Future Acquisitions
(unless not required to be approved pursuant to
Section 4F(e));
(iii) in the ordinary course of business,
contributions by the Company to the capital of any of
its Subsidiaries, or by any such Subsidiary to the
capital of any of its Subsidiaries;
(iv) in the ordinary course of business, Investments
by the Company in any Subsidiary or by any of the
Subsidiaries in the Company, by way of intercompany
loans, advances or guaranties, all to the extent
permitted by Section 6.9 of the Subordinated Loan
Agreement;
(v) Suretyship Liabilities permitted by Section 6.9
of the Subordinated Loan Agreement;
(vi) loans to officers and employees not exceeding
(i) $115,000 in the aggregate to any single
individual or (ii) $287,500 in the aggregate for all
such individuals;
(vii) good faith deposits and escrow accounts in
connection with prospective acquisitions of stock or
assets for Future Acquisitions approved by the
Lender;
(viii) Cash Equivalent Investments; and
(ix) bank deposits in the ordinary course of
business; provided that the aggregate amount of all
such deposits (excluding (x) amounts in payroll
accounts or for accounts payable, in each case to the
extent that checks have been issued to third parties,
and (y) amounts maintained (in the ordinary course of
business consistent with past practice) in accounts
of any Person which is acquired by the Company or a
Subsidiary in accordance with the terms hereof during
the 45 days following the date of such acquisition)
which are maintained with any bank other than a
Senior Lender shall not at any time exceed (x) in the
case of such deposits with any single bank, $115,000
for three consecutive Business Days and (y) in the
case of all such deposits, $1,115,000 for three
consecutive Business Days;
-12-
<PAGE> 171
provided that no Investment otherwise permitted by clause (ii), (iii), (iv),
(v), (vi) or (vii) shall be permitted to be made if, immediately before or after
giving effect thereto, any Event of Default or Default or any Event of
Noncompliance shall have occurred and be continuing.
(e) be a party to, or permit any Subsidiary to be a
party to, any merger or consolidation, or purchase or otherwise acquire
all or substantially all of the assets or any stock of any class of, or
any partnership or joint venture interest in, any other Person, or
sell, transfer, convey or lease all or any substantial part of its
assets, or sell or assign with or without recourse any receivables,
except for (a) any such merger or consolidation, sale, transfer,
conveyance, lease or assignment of or by any Wholly-Owned Subsidiary
into the Company or into, with or to any other Wholly-Owned Subsidiary;
(b) any such purchase or other acquisition by the Company or any
Wholly-Owned Subsidiary of the assets or stock of any Wholly-Owned
Subsidiary; and (c) any such purchase or other acquisition by the
Company or any wholly-owned Subsidiary of the assets or stock of any
other Person where (1) such assets (in the case of an asset purchase)
are for use, or such Person (in the case of a stock purchase) is
engaged, or after the acquisition will be, in the business activities
permitted by Section 4F(f); (2) immediately before or after giving
effect to such purchase or acquisition, no Event of Default or Default
s under the Subordinated Loan Agreement shall have occurred and be
continuing; (3) the aggregate consideration to be paid by the Company
and its Subsidiaries (including any Debt assumed or issued in
connection therewith, the amount thereof to be calculated in accordance
with GAAP) in connection with such purchase or other acquisition after
the date hereof (or any series of related acquisitions) is less than
$3,000,000 for any single transaction or series of related transactions
and less than $10,000,000 in the aggregate for all such transactions;
(4) the Company is in pro forma compliance with all the financial
ratios and restrictions set forth in Section 6.8 of the Subordinated
Loan Agreement; and (5) the proceeds of any of the Preferred Stock
hereunder are not used to finance such transactions. Notwithstanding
the foregoing, the Company shall not, and shall not permit any
Subsidiary to, consummate any such merger, consolidation or purchase
described above within the 120 days immediately following the Closing
Date without the prior written consent of the Purchaser other than
Future Acquisitions approved by the Purchaser.
(f) enter into, or permit any Subsidiary to enter
into, the ownership, active management or operation of any business
other than the management, processing, collection, handling and
disposal of non-hazardous bio-solid waste, animal manures, and green
and other organic waste or similar non-hazardous waste-related business
activities;
(g) enter into, or permit any Subsidiary to, enter
into, or cause, suffer or permit to exist any transaction, arrangement
or contract with any of its other Affiliates (other
-13-
<PAGE> 172
than the Company and its Subsidiaries) which is on terms which are less
favorable than are obtainable from any Person which is not one of its
Affiliates.
(h) become subject to, or permit any of its
Subsidiaries to become subject to, any agreement or instrument which by
its terms would (under any circumstances) restrict (A) the right of any
Subsidiary to make loans or advances or pay dividends to, transfer
property to, or repay any Debt owed to, the Company or any Subsidiary
or (B) the Company's right to perform the provisions of this Agreement,
the Certificates of Designation, the Bylaws or the other Documents;
(i) except as expressly contemplated by this
Agreement, make any amendment to the Certificates of Designation or the
Bylaws, or file any resolution of the Board with the Secretary of the
State of Delaware, in each case containing any provisions which would
increase the number of authorized shares of capital stock or adversely
affect or otherwise impair the rights or the relative preferences and
priorities of the holders of the Preferred Stock under this Agreement,
the Certificates of Designation, the Bylaws or the other Documents; or
(j) create, incur, assume or suffer to exist or
permit any Subsidiary to, create, incur, assume or suffer to exist any
Debt, except:
(i) Debt under the Credit Agreement or Permitted
Refinancing Debt with respect thereto in an aggregate
principal amount at any one time outstanding
(including loans, the nominal amount of outstanding
letters of credit and all unused commitments) not to
exceed (as determined from time to time, the "Maximum
Senior Indebtedness") (A) $10,000,000 of revolving
Senior Indebtedness, (B) $100,000,000 of term Senior
Indebtedness, (C) $15,000,000 of additional Senior
Indebtedness (whether revolving or term) and (D) up
to $10,000,000 of additional Senior Indebtedness
(whether revolving or term) incurred to fund the
Rhode Island Project in each case with respect to
this Section 4F(i) less the aggregate principal
amount of any permanent reductions of commitments for
revolving Senior Indebtedness or repayments of term
Senior Indebtedness under the instruments governing
such Senior Indebtedness (including, without
limitation, payments actually applied to the Senior
Indebtedness pursuant to Section 3.5 of the
Subordinated Loan Agreement) and (D) guaranties in
respect of Debt described in the foregoing clauses
(A), (B) and (C);
-14-
<PAGE> 173
(ii) unsecured seller Debt which represents all or
part of the purchase price payable in connection with
a Future Acquisition approved by the Lender and the
existing Debt listed on the attached "Unsecured
Seller Debt Schedule"; provided that the aggregate
principal amount of all such Debt (other than (i) the
Debt designated with an asterisk on the Unsecured
Seller Debt Schedule, and (ii) an unsecured seller
note payable in connection with the acquisition of
EPIC not in excess of $6,000,000, the payment of
which is contingent upon the performance of EPIC)
shall not at any time exceed $7,500,000;
(iii) Debt arising under Capital Leases, Debt secured
by Liens permitted by subsection 6.10(c) or (d) of
the Subordinated Loan Agreement and other Debt
outstanding on the date hereof and listed on the
attached Capital Lease Debt Schedule, and
refinancings of any such Debt so long as the terms
applicable to such refinanced Debt are no less
favorable to the Company or the applicable Subsidiary
than the terms in effect immediately prior to such
refinancing, provided that the aggregate amount of
all such Debt at any time outstanding shall not
exceed $15,000,000;
(iv) Debt of Subsidiaries owed to the Company;
(v) Hedging Obligations of the Company for the
hedging of interest payments on the Senior
Indebtedness to the extent required by the Credit
Agreement;
(vi) unsecured Debt of the Company to Subsidiaries;
(vii) the RESTEC Bonds; provided that the RESTEC
Bonds must be repaid or defeased not later than 360
days after the Closing Date; and
(viii) the Loans made pursuant to the Subordinated
Loan Agreement.
4G. Affirmative Covenants. For so long as the Purchaser holds
shares of Investor Preferred convertible into at least 15% of the outstanding
shares of Common Stock (after giving effect to such conversion), the Company
shall, and shall cause each Subsidiary to:
(a) comply with all applicable laws, rules and
regulations of all governmental authorities, the violation of which
would reasonably be expected to have a material adverse effect upon the
financial condition, operating results, assets, operations or business
prospects of the Company and its Subsidiaries taken as a whole, and pay
and
-15-
<PAGE> 174
discharge when payable all taxes, assessments and governmental charges
(except to the extent the same are being contested in good faith and
adequate reserves therefor have been established); and
(b) enter into and maintain appropriate nondisclosure
and noncompete agreements with its key employees.
4H. Current Public Information. At all times after the Company
has filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Securities Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and
shall take such further action as any holder or holders of Restricted Securities
may reasonably request, all to the extent required to enable such holders to
sell Restricted Securities pursuant to (i) Rule 144 adopted by the Securities
and Exchange Commission under the Securities Act (as such rule may be amended
from time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission or (ii) a registration statement on Form S-2
or S-3 or any similar registration form hereafter adopted by the Securities and
Exchange Commission. Upon request, the Company shall deliver to any holder of
Restricted Securities a written statement as to whether it has complied with
such requirements.
4I. Public Disclosures. The Company shall not, nor shall it
permit any Subsidiary to, disclose the Purchaser's name or identity as an
investor in the Company in any press release or other public announcement or in
any document or material filed with any governmental entity, without the prior
written consent of the Purchaser, unless such disclosure is required by
applicable law or governmental regulations or by order of a court of competent
jurisdiction, in which case prior to making such disclosure the Company shall
give written notice to the Purchaser describing in reasonable detail the
proposed content of such disclosure and shall permit the Purchaser to review and
comment upon the form and substance of such disclosure.
4J. Unrelated Business Taxable Income. The Company shall not
engage in any transaction which is reasonably likely to cause GTCR Fund VII or
any of its limited partners which are exempt from income taxation under Section
501(a) of the IRC and, if applicable, any pension plan that any such trust may
be a part of, to recognize unrelated business taxable income as defined in
Section 512 and Section 514 of the IRC.
4K. Hart-Scott-Rodino Compliance. In connection with any
transaction in which the Company is involved (an "HSR Transaction") which is
required to be reported under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended from time to time (the "HSR Act"),
-16-
<PAGE> 175
the Company and GTCR Fund VII shall prepare and file all documents with the
Federal Trade Commission and the United States Department of Justice which may
be required to comply with the HSR Act, and shall promptly furnish all materials
thereafter requested by any of the regulatory agencies having jurisdiction over
such filings, in connection with an HSR Transaction. The Company and GTCR Fund
VII shall take all reasonable actions and shall file and use reasonable best
efforts to have declared effective or approved all documents and notifications
with any governmental or regulatory bodies, as may be necessary or may
reasonably be requested under federal antitrust laws for the consummation of the
HSR Transaction; provided that in no event shall the Company or GTCR Fund VII or
any of its Affiliates be required to divest any of its assets or Subsidiaries.
If GTCR Fund VII is required to make a filing under the HSR Act in connection
with an HSR Transaction, the Company will provide to GTCR Fund VII all necessary
information relating to the Company for such filing and will pay all fees
associated with such filing.
4L. Rights Agreement. The Company will not further amend the
Rights Agreement, or adopt any similar rights plan or rights agreement, in a
manner that conflicts with, or restricts the Purchaser or any of its Affiliates
to a greater extent than the amendment to the Rights Agreement as set forth in
the representation in Section 6DD.
4M. Filing of Information Statement. Within twenty (20) days
after the Closing, the Company shall file with the Securities and Exchange
Commission an information statement pursuant to Section 14(c) and Regulation 14C
of the Securities Exchange Act (an "Information Statement") regarding the
Shareholders Consent. The Company shall comply with all of its obligations
pursuant to Section 14(c) and Regulation 14C of the Securities Exchange Act in
connection with the Shareholders Consent.
4N. Filing of Charter Amendment. Twenty-one calender days
after the date that the Company sends or gives its shareholders the Information
Statement relating to the Shareholders Consent, the Company shall file the
Charter Amendment.
4O. Board of Director Nominations. For so long as the
Purchaser holds shares of Investor Preferred convertible into at least 15% of
the outstanding shares of Common Stock (after giving effect to such conversion),
the Purchaser and the Nominating Committee of the Board shall have the right to
mutually approve all nominations to elect or appoint persons to serve as members
of the Board, other than directors elected pursuant to the Closing Certificates
of Designation and the Future Certificates of Designation.
4P. Authorization of Sixth Director. At such time as the
holders of the Series C Preferred convert such shares into Series D Preferred,
the Board shall authorize an increase in the number of persons constituting the
entire Board from five to six directors.
-17-
<PAGE> 176
Section 5. Transfer of Restricted Securities.
(a) Restricted Securities are transferable only
pursuant to (i) public offerings registered under the Securities Act, (ii) Rule
144 of the Securities and Exchange Commission (or any similar rule or rules then
in force) if such rule or rules are available and (iii) subject to the
conditions specified in clause (b) below, any other legally available means of
transfer.
(b) In connection with the transfer of any Restricted
Securities (other than a transfer described in Sections 5(a)(i) or (ii) above),
the holder thereof shall deliver written notice to the Company describing in
reasonable detail the transfer or proposed transfer, together with an opinion of
Kirkland & Ellis or other counsel which (to the Company's reasonable
satisfaction) is knowledgeable in securities law matters to the effect that such
transfer of Restricted Securities may be effected without registration of such
Restricted Securities under the Securities Act. In addition, if the holder of
the Restricted Securities delivers to the Company an opinion of Kirkland & Ellis
or such other counsel that no subsequent transfer of such Restricted Securities
shall require registration under the Securities Act, the Company shall promptly
upon such contemplated transfer deliver new certificates for such Restricted
Securities which do not bear the Securities Act legend set forth in Section 8C.
If the Company is not required to deliver new certificates for such Restricted
Securities not bearing such legend, the holder thereof shall not transfer the
same until the prospective transferee has confirmed to the Company in writing
its agreement to be bound by the conditions contained in this Section and
Section 8C.
(c) Upon the request of the Purchaser, the Company
shall promptly supply to the Purchaser or its prospective transferees all
information regarding the Company required to be delivered in connection with a
transfer pursuant to Rule 144A of the Securities and Exchange Commission.
Section 6. Representations and Warranties of the Company. As a
material inducement to the Purchaser to enter into this Agreement and purchase
the Preferred Stock, the Company hereby represents and warrants to the Purchaser
that:
6A. Shareholders Consent. The Shareholders Consent was
executed by the stockholders of the Company set forth on the attached
"Shareholders Consent Schedule", each of whom owns the number of shares of
Common Stock indicated next to such person's name on the Shareholders Consent
Schedule (the "Consenting Stockholders"). The Consenting Stockholders
collectively own a majority of the outstanding Common Stock. The disclosure
provided to the Consenting Stockholders in connection with the solicitation of
the Shareholders Consent did not
-18-
<PAGE> 177
contain a material misstatement of fact or an omission of a material fact
necessary to make the statements made, in light of the circumstances in which
they were made, not misleading.
6B. Waiver of Vesting Upon Change in Control. Each employee
and director of the Company who has the right (whether granted in an agreement,
by action of the Board or otherwise) to have his or her options to purchase the
Company's stock vest upon a "change in control" has executed a waiver providing
that the Purchaser's and Lender's investment in the Company pursuant to the
Purchase Agreement, the Subordinated Loan Agreement and the Warrant Agreement,
whether on the date hereof or in the future, shall not be considered a "change
in control" and shall not trigger vesting of such person's options. In addition,
each employee who has an agreement with the Company that contains provisions
allowing such agreement to be terminated upon a "change in control" or requiring
the payment of severance upon a "change in control" has executed a waiver
providing that the Purchaser's and Lender's investment in the Company pursuant
to the Purchase Agreement, the Subordinated Loan Agreement and the Warrant
Agreement, whether on the date hereof or in the future, shall not be considered
a "change in control" for purposes of such agreement.
6C. Organization, Corporate Power and Licenses. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of Delaware and is qualified to do business in every jurisdiction in which
its ownership of property or conduct of business requires it to qualify (except
in those instances in which the failure to be so qualified or to be validly
existing and in good standing has not and would not reasonably be expected to
have a Material Adverse Effect). The Company possesses all requisite corporate
power and authority and all material licenses, permits and authorizations
necessary to own and operate its properties, to carry on its businesses as now
conducted and presently proposed to be conducted and to carry out the
transactions contemplated by this Agreement. The copies of the Company's and
each Subsidiary's charter documents and bylaws which have been furnished to the
Purchaser's special counsel reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete.
6D. Capital Stock and Related Matters.
(a) As of the Closing and immediately thereafter, the
authorized capital stock of the Company shall consist of:
(1) 10,000,000 shares of preferred stock, (i) of
which 500,000 shares shall be designated as Series A Preferred, none of which
shall be issued and outstanding, (ii) of which 1,458,335 shares shall be
designated as Series B Preferred, none of which shall be issued and outstanding,
(iii) of which 30,000 shares shall be designated as Series C Preferred, of which
-19-
<PAGE> 178
17,358.824 shares shall be issued and outstanding, (iv) of which 32,000 shares
shall be designated as Series D Preferred, of which (a) 5,498.319 shares shall
be issued and outstanding and (b) 17,358.824 shares shall be reserved for future
issuance upon conversion of the Series C Preferred, (v) of which 15,000 shares
shall be reserved for future issuance under the Warrant Agreement and (vi) of
which 105,000 shares shall be reserved for future issuance pursuant to this
Agreement; and
(2) 100,000,000 shares of Common Stock, of which
17,710,189 shares shall be issued and outstanding, 9,142,858 shares shall be
reserved for issuance upon conversion of the Series D Preferred, and 4,689,599
shares shall be reserved for issuance upon exercise of outstanding options and
warrants to purchase Common Stock as set forth on the attached "Capitalization
Schedule."
(b) As of the Closing, neither the Company nor any
Subsidiary shall have outstanding any stock or securities convertible or
exchangeable for any shares of its capital stock or containing any profit
participation features, nor shall it have outstanding any rights or options to
subscribe for or to purchase its capital stock or any stock or securities
convertible into or exchangeable for its capital stock or any stock appreciation
rights or phantom stock plans, except for the Preferred Stock, the Warrants and
except as set forth on the attached Capitalization Schedule. The Capitalization
Schedule accurately sets forth the following information with respect to all
outstanding options and rights to acquire the Company's capital stock: the
holder, the type of security, the number of shares covered, the exercise price,
the expiration date and whether such security vests upon a "change in control".
As of the Closing, neither the Company nor any Subsidiary shall be subject to
any obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any warrants, options or other rights
to acquire its capital stock, except as set forth on the Capitalization Schedule
and except pursuant to the Certificates of Designation. As of the Closing, all
of the outstanding shares of the Company's capital stock shall be validly
issued, fully paid and nonassessable.
(c) There are no statutory or, to the best of the
Company's knowledge, contractual stockholders preemptive rights or rights of
refusal with respect to the issuance of the Warrant Shares, the Warrants, or the
Preferred Stock or the issuance of the Common Stock issuable upon conversion of
the Warrant Shares or the Preferred Stock or upon exercise of the Warrants. The
Company has not violated any applicable federal or state securities laws in
connection with the offer, sale or issuance of any of its capital stock, and the
offer, sale and issuance of the Warrants and the Preferred Stock do not require
registration under the Securities Act or any applicable state securities laws.
To the best of the Company's knowledge, there are no agreements between the
Company's stockholders with respect to the voting or transfer of the Company's
capital stock or with respect to any other aspect of the Company's affairs,
except as set forth on the Capitalization Schedule.
-20-
<PAGE> 179
6E. Subsidiaries; Investments. The attached "Subsidiary
Schedule" correctly sets forth the name of each Subsidiary, the jurisdiction of
its incorporation and the Persons owning the outstanding capital stock of such
Subsidiary. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, possesses all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own its properties and to carry on its businesses as
now being conducted and as presently proposed to be conducted and is qualified
to do business in every jurisdiction in which its ownership of property or the
conduct of business requires it to qualify (except in those instances in which
the failure to be so qualified or to be validly existing and in good standing
has not and would not reasonably be expected to have a Material Adverse Effect).
All of the outstanding shares of capital stock of each Subsidiary are validly
issued, full paid and nonassessable, and all such shares are owned by the
Company or another Subsidiary free and clear of any Lien, except for Liens under
the Credit Documents, and not subject to any option or right to purchase any
such shares. Except as set forth on the Subsidiary Schedule, neither the Company
nor any Subsidiary owns or holds the right to acquire any shares of stock or any
other security or interest in any other Person.
6F. Authorization; No Breach. The execution, delivery and
performance of this Agreement and the other Documents, the filing of the
Certificates of Designation and the amendment of the Company's bylaws have been
duly authorized by the Company. This Agreement, the other Documents and the
Certificates of Designation each constitutes a valid and binding obligation of
the Company, enforceable in accordance with its terms (except as limited by
bankruptcy, insolvency or other laws affecting the enforcement of creditors'
rights. Except as set forth on the attached "Restrictions Schedule," the
execution and delivery by the Company of this Agreement and the other Documents,
the offering, sale and issuance of the Preferred Stock, the issuance of the
Common Stock upon conversion of the Series C Preferred, the issuance of Warrants
pursuant to the Warrant Agreement, the issuance of the Warrant Shares upon
exercise of Warrants, the filing of the Certificates of Designation, and the
amendment of the Company's bylaws and the fulfillment of and compliance with the
respective terms hereof and thereof by the Company, do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon the Company's or any Subsidiary's
capital stock or assets pursuant to, (iv) give any third party the right to
modify, terminate or accelerate any obligation under, (v) result in a violation
of, or (vi) require any authorization, consent, approval, exemption or other
action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, the Certificates of
Designation or the charter or bylaws of the Company or any Subsidiary, or any
law, statute, rule or regulation to which the Company or any Subsidiary is
subject, or any agreement, instrument, order, judgment or decree to which the
Company or any Subsidiary is subject. Except as set forth on the Restrictions
Schedule, none of the Subsidiaries are subject to any restrictions upon making
-21-
<PAGE> 180
loans or advances or paying dividends to, transferring property to, or repaying
any Debt owed to, the Company or another Subsidiary.
6G. Financial Statements. Attached hereto as the "Financial
Statements Schedule" are the following financial statements:
(a) the audited consolidated balance sheets of the
Company and its Subsidiaries as of December 31, 1997 and 1998, and the related
statements of income and cash flows (or the equivalent) for the respective
twelve-month periods ended December 31, 1997 and 1998; and
(b) the unaudited consolidated balance sheet of the
Company and its Subsidiaries as of November 30, 1999 (the "Latest Balance
Sheet"), and the related statements of income and cash flows (or the equivalent)
for the eleven-month period then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) is accurate and complete in all material respects, is
consistent with the books and records of the Company (which, in turn, are
accurate and complete in all material respects) and has been prepared in
accordance with GAAP, consistently applied, subject in the case of the unaudited
financial statements to the absence of footnote disclosure and changes resulting
from normal year-end adjustments for recurring accruals (none of which would,
alone or in the aggregate, be materially adverse to the financial condition,
operating results, assets, operations or business prospects of the Company and
its Subsidiaries taken as a whole).
The pro forma consolidated balance sheet of the Company and its Subsidiaries as
of December 31, 1999, which gives effect to the Transactions and the
Acquisition, is also attached hereto in the Financial Statement Schedule and is
complete and correct in all material respects and presents fairly in all
material respects the consolidated financial condition of the Company and its
Subsidiaries as of such date as if the transactions contemplated by this
Agreement had occurred immediately prior to such date, and such balance sheet
contains all pro forma adjustments necessary in order to fairly reflect such
assumption.
6H. Absence of Undisclosed Liabilities. Except as set forth on
the attached "Liabilities Schedule," the Company and its Subsidiaries do not
have any material obligation or liability (whether accrued, absolute,
contingent, unliquidated or otherwise, whether or not known to the Company or
any Subsidiary, whether due or to become due and regardless of when asserted)
arising out of transactions entered into at or prior to the Closing, or any
action or inaction at or prior to the Closing, or any state of facts existing at
or prior to the Closing other than: (i) liabilities set forth on the Latest
Balance Sheet (including any notes thereto), (ii) liabilities and obligations
which have arisen after the date of the Latest Balance Sheet in the ordinary
course of business consistent
-22-
<PAGE> 181
with past practice (none of which is a liability resulting from breach of
contract, breach of warranty, tort, infringement, claim or lawsuit), (iii) other
liabilities and obligations expressly disclosed in the other Schedules to this
Agreement and (iv) obligations under contract not required to be disclosed on
the Contracts Schedule.
6I. No Material Adverse Change. Except as set forth on the
attached "Adverse Change Schedule," since November 30, 1999, there has been no
material adverse change in the financial condition, operating results, assets,
operations, business prospects, employee relations or customer or supplier
relations of the Company and its Subsidiaries taken as a whole.
6J. Absence of Certain Developments.
(i) Except as expressly contemplated by this
Agreement or as set forth on the attached "Developments Schedule," since the
date of the Latest Balance Sheet, neither the Company nor any Subsidiary has
(a) issued any notes, bonds or other debt securities
or any capital stock or other equity securities or any securities convertible,
exchangeable or exercisable into any capital stock or other equity securities;
(b) borrowed any amount or incurred or become subject
to any liabilities, except current liabilities incurred in the ordinary course
of business and liabilities under contracts entered into in the ordinary course
of business;
(c) discharged or satisfied any Lien or paid any
obligation or liability, other than current liabilities paid in the ordinary
course of business;
(d) declared or made any payment or distribution of
cash or other property to its stockholders with respect to its capital stock or
other equity securities or purchased or redeemed any shares of its capital stock
or other equity securities (including, without limitation, any warrants, options
or other rights to acquire its capital stock or other equity securities);
(e) mortgaged or pledged any of its properties or
assets or subjected them to any Lien, except for Permitted Encumbrances;
(f) sold, assigned or transferred any of its tangible
assets, except in the ordinary course of business, or canceled any debts or
claims;
-23-
<PAGE> 182
(g) sold, assigned or transferred any patents or
patent applications, trademarks, service marks, trade names, corporate names,
copyrights or copyright registrations, trade secrets or other intangible assets,
or disclosed any proprietary confidential information to any Person;
(h) suffered any extraordinary losses or waived any
rights of value, whether or not in the ordinary course of business or consistent
with past practice;
(i) made capital expenditures or commitments therefor
that aggregate in excess of $250,000;
(j) made any loans or advances to, guarantees for the
benefit of, or any Investments in, any Persons in excess of $50,000 in the
aggregate;
(k) made any charitable contributions or pledges in
excess of $10,000 in the aggregate;
(l) suffered any damage, destruction or casualty loss
exceeding in the aggregate $100,000, whether or not covered by insurance;
(m) made any Investment in or taken steps to
incorporate any Subsidiary except for the incorporation of Wholly-Owned
Subsidiaries in connection with Future Acquisitions approved by the Board and
the Purchaser; or
(n) entered into any other transaction other than in
the ordinary course of business or entered into any other material transaction,
whether or not in the ordinary course of business consistent with past practice.
(ii) No officer, director, employee or agent of the
Company or any of its Subsidiaries has been or is authorized to make or receive,
and the Company does not know of any such person making or receiving, any bribe,
kickback or other illegal payment.
6K. Assets. Except as set forth on the attached "Assets
Schedule," the Company and each Subsidiary have good and marketable title to, or
a valid leasehold interest in, the properties and assets used by them, located
on their premises or shown on the Latest Balance Sheet or acquired thereafter,
free and clear of all Liens, except for properties and assets disposed of in the
ordinary course of business since the date of the Latest Balance Sheet and
except for Liens disclosed on the Latest Balance Sheet (including any notes
thereto) and Permitted Encumbrances. Except as described on the Assets Schedule,
the Company's and each Subsidiary's buildings, equipment and other tangible
assets are in good operating condition in all material respects and are fit for
use in the
-24-
<PAGE> 183
ordinary course of business. The Company and each Subsidiary own, or have a
valid leasehold interest in, all assets necessary for the conduct of their
respective businesses as presently conducted and as presently proposed to be
conducted.
6L. Real Property.
(a) Owned Properties. The "Owned Real Property Schedule"
attached hereto sets forth a list of all owned real property (the "Owned Real
Property") used by the Company or any of it Subsidiaries in the operation of the
Company's or any of it Subsidiaries' business. With respect to each such parcel
of Owned Real Property and except for Liens in favor of the Senior Lenders: (i)
such parcel is free and clear of all covenants, conditions, restrictions,
easements, liens or other encumbrances, except Permitted Encumbrances; (ii)
there are no leases, subleases, licenses, concessions, or other agreements,
written or oral, granting to any person the right of use or occupance of any
portion of such parcel; and (iii) there are no outstanding actions or rights of
first refusal to purchase such parcel, or any portion thereof or interest
therein.
(b) Leased Properties. The "Leased Property Schedule" attached
hereto sets forth a list of all of the leases and subleases ("Leases") and each
leased and subleased parcel of real property in which the Company or any of it
Subsidiaries have a leasehold and subleasehold interest (the "Leased Real
Property"). The Company has delivered to the Purchaser true, correct, complete
and accurate copies of each of the Leases described in the Leased Property
Schedule. With respect to each Lease listed on the Leased Property Schedule: (i)
the Lease is legal, valid, binding, enforceable and in full force and effect;
(ii) the Lease will continue to be legal, valid, binding, enforceable and in
full force and effect on identical terms following the Closing; (iii) neither
the Company nor any of its Subsidiaries nor, to the best of the Company's
knowledge, any other party to the Lease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute such a breach
or default or permit termination, modification or acceleration under the Lease;
(iv) to the best of the Company's knowledge, no party to the Lease has
repudiated any provision thereof; (v) to the best of the Company's knowledge,
there are no disputes, oral agreements, or forbearance programs in effect as to
the Lease; (vi) the Lease has not been modified in any respect, except to the
extent that such modifications are disclosed by the documents delivered to the
Purchaser; and (vii) neither the Company nor any of its Subsidiaries has
assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any
interest in the Lease.
(c) Real Property Disclosure. Except as disclosed in the Owned
Real Property Schedule and the Leased Property Schedule, there is no Real
Property leased or owned by the Company or any of it Subsidiaries used in the
Company's or any of it Subsidiaries' business.
-25-
<PAGE> 184
6M. Tax Matters.
(a) Except as set forth on the attached "Taxes
Schedule": the Company, each Subsidiary and each Affiliated Group have filed all
Tax Returns which they are required to file under applicable laws and
regulations; all such Tax Returns are complete and correct in all material
respects and have been prepared in compliance with all applicable laws and
regulations in all material respects; the Company, each Subsidiary and each
Affiliated Group in all material respects have paid all Taxes due and owing by
them (whether or not such Taxes are required to be shown on a Tax Return) and
have withheld and paid over to the appropriate taxing authority all Taxes which
they are required to withhold from amounts paid or owing to any employee,
stockholder, creditor or other third party; neither the Company, any Subsidiary
nor any Affiliated Group has waived any statute of limitations with respect to
any Taxes or agreed to any extension of time with respect to any Tax assessment
or deficiency; the accrual for Taxes on the Latest Balance Sheet would be
adequate to pay all Tax liabilities of the Company and its Subsidiaries if their
current tax year were treated as ending on the date of the Latest Balance Sheet
(excluding any amount recorded which is attributable solely to timing
differences between book and Tax income); since the date of the Latest Balance
Sheet, the Company and its Subsidiaries have not incurred any liability for
Taxes other than in the ordinary course of business; the assessment of any
additional Taxes for periods for which Tax Returns have been filed by the
Company, each Subsidiary and each Affiliated Group shall not exceed the recorded
liability therefor on the Latest Balance Sheet (excluding any amount recorded
which is attributable solely to timing differences between book and Tax income);
the federal income Tax Returns of the Company and its Subsidiaries have been
audited and closed for all tax years through 1998; to the best of the Company's
knowledge, no foreign, federal, state or local tax audits or administrative or
judicial proceedings are pending or being conducted with respect to the Company,
any Subsidiary or any Affiliated Group; no information related to Tax matters
has been requested by any foreign, federal, state or local taxing authority; no
written notice indicating an intent to open an audit or other review has been
received by the Company from any foreign, federal, state or local taxing
authority; and there are no material unresolved questions or claims concerning
the Company's, any Subsidiary's or any Affiliated Group Tax liability.
(b) Neither the Company nor any of its Subsidiaries
has made an election under Section 341(f) of the Internal Revenue Code of 1986,
as amended. Neither the Company nor any Subsidiary is liable for the Taxes of
another Person that is not a Subsidiary in a material amount under (a) Treas.
Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign law),
(b) as a transferee or successor, (c) by contract or indemnity or (d) otherwise.
Neither the Company nor any Subsidiary is a party to any tax sharing agreement.
The Company, each Subsidiary and each Affiliated Group have disclosed on their
federal income Tax Returns any position taken for which substantial authority
(within the meaning of IRC Section 6662(d)(2)(B)(i)) did not exist at the time
the return was filed. Neither the Company nor any Subsidiary has made any
payments, is obligated to
-26-
<PAGE> 185
make payments or is a party to an agreement that could obligate it to make any
payments that would not be deductible under IRC Section 280G.
6N. Contracts and Commitments.
(i) Except as expressly contemplated by this
Agreement or as set forth on the attached "Contracts Schedule" or the attached
"Employee Benefits Schedule," neither the Company nor any Subsidiary is a party
to or bound by any written or oral:
(a) pension, profit sharing, stock option, employee
stock purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other employee benefit plan or arrangement, or
any collective bargaining agreement or any other contract with any labor union,
or severance agreements, programs, policies or arrangements;
(b) contract for the employment of any officer,
individual employee or other Person on a full-time, part-time, consulting or
other basis providing annual compensation in excess of $75,000 or contract
relating to loans to officers, directors or Affiliates;
(c) contract under which the Company or Subsidiary
has advanced or loaned any other Person amounts in the aggregate exceeding
$100,000;
(d) agreement or indenture relating to borrowed money
or other Debt or the mortgaging, pledging or otherwise placing a Lien on any
material asset or material group of assets of the Company and its Subsidiaries;
(e) guarantee of any obligation in excess of $100,000
(other than by the Company of a Wholly-Owned Subsidiary's debts or a guarantee
by a Subsidiary of the Company's debts or another Subsidiary's debts);
(f) lease or agreement under which the Company or any
Subsidiary is lessee of or holds or operates any property, real or personal,
owned by any other party, except for any lease of real or personal property
under which the aggregate annual rental payments do not exceed $100,000;
(g) lease or agreement under which the Company or any
Subsidiary is lessor of or permits any third party to hold or operate any
property, real or personal, owned or controlled by the Company or any
Subsidiary;
-27-
<PAGE> 186
(h) assignment, license, indemnification or agreement
with respect to any intangible property (including, without limitation, any
Intellectual Property);
(i) warranty agreement with respect to its services
rendered or its products sold or leased;
(j) agreement under which it has granted any Person
any registration rights (including, without limitation, demand and piggyback
registration rights);
(k) sales, distribution or franchise agreement;
(l) contract, agreement or other arrangement with any
officer, director, stockholder, employee or Affiliate, or any Affiliate of any
officer, director, stockholder or employee;
(m) contract or agreement prohibiting it from freely
engaging in any business or competing anywhere in the world; or
(n) contract or group of related contracts with the
same party or group of affiliated parties the performance of which involves
consideration in excess of $200,000; or agreement with a term of more than six
months which is not terminable by the Company or any Subsidiary upon less than
30 days notice without penalty.
(ii) All of the contracts, agreements and instruments
set forth on the Contracts Schedule are valid, binding and enforceable in
accordance with their respective terms in all material respects. The Company and
each Subsidiary have performed all material obligations required to be performed
by them and are not in default under or in breach of nor in receipt of any claim
of default or breach under any material contract, agreement or instrument to
which the Company or any Subsidiary is subject; no event has occurred which with
the passage of time or the giving of notice or both would result in a default,
breach or event of noncompliance by the Company or any Subsidiary under any
material contract, agreement or instrument to which the Company or any
Subsidiary is subject and; neither the Company nor any Subsidiary has any
present expectation or intention of not fully performing all such obligations;
neither the Company nor any Subsidiary has knowledge of any breach or
anticipated breach by the other parties to any material contract, agreement,
instrument or commitment to which it is a party.
(iii) The Purchaser's special counsel has been
supplied with a true and correct copy of each of the written instruments, plans,
contracts and agreements and an accurate description of each of the oral
arrangements, contracts and agreements which are referred to on the Contracts
Schedule, together with all amendments, waivers or other changes thereto.
-28-
<PAGE> 187
6O. Intellectual Property Rights.
(a) The attached "Intellectual Property Schedule"
contains a complete and accurate list of all (i) patented or registered
Intellectual Property Rights owned or used by the Company or any Subsidiary,
(ii) pending patent applications and applications for registrations of other
Intellectual Property Rights filed by the Company or any Subsidiary, (iii)
unregistered trade names and corporate names owned or used by the Company or any
Subsidiary and (iv) unregistered trade marks, service marks, copyrights, mask
works and computer software owned or used by the Company or any Subsidiary, in
each case which are material to the financial condition, operating results,
assets, operations or business prospects of the Company and its Subsidiaries
taken as a whole. The Intellectual Property Schedule also contains a complete
and accurate list of all licenses and other rights granted by the Company or any
Subsidiary to any third party with respect to any Intellectual Property Rights
and all licenses and other rights granted by any third party to the Company or
any Subsidiary with respect to any Intellectual Property Rights, in each case
identifying the subject Intellectual Property Rights. Except as set forth on the
Intellectual Property Schedule, the Company or one of its Subsidiaries owns all
right, title and interest to, or has the right to use pursuant to a valid
license, all Intellectual Property Rights necessary for the operation of the
businesses of the Company and its Subsidiaries as presently conducted and as
presently proposed to be conducted, free and clear of all Liens. The loss or
expiration of any Intellectual Property Right or related group of Intellectual
Property Rights owned or used by the Company or any Subsidiary has not had and
would not reasonably be expected to have a Material Adverse Effect, and no such
loss or expiration is, to the best of the Company's knowledge, threatened,
pending or reasonably foreseeable. The Company and its Subsidiaries have taken
all reasonably necessary and desirable actions to maintain and protect the
Intellectual Property Rights which they own. To the best of the Company's
knowledge, the owners of any Intellectual Property Rights licensed to the
Company or any Subsidiary have taken all reasonably necessary and desirable
actions to maintain and protect the Intellectual Property Rights which are
subject to such licenses.
(b) (i) The Company and its Subsidiaries own all
right, title and interest in and to all of the Intellectual Property Rights
listed on such schedule, free and clear of all Liens, (ii) there have been no
claims made against the Company or any Subsidiary asserting the invalidity,
misuse or unenforceability of any of such Intellectual Property Rights, and, to
the best of the Company's knowledge, there are no grounds for the same, (iii)
neither the Company nor any Subsidiary has received any notices of, and is not
aware of any facts which indicate a likelihood of, any infringement or
misappropriation by, or conflict with, any third party with respect to such
Intellectual Property Rights (including, without limitation, any demand or
request that the Company or any Subsidiary license any rights from a third
party), (iv) the conduct of the Company's and each Subsidiary's business has not
infringed, misappropriated or conflicted with and does not infringe,
misappropriate or conflict with any Intellectual Property Rights of other
Persons, nor would any
-29-
<PAGE> 188
future conduct as presently contemplated infringe, misappropriate or conflict
with any Intellectual Property Rights of other Persons and (v) to the best of
the Company's knowledge, the Intellectual Property Rights owned by or licensed
to the Company or any Subsidiary have not been infringed, misappropriated or
conflicted by other Persons. The transactions contemplated by this Agreement
shall have no material adverse effect on the Company's or any Subsidiary's
right, title and interest in and to the Intellectual Property Rights listed on
the Intellectual Property Schedule.
6P. Litigation, etc. Except as set forth on the attached
"Litigation Schedule," there are no actions, suits, proceedings, orders,
investigations or claims pending or, to the best of the Company's knowledge,
threatened against or affecting the Company or any Subsidiary (or to the best of
the Company's knowledge, pending or threatened against or affecting any of the
officers, directors or employees of the Company and its Subsidiaries with
respect to their businesses or proposed business activities), or pending or
threatened by the Company or any Subsidiary against any third party, at law or
in equity, or before or by any governmental department, commission, board,
bureau, agency or instrumentality (including, without limitation, any actions,
suit, proceedings or investigations with respect to the transactions
contemplated by this Agreement); neither the Company nor any Subsidiary is
subject to any arbitration proceedings under collective bargaining agreements or
otherwise or, to the best of the Company's knowledge, any governmental
investigations or inquiries (including, without limitation, inquiries as to the
qualification to hold or receive any license or permit); and, to the best of the
Company's knowledge, there is no basis for any of the foregoing. Neither the
Company nor any Subsidiary is subject to any judgment, order or decree of any
court or other governmental agency, and neither the Company nor any Subsidiary
has received any opinion or memorandum or legal advice from legal counsel to the
effect that it is exposed, from a legal standpoint, to any liability or
disadvantage which may be material to its business.
6Q. Brokerage. Other than fees payable by the Company to
Sanders Morris and Mundy as described in the Financial Advisory Agreement dated
November 16, 1999, as amended by the Amendment dated January 24, 2000, there are
no claims for brokerage commissions, finders' fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement binding upon the Company or any Subsidiary. The Company
shall pay, and hold the Purchaser harmless against, any liability, loss or
expense (including, without limitation, reasonable attorneys' fees and
out-of-pocket expenses) arising in connection with any such claim.
6R. Governmental Consent, etc. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated
-30-
<PAGE> 189
hereby, or the consummation by the Company of any other transactions
contemplated hereby or thereby, except as set forth on the attached "Consents
Schedule" and except as expressly contemplated herein or in the exhibits hereto.
6S. Insurance. The attached "Insurance Schedule" contains a
description of each insurance policy maintained by the Company and its
Subsidiaries with respect to its properties, assets and businesses, and each
such policy is in full force and effect as of the Closing. Neither the Company
nor any Subsidiary is in default with respect to its obligations under any
insurance policy maintained by it, and neither the Company nor any Subsidiary
has been denied insurance coverage. Except as set forth on the Insurance
Schedule, the Company and its Subsidiaries do not have any self- insurance or
co-insurance programs, and the reserves set forth on the Latest Balance Sheet
are adequate to cover all anticipated liabilities with respect to any such
self-insurance or co-insurance programs.
6T. Employees. The Company is not aware that any of the
persons set forth in the "Key Employees Schedule" hereto has any plans to
terminate employment with the Company or any Subsidiary. The Company and each
Subsidiary have complied in all material respects with all laws relating to the
employment of labor (including, without limitation, provisions thereof relating
to wages, hours, equal opportunity, collective bargaining and the payment of
social security and other taxes), and the Company is not aware that it or any
Subsidiary has any material labor relations problems (including, without
limitation, any union organization activities, threatened or actual strikes or
work stoppages or material grievances). Neither the Company, its Subsidiaries
nor, to the best of the Company's knowledge, any of their employees is subject
to any noncompete, nondisclosure, confidentiality, employment, consulting or
similar agreements relating to, affecting or in conflict with the present or
proposed business activities of the Company and its Subsidiaries, except for
agreements between the Company and its present and former employees.
6U. Employee Benefit Plans.
(a) The attached Employee Benefits Schedule sets forth an
accurate and complete list of each employee benefit plan (as such term is
defined in Section 3(3) of ERISA), and any other bonus, deferred compensation,
incentive compensation, stock, severance or other plan or arrangement, other
than a non-material fringe benefit plan (each of the foregoing, a "Benefit
Plan"), currently maintained or contributed to by the Company and its
Subsidiaries or with respect to which the Company and its Subsidiaries have or
may have any material liability.
(b) None of the Benefit Plans is subject to Title IV of ERISA
or the minimum funding requirements of Section 412 of the Code or Section 302 of
ERISA. No underfunded defined benefit plan has been, during the five years
preceding the Closing Date, transferred out of the Company's Controlled Group.
-31-
<PAGE> 190
(c) None of the Benefits Plans is a multiemployer plan (as
defined in Section 3(37) of ERISA).
(d) None of the Benefit Plans provides for medical or life
insurance benefits to current or future retired or former employees of the
Company or any Subsidiary beyond their retirement or other termination of
service (other than as required under Section 4980B of the Code or applicable
state law).
(e) None of the Benefit Plans obligates the Company or any
Subsidiary to pay any severance or similar benefit solely as a result of a
change in control or ownership within the meaning of Section 280G of the Code.
(f) All required contributions to date by the Company or any
Subsidiary under the terms of any Benefit Plan or applicable law have been made
within the time prescribed by any such plan or applicable law or properly
accrued on the appropriate balance sheet. All contributions, premiums and
expenses payable to or in respect of any Benefit Plan or the operation or
administration thereof relating to any period on or prior to the date hereof
have been paid or properly accrued on the appropriate balance sheet. No material
liability has been assessed or is expected to be incurred by the Company or any
Subsidiary or any trade or business, whether or not incorporated, which is or
would have been at any date of determination occurring within the preceding six
years treated as a single employer under Section 414 of the Code together with
the Company or the Subsidiaries (each such person, a "Related Person") (either
directly or indirectly, including as a result of an indemnification obligation
or any joint and several liability obligations) under or pursuant to Title I or
IV of ERISA or the penalty, excise tax or joint and several liability provisions
of the Code relating to employee benefit plans, and no event, transaction or
condition has occurred or exists that could result in any material liability to
the Buyer, the Company, any Subsidiary or any Related Person or any employee
benefit plan of the Company, any Subsidiary or any Related Person. No actions,
suits, investigations or claims with respect to any Benefit Plan (other than
routine claims for benefits) are pending or, to the knowledge of the Company,
threatened, which could reasonably be expected to result in liability to the
Company or any Subsidiary.
(g) Each of the Benefit Plans has been administered in
accordance with its terms in all material respects and is in compliance in all
material respects with applicable laws and regulations including, without
limitation, ERISA and the Code.
(h) Each of the Benefit Plans which is intended to be a
qualified plan within the meaning of Section 401(a) of the Code and the trust
forming a part thereof has received a favorable determination letter from the
IRS to be so qualified and to the extent that each such trust is exempt from
taxation under section 501(a) of the Code, and, to the knowledge of the Company,
nothing has
-32-
<PAGE> 191
occurred since the date of such determination that could adversely affect such
qualification or tax- exempt status.
(i) With respect to each Benefit Plan, the Company previously
has furnished to the Lender a true and correct copy of, where applicable, (a)
the most recent annual report (Form 5500) filed with the IRS, (b) the plan
document if written, or a description of such plan if not written, (c) each
trust agreement, group annuity contract or other funding arrangement, if any,
relating to such Benefit Plan, (d) the most recent actuarial report or valuation
relating to such Benefit Plan (in the event such Benefit Plan is subject to
Title IV of ERISA, is a non-U.S. pension plan, or provides any post-employment
health, medical or life insurance benefits), (e) the most recent summary plan
description and (f) the most recent determination letter issued by the IRS.
6V. Compliance with Laws. Neither the Company nor any
Subsidiary has violated any law or any governmental regulation or requirement
which violation has had or would reasonably be expected to have a Material
Adverse Effect, and neither the Company nor any Subsidiary has received notice
of any such violation.
6W. Environmental and Safety Matters.
Except as set forth on the attached "Environmental Schedule":
(a) The Company and its Subsidiaries have complied
with and are currently in compliance with all Environmental and Safety
Requirements, and neither the Company nor its Subsidiaries have received any
oral or written notice, report or information regarding any liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise) or any corrective,
investigatory or remedial obligations arising under Environmental and Safety
Requirements which relate to the Company or its Subsidiaries or any of their
properties or facilities that has not been complied with.
(b) Without limiting the generality of the foregoing,
the Company and its Subsidiaries have obtained and complied with, and are
currently in compliance with, all material, permits, licenses and other
authorizations that may be required pursuant to any Environmental and Safety
Requirements for the occupancy of their properties or facilities or the
operation of their businesses. A list of all such permits, licenses and other
authorizations is set forth on the attached Environmental Schedule.
(c) Neither this Agreement nor the consummation of
the transactions contemplated by this Agreement shall impose any obligations on
the Company and its Subsidiaries or otherwise for site investigation or cleanup,
or notification to or consent of any government agencies
-33-
<PAGE> 192
or third parties under any Environmental and Safety Requirements (including,
without limitation, any so called "transaction-triggered" or "responsible
property transfer" laws and regulations).
(d) To the best of the Company's knowledge, none of
the following exists at any property or facility owned, occupied or operated by
the Company or any of its Subsidiaries if the existence of same would violate
Environmental Laws:
(i) underground storage tanks or
surface impoundments;
(ii) asbestos-containing materials in
any form or condition; or
(iii) materials or equipment containing
polychlorinated biphenyls.
(e) Neither the Company nor any of its Subsidiaries
has treated, stored, disposed of, arranged for or permitted the disposal of,
transported, handled or Released any substance (including, without limitation,
any hazardous substance) or owned, occupied or operated any facility or
property, so as to give rise to liabilities of the Company or its Subsidiaries
pursuant to Environmental and Safety Requirements (including, without
limitation, any liability for response costs, natural resource damages or
attorneys fees pursuant to CERCLA).
(f) Neither the Company nor any of its Subsidiaries
has, either expressly or by operation of law, assumed or undertaken any
liability or corrective, investigatory or remedial obligation of any other
Person relating to any Environmental and Safety Requirements.
(g) No Environmental Lien has attached to any
property owned, leased or operated by the Company or any of its Subsidiaries.
6X. Affiliated Transactions. Except as set forth on the
attached "Affiliated Transactions Schedule," no officer, director, employee, or
Affiliate of the Company or any Subsidiary or any individual related by blood,
marriage or adoption to any such individual or any entity in which any such
Person or individual owns any beneficial interest, is a party to any agreement,
contract, commitment or transaction with the Company or any Subsidiary or has
any material interest in any material property used by the Company or any
Subsidiary.
6Y. Real Property Holding Corporation Status. Since its date
of incorporation, the Company has not been, and as of the date of the Closing
shall not be, a "United States real property holding corporation", as defined in
Section 897(c)(2) of the Code, and in Section 1.897-2(b) of the Treasury
Regulations issued thereunder. The Company has no current plans or intentions
which would cause the Company to become a "United States real property holding
company," and
-34-
<PAGE> 193
the Company has filed with the Internal Revenue Service all statements, if any,
with its United States income tax returns which are required under
Section 1.897-2(h) of the Treasury Regulations.
6Z. Customers and Suppliers.
(a) The attached "Customer Schedule" lists the 10
largest customers of the Company (on a consolidated basis) for each of the two
most recent Fiscal Years and sets forth opposite the name of each such customer
the percentage of consolidated net sales attributable to such customer. The
Customer Schedule also lists any additional current customers which the Company
anticipates shall be among the 10 largest customers for the current Fiscal Year.
(b) Since the date of the Latest Balance Sheet, no
material supplier of the Company or any Subsidiary has indicated that it shall
stop, or materially decrease the rate of, supplying materials, products or
services to the Company or any Subsidiary, and no customer listed on the
Customer Schedule has indicated that it shall stop, or materially decrease the
rate of, buying materials, products or services from the Company or any
Subsidiary.
6AA. Reports with the Securities and Exchange Commission. The
Company has furnished the Purchaser with complete and accurate copies of its
annual report on Form 10-K for its three most recent Fiscal Years, all other
reports or documents required to be filed by the Company pursuant to Section
13(a) or 15(d) of the Securities Exchange Act since the filing of the most
recent annual report on Form 10-K and its most recent annual report to its
stockholders. Such reports and filings do not contain any material false
statements or any misstatement of any material fact and do not omit to state any
fact necessary to make the statements set forth therein not misleading. The
Company has made all filings with the Securities and Exchange Commission which
it is required to make, and the Company has not received any request from the
Securities and Exchange Commission to file any amendment or supplement to any of
the reports described in this paragraph.
6BB. Investment Company. The Company is not an "investment
company" as defined under the Investment Company Act of 1940.
6CC. Section 203 of the DGCL; Takeover Statute. The Board of
Directors has taken all actions necessary or advisable so that the restrictions
contained in Section 203 of the Delaware General Corporate Law ("DGCL")
applicable to a "business combination" (as defined in such Section) will not
apply to the execution, delivery or performance of this Agreement or any of the
other Documents or the consummation of the transactions contemplated hereby or
thereby, including the issuance of the Series C Preferred, the Series D
Preferred, the Warrants and all issuances of Future Convertible Preferred Stock.
The execution, delivery and performance of this Agreement or any of the other
Documents and the consummation of the transactions contemplated hereby or
-35-
<PAGE> 194
thereby will not cause to be applicable to the Company any "fair price,"
"moratorium," "control share acquisition" or other similar antitakeover statute
or regulation enacted under state or federal laws.
6DD. Rights Agreement. The Rights Agreement has been amended
to provide that the Purchaser, GTCR Capital Partners, L.P. and their Affiliates
shall be an "Exempt Person" (and therefore not an "Acquiring Person") under such
plan and that the Rights Agreement is otherwise inapplicable to the execution
and delivery of this Agreement, the other Documents and the transactions
contemplated hereby and thereby, including the issuance of the Series C
Preferred, the Series D Preferred, the Warrants and all issuances of Future
Convertible Preferred Stock. No "Distribution Date" has occurred within the
meaning of the Rights Agreement, and the consummation of the transactions
contemplated hereby and by the other Documents will not result in the occurrence
of a Distribution Date. The Company has taken all action required to render the
Rights Agreement (and the "Rights" thereunder) inapplicable to this Agreement,
the other Documents and the transactions contemplated hereby and thereby.
6EE. Disclosure. All information heretofore or
contemporaneously herewith furnished in writing by the Company or any Subsidiary
to the Purchaser for purposes of or in connection with this Agreement and the
transactions contemplated hereby is, and all written information hereafter
furnished by or on behalf of the Company or any Subsidiary to the Purchaser
pursuant hereto or in connection herewith will be, true and accurate in every
material respect on the date as of which such information is dated or certified,
and none of such information is or will be incomplete by omitting to state any
material fact necessary to make such information not misleading in light of the
circumstances under which made (it being recognized by the Purchaser that (a)
any projections and forecasts provided by the Company are based on good faith
estimates and assumptions believed by the Company to be reasonable as of the
date of the applicable projections or assumptions and that actual results during
the period or periods covered by any such projections and forecasts will likely
differ from projected or forecasted results and (b) any information provided by
the Company or any Subsidiary with respect to any Person or assets acquired or
to be acquired by the Company or any Subsidiary shall, for all periods prior to
the date of such acquisition, be limited to the knowledge of the Company or the
acquiring Subsidiary after reasonable inquiry). There is no fact known to the
Company which the Company has not disclosed to the Purchaser in writing and of
which any of its officers, directors or executive employees is aware (other than
general economic and industry conditions) and which has had or would reasonably
be expected to have a Material Adverse Effect.
On the Closing Date and the date of each subsequent purchase of Preferred Stock
hereunder, or at any other time at which the Company or its Subsidiaries is
required to make representations and warranties hereunder, each representation
and warranty shall be made after giving effect to each purchase of Preferred
Stock hereunder, each borrowing under the Subordinated Loan Agreement and
-36-
<PAGE> 195
under the Credit Agreement and the application of the proceeds therefrom
including the acquisition of RESTEC or any Future Acquisitions as if such
acquisition had at that time been made. Without limiting the foregoing, to the
extent representations and warranties are being made in connection with a
purchase of Preferred Stock the proceeds of which will be used to consummate the
Acquisition or a Future Acquisition, the Company's "Subsidiaries" in such
representations and warranties shall include the entities and businesses being
acquired pursuant to such Acquisition or Future Acquisition.
The Company shall have the right to supplement and amend the Schedules to this
Agreement with respect to events occurring after the date of this Agreement,
which such new event, when scheduled, shall not constitute a breach hereof;
provided that any such amendment or supplement shall be approved by the
Purchaser and shall be in a form satisfactory to the Purchaser; and further
provided that no such amendment or supplement shall cure a breach hereunder.
Section 7. Definitions. For the purposes of this Agreement,
the following terms have the meanings set forth below:
"Acquisition" is defined in the definition of Acquisition
Agreement.
"Acquisition Agreement" means the Purchase and Sale Agreement,
dated as of October 20, 1999 together with all amendments, with Paul A. Toretta,
individually, Eileen Toretta, as trustee of the Paul A. Toretta 1998 Grat,
Frances A. Guerrera, individually, Frances A. Guerrera, as executrix of the
estate of Richard J. Guerrera, and Frances A. Guerrera and Robert Dionne, as co-
trustees of the Richard J. Guerrera Revocable Trust under agreement dated
November 2, 1998, which collectively own, directly or indirectly, all of the
outstanding capital stock, limited partnership interests and limited liability
companies interests listed on Schedule 1 thereto (the "Acquisition").
"Affiliate," as applied to any Person, means any other Person
directly or indirectly controlling, controlled by, or under common control with,
that Person. For the purposes of this definition, "control" (including with
correlative meanings, the terms "controlling," "controlled by" and "under common
control with"), as applied to any Person, means the possession, directly,
indirectly or beneficially, of the power to direct or cause the direction of the
management and policies of that Person, whether through the ownership of voting
securities or by contract or otherwise. For purposes of this Agreement, all
holdings of Preferred Stock by Persons who are Affiliates of each other shall be
aggregated for purposes of meeting any threshold tests under this Agreement.
-37-
<PAGE> 196
"Affiliated Group" means any affiliated group as defined in
IRC Section 1504 that has filed a consolidated return for federal income tax
purposes (or any similar group under state, local or foreign law) for a period
during which the Company or any of its Subsidiaries was a member.
"Business Day" means any day excluding Saturday, Sunday and
any day which is a legal holiday under the laws of the States of Illinois or
Texas or is a day on which banking institutions located in Chicago, Illinois or
Houston, Texas are authorized or required by law or other governmental action to
close.
"Capital Lease" means, with respect to any Person, any lease
of (or other agreement conveying the right to use) any real or personal property
by such Person that, in conformity with GAAP, is accounted for as a capital
lease on the balance sheet of such Person.
"Cash Equivalent Investment" means, at any time, (a) any
evidence of Debt, maturing not more than one year after such time, issued or
guaranteed by the United States Government or any agency thereof, (b) commercial
paper, maturing not more than one year from the date of issue, or corporate
demand notes, in each case (unless issued by a Bank or its holding company)
rated at least A-l by Standard & Poor's Ratings Group or P-l by Moody's
Investors Service, Inc., (c) any certificate of deposit (or time deposits
represented by such certificates of deposit) or bankers acceptance, maturing not
more than one year after such time, or overnight Federal Funds transactions that
are issued or sold by a commercial banking institution that is a member of the
Federal Reserve System and has a combined capital and surplus and undivided
profits of not less than $500,000,000, (d) any repurchase agreement entered into
with any Bank (or other commercial banking institution of the stature referred
to in clause (c)) which (i) is secured by a fully perfected security interest in
any obligation of the type described in any of clauses (a) through (c) and (ii)
has a market value at the time such repurchase agreement is entered into of not
less than 100% of the repurchase obligation of such Bank (or other commercial
banking institution) thereunder and (e) investments in short-term asset
management accounts offered by any Bank for the purpose of investing in loans to
any corporation (other than the Company or an Affiliate of the Company), state
or municipality, in each case organized under the laws of any state of the
United States or of the District of Columbia.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or any other Environmental
and Safety Requirements.
"Certificates of Designation" means, collectively, the Closing
Certificates of Designation and, once they have been filed with the Delaware
Secretary of State, the Future Certificates of Designation.
-38-
<PAGE> 197
"Controlled Group" means all members of a controlled group of
corporations and all members of a controlled group of trades or businesses
(whether or not incorporated) under common control which, together with the
Company, are treated as a single employer under Section 414 of the Code or
Section 4001 of ERISA.
"Credit Agreement" means the Amended and Restated Credit
Agreement, dated as of the date hereof, by and among the Company, various
financial institutions (together with their respective successors and assigns
(the "Senior Lenders") and Bank of America, N.A., individually and as
administrative agent for the Senior Lenders, and related documents pursuant to
which the Senior Lenders have extended term and revolving loans to the Company
and its Subsidiaries on a senior secured basis, together with any schedules,
exhibits, appendices or other attachments thereto, as such agreement may be
amended, restated, extended, renewed, supplemented, refinanced, replaced or
otherwise modified from time to time (including, without limitation, by
increasing the amount of available borrowings thereunder or adding any direct or
indirect Subsidiaries of the Company as additional borrowers or guarantors
thereunder) and whether by the same or any other agent, lender or group of
lenders.
"Credit Documents" means, collectively, the Credit Agreement,
the related security agreements, guarantees, pledge agreements, notes and the
other documents executed in connection therewith, the Intercreditor Agreement,
and each other document or instrument executed by the Company, any Subsidiary of
the Company or any other obligor under any such documents, including any
schedules, exhibits, appendices or other attachments thereto.
"Debt" of any Person means, without duplication, (a) all
indebtedness of such Person for borrowed money, whether or not evidenced by
bonds, debentures, notes or similar instruments, (b) all obligations of such
Person as lessee under Capital Leases which have been or should be recorded as
liabilities on a balance sheet of such Person, (c) all obligations of such
Person to pay the deferred purchase price of property or services (excluding
trade accounts payable in the ordinary course of business), (d) all indebtedness
secured by a Lien on the property of such Person, whether or not such
indebtedness shall have been assumed by such Person (it being understood that if
such Person has not assumed or otherwise become personally liable for any such
indebtedness, the amount of the Debt of such Person in connection therewith
shall be limited to the lesser of the face amount of such indebtedness or the
fair market value of all property of such Person securing such indebtedness),
(e) all obligations, contingent or otherwise, with respect to the face amount of
all letters of credit (whether or not drawn) and banker's acceptances issued for
the account of such Person (including the letters of credit), (f) all Hedging
Obligations of such Person, (g) all Suretyship Liabilities of such Person and
(h) all Debt of any partnership in which such Person is a general partner. The
amount of any Person's Debt in respect of any obligation to pay the deferred
purchase price of property or services where such obligation (including any such
obligation evidenced by a
-39-
<PAGE> 198
note or similar instrument) is contingent upon sales, revenues, the achievement
of a particular business goal or any similar test shall be the maximum amount
which (at any date of determination) is reasonably expected to be paid in
respect of such obligation as estimated by the Company (subject to the approval
of the Purchaser, which shall not be unreasonably withheld).
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Documents" means this Agreement, the Credit Documents, the
Subordinated Loan Documents, the Acquisition Agreement, the Warrant Agreement,
the Warrants, the Registration Agreement, the Monitoring Agreement, the
Professional Services Agreement and all documents, certificates and agreements
delivered with respect thereto, in each case, together with any schedules,
exhibits, appendices or other attachments thereto.
"Environmental Claims" means all claims, however asserted, by
any governmental, regulatory or judicial authority or other Person alleging
potential liability or responsibility for violation of any Environmental Law, or
for release of Hazardous Substances or injury to the environment.
"Environmental Laws" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes, together
with all administrative orders, directed and enforceable duties, licenses,
authorizations and permits of, and agreements with, any governmental authority,
in each case relating to environmental matters.
"Environmental Lien" shall mean any Lien, whether recorded or
unrecorded, in favor of any governmental entity, relating to any liability of
the Company or any Subsidiary arising under any Environmental and Safety
Requirements.
"Environmental and Safety Requirements" shall mean all
federal, state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, all contractual obligations and all common law, in
each case concerning public health and safety, worker health and safety and
pollution or protection of the environment (including, without limitation, all
those relating to the presence, use, production, generation, handling,
transport, treatment, storage, disposal, distribution, labeling, testing,
processing, discharge, Release, threatened Release, control or cleanup of any
hazardous or otherwise regulated materials, substances or wastes, chemical
substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals,
petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or
radiation).
-40-
<PAGE> 199
"EPIC" means Environmental Protection & Improvement Co., a New
Jersey corporation.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor statute.
"Event of Default" has the meaning set forth in Section 7 of
the Subordinated Loan Agreement.
"Event of Noncompliance" is defined in the Certificates of
Designation of the Series C Preferred and Series D Preferred.
"Fiscal Quarter" means a fiscal quarter of a Fiscal Year.
"Fiscal Year" means the fiscal year of the Company and its
Subsidiaries, which period shall be the 12-month period ending on December 31 of
each year. References to a Fiscal Year with a number corresponding to any
calendar year (e.g., "Fiscal Year 1999") refer to the Fiscal Year ending on
December 31 of such calendar year.
"Future Convertible Preferred Stock" means future series
(i.e., series E, F, G, etc.) of the Company's preferred stock (other than the
Series C Preferred and Series D Preferred) that are identical in terms to the
Series D Preferred in all respects other than their conversion price and that
are issued in connection with this Agreement.
"GAAP" means generally accepted accounting principles set
forth from time to time in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board (or
agencies with similar functions of comparable stature and authority within the
U.S. accounting profession), which are applicable to the circumstances as of the
date of determination.
"Hazardous Substances" means any hazardous waste, as defined
by 42 U.S.C. Section 6903(5), any hazardous substance as defined by 42 U.S.C.
Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C. Section
9601(33) or any toxic substance, oil or hazardous material or other chemical or
substance regulated by any Environmental Law, excluding household hazardous
waste.
"Hedging Obligations" means, with respect to any Person, all
liabilities of such Person under interest rate, currency and commodity swap
agreements, cap agreements and collar
-41-
<PAGE> 200
agreements, and all other agreements or arrangements designed to protect such
Person against fluctuations in interest rates, currency exchange rates or
commodity prices.
"Intercreditor Agreement" has the meaning set forth in the
Subordinated Loan Agreement.
"Intellectual Property Rights" means all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, formulas, compositions, inventions (whether patentable or unpatentable
and whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable works,
financial and marketing plans and customer and supplier lists and information),
(vii) other intellectual property rights and (viii) copies and tangible
embodiments thereof (in whatever form or medium).
"Lien" means, with respect to any Person, any interest granted
by such Person in any real or personal property, asset or other right owned or
being purchased or acquired by such Person which secures payment or performance
of any obligation and shall include any mortgage, lien, encumbrance, charge or
other security interest of any kind, whether arising by contract, as a matter of
law, by judicial process or otherwise.
"Investor Preferred" means (i) the Preferred Stock issued
hereunder (including, without limitation, pursuant to Section 1B(b)) and (ii)
any Preferred Stock issued or issuable with respect to the Preferred Stock
referred to in clause (i) above by way of stock dividends or stock splits or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular shares of Investor Preferred, such
shares shall cease to be Investor Preferred when they have been (a) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them or (b) distributed to the public through a
broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or
any similar rule then in force).
"Investment" means, relative to any Person, (a) any loan or
advance made by such Person to any other Person (excluding any commission,
travel or similar advances made to directors, officers and employees of the
Company or any of its Subsidiaries), (b) any Suretyship Liability of
-42-
<PAGE> 201
such Person, (c) any ownership or similar interest held by such Person in any
other Person and (d) deposits and the like relating to prospective acquisitions
of businesses.
"IRC" means the Internal Revenue Code of 1986, as amended, and
any reference to any particular IRC Section shall be interpreted to include any
revision of or successor to that Section regardless of how numbered or
classified.
"Lender" means GTCR Capital Partners, L.P.
"Majority Holders" means the holders of a majority of the
Investor Preferred.
"Material Adverse Effect" means a material adverse change in,
or a material adverse effect on, (a) the business, assets, property, operations,
results, prospects or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole or (b) the validity or enforceability of this
Agreement or any of the other Documents or the rights or remedies, taken as a
whole, of the Purchaser thereunder.
"Monitoring Agreement" means that certain Monitoring
Agreement, dated as of the date hereof, between the Company and GTCR Golder
Rauner, L.L.C.
"Multiemployer Pension Plan" means a multiemployer plan, as
such term is defined in Section 4001(a)(3) of ERISA, and to which the Company or
any member of the Controlled Group may have any liability.
"Officer's Certificate" means a certificate signed by the
Company's president or its chief financial officer on behalf of the Company,
stating that (i) the Company has made or has caused to be made such
investigations as are necessary in order to verify the accuracy of the
information set forth in such certificate and (ii) to the best of the Company's
knowledge, such certificate does not misstate any material fact and does not
omit to state any fact necessary to make the certificate not misleading.
"PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Pension Plan" means a "pension plan", as such term is defined
in Section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a
Multiemployer Pension Plan), and to which the Company or any member of the
Controlled Group may have any liability, including any liability by reason of
having been a substantial employer within the meaning of Section 4063 of
-43-
<PAGE> 202
ERISA at any time during the preceding five years, or by reason of being deemed
to be a contributing sponsor under Section 4069 of ERISA.
"Permitted Encumbrances" means (a) statutory liens for current
taxes or other governmental charges with respect to the Real Property not yet
due and payable or the amount or validity of which is being contested in good
faith by appropriate proceedings by the Company and for which appropriate
reserves have been established in accordance with GAAP; (b) mechanics, carriers
workers, repairers and similar statutory liens arising or incurred in the
ordinary course of business for amounts which are not delinquent and which are
not, individually or in the aggregate, material to the operation of the
Company's or its Subsidiaries' business; (c) zoning, entitlement, building and
other land use regulations imposed by governmental agencies having jurisdiction
over the Real Property which are not violated by the current use and operation
of the Real Property; and (d) covenants, conditions, restrictions, easements and
other similar matters of record affecting title to the Real Property which do
not materially impair the occupancy or use of the Real Property for the purposes
for which it is currently used in connection with the Company's or its
Subsidiaries' business.
"Permitted Refinancing Debt" means any Debt issued in exchange
for, or the net proceeds of which are used to refinance, renew, replace, defease
or refund the Senior Indebtedness (including, without limitation, the stated
amounts of letters of credit and all unused commitments); provided that: (1) the
principal amount of such Debt does not exceed the Maximum Senior Indebtedness
(including, without limitation, the stated amounts of letters of credit and all
unused commitments) at the time of such refinancing renewal, replacement,
defeasance or refunding (plus the amount of reasonable fees and expenses
incurred in connection therewith); (2) such Debt has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of the
Senior Indebtedness being refinanced, renewed, replaced, defeased or refunded
and such Debt has a final maturity equal to or greater than the Senior
Indebtedness being refinanced, renewed, replaced, defeased or refunded; (3) such
Debt is ranked superior in right of payment to the Loans on terms at least as
favorable to the holders of the Loans as those, if any, contained in the
documentation governing the Senior Indebtedness (including the Intercreditor
Agreement); (4) the annual interest rate with respect to such Debt (x) if it is
a fixed rate, it is not more than 2% per annum more than, and such interest is
payable no more frequently than, that of the Senior Indebtedness as in effect on
the date hereof and (y) if it is a variable rate, the index used for the
calculation of the annual interest rate is substantially similar to and the
margins applied to such index are not more than 2% per annum more than, and such
interest is payable no more frequently than, that of the Senior Indebtedness as
in effect on the date hereof; (5) such Debt is incurred by the Company; and (6)
such Debt satisfies the provisions of the subsection of Section 6.9(a) of the
Subordinated Loan Agreement pursuant to which the Debt being refinanced was
incurred.
-44-
<PAGE> 203
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"Preferred Stock" means, collectively, the Closing Preferred
Stock and the Future Convertible Preferred Stock.
"Professional Services Agreement" means that certain
Professional Services Agreement, dated as of the date hereof, between the
Company and GTCR Golder Rauner, L.L.C.
"Real Property" means the Owned Real Property and Leased Real
Property.
"Release" shall have the meaning set forth in CERCLA.
"RESTEC" means the Persons and interests acquired pursuant to
the Acquisition.
"RESTEC Bonds" means the Sewage Sludge Disposal Facility
Revenue Bonds (Netco-Waterbury, Limited Partnership Project - 1995 Series) and
the Sewage Sludge Disposal Facility Revenue Bonds (New Haven Residuals, Limited
Partnership Project - 1996 Series).
"Restricted Securities" means (i) the Preferred Stock issued
hereunder and pursuant to Section 1B(b) hereof and (ii) any securities issued
with respect to the securities referred to in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Restricted Securities, such securities shall cease to be Restricted
Securities when they have (a) been effectively registered under the Securities
Act and disposed of in accordance with the registration statement covering them,
(b) become eligible for sale pursuant to Rule 144(k) (or any similar provision
then in force) under the Securities Act or (c) been otherwise transferred and
new certificates for them not bearing the Securities Act legend set forth in
Section 8C have been delivered by the Company in accordance with Section 5(ii).
Whenever any particular securities cease to be Restricted Securities, the holder
thereof shall be entitled to receive from the Company, without expense, new
securities of like tenor not bearing a Securities Act legend of the character
set forth in Section 8C.
"Rhode Island Project" means the proposed project in which
RESTEC would develop a soil manufacturing facility to process biosolids in Rhode
Island for which a proposal was submitted in response to a request for proposals
issued by the Rhode Island Resource Recovery Corporation. RESTEC originally
contemplated a joint venture for this project, but both of its proposed partners
have now agreed to sell their rights to the project to RESTEC for contingent
payments.
-45-
<PAGE> 204
"Rights Agreement" means the Rights Agreement, dated as of
December 20, 1996, between the Corporation and Intercontinental Registrar &
Transfer Agency, Inc., as Rights Agent.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Securities Exchange Act" means the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"Securities and Exchange Commission" includes any governmental
body or agency succeeding to the functions thereof.
"Senior Indebtedness" means all obligations of the Company now
or hereafter incurred pursuant to the Credit Documents, including any increase,
refinancing, refunding, renewal, extension or replacement thereof permitted
hereunder, whether for principal, premium (if any), interest, fees or expenses
payable thereon or pursuant thereto.
"Senior Lenders" is defined in the definition of Credit
Agreement.
"Series A Preferred" means the Company's Series A Junior
Participating Preferred Stock, par value $.002 per share.
"Series B Preferred" means the Company's Series B Redeemable
Preferred Stock, par value $.002 per share.
"Subordinated Loan Agreement" means the Senior Subordinated
Loan Agreement dated as of the date hereof by and among the Company, certain
Subsidiary guarantors and GTCR Capital Partners, L.P.
"Subordinated Loan Documents" means, collectively, the
Subordinated Loan Agreement, any related notes and guaranties, including all
exhibits, schedules and other attachments thereto.
"Subsidiary" means any corporation of which the securities
having a majority of the ordinary voting power in electing the board of
directors are, at the time as of which any determination is being made, owned by
the Company either directly or through one or more Subsidiaries.
"Suretyship Liability" means any agreement, undertaking or
arrangement by which any Person guarantees, endorses or otherwise becomes or is
contingently liable upon (by direct or
-46-
<PAGE> 205
indirect agreement, contingent or otherwise, to provide funds for payment, to
supply funds to or otherwise to invest in a debtor, or otherwise to assure a
creditor against loss) any indebtedness, obligation or other liability of any
other Person (other than by endorsements of instruments in the course of
collection), or guarantees the payment of dividends or other distributions upon
the shares of any other Person. The amount of any Person's obligation in respect
of any Suretyship Liability shall (subject to any limitation set forth therein)
be deemed to be the principal amount of the debt, obligation or other liability
supported thereby.
"Tax" or "Taxes" means federal, state, county, local, foreign
or other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing
with respect to Taxes, including any schedules attached thereto and including
any amendment thereof.
"Transactions" means those transactions contemplated by the
Documents.
"Treasury Regulations" means the United States Treasury
Regulations promulgated under the Code, and any reference to any particular
Treasury Regulation section shall be interpreted to include any final or
temporary revision of or successor to that section regardless of how numbered or
classified.
"Warrant Agreement" is defined in the definition of Warrants.
"Warrants" means the warrants to purchase shares of the
Company's Convertible Preferred Stock (the "Warrant Shares") issued by the
Company to GTCR Capital Partners, L.P. in connection with the borrowing of
subsequent loans under the Subordinated Loan Agreement, pursuant to a Warrant
Agreement, dated as of the date hereof, by and between the Company and GTCR
Capital Partners, L.P. (the "Warrant Agreement").
"Warrant Shares" is defined in the definition of Warrants.
"Weighted Average Life to Maturity" means, when applied to any
Debt at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years
-47-
<PAGE> 206
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (b) the then outstanding principal amount of such
Debt.
"Wholly-Owned Subsidiary" means, with respect to any Person, a
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
Section 8. Miscellaneous.
8A. Expenses. If the transactions contemplated hereby are
consummated, the Company agrees to pay, and hold the Purchaser and all holders
of Investor Preferred harmless against liability for the payment of, (i) the
reasonable fees and expenses of their counsel arising in connection with the
negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement (including, without limitation, fees
and expenses arising with respect to any subsequent purchase of Preferred Stock
pursuant to Section 1B(b) hereof), (ii) the reasonable fees and expenses
incurred with respect to any amendments or waivers (whether or not the same
become effective) under or in respect of this Agreement, the Registration
Agreement, the Professional Services Agreement, the Monitoring Agreement, the
other agreements contemplated hereby and the Certificates of Designation, (iii)
stamp and other taxes which may be payable in respect of the execution and
delivery of this Agreement or the issuance, delivery or acquisition of any
shares of Preferred Stock purchased hereunder or in accordance with Section
1B(b) hereof, (iv) the fees and expenses incurred with respect to the
interpretation or enforcement of the rights granted under this Agreement, the
Registration Agreement, the Professional Services Agreement, the Monitoring
Agreement, the other agreements contemplated hereby, the Certificates of
Designation and the Company's bylaws and (v) such reasonable travel expenses,
legal fees and other out-of-pocket fees and expenses as have been or may be
incurred by the Purchaser, its Affiliates and its Affiliates' directors,
officers and employees in connection with any Company-related financing and in
connection with the rendering of any other services by the Purchaser or its
Affiliates (including, but not limited to, fees and expenses incurred in
attending board of directors or other Company-related meetings).
8B. Remedies. Each holder of Investor Preferred shall have all
rights and remedies set forth in this Agreement and the Certificates of
Designation and all rights and remedies which such holders have been granted at
any time under any other agreement or contract and all of the rights which such
holders have under any law. Any Person having any rights under any provision of
this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by law.
-48-
<PAGE> 207
8C. Purchaser's Investment Representations. The Purchaser
hereby represents (i) that it is acquiring the Restricted Securities purchased
hereunder or acquired pursuant hereto for its own account with the present
intention of holding such securities for purposes of investment, and that it has
no intention of selling such securities in a public distribution in violation of
the federal securities laws or any applicable state securities laws, (ii) that
it is an "accredited investor" and a sophisticated investor for purposes of
applicable U.S. federal and state securities laws and regulations, (iii) that
this Agreement and each of the other agreements contemplated hereby constitutes
(or will constitute) the legal, valid and binding obligation of the Purchaser,
enforceable in accordance with its terms, and (iv) that the execution, delivery
and performance of this Agreement and such other agreements by the Purchaser
does not and will not violate any laws, and does not and will not conflict with,
violate or cause a breach of any agreement, contract or instrument to which such
purchaser is subject. Notwithstanding the foregoing, nothing contained herein
shall prevent the Purchaser and subsequent holders of Restricted Securities from
transferring such securities in compliance with the provisions of Section 5
hereof. Each certificate for Restricted Securities shall be imprinted with a
legend in substantially the following form:
"The securities represented by this certificate were
originally issued on January 27, 2000 and have not been
registered under the Securities Act of 1933, as amended. The
transfer of the securities represented by this certificate is
subject to the conditions specified in the Purchase Agreement,
dated as of January 27, 2000 by and among the issuer (the
"Company") and certain investors, and the Company reserves the
right to refuse the transfer of such securities until such
conditions have been fulfilled with respect to such transfer.
A copy of such conditions shall be furnished by the Company to
the holder hereof upon written request and without charge."
8D. Consent to Amendments. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the Majority Holders. No other course of dealing between the Company
and the holder of any Preferred Stock or any delay in exercising any rights
hereunder or under the Certificates of Designation shall operate as a waiver of
any rights of any such holders. For purposes of this Agreement, shares of
Preferred Stock held by the Company or any Subsidiaries shall not be deemed to
be outstanding.
8E. Survival of Representations and Warranties. All
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive until the earlier of (i) the redemption of
the Preferred Stock and (2) a period of four (4) years from the Closing or from
any subsequent closing of additional issuances of Preferred Stock hereunder, as
-49-
<PAGE> 208
applicable, regardless of any investigation made by the Purchaser or on its
behalf (the "Survivability Period").
8F. Successors and Assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so expressed
or not. In addition, and whether or not any express assignment has been made,
the provisions of this Agreement which are for the Purchaser's benefit as a
purchaser or holder of Preferred Stock are also for the benefit of, and
enforceable by, any subsequent holder of such Preferred Stock. The rights and
obligations of the Purchaser under this Agreement and the agreements
contemplated hereby may be assigned by such Purchaser at any time, in whole or
in part, to any investment fund managed by GTCR Golder Rauner, L.L.C., or any
successor thereto.
8G. Generally Accepted Accounting Principles. Where any
accounting determination or calculation is required to be made under this
Agreement or the exhibits hereto, such determination or calculation (unless
otherwise provided) shall be made in accordance with GAAP, consistently applied,
except that if because of a change in GAAP the Company would have to alter a
previously utilized accounting method or policy in order to remain in compliance
with GAAP, such determination or calculation shall continue to be made in
accordance with the Company's previous accounting methods and policies.
8H. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
8I. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
8J. Entire Agreement. This Agreement, those documents
expressly referred to herein and other documents of even date herewith embody
the complete agreement among the parties and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
8K. Descriptive Headings; Interpretation. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a Section of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
-50-
<PAGE> 209
8L. Governing Law. The corporate law of Delaware shall govern
all issues concerning the relative rights of the Company and its stockholders.
All other questions concerning the construction, validity and interpretation of
this Agreement and the exhibits and schedules hereto shall be governed by and
construed in accordance with the internal laws of the State of Illinois, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Illinois or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Illinois.
8M. Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and delivered personally, mailed by certified or registered
mail, return receipt requested and postage prepaid, sent via a nationally
recognized overnight courier, or via facsimile. Such notices, demands and other
communications will be sent to the address indicated below:
If to the Company:
Synagro Technologies, Inc.
1800 Bering Drive, Suite 1000
Houston, TX 77057
Attention: Chief Financial Officer
Telecopier No.: (713) 369-1760
With a copy to:
Locke Liddell & Sapp LLP
3400 Chase Tower
600 Travis Street
Houston, TX 77002-3095
Attention: Michael T. Peters
Telecopier No.: (713) 223-3717
If to the Purchaser:
GTCR Fund VII, L.P.
c/o GTCR Golder Rauner, L.L.C.
6100 Sears Tower
Chicago, IL 60606
Attention: David A. Donnini
Telecopier No.: (312) 382-2201
-51-
<PAGE> 210
With a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: Stephen L. Ritchie
Telecopier No.: (312) 861-2200
or such other address or to the attention of such other Person as the recipient
party shall have specified by prior written notice to the sending party;
provided, that, the failure to deliver copies of notices as indicated above
shall not affect the validity of any notice. Any such communication shall be
deemed to have been received (i) when delivered, if personally delivered or sent
by nationally recognized overnight courier or sent via facsimile or (ii) on the
third Business Day following the date on which the piece of mail containing such
communication is posted if sent by certified or registered mail.
8N. Indemnification.
(a) General. In consideration of the Purchaser's
execution and delivery of this Agreement and acquiring the Preferred Stock
hereunder and in addition to all of the Company's other obligations under this
Agreement, the Company shall defend, protect, indemnify and hold harmless the
Purchaser and each other holder of Preferred Stock and all of their officers,
directors, employees and agents (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"Indemnified Liabilities"), incurred by the Indemnitees or any of them as a
result of, or arising out of, or relating to (i) third parties claims relating
to (x) any transaction financed or to be financed in whole or in part, directly
or indirectly, with the proceeds of the issuance of the Preferred Stock or (y)
the execution, delivery, performance or enforcement of this Agreement and any
other instrument, document or agreement executed pursuant hereto by any of the
Indemnitee, (ii) a breach of a representation or warranty by the Company of any
Subsidiary hereunder in any respect, in the case of representations or
warranties qualified by a materiality standard, including, without limitation, a
"material adverse effect" qualifier, or in any respect which is material to the
business, assets, property, operations, results or condition (financial or
otherwise) of the Company and its Subsidiaries taken as a whole, in the case of
all other representations and warranties or (iii) a breach of a covenant by the
Company or any Subsidiary under this Agreement or any instrument or other
document executed in connection with the transactions contemplated hereby.
-52-
<PAGE> 211
Notwithstanding the foregoing, Indemnified Liabilities shall not include costs
and expenses incurred by any Indemnitee in connection with (i) any violations of
law or governmental regulations by such Indemnitee, (ii) any acts of willful
misconduct or gross negligence by such Indemnitee or (iii) any actions against
such Indemnitee by creditors of such Indemnitee or shareholders or creditors of
such Indemnitee's parent companies. THIS INDEMNITY INDEMNIFIES THE INDEMNITEES
AGAINST THEIR OWN NEGLIGENCE. To the extent that the foregoing undertaking by
the Company may be unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
(b) Environmental Liabilities. Without limiting the
generality of the indemnity set out in Section 8N(a) above, the Company shall
defend, protect, indemnify and hold harmless the Purchaser and all other
Indemnitees from and against any and all actions, causes of action, suits,
losses, liabilities, damages, injuries, penalties, fees, costs, expenses and
claims of any and every kind whatsoever paid, incurred or suffered by, or
asserted against, each Purchaser or any other Indemnitee for, with respect to,
or as a direct or indirect result of, the past, present or future environmental
condition of any property owned, operated or used by the Company, any
Subsidiary, their predecessors or successors or of any offsite treatment,
storage or disposal location associated therewith, including, without
limitation, the presence on or under, or the escape, seepage, leakage, spillage,
discharge, emission, release, or threatened release into, onto or from, any such
property or location of any toxic, chemical or hazardous substance, material or
waste (including, without limitation, any losses, liabilities, damages,
injuries, penalties, fees, costs, expenses or claims asserted or arising under
CERCLA, any so-called "Superfund" or "Superlien" law, or any other federal,
state, local or foreign statute, law, ordinance, code, rule, regulation, order
or decree regulating, relating to or imposing liability or standards on conduct
concerning, any toxic, chemical or hazardous substance, material or waste),
regardless of whether caused by, or within the control of, the Company or any
Subsidiary.
8O. Standstill. During the term of this Agreement, the
Purchaser, together with any 13d Group (as hereinafter defined) of which it is a
part, shall not at any time (i) purchase, offer or agree to purchase, announce
an intention to purchase, or otherwise beneficially own, directly or indirectly,
any securities or material assets of the Company or any of its Subsidiaries
other than the Investor Preferred or shares of Common Stock to be issued upon
conversion of such shares or the exercise of the Warrants, (ii) publicly
disclose any intention, plan or arrangement inconsistent with the foregoing or
(iii) form, join or in any way participate in a 13d Group in connection with any
of the foregoing. The term "13d Group" means a group within the meaning of
Section 13(d)(3) of the Securities Exchange Act, but not including any person
entitled to file a statement on Schedule 13G.
* * * * *
-53-
<PAGE> 212
IN WITNESS WHEREOF, the parties hereto have executed this Purchase
Agreement on the date first written above.
SYNAGRO TECHNOLOGIES, INC.
By: /s/ ROSS M. PATTEN
--------------------------
Name: Ross M. Patten
Its: Chairman/CEO
GTCR FUND VII, L.P.
By: GTCR Partners VII, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ DAVID A. DONNINI
--------------------------
Name: David A. Donnini
Its: Principal
SIGNATURE PAGE TO THE PURCHASE AGREEMENT
<PAGE> 213
LIST OF EXHIBITS
Exhibit A -- Certificate of Designation of Series C Preferred
Exhibit B -- Certificate of Designation of Series D Preferred
Exhibit C -- Form of Professional Services Agreement
Exhibit D -- Form of Registration Agreement
Exhibit E -- Amendment to Restated Certificate of Incorporation
LIST OF DISCLOSURE SCHEDULES
Shareholders Consent Schedule
Capitalization Schedule
Subsidiary Schedule
Restrictions Schedule
Financial Statements Schedule
Liabilities Schedule
Adverse Change Schedule
Developments Schedule
Assets Schedule
Owned Real Property Schedule
Leased Property Schedule
Taxes Schedule
Contracts Schedule
Intellectual Property Schedule
Litigation Schedule
Consents Schedule
Insurance Schedule
Key Employees Schedule
Employee Benefits Schedule
Environmental Schedule
Affiliated Transactions Schedule
Customer Schedule
Unsecured Seller Debt Schedule
<PAGE> 214
EXHIBIT C
FAIRNESS OPINION
January 21, 2000
Board of Directors
Synagro Technologies, Inc.
1800 Bering, Suite 1000
Houston, TX 77057
Dear Sirs:
You have requested Howard Frazier Barker Elliott, Inc., ("HFBE") to
render its opinion (the "Opinion") to the Board of Directors of Syangro
Technologies, Inc. ("Synagro" or the "Company") as to the fairness, from a
financial point of view, to the existing shareholders of the Company of the
terms of the proposed financing (the "Financing") whereby GTCR Golder Rauner,
LLC ("GTCR") would make an initial investment of $46 million in the Company and
receive newly issued convertible preferred equity securities, senior
subordinated notes and warrants (Collectively the "Securities).
As part of our financial advisory activities, HFBE engages in the
valuation of business and securities in connection with mergers and
acquisitions, private placements, and valuations for estate, corporate and other
purposes. We are experienced in these activities and have performed assignments
similar in nature to that requested by you on numerous occasions. The opinion of
HFBE is solely for the use of the Board of Directors and cannot be used for any
other purpose without our prior written consent.
In rendering our written opinion, HFBE: (i) reviewed Synagro's Form
10-K and related financial information for the years ended December 31, 1994
through 1998, and Form 10-Q and related financial information for the quarter
ended September 30, 1999; (ii) reviewed certain information relating o the
business, earnings, cash flow, assets and prospects of Synagro furnished to HFBE
by the Company; (iii) conducted discussions with members of senior management of
Synagro concerning the Company's business and prospects; (iv) reviewed the
historical market prices and trading activity for the Company's Common Stock (v)
compared the results of operations of Synagro with that of certain companies
which it deemed to be reasonably similar to Synagro; (vi) analyzed the nature
and financial terms of certain business combinations involving Synagro and
companies in lines of business we believe to be generally comparable to those of
the Company; (vii) considered the pro forma effect of the Financing on certain
of Synagro's income statement, balance sheet, and cash flow statement items
based on projections for the years ended December 31, 1999 through December 31,
2004 as provided to HFBE by the Company; (viii) reviewed projected financial
statements for the years ended December 31, 1999 through December 31, 2004 of
the Company without the Financing as provided to HFBE by the Company; (ix)
reviewed documents related to the Financing including: the Senior Subordinated
Loan Agreement between GTCR Capital Partners, L.P. ("GTCR Capital") and the
Company; the Warrant Agreement between Synagro and GTCR Capital; the Certificate
of Designation, Preferences, and Rights of Series C Convertible Preferred Stock;
the Registration Agreement between Synagro, GTCR Fund VII, L.P. ("GTCR Fund")
and GTCR Capital; and the Purchase Agreement between the Company and GTCR Fund;
and (x) reviewed such other matters as HFBE deemed necessary, including an
assessment of general economic, market and monetary conditions.
In preparing its opinion, HFBE relied on the accuracy and completeness
of all information supplied or otherwise made available to HFBE by Synagro and
assumed that financial forecasts had been reasonably prepared on bases
reflecting the best currently available estimates and judgements of the
management of Synagro as to the expected future financial performance of the
Company. HFBE did not independently verify such information or assumptions,
including financial forecasts, or undertake an independent appraisal of the
assets of the Company. HFBE's opinion is based upon market, economic, financial
and other conditions as they exist and can be evaluated as of the date of the
opinion and we do not have any obligation to update, revise or reaffirm this
Opinion. In rendering our Opinion, we did not perform any procedures or analysis
regarding the potential environmental liabilities of the Company, nor did we
consider the impact of changes in the regulatory environment in which Synargo
operates.
To the extent a vote of the Company's stockholders is required or
sought, HFBE's opinion does not constitute a recommendation to any stockholder
of the Company as to how any such stockholder should vote on the Financing. The
opinion does not address the relative merits of the Financing and any other
transaction or business strategies discussed by the Company's Board of Directors
as alternatives to the Financing or the decision of the Company's Board of
Directors to proceed with the Financing. HFBE has not been requested to and did
not solicit third party indications of interest in acquiring all or any part of
the Company. No opinion is expressed by HFBE as to the price at which Synagro
Common Stock may trade at anytime following the Financing.
HFBE assumed that there had been no material change in the Company's
financial condition, results of operations, business or prospects since the date
of the last financial statements made available to HFBE. HFBE relied on advice
of counsel to Synagro as to all legal matters with respect to Synagro, the
Financing and documents related to the Financing. In addition, HFBE did not make
an independent evaluation appraisal or physical inspection of the assets or
individual properties of the Company, nor was it furnished with any such
appraisals.
The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to the
partial analysis or summary description. Furthermore, in arriving at our
opinion, HFBE did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis or factor. Accordingly, HFBE believes that our
analysis must be considered as a whole and that considering any portion of such
analysis and of the factors considered, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
its opinion. In our analyses, HFBE made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values which may be significantly more or less
favorable than as set forth therein.
Neither HFBE nor our employees have any present or contemplated future
interest in the Company which might tend to prevent us from rendering a fair and
unbiased opinion.
Subject to and based upon the foregoing, it is our opinion that the
Financing is fair, from a financial point of view, to Synagro and its existing
shareholders.
Sincerely,
HOWARD FRAZIER BARKER ELLIOTT, INC.
By: /s/ ALEX W. HOWARD
----------------------------------
Alex W. Howard
Senior Managing Director
By: /s/ DAVID S. KULKARNI
----------------------------------
David S. Kulkarni
Vice President
C-1
<PAGE> 215
EXHIBIT D
AMENDMENT TO CERTIFICATE OF INCORPORATION
I. The amendment to the Company's Restated Certificate of Incorporation is
set forth below.
II. Article SEVENTH of the Company's Restated Certificate of Incorporation
be and it hereby is amended to read in its entirety as follows:
"SEVENTH: The business and affairs of the Corporation shall be managed
by and under the direction of the Board of Directors. Except as may
otherwise be provided pursuant to Section 2 of Article Fourth or Part
B of Article Ninth hereof in connection with rights to elect
additional directors under specified circumstances which may be
granted to the holders of any series of Preferred Stock or to the
Noteholders, the exact number of directors of the Corporation shall be
determined from time to time by a Bylaw or Amendment thereto provided
that the number of directors shall not be reduced to less than three
(3), except that there need be only as many directors as there are
stockholders in the event that the outstanding shares are held of
record by fewer than three (3) stockholders.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide."
III. Article EIGHTH of the Company's Restated Certificate of Incorporation
be and it hereby is amended to read in its entirety as follows:
"EIGHTH: Each director shall serve until his successor is elected and
qualified or until his death, resignation or removal; no decrease in
the authorized number of directors shall shorten the term of any
incumbent director; and additional directors, elected pursuant to
Section 2 of Article Fourth or Part B of Article Ninth hereof in
connection with rights to elect such additional directors under
specified circumstances which may be granted to the holders of any
series of Preferred Stock or to the Noteholders, shall not be included
in any class, but shall serve for such term or terms and pursuant to
such other provisions as are specified in the resolution of the Board
of Directors establishing such series."
IV. Article NINTH of the Company's Restated Certificate of Incorporation be
and it hereby is amended to read in its entirety as follows:
D-1
<PAGE> 216
"NINTH: Part A. Election of New Directors. Except as may otherwise be
provided pursuant to Section 2 of Article Fourth or Part B of Article
Ninth hereof in connection with rights to elect additional directors
under specified circumstances which may be granted to the holders of
any series under specified circumstances which may be granted to the
holders of any series of Preferred Stock or to the Noteholders, newly
created directorships resulting from any increase in the number of
directors, or any vacancies on the Board of Directors resulting from
death, resignation, removal or other causes, shall be filled solely by
the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors. Any
director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified
or until such director's death, resignation or removal, whichever
first occurs.
Part B. Rights of Holders of Bonds, Debentures, Notes, etc.
D-2
<PAGE> 217
Section 1. General. To the extent and in the manner provided in
this Article Ninth, Part B, the holders of the Corporation's
promissory note or notes issued pursuant to the Subordinated Loan
Agreement (the "Notes") shall have the power to vote as set forth in
this Part B and shall be deemed to be stockholders of the Corporation
and the Notes shall be deemed to be shares of stock for any matter
relating to the purposes hereof.
Section 2. Voting Rights. If an Event of Default has occurred and
is continuing, the number of directors constituting the Board of
Directors shall, at the request of a majority in interest of the Notes
then outstanding, be increased by one member, and the Noteholders
shall have the special right, voting together as a single class (with
each $1 of principal amount of the Notes held by a Noteholder entitled
to one vote) and to the exclusion of all other classes of the
Corporation's stock, to elect an individual to fill such newly created
directorship, to fill any vacancy of such directorship and to remove
any individual elected to such directorship. The newly created
directorship shall constitute a separate class of directors. The
special right of the Noteholders to elect a member of the Board of
Directors may be exercised at the special meeting called pursuant to
this Part B, at any annual or other special meeting of stockholders
and, to the extent and in the manner permitted by applicable law,
pursuant to a written consent in lieu of a meeting. Such special right
shall continue until such time as there is no longer any Event of
Default in existence, at which time such special right shall terminate
subject to revesting upon the occurrence and continuation of any Event
of Default which gives rise to such special right hereunder.
At any time when such special right has vested in the
Noteholders, a proper officer of the Corporation shall, upon the
written request of the holders of at least 10% in interest of the
Notes then outstanding, addressed to the secretary of the Corporation,
call a special meeting of the Noteholders for the purpose of electing
a director pursuant to this Part B. Such meeting shall be held at the
earliest legally permissible date at the principal office of the
Corporation, or at such other place designated by the holders of at
least 10% in interest of the Notes then outstanding. If such meeting
has not been called by a proper officer of the Corporation within 10
days after personal service of such written request upon the secretary
of the Corporation or within 20 days after mailing the same to the
secretary of the Corporation at its principal office, then the holders
of at least 10% in interest of the Notes
D-3
<PAGE> 218
then outstanding may designate in writing one of their number to call
such meeting at the expense of the Corporation, and such meeting may
be called by such Person so designated upon the notice required for
annual meetings of stockholders and shall be held at the Corporation's
principal office, or at such other place designated by the holders of
at least 10% in interest of the Notes then outstanding. Any Noteholder
so designated shall be given access to the record books of the
Corporation for the purpose of causing a meeting of Noteholders to be
called pursuant to this Part B.
At any meeting or at any adjournment thereof at which the
Noteholders have the special right to elect a director, the presence,
in person or by proxy, of the holders of a majority in interest of the
Notes then outstanding shall be required to constitute a quorum for
the election or removal of such director by the Noteholders exercising
such special right. The vote of a majority of such quorum shall be
required to elect or remove any such director.
Any director so elected by the Noteholders shall continue to
serve as a director until six months after such Event of Default is no
longer in existence, and on such date the number of directors
constituting the Board of Directors shall decrease to such number as
constituted the whole Board of Directors immediately prior to the
occurrence of the Event or Events of Default giving rise to the
special right to elect a director.
Section 3. Definitions. Capitalized terms not otherwise defined
in this Part B shall have the meanings set forth below:
"Board of Directors" means the Board of Directors of the Corporation.
"Event of Default" means an Event of Default (as defined in the
Subordinated Loan Agreement) under the Subordinated Loan Agreement.
"Noteholder" means a holder of the Note or Notes.
"Subordinated Loan Agreement" means the Senior Subordinated Loan
Agreement, dated on or about January __, 2000, by and between the
Corporation and GTCR Capital Partners, L.P., a Delaware limited
partnership, as amended from time to time in accordance with the
provisions thereof."
V. Article TENTH of the Company's Restated Certificate of Incorporation be
and it hereby is amended to read in its entirety as follows:
"TENTH: Except for such additional directors as may be elected by the
holders of any series of Preferred Stock or to the Noteholders
pursuant to the terms thereof established by a resolution of the Board
of Directors pursuant to Article Fourth or Part B of Article Ninth
hereof, any director may be removed from office with or without cause
and only by the affirmative vote of the holders of not less than 66
2/3% of the voting
D-4
<PAGE> 219
power of all outstanding shares of voting stock entitled to vote in
connection with the election of such director regardless of class and
voting together as a single voting class; PROVIDED, HOWEVER, that
where such removal is approved by a majority of the continuing
directors, the affirmative vote of a majority of the voting power of
all outstanding shares of voting stock entitled to vote in connection
with the election of such director, regardless of class and voting
together as a single voting class, shall be required for approval of
such removal."
VI. Article ELEVENTH of the Company's Restated Certificate of Incorporation
be and it hereby is amended to read in its entirety as follows:
"ELEVENTH: Except as provided in Part B of Article Ninth or pursuant
to Section 2 of Article Fourth in connection with rights granted to
the holders of any series of Preferred Stock, any action required or
permitted to be taken by the stockholders of the Corporation must be
effected at a duly called Annual Meeting or at a special meeting of
stockholders of the Corporation, unless such action requiring or
permitting stockholder approval is approved by a majority of the
continuing directors, in which case such action may be authorized or
taken by the written consent of the holders of outstanding shares of
voting stock having not less than the minimum voting power that would
be necessary to authorize or take such action at a meeting of
stockholders at which all shares entitled to vote thereon were present
and voted, provided, all other requirements of applicable law and this
Certificate have been satisfied. Except as specifically set forth in
this Article Eleventh, Part B of Article Ninth or in the terms of any
Preferred Stock issued pursuant to Section 2 of Article Fourth, no
action may be taken by stockholders by written consent."
D-5
<PAGE> 220
EXHIBIT E
PURCHASE AND SALE AGREEMENT
E-1
<PAGE> 221
PURCHASE AND SALE AGREEMENT
BY AND AMONG
SYNAGRO TECHNOLOGIES, INC.,
PAUL A. TORETTA,
EILEEN TORETTA,
AS TRUSTEE OF THE
PAUL A. TORETTA 1998 GRAT,
FRANCES A. GUERRERA,
FRANCES A. GUERRERA,
AS EXECUTRIX OF THE ESTATE OF
RICHARD J. GUERRERA
AND
FRANCES A. GUERRERA AND ROBERT DIONNE,
AS CO-TRUSTEES OF THE
RICHARD J. GUERRERA REVOCABLE TRUST
UNDER AGREEMENT DATED NOVEMBER 2, 1998
OCTOBER 20, 1999
<PAGE> 222
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS.....................................................................................2
Section 1.1. Accounting Terms............................................................2
Section 1.2. Defined Terms...............................................................2
ARTICLE II
CLOSING.........................................................................................2
Section 2.1. Closing.....................................................................2
ARTICLE III
SALE OF OWNERSHIP INTERESTS.....................................................................2
Section 3.1. Ownership Interests.........................................................2
Section 3.2. Purchase Price..............................................................2
Section 3.3. Purchase Price Adjustment...................................................3
Section 3.4. Earn Out Payment............................................................4
Section 3.5. Closing Deliveries..........................................................8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER....................................................10
Section 4.1. Organization and Qualification.............................................10
Section 4.2. Capitalization.............................................................10
Section 4.3. Authority; Non-Contravention; Approvals....................................11
Section 4.4. Registration Statements....................................................12
Section 4.5. Reports and Financial Statements...........................................12
Section 4.6. Brokers and Finders........................................................13
ARTICLE IV-A
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
CONCERNING THE TRANSACTION................................................................13
Section 4A.1. Ownership..................................................................13
Section 4A.2. Authority..................................................................14
Section 4A.3. Brokers and Finders........................................................14
Section 4A.4. Registration Statements....................................................14
Section 4A.5. Investment Representations.................................................15
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE SELLERS CONCERNING THE COMPANIES.........................16
Section 5.1. Organization and Qualification.............................................16
Section 5.2. Capitalization.............................................................16
Section 5.3. Authority; Non-Contravention; Approvals....................................17
Section 5.4. Subsidiaries...............................................................18
</TABLE>
i
<PAGE> 223
<TABLE>
<S> <C>
Section 5.5. Financial Statements.......................................................18
Section 5.6. Absence of Undisclosed Liabilities.........................................18
Section 5.7. Absence of Certain Changes or Events.......................................18
Section 5.8. Litigation.................................................................19
Section 5.9. Accounts Receivable........................................................19
Section 5.10. No Violation of Law; Compliance with Agreements............................19
Section 5.11. Insurance..................................................................19
Section 5.12. Taxes......................................................................20
Section 5.13. Employee Benefit Plans.....................................................21
Section 5.14. Employee and Labor Matters.................................................23
Section 5.15. Environmental Matters......................................................23
Section 5.16. Non-Competition Agreements.................................................25
Section 5.17. Title to Assets............................................................25
Section 5.18. Contracts, Agreements, Plans and Commitments...............................26
Section 5.19. Supplies...................................................................27
Section 5.20. Brokers and Finders........................................................27
Section 5.21. Intellectual Property......................................................27
Section 5.22. Relationships..............................................................27
Section 5.23. Year 2000..................................................................28
Section 5.24. Certain Payments...........................................................28
Section 5.25. Books and Records..........................................................28
Section 5.26. Condition and Sufficiency of Assets........................................28
ARTICLE VI
CONDUCT OF BUSINESS PENDING CLOSING............................................................29
Section 6.1. Conduct of Business by the Sellers Pending Closing.........................29
Section 6.2. Other Offers...............................................................30
Section 6.3. Access to Information......................................................31
Section 6.4. Commercially Reasonable Efforts............................................31
ARTICLE VII
CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES...........................................32
Section 7.1. Consents...................................................................32
Section 7.2. Further Assurances.........................................................32
Section 7.3. Expenses and Fees..........................................................32
Section 7.4. Agreement to Cooperate.....................................................32
Section 7.5. Notification of Certain Matters............................................32
Section 7.6. Registration Statements....................................................33
Section 7.7. Purchaser's Liquidity Program..............................................34
Section 7.8. Exchange Listing...........................................................34
Section 7.9. Public Statements..........................................................35
Section 7.10. Section 338(h)(10) Election................................................35
Section 7.11. Allocation of Purchase Price...............................................35
Section 7.12. Code Section 754 Adjustments...............................................35
</TABLE>
ii
<PAGE> 224
<TABLE>
<S> <C>
Section 7.13. Control of Tax Returns.....................................................35
Section 7.14. Supplements to Disclosure Schedules........................................36
ARTICLE VIII
CONDITIONS TO CLOSING..........................................................................36
Section 8.1. Conditions to Each Party's Obligation to Close.............................36
Section 8.2. Conditions to Obligation of the Sellers....................................36
Section 8.3. Conditions to Obligations of Purchaser.....................................37
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER..............................................................38
Section 9.1. Termination................................................................38
Section 9.2. Effect of Termination......................................................39
Section 9.3. Extensions; Waiver.........................................................40
Section 9.4. Purchaser's Option to Extend...............................................40
ARTICLE X
INDEMNIFICATION AND LIMITATION ON LIABILITY....................................................40
Section 10.1. The Sellers' Indemnity Obligations.........................................40
Section 10.2. Purchaser's Indemnity Obligations..........................................41
Section 10.3. Indemnification Procedures.................................................41
Section 10.4. Limitation of Sellers' Liability...........................................43
Section 10.5. Limitation of Purchaser's Liability........................................44
ARTICLE XI
GENERAL PROVISIONS.............................................................................44
Section 11.1. Survival...................................................................44
Section 11.2. Notices....................................................................45
Section 11.3. Interpretation.............................................................47
Section 11.4. Miscellaneous..............................................................47
Section 11.5. Governing Law..............................................................48
Section 11.6. Binding Arbitration........................................................48
Section 11.7. Amendment..................................................................50
Section 11.8. Counterparts...............................................................50
Section 11.9. Parties in Interest........................................................50
Section 11.10. Validity...................................................................50
Section 11.11. Guarantee..................................................................50
</TABLE>
iii
<PAGE> 225
Exhibits
Exhibit A Glossary
Exhibit B Form of Estimated Adjustment Amount Worksheet
Exhibit C Form of Release of Claims Agreement
Exhibit D Form of Consulting Agreement
Exhibit E Form of Covenant Not to Compete Agreement
Exhibit F Form of Covenant Not to Compete Agreement
Schedules
Schedule 1 The Companies
Schedule 3.3(d) Projects
Schedule 3.4(i) Operating Practices
Schedule 3.4(j) Capital Budget
Schedule 3.4(k) Projects Excepted from Earn Out
Schedule 3.5 Guarantees or Surety Obligations
Schedule 4A.3 Sellers' Brokers and Finders
Schedule 5.3 Non-Contravention; Approvals
Schedule 5.5 Financial Statements
Schedule 5.6 Absence of Undisclosed Liabilities
Schedule 5.7 Absence of Certain Changes or Events
Schedule 5.8 Litigation
Schedule 5.10 No Violation of Law; Compliance with Agreements
Schedule 5.12 Taxes
Schedule 5.13 Employee Benefit Plans
Schedule 5.14 Employee and Labor Matters
Schedule 5.15 Environmental Matters
Schedule 5.16 Non-Competition Agreements
Schedule 5.17 Title to Assets
Schedule 5.18 Contracts, Agreements, Plans and Commitments
Schedule 5.20 Companies' Brokers and Finders
Schedule 5.21 Intellectual Property
Schedule 5.22 Relationships
Schedule 5.23 Year 2000 Compliance
Schedule 5.26 Condition and Sufficiency of Assets
iv
<PAGE> 226
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT, dated as of October 20, 1999 (the
"Agreement"), is by and among SYNAGRO TECHNOLOGIES, INC., a Delaware corporation
(the "Purchaser"), and PAUL A. TORETTA, individually ("Mr. Toretta"), EILEEN
TORETTA, as Trustee of the Paul A. Toretta 1998 Grat (the "Grat"), FRANCES A.
GUERRERA, individually ("Mrs. Guerrera"), FRANCES A. GUERRERA, as Executrix of
the Estate of Richard J. Guerrera (the "Estate"), and FRANCES A. GUERRERA and
ROBERT DIONNE, as Co-Trustees of the Richard J. Guerrera Revocable Trust under
Agreement dated November 2, 1998 (the "Trust"). Each of Mr. Toretta, the Grat
and the Estate is a "Seller" and, collectively, they are sometimes referred to
as the "Sellers". The Purchaser and each of the other signatories to this
Agreement are a "Party" and, collectively, they are sometimes referred to as the
"Parties." Mrs. Guerrera, individually and in her capacity as Co-Trustee of the
Trust, and Robert Dionne, in his capacity as Co-Trustee of the Trust, join this
Agreement for purposes of guaranteeing the performance by the Estate and the
Trust, as the case may be, of their respective joint and several obligations
under this Agreement, as further set forth in Section 11.11 of this Agreement.
W I T N E S S E T H:
WHEREAS, the Sellers own, directly or indirectly, all of the
outstanding capital stock, limited partnership interests and membership
interests (the "Ownership Interests") of those corporations, limited
partnerships and limited liability companies set forth on Schedule 1 (each of
which is a "Company" and which, collectively, are sometimes referred to as the
"Companies"), as of the date hereof;
WHEREAS, the Companies are engaged in the business of sewage sludge
disposal in the northeastern United States, including the hauling, treatment and
disposal of sewage sludge; the providing of non-hazardous biosolids
transportation, treatment and disposal services to municipal wastewater
treatment plants and commercial customers; and the operation, maintenance,
repair and management of sewage sludge treatment and incineration facilities
(the "Business");
WHEREAS, Purchaser desires to purchase from the Sellers, and the
Sellers desire to sell to the Purchaser, the Ownership Interests upon the terms
and conditions set forth herein; and
WHEREAS, the Sellers, Mrs. Guerrera and the Trust are making certain
representations, warranties, covenants, agreements and indemnities herein, as an
inducement to Purchaser to enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements stated herein, the receipt
and sufficiency of which are hereby acknowledged, the Parties, intending to be
legally bound, covenant and agree as follows:
<PAGE> 227
ARTICLE I
DEFINITIONS
SECTION 1.1. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles ("GAAP") and on a basis not inconsistent with those
applied in the preparation of the financial statements referred to in Sections
4.5(d) and 5.5 hereof.
SECTION 1.2. DEFINED TERMS. As used in this Agreement, certain words
and terms have the meanings ascribed to them in the Glossary attached hereto as
Exhibit A. Other capitalized terms have the meanings ascribed to them elsewhere
in this Agreement.
ARTICLE II
CLOSING
SECTION 2.1. CLOSING. Subject to the terms and provisions of Article
IX, the closing of the purchase and sale provided for herein (the "Closing")
shall take place at the offices of RICHARDS & O'NEIL, LLP, 43 Arch Street,
Greenwich, Connecticut as promptly as practicable (but in any event within five
(5) business days) following the date on which the last of the conditions set
forth in Article VIII is fulfilled or waived, or at such other time and place as
the Purchaser and Sellers shall agree. The date on which the Closing occurs is
referred to in this Agreement as the "Closing Date."
ARTICLE III
SALE OF OWNERSHIP INTERESTS
SECTION 3.1. OWNERSHIP INTERESTS. Subject to the terms and conditions
of this Agreement, the Sellers will sell, transfer and deliver to the Purchaser,
and the Purchaser will purchase, the Ownership Interests directly owned by the
Sellers as set forth on Schedule 1 (the "Direct Ownership Interests") on the
Closing Date.
SECTION 3.2. PURCHASE PRICE. The aggregate purchase price (the
"Purchase Price") for the Direct Ownership Interests and the representations,
warranties, covenants and agreements referenced herein shall be:
(i) cash equal to Forty-Four Million Dollars
($44,000,000) minus (1) the Companies' Indebtedness as of Closing, plus or minus
(2) the amount, if any, by which the Companies' Net Working Capital as of
Closing is greater than or less than One Million One Hundred Forty Thousand
Dollars ($1,140,000). The amount, if any, by which the cash portion of the
Purchase Price is adjusted pursuant to this Section 3.2(i) (i.e., the sum of (1)
and (2) above) is referred to herein as the "Adjustment Amount"; and
2
<PAGE> 228
(ii) the Earn Out Payments, if any, as defined and
further described in Section 3.4 below.
The portion of the Purchase Price payable in cash at Closing (as determined in
accordance with Section 3.2 and Section 3.3) (the "Cash Portion") shall be
allocated as follows: (i) the Estate shall receive fifty percent (50%) of the
Cash Portion less $2,250,000, and (ii) the Grat shall receive ninety-nine
percent (99%) and Mr. Toretta shall receive one percent (1%) of the remaining
Cash Portion. The Earn Out Payments (as determined in accordance with Section
3.4), if any, shall be paid sixteen percent (16%) to the Estate and eighty-four
percent (84%) to the Earn Out Representative (for the benefit, and in
satisfaction of Purchaser's payment obligations regarding the Earn Out Payments
to, the Grat and Mr. Toretta).
SECTION 3.3. PURCHASE PRICE ADJUSTMENT.
(a) Prior to the Closing Date, Mr. Toretta shall deliver to
the Purchaser a worksheet, in the form attached as Exhibit B hereto, setting
forth a reasonable estimate of the Indebtedness and Net Working Capital as of
the Closing Date, as well as a computation of the estimated Adjustment Amount
(the "Estimated Adjusted Amount"). The worksheet shall be prepared by Mr.
Toretta and reasonably acceptable to the Purchaser. If the Estimated Adjustment
Amount is a positive number, the Cash Portion as allocated to (i) Mr. Toretta
shall be decreased in an amount equal to one-half percent (0.5%) of the positive
Estimated Adjustment Amount; (ii) the Grat shall be decreased in an amount equal
to forty-nine and one-half percent (49.5%) of the positive Estimated Adjustment
Amount and (iii) the Estate shall be decreased in an amount equal to fifty
percent (50%) of the positive Estimated Adjustment Amount. If the Estimated
Adjustment Amount is a negative number (i.e., the excess Net Working Capital
exceeds the Indebtedness), the Cash Portion as allocated to (i) Mr. Toretta
shall be increased in an amount equal to one-half percent (0.5%) of the negative
Estimated Adjustment Amount; (ii) the Grat shall be increased in an amount equal
to forty-nine and one-half percent (49.5%) of the negative Estimated Adjustment
Amount and (iii) the Estate shall be increased in an amount equal to fifty
percent (50%) of the negative Estimated Adjustment Amount.
(b) Within 90 days after the Closing, Purchaser shall cause
the Companies to prepare a consolidated balance sheet of the Companies as of the
Closing Date (the "Closing Date Balance Sheet"), including a computation of the
actual Adjustment Amount of the Companies as of the Closing Date (the "Actual
Adjustment Amount"). If within 15 days following delivery of the Closing Date
Balance Sheet to Mr. Toretta, Mr. Toretta does not object in writing thereto,
then the Actual Adjustment Amount shall be as computed on such Closing Date
Balance Sheet. If Mr. Toretta does object in writing to the computation within
such 15-day period, then the Purchaser and Mr. Toretta shall negotiate in good
faith and attempt to resolve their disagreement. Should such negotiations not
result in an agreement within 20 days, then the matter shall be submitted to an
independent accounting firm of national reputation mutually acceptable to the
Purchaser and Mr. Toretta (the "Neutral Auditors"). If the Purchaser and Mr.
Toretta are unable to agree on the Neutral Auditors, then they shall request the
American Arbitration Association to appoint the Neutral Auditors. All fees and
expenses relating to appointment of the Neutral Auditors and the work, if any,
to be performed by the Neutral Auditors will be borne equally by
3
<PAGE> 229
the Purchaser and Mr. Toretta. The Neutral Auditors will deliver to the
Purchaser and Mr. Toretta a written determination (such determination to include
a worksheet setting forth all material calculations used in arriving at such
determination and to be based solely on information provided to the Neutral
Auditors by the Purchaser and Mr. Toretta, or their respective affiliates) of
the disputed items within 30 days of receipt of the disputed items, which
determination will be final, binding and conclusive on the Parties.
(c) Promptly following agreement on or delivery of the final,
binding and conclusive Closing Date Balance Sheet setting forth the Actual
Adjustment Amount, the Purchaser, the Estate, the Grat and Mr. Toretta shall
account to each other as provided for in this Section 3.3(c). If the Estimated
Adjustment Amount less the Actual Adjustment Amount is a positive number, the
Estate, the Grat and Mr. Toretta shall have a right to receive aggregate cash
payments from Purchaser equal to such excess. If the Estimated Adjustment Amount
less the Actual Adjustment Amount is a negative number, Purchaser shall be
entitled to receive aggregate cash payments from each of the Estate, the Grat
and Mr. Toretta equal to such deficit. Any such excess or deficit payment shall
be due and payable within three (3) business days after the Actual Adjustment
Amount is determined pursuant to this Section 3.3. Any payments due from or to
the Estate, the Grat and Mr. Toretta pursuant to this Section 3.3(c) shall be
payable or paid (i) fifty percent (50%) by or to the Estate, (ii) forty-nine and
one-half percent (49.5%) by or to the Grat, and (iii) one-half percent (0.5%) by
or to Mr. Toretta.
(d) For purposes of determining the Net Working Capital
pursuant to this Section 3.3, any cash payments made or current liabilities
incurred on or after August 1, 1999, and prior to Closing with respect to the
projects described on Schedule 3.3(d) hereto, up to an aggregate amount of cash
and current liabilities of $1,050,000, shall not be deducted in the Net Working
Capital computation.
SECTION 3.4. EARN OUT PAYMENT.
(a) As soon as practicable after December 31, 2000, and after
the last day of each succeeding calendar year through and including December 31,
2007 (the "Earn Out Period"), the Purchaser's independent auditor (the
"Auditor") shall audit the financial statements of the Companies as of the last
day of the calendar year then ended and the Purchaser's calculation of the
Earnings of the Companies during such calendar year in the manner specified in
this Section 3.4. No later than April 30th of each year from 2001 through 2008,
the Purchaser shall deliver notice of the Earnings of the Companies for the
preceding calendar year to the Earn Out Representative and the Estate, as
audited by the Auditor, together with the Auditor's audit report on the
Companies' financial statements and on Purchaser's calculation of Earnings
during the calendar year then ended.
(b) The Companies' Earnings shall be calculated in accordance
with this Section 3.4 and the definition of Earnings and in a manner consistent
with that used to compute the Earn Out Baseline referenced in Section 3.4(c)
below. For purposes of calculating the Earnings pursuant to this Section 3.4
only, the term "Companies" shall also include (i) New England Treatment Company,
Inc. and (ii) any newly-organized Affiliate of the Companies
4
<PAGE> 230
formed by the Purchaser during the Earn Out Period to conduct any new biosolids
incineration or lime stabilization business of the Companies in New England.
During the Earn Out Period and thereafter until the last Earn Out Payment, if
any, is actually made pursuant to this Section 3.4, the Companies and the
Purchaser shall give the Sellers and their respective accountants, counsel and
other representatives, reasonable and prompt access during normal business hours
to (x) all of the properties, books, contracts, commitments and records related
to the Companies, and (y) all other information concerning the Companies that
the Sellers may reasonably request and that is necessary to evaluate and propose
changes to the computation of the Companies' Earnings.
(c) In the event that the Earnings of the Companies are less
than or equal to Four Million Seventy-One Thousand Five Hundred Forty-Nine
Dollars ($4,071,549) (as adjusted from time to time pursuant to this Section
3.4, the "Earn Out Baseline") during any calendar year during the Earn Out
Period, then no additional amounts shall be payable to the Sellers with respect
to such calendar year. In the event that the Companies' Earnings exceed Four
Million Seventy-One Thousand Five Hundred Forty-Nine Dollars ($4,071,549) during
any calendar year during the Earn Out Period, an additional amount (an "Earn Out
Payment") shall be calculated and paid by the Purchaser to the Sellers in
accordance with this Section 3.4(c) (and pro rata in accordance with the
percentages set forth in Section 3.2) with respect to such calendar year and
shall equal fifty percent (50%) of such excess. In no event shall the aggregate
Earn Out Payments payable to the Sellers (together with any Accelerated Amounts
(as defined below)) under this Section 3.4 exceed Twelve Million Dollars
($12,000,000). At the Purchaser's option each Earn Out Payment shall be paid
either (i) in all cash or other immediately available funds or (ii) fifty
percent (50%) in cash or other immediately available funds and fifty percent
(50%) in Purchaser Common Stock. The number of shares of Purchaser Common Stock
shall be calculated using the Average Purchaser Common Stock Price.
(d) Each Earn Out Payment shall be paid by the Purchaser to
the Earn Out Representative and the Estate (pro rata in accordance with the
percentages set forth in Section 3.2) on or before the date that the Purchaser
is required to deliver the annual report of the Auditor to the Earn Out
Representative and the Estate.
(e) Upon receipt of an annual report of the Auditor regarding
the Companies' Earnings, the Earn Out Representative shall have 30 days in which
to object in writing to the Purchaser with respect to the Purchaser's
calculation of the Companies' Earnings (an "Earnings Dispute Notice"). In the
event the Earn Out Representative does not object to the Purchaser's calculation
of the Companies' Earnings within such 30-day period, the Purchaser's
calculation of the Companies' Earnings, as notified to the Earn Out
Representative, shall be deemed final, conclusive and binding on all Parties. In
the event the Earn Out Representative gives a timely Earnings Dispute Notice,
then the Earn Out Representative and Purchaser shall work together in good faith
to reach an agreement on an appropriate adjustment to the Earn Out Payment. If
within 15 days after Purchaser's receipt of an Earnings Dispute Notice, the Earn
Out Representative and Purchaser have not reached an agreement, the Earn Out
Representative and Purchaser shall engage the Accounting Arbitrator to calculate
the amount of an appropriate adjustment to Purchaser's calculation of the
Companies' Earnings, if any, except as otherwise provided in Section 3.4(f)
hereof. The decision of the Accounting Arbitrator shall be final,
5
<PAGE> 231
conclusive and binding on all Parties. The Accounting Arbitrator shall make its
determinations using the accounting and other principles set forth in Section
3.4(b) hereof. The Accounting Arbitrator shall be directed to make its
determination within 45 days of its engagement. Payment of any adjustment to the
Earn Out Payment from the Purchaser to the Earn Out Representative and the
Estate, if any, shall be due within ten (10) days after the resolution of any
such dispute.
(f) In the event that the Earn Out Representative alleges in
an Earnings Dispute Notice an entitlement to a higher Earn Out Payment because
of breaches of the Purchaser's covenants set forth in Section 3.4(i) or (j)
hereof, and the Earn Out Representative and Purchaser are unable to resolve the
dispute within the 15-day resolution period provided for in Section 3.4(e)
hereof, then the Accounting Arbitrator shall not be engaged and the dispute
shall be resolved in accordance with Section 11.6 hereof.
(g) Purchaser will not issue any certificates for any
fractional shares of Purchaser Common Stock otherwise issuable pursuant to
either Section 3.2 or Section 3.4. In lieu of issuing such fractional shares,
Purchaser shall pay cash to the Earn Out Representative and the Estate (pro rata
in accordance with the percentages set forth in Section 3.2), such cash payments
to be based on the value of such fractional shares using the Average Purchaser
Common Stock Price.
(h) As soon as practicable after the completion of the first
two years of operations of the Rhode Island Project (as defined in Schedule 5.6)
(such two (2) year period beginning the first day of the calendar month
following the Purchaser's receipt of notice from the Earn Out Representative
that the Rhode Island Project has commenced operation for purposes of this
Section 3.4), the Auditor shall audit the Purchaser's calculation of the
Earnings attributable to the Rhode Island Project over such two years of
operations (the "Rhode Island Earnings"). No later than 120 days after the end
of such two years of operations of the Rhode Island Project, the Purchaser shall
deliver (i) notice of the Purchaser's calculation of the Rhode Island Earnings
to the Earn Out Representative and the Estate, as audited by the Auditor,
together with the Auditor's audit report on the Purchaser's calculation of the
Rhode Island Earnings (the "Rhode Island Notice") and (ii) an accelerated Earn
Out Payment to the Estate and the Earn Out Representative (pro rata in
accordance with the percentages set forth in Section 3.2) equal to twenty-five
percent (25%) of the Rhode Island Earnings multiplied by the number of years
then remaining in the Earn Out Period (the "Accelerated Amount"). The Earn Out
Baseline shall be adjusted to reflect the payment of the Accelerated Amount by
the addition of one-half of the Rhode Island Earnings (i.e., the one-year
average of the Earnings attributable to the Rhode Island Project over such two
years of operations) to the Earn Out Baseline set forth in Section 3.4(c). Upon
receipt of the Rhode Island Notice, the Earn Out Representative shall have 30
days in which to object in writing to the Purchaser with respect to the
Purchaser's calculation of the Rhode Island Earnings (a "Rhode Island Earnings
Dispute Notice"). In the event the Earn Out Representative does not object to
the Purchaser's calculation of the Rhode Island Earnings within such 30-day
period, the Purchaser's calculation of the Rhode Island Earnings, as set forth
in the Rhode Island Notice, shall be deemed final, conclusive and binding on all
Parties. In the event the Earn Out Representative gives a timely Rhode Island
Earnings Dispute Notice, then the Earn Out Representative and Purchaser shall
work together in good faith to reach an agreement
6
<PAGE> 232
on an appropriate adjustment to the calculation of the Rhode Island Earnings, if
any. If within 15 days after the Purchaser's receipt of a Rhode Island Earnings
Dispute Notice, the Earn Out Representative and Purchaser have not reached an
agreement, the Earn Out Representative and the Purchaser shall engage the
Accounting Arbitrator to calculate the amount of an appropriate adjustment to
the calculation of the Rhode Island Earnings, if any. The decision of the
Accounting Arbitrator shall be final, conclusive and binding on all Parties. The
Accounting Arbitrator shall make its determinations consistent with the terms
hereof. The Accounting Arbitrator shall be directed to make its determination
within 45 days of its engagement.
Within ten (10) days after determination of a final, conclusive and
binding calculation of the Rhode Island Earnings, the Purchaser shall pay any
adjustment amount to the Estate and the Earn Out Representative in accordance
with the foregoing formula and the Earn Out Baseline shall be further adjusted
to reflect the payment of such adjustment amount.
(i) Until the earlier of the end of the Earn Out Period or the
satisfaction of all of the Purchaser's payment obligations under this Section
3.4, the Purchaser shall use commercially reasonable efforts to operate or cause
the Companies to be operated as stand-alone entities in New England in
conformity with past operating practices, as illustrated generally by the
adjusted income statement for the trailing twelve (12) month period ended July
31, 1999, attached hereto as Schedule 3.4(i). Without limiting the generality of
the foregoing, until the earlier of the end of the Earn Out Period or the
satisfaction of all of the Purchaser's payment obligations under this Section
3.4, the Purchaser agrees with respect to business in New England that without
the prior consent of the Earn Out Representative, Purchaser: (1) shall not alter
in any material respect the pricing formulas in any customer contract of any of
the Companies; (2) shall not, and shall not permit any of its other Affiliates
to, solicit any present customer of any of the Companies; (3) shall not, and
shall not permit any of its other Affiliates to, bid for or otherwise solicit
any Governmental Authority for the construction or operation of any biosolids
incineration or lime stabilization facility in New England and (4) will not sell
or transfer control of any of the Companies or any of their respective operating
facilities, except (i) to another Company or (ii) a sale or transfer of control
of any of the Companies which is incidental to either a sale, transfer of
control or internal reorganization of Purchaser.
(j) Until the earlier of the end of the Earn Out Period or the
satisfaction of all of the Purchaser's payment obligations under this Section
3.4, the Purchaser shall use its commercially reasonable efforts to provide
capital to the Companies in such amounts (at market rates) and at such times as
set forth on Schedule 3.4(j).
(k) At any time until the earlier of the end of the Earn Out
Period or the satisfaction of all of the Purchaser's payment obligations under
this Section 3.4, in the event that the Purchaser or any of its Affiliates
(other than a Company) either (i) with the consent of the Earn Out
Representative, engages in any of the activities described in Section 3.4(i)(2)
or (3) hereof, or (ii) enters into any business or solicits any contract (except
existing contracts with customers of Purchaser or its Affiliates or renewals
thereof) that competes with any of the Companies in New England through the use
of a biosolids management technology other than incineration or lime
stabilization, the Companies' Earnings shall be deemed to include twenty
7
<PAGE> 233
(20%) of the Purchaser's (or its Affiliate's) earnings attributable to such
activity, such earnings to be calculated in a manner reasonably consistent with
that used to compute the Companies' Earnings and shall otherwise be subject to
all of the procedural requirements of this Section 3.4. Notwithstanding the
foregoing sentence, the Companies' Earnings shall not be deemed to include any
of the Purchaser's (or its Affiliate's) earnings attributable to any of the
projects identified on Schedule 3.4(k), hereto.
(l) The Purchaser acknowledges that it is the intention of the
Earn Out Representative to retain certain employees of the Companies to act as
independent contractors for the Earn Out Representative and certain of the
Sellers with respect to monitoring and assisting the Earn Out Representative in
earning the Earn Out Payments.
(m) Until the earlier of the end of the Earn Out Period or the
satisfaction of all of the Purchaser's payment obligations under this Section
3.4, the Purchaser shall cause the Companies to (i) provide the Earn Out
Representative with monthly financial reports of the operations of the Companies
within 14 days following the close of each calendar month, accompanied by a
management report disclosing all material developments during such period with
respect to the Companies, and (ii) upon reasonable prior notice from the
Sellers, provide the Sellers with access to the management employees of the
Companies.
(n) Any Purchaser Common Stock issued by Purchaser to the
Sellers pursuant to Section 3.4 shall be allocated first to Earnings
attributable to the New England Treatment Company, Inc. ("NETCO"), if any.
Notwithstanding any other provision set forth herein, the aggregate of Earn Out
Payments paid in cash attributable to the Earnings of NETCO shall not exceed an
amount determined, in the sole judgment of the Earn Out Representative, to be
the maximum amount of cash payable in order for the transactions contemplated by
the Merger Agreement to comply with Section 368(a)(2)(E) of the Code (assuming
the portion of the Earn Out Baseline attributable to NETCO being equal to
$500,000), unless the Earn Out Representative elects to waive this limitation.
(o) A copy of any and all correspondence and/or notices sent
pursuant to this Section 3.4 between (i) Purchaser and (ii) the Earn Out
Representative and/or Mr. Toretta, shall simultaneously be sent to Donald F.
Dwyer, c/o Astra Zeneca, 725 Chesterbrook Blvd., Wayne, PA 19087.
SECTION 3.5. CLOSING DELIVERIES.
(a) At the Closing, the Sellers shall deliver to the
Purchaser:
(i) certificates representing all of the certificated
Ownership Interests, either registered in the name of one of the Companies or,
with respect to the Direct Ownership Interests, duly endorsed for transfer to
the Purchaser or accompanied by duly executed assignment documents, which shall
transfer to the Purchaser good and valid title to all of the certificated Direct
Ownership Interests, free and clear of all Liens, and, with respect to
uncertificated Direct Ownership Interests, if any, duly executed assignment
documents, which
8
<PAGE> 234
shall transfer to Purchaser good and valid title to any uncertificated Direct
Ownership Interests, free and clear of all Liens;
(ii) Release of Claims Agreements executed by the
officers, directors, stockholders, partners and members of the Companies
releasing the Companies from any and all prior claims of such officers,
directors, stockholders, partners and members, in the form attached hereto as
Exhibit C;
(iii) all corporate, accounting, business and tax
records of the Companies;
(iv) a legal opinion from Richards & O'Neil, LLP,
counsel to Mr. Toretta and the Companies, in a form reasonably satisfactory to
Purchaser;
(v) a legal opinion from Carter, Ledyard & Milburn,
counsel to the Grat, in a form reasonably satisfactory to Purchaser;
(vi) a legal opinion from Palmeri, Rock & Talbot,
P.C., counsel to Frances Guerrera, individually, the Estate and the Trust, in a
form reasonably satisfactory to Purchaser;
(vii) a Consulting Agreement between the Purchaser
and Mr. Toretta, individually, in the form attached as Exhibit D hereto;
(viii) Covenant Not to Compete Agreements between the
Purchaser and each of Mr. Toretta, individually, and the Grat, in the form
attached as Exhibit E hereto;
(ix) Covenant Not to Compete Agreements between the
Purchaser and each of Mrs. Guerrera, individually, the Estate, the Trust and R.
J. Guerrera Trucking Company, Inc. (the "Trucking Company"), in the form
attached as Exhibit F hereto; and
(x) such other documents, including certificates of
the Sellers, as may be required by this Agreement or reasonably requested by the
Purchaser.
(b) At the Closing, the Purchaser shall deliver to:
(i) the Sellers, the cash portion of the Purchase
Price determined in accordance with and allocated as set forth in Section 3.2,
in immediately available funds;
(ii) Mr. Toretta, individually, a Consulting
Agreement, in the form attached as Exhibit D;
(iii) Mr. Toretta, individually, and the Grat, a
Covenant Not to Compete Agreement, in the form attached as Exhibit E;
9
<PAGE> 235
(iv) each of the Estate, Mrs. Guerrera, individually,
the Trust and the Trucking Company, a Covenant Not to Compete Agreement, in the
form attached as Exhibit F; and
(v) documents relating to the removal of the Sellers
from any and all personal guarantees and/or surety obligations in connection
with the Companies' debts or operations listed on Schedule 3.5; and,
(vi) legal opinions from in-house legal counsel to
the Purchaser, dated the Closing Date, in a form reasonably satisfactory to the
Sellers.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Sellers as follows, except as
set forth in the Purchaser's Form 10-K for the fiscal year ended December 31,
1998, all quarterly reports on Form 10-Q filed with the SEC since January 1,
1999, and all amendments to any of the foregoing:
SECTION 4.1. ORGANIZATION AND QUALIFICATION. Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of Delaware
and has the requisite corporate power and authority to own, lease and operate
its assets and properties and to carry on its business as it is now being
conducted. Purchaser is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction in which the properties owned,
leased, or operated by it or the nature of the business conducted by it makes
such qualification necessary, except where the failure to be so qualified and in
good standing would not have, or could not reasonably be anticipated to have,
individually or in the aggregate, a Material Adverse Effect (as defined in
Exhibit A).
SECTION 4.2. CAPITALIZATION.
(a) As of June 30, 1999, the authorized capital stock of
Purchaser consisted of 100,000,000 shares of Purchaser Common Stock, of which
17,392,790 shares were issued and outstanding, and 10,000,000 shares of
preferred stock, par value $.002 per share, of which 500,000 shares have been
designated as "Preferred Stock-Junior Participating Series A" and reserved for
issuance upon exercise of rights evidenced by the certificates representing all
outstanding shares of Purchaser Common Stock, but no such shares are issued and
outstanding. All of the issued and outstanding shares of Purchaser Common Stock
were validly issued and are fully paid, nonassessable and free of preemptive
rights.
(b) As of June 30, 1999, except for 4,020,393 options granted
pursuant to Purchaser incentive or option plans (or to current or former
employees of Purchaser), warrants to acquire 770,000 shares of Purchaser Common
Stock and shares issuable in connection with proposed acquisitions, if any,
there are no outstanding (i) securities of Purchaser convertible into
10
<PAGE> 236
or exchangeable for shares of capital stock or voting securities of Purchaser or
(ii) options or other rights to acquire from Purchaser or other obligations of
Purchaser to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of
Purchaser.
(c) The shares of Purchaser Common Stock to be issued as part
of the Purchase Price have been duly authorized and when issued and delivered in
accordance with the terms of this Agreement, will have been validly issued and
will be fully paid and non-assessable, and the issuance thereof is not subject
to any preemptive or other similar right.
SECTION 4.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Purchaser has full corporate power and authority to
execute and deliver this Agreement and, subject to the Purchaser Required
Statutory Approvals (as defined in Section 4.3(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the Board
of Directors of the Purchaser and no other corporate proceedings on the part of
Purchaser are necessary to authorize the execution and delivery of this
Agreement or the consummation by Purchaser of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by Purchaser, and,
assuming the due authorization, execution and delivery hereof by the other
Parties, constitutes a valid and legally binding agreement of Purchaser
enforceable against Purchaser in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by Purchaser
and the consummation by Purchaser of the transactions contemplated hereby do not
and will not violate or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any Lien, upon, any of the properties or
assets of Purchaser or any of its Subsidiaries under any of the terms,
conditions or provisions of (i) the respective charters or bylaws of Purchaser
or any of its Subsidiaries, (ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any court or
Governmental Authority applicable to Purchaser or any of its Subsidiaries or any
of their respective properties or assets (assuming compliance with the matters
referred to in Section 4.3(c)) or (iii) any note, bond, mortgage, indenture,
deed of trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which Purchaser or any of its
Subsidiaries is now a party or by which Purchaser or any of its Subsidiaries or
any of their respective properties or assets may be bound or affected, except,
in the case of clauses (ii) and (iii), for matters as would not have, or could
not reasonably be anticipated to have, individually or in the aggregate, a
Material Adverse Effect or materially impair the ability of Purchaser to
consummate the transactions contemplated by this Agreement.
11
<PAGE> 237
(c) Except for the filing of the Registration Statements (as
defined in Section 4.4) with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), and
the declaration of the effectiveness thereof by the SEC and filings with various
state blue sky authorities (the "Purchaser Required Statutory Approvals"), no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by Purchaser or the
consummation by Purchaser of the transactions contemplated hereby, other than
such declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, have,
or could not reasonably be anticipated to have, individually or in the
aggregate, a Material Adverse Effect or materially impair the ability of
Purchaser to consummate the transactions contemplated by this Agreement.
SECTION 4.4. REGISTRATION STATEMENTS. None of the information to be
supplied by Purchaser or its Subsidiaries for inclusion in the Registration
Statements on Form S-3 to be filed under the Securities Act with the SEC by
Purchaser pursuant to Section 7.6 of this Agreement for the purpose of
registering the Purchaser Shares (as amended or supplemented, the "Registration
Statements") will, at the time they become effective, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading.
SECTION 4.5. REPORTS AND FINANCIAL STATEMENTS.
(a) Since January 1, 1999, Purchaser has filed with the SEC
all material forms, statements, reports and documents (including all exhibits,
amendments and supplements thereto) required to be filed by it under each of the
Securities Act, the Securities Exchange Act of 1934, as amended, and the
respective rules and regulations thereunder, all of which complied in all
material respects with all applicable requirements of the appropriate acts and
the rules and regulations thereunder.
(b) Purchaser has previously made available or delivered to
the Companies or the Sellers copies of Purchaser's (a) Annual Reports on Form
10-K for the fiscal year ended December 31, 1998, and for the immediately
preceding fiscal year, as filed with the SEC, (b) proxy and information
statements relating to (i) all meetings of its shareholders (whether annual or
special) and (ii) any actions by written consent in lieu of a shareholders'
meeting from January 1, 1999, until the date hereof, and (c) all other reports,
including quarterly reports, or registration statements filed by Purchaser with
the SEC since January 1, 1999 (other than Registration Statements filed on Form
S-8) (the documents referred to in clauses (a), (b) and (c), including the
exhibits thereto, are collectively referred to as the "Purchaser SEC Reports").
12
<PAGE> 238
(c) As of their respective dates, the Purchaser SEC Reports
did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(d) The audited consolidated financial statements and
unaudited interim consolidated financial statements of Purchaser included in
such reports (collectively, the "Purchaser Financial Statements") have been
prepared in accordance with GAAP (except as may be indicated therein or in the
notes thereto) and fairly present in all material respects the consolidated
financial position of Purchaser and its Subsidiaries as of the dates thereof and
the consolidated results of their operations and cash flows for the periods then
ended, subject, in the case of the unaudited interim financial statements, to
normal year-end and audit adjustments and any other adjustments described
therein.
SECTION 4.6. BROKERS AND FINDERS. Purchaser has not entered into any
contract, arrangement or understanding with any Person or firm which may result
in the obligation of Purchaser to pay any finder's fees, brokerage or agent
commissions or other like payments in connection with the transactions
contemplated hereby. There is no claim for payment by Purchaser of any
investment banking fees, finder's fees, brokerage or agent commissions or other
like payments in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby.
ARTICLE IV-A
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
CONCERNING THE TRANSACTION
Each Seller, severally but not jointly, represents and warrants to the
Purchaser as follows:
SECTION 4A.1 OWNERSHIP.
(a) The Seller holds of record and beneficially all of the
equity securities of the Companies shown as owned by the Seller on Schedule 1
free and clear of any Liens (except for Liens arising under Federal and state
securities laws and restrictions arising under the Companies' organizational
documents which have been waived).
(b) There are no outstanding subscriptions, options, calls,
contracts, commitments, understandings, restrictions, arrangements, rights or
warrants, including any right of conversion or exchange under any outstanding
security, debenture, instrument or other agreement obligating the Seller to
deliver or sell, or cause to be delivered or sold, any Ownership Interests in
any of the Companies, or obligating the Seller to grant, extend or enter into
any such agreement or commitment. There are no voting trusts, proxies or other
agreements or understandings to which the Seller is a party or is bound with
respect to the voting of any ownership interest of any of the Companies.
13
<PAGE> 239
SECTION 4A.2 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Seller has full power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been approved by the respective boards of directors, partners
and/or members of the Companies, and no other proceedings on the part of the
Seller are necessary to authorize the execution and delivery of this Agreement
by the Seller or the consummation by the Seller of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by the Seller, and,
assuming the due authorization, execution and delivery hereof by the other
Parties, constitutes a valid and legally binding agreement of the Seller,
enforceable against the Seller in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally, and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by the Seller
and the consummation by the Seller of the transactions contemplated hereby do
not and will not violate or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any Lien upon any of the
properties or assets of the Seller under any of the terms, conditions or
provisions of (i) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any court or Governmental
Authority applicable to the Seller, or any of its properties or assets, or (ii)
any note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which the Seller is now a party or by which the Seller or any of the
Seller's properties or assets may be bound or affected.
(c) No declaration, filing or registration with, or notice to,
or authorization, consent or approval of, any governmental or regulatory body or
authority is necessary for the execution and delivery of this Agreement by the
Seller or the consummation by the Seller of the transactions contemplated
hereby.
SECTION 4A.3 BROKERS AND FINDERS. Except as disclosed on Schedule 4A.3,
the Seller has not entered into any contract, arrangement or understanding with
any Person or firm which may result in the obligation of any of the Companies to
pay any finder's fees, brokerage or agent commissions or other like payments in
connection with the transactions contemplated hereby.
SECTION 4A.4 REGISTRATION STATEMENTS. None of the information to be
supplied by the Seller for inclusion in the Registration Statements will contain
any untrue statement of any material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
14
<PAGE> 240
SECTION 4A.5 INVESTMENT REPRESENTATIONS. Each Seller acknowledges,
represents and agrees that:
(a) (i) Purchaser has made available to Seller the
information and documents described in Section 4.5 hereof, (ii) Seller
understands the risks associated with ownership of Purchaser Common Stock, and
(iii) Seller is capable of bearing the financial risks associated with such
ownership;
(b) The Purchaser Shares included within the Purchase
Price have not been registered under the Securities Act or registered or
qualified under any applicable state securities laws;
(c) The Purchaser Shares are being issued to Seller in
reliance upon exemptions from such registration or qualification requirements,
and the availability of such exemptions depends in part upon Seller's bona fide
investment intent with respect to the Purchaser Shares;
(d) Seller's acquisition of the Purchaser Shares is
solely for his own account for investment, and Seller is not acquiring such
Purchaser Shares for the account of any other Person or with a view toward
resale, assignment, fractionalization, or distribution thereof;
(e) Seller shall not offer for sale, sell, transfer,
pledge, hypothecate or otherwise dispose of any of the Purchaser Shares except
in accordance with this Agreement and (i) the registration requirements of the
Securities Act and applicable state securities laws or (ii) upon delivery to
Purchaser of an opinion of legal counsel reasonably satisfactory to Purchaser
that an exemption from registration is available or pursuant to an effective
registration statement covering the Purchaser Shares to be sold;
(f) Seller has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of an
investment in the Purchaser Shares, and to make an informed investment decision
with respect thereto;
(g) Seller has had the opportunity to ask questions of,
and receive answers from, Purchaser's officers and directors concerning Seller's
acquisition of the Purchaser Shares and to obtain such other information
concerning Purchaser and the Purchaser Shares, to the extent Purchaser's
officers and directors possessed the same or could acquire it without
unreasonable effort or expense, as Seller deemed necessary in connection with
making an informed investment decision; and
(h) In addition to any other legends required by law or
the other agreements entered into in connection herewith, each certificate
evidencing the Purchaser Shares will bear a conspicuous restrictive legend
substantially as follows:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS, AND THEY CANNOT BE OFFERED
15
<PAGE> 241
FOR SALE, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE HYPOTHECATED
EXCEPT IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE
ACT AND SUCH OTHER STATE LAWS OR UPON DELIVERY TO THIS
CORPORATION OF AN OPINION OF LEGAL COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION THAT AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE SELLERS CONCERNING THE COMPANIES
The Sellers, jointly and severally, represent and warrant to the
Purchaser as follows:
SECTION 5.1. ORGAnIZATION AND QUALIFICATION. Each of the Companies is a
corporation, limited partnership or limited liability company duly organized,
validly existing and in good standing under the laws of the state of its
organization and has the requisite organizational power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. Each of the Companies is duly qualified to do business
as a foreign entity and is in good standing in each jurisdiction in which the
properties owned, leased, or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified and in good standing would not have, or could not reasonably be
anticipated to have, individually or in the aggregate, a Material Adverse
Effect. True, accurate and complete copies of each of the Companies' articles of
incorporation, certificate of partnership, certificate of formation, or other
organizational documents, as amended, and each of the Companies' bylaws,
partnership agreement, regulations, or other similar documents, in each case as
in effect on the date hereof, including all amendments thereto, have heretofore
been delivered to Purchaser.
SECTION 5.2. CAPITALIZATION.
(a) One or more of the Companies holds of record and
beneficially all of the equity securities of the Companies, excluding the Direct
Ownership Interests, as set forth on Schedule 1. Schedule 1 also sets forth for
each Company (i) its name, jurisdiction of organization and form of
organization, (ii) the classes and number of shares of its authorized capital
stock or other equity securities, (iii) the number of issued and outstanding
shares of each class of its capital stock or other equity securities, and (iv)
the number of shares of its capital stock or other equity securities held in
treasury. All of the Sellers' ownership interests in the Companies were validly
issued and are fully paid, and nonassessable. No Subsidiary of any of the
Companies, other than as described on Schedule 1, holds any ownership interests
in any of the Companies.
16
<PAGE> 242
(b) Except as disclosed on Schedule 5.2(b), there are no
outstanding (i) subscriptions, options, calls, contracts, commitments,
understandings, restrictions, arrangements, rights or warrants, including any
right of conversion or exchange under any outstanding security, debenture,
instrument or other agreement obligating any of the Companies to issue, deliver
or sell, or cause to be issued, delivered or sold, additional ownership
interests in any of the Companies, or obligating any of the Companies to grant,
extend or enter into any such agreement or commitment or (ii) obligations of any
of the Companies to repurchase, redeem or otherwise acquire any securities
referred to in clause (i) above. There are no voting trusts, proxies or other
agreements or understandings to which any of the Companies is a party or is
bound with respect to the voting of any ownership interests of any of the
Companies.
SECTION 5.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) This Agreement has been approved by the respective boards
of directors, partners and/or members of the Companies, and no other proceedings
on the part of the Companies are necessary to authorize the execution and
delivery of this Agreement or the consummation by the Companies and the Sellers
of the transactions contemplated hereby.
(b) Except as disclosed on Schedule 5.3 hereto, the execution
and delivery of this Agreement by the Sellers and the consummation by the
Sellers of the transactions contemplated hereby do not and will not violate or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Lien upon any of the properties or assets of any of the
Companies under any of the terms, conditions or provisions of (i) the respective
charters, bylaws, partnership agreements, regulations or other similar documents
of any of the Companies, (ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any court or
Governmental Authority applicable to any of the Companies, or any of their
respective properties or assets, or (iii) any note, bond, mortgage, indenture,
deed of trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which any of the Companies is
now a party or by which any of the Companies or any of their respective
properties or assets may be bound or affected.
(c) Except as disclosed on Schedule 5.3 hereto, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary on the part of the Companies for the execution and delivery of this
Agreement by the Sellers or the consummation by the Sellers of the transactions
contemplated hereby.
17
<PAGE> 243
SECTION 5.4. SUBSIDIARIES. Except as set forth on Schedule 1, none of
the Companies has any Subsidiaries, nor do any of the Companies hold any equity
interest in or control (directly or indirectly, through the ownership of
securities, by contract, by proxy, alone or in combination with others, or
otherwise) any corporation, limited liability company, partnership, business
organization or other Person.
SECTION 5.5. FINANCIAL STATEMENTS. The audited financial statements of
the Companies (excluding NETCO-Waterbury, Limited Partnership, NETCO-Waterbury
Systems, Inc. and NETCO-Residuals Management Systems, Inc.) for the fiscal year
ended December 31, 1998, attached as part of Schedule 5.5, have been prepared in
accordance with GAAP (except as may be indicated therein or in the notes
thereto) and fairly present in all material respects the financial position of
the Companies as of the dates thereof and the results of their operations and
cash flows for the periods then ended. The unaudited financial statements for
NETCO-Waterbury, Limited Partnership, NETCO-Waterbury Systems, Inc. and
NETCO-Residuals Management Systems, Inc. for the fiscal year ended December 31,
1998, and the unaudited interim financial statements of the Companies for the
seven (7) months ended July 31, 1999, also attached as part of Schedule 5.5 (and
together with the audited financial statements described in the preceding
sentence, the "Companies' Financial Statements"), have been prepared in
accordance with the accrual method of accounting and fairly present in all
material respects the financial position of the Companies as of the dates
thereof and the results of their operations and cash flows for the seven (7)
month period then ended, subject to normal year-end adjustments and any other
adjustments described therein.
SECTION 5.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on
Schedule 5.6, the Companies have not incurred any liabilities or contingencies
(whether absolute, accrued, contingent or otherwise) of any nature, except
liabilities (i) which are accrued or reserved against the Companies' Financial
Statements or reflected in the notes thereto or (ii) which were incurred after
December 31, 1998, and were incurred in the ordinary course of business and
consistent with past practices.
SECTION 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since July 31, 1999,
and except as described on Schedule 5.7, (i) the Companies have not declared or
set aside or paid any dividend or made any other distribution with respect to
any outstanding securities or ownership interests, or, directly or indirectly,
purchased, redeemed or otherwise acquired any of their securities or ownership
interests and (ii) the Companies have not granted any general increase in the
compensation of any of their officers, directors or employees (including any
increase pursuant to any bonus, pension, profit-sharing or other plan or
commitment) and have not paid any bonuses to any officers, directors or
employees. Since December 31, 1998, and except as described on Schedule 5.7, (i)
the Companies have not adopted, entered into or amended any bonus, profit
sharing, compensation, stock option, pension, retirement, deferred compensation,
health care, employment or other employee benefit plan, agreement, trust fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law; (ii) the Companies have not
made any amendment to any of their articles of incorporation, certificates of
partnership, regulations, bylaws, partnership agreements, operating agreements
or other similar documents or changed the character of any of their businesses
in any
18
<PAGE> 244
manner; (iii) the businesses of the Companies have been conducted in the
ordinary course of business consistent with past practices; and (iv) there has
not been any event, occurrence, development or state of circumstances or facts
which has had, or could reasonably be anticipated to have, individually or in
the aggregate, a Material Adverse Effect.
SECTION 5.8. LITIGATION. Except as described on Schedule 5.8, there are
no claims, suits, actions, Environmental Claims, inspections, investigations or
proceedings pending or, to the knowledge of any of the Companies or Sellers,
threatened against, relating to or affecting any of the Companies before any
court, governmental department, commission, agency, instrumentality, authority,
or any mediator or arbitrator. Except as described on Schedule 5.8, none of the
Companies is subject to any judgment, decree, injunction, rule or order of any
court, governmental department, commission, agency, instrumentality, authority,
or any mediator or arbitrator.
SECTION 5.9. ACCOUNTS RECEIVABLE. All accounts receivable reflected on
the Companies' Financial Statements represent sales actually made in the
ordinary course of business and are collectible in the ordinary course of
business.
SECTION 5.10. NO VIOLATION OF LAW; COMPLIANCE WITH AGREEMENTS.
(a) Except as disclosed on Schedule 5.10, none of the
Companies is in violation of, and none of the Companies has been given notice or
been charged with any violation of, any law, statute, order, rule, regulation,
ordinance or judgment (including, without limitation, any applicable
Environmental Law) of any governmental or regulatory body or authority. To the
knowledge of the Sellers, no investigation or review by any governmental or
regulatory body or authority is pending or threatened, nor has any governmental
or regulatory body or authority indicated an intention to conduct the same.
Except as disclosed on Schedule 5.10, the Companies have all permits (including
without limitation Environmental Permits), licenses, franchises, variances,
exemptions, orders and other governmental authorizations, consents and approvals
required or necessary to conduct their business as presently conducted
(collectively, the "Company Permits"). The Companies are not in violation of the
terms of any of the Company Permits.
(b) Except as disclosed on Schedule 5.10, none of the
Companies nor any of the Sellers is in breach or violation of or in default in
the performance or observance of any term or provision of, and no event has
occurred which, with lapse of time or action by a third party, could result in a
default under, (i) the charter, bylaws, partnership agreement, regulations or
similar organizational instruments of any of the Companies or (ii) any contract,
commitment, agreement, indenture, mortgage, loan agreement, note, lease, bond,
license, approval or other instrument to which any of the Companies is a party
or by which any of the Companies is bound or to which any of their property is
subject.
SECTION 5.11. INSURANCE. The Sellers have heretofore delivered to the
Purchaser true and correct copies of all insurance policies owned by the
Companies or by which any of the Companies or any of their properties or assets
is covered against present losses, all of which are
19
<PAGE> 245
now in full force and effect. No insurance has been refused with respect to any
operations, properties or assets of any of the Companies nor has coverage of any
insurance been limited by any insurance carrier that has carried, or received
any application for, any such insurance during the last three years. No
insurance carrier has denied any claims made against any of the Companies'
policies.
SECTION 5.12. TAXES.
(a) Except as set forth on Schedule 5.12, (i) the Companies
have (x) duly filed (or there have been filed on their behalf) with the
appropriate taxing authorities all Tax Returns (as hereinafter defined) required
to be filed by the Companies on or prior to the date hereof, and (y) duly paid
in full or made adequate provision therefor on the Companies' Financial
Statements in accordance with GAAP (or there have been paid or adequate
provision has been made on their behalf) for the payment of all Taxes (as
hereinafter defined) for all periods ending through the date hereof; (ii) all
such Tax Returns filed by or on behalf of the Companies are true, correct and
complete in all material respects; (iii) the Companies are not the beneficiary
of any extension of time within which to file any Tax Return; (iv) no claim has
been made since January 1, 1997 by any authority in a jurisdiction where the
Companies do not file Tax Returns that they are or may be subject to taxation by
that jurisdiction; (v) the liabilities and reserves for Taxes reflected in the
most recent balance sheet included in the Companies' Financial Statements to
cover all Taxes for all periods ending at or prior to the date of such balance
sheet have been determined in accordance with GAAP, and there is no material
liability for Taxes for any period beginning after such date other than Taxes
arising in the ordinary course of business; (vi) there are no Liens for Taxes
upon any property or assets of the Companies, except for Liens for Taxes not yet
due; (vii) the Companies have not made any change in accounting methods since
December 31, 1998; (viii) the Companies have not received a ruling from any
taxing authority or signed an agreement with any taxing authority; (ix) the
Companies have complied in all respects with all applicable laws, rules and
regulations relating to the payment and withholding of Taxes (including, without
limitation, withholding of Taxes pursuant to Sections 1441 and 1442 of the Code,
as amended or similar provisions under any foreign laws) and have, within the
time and the manner prescribed by law, withheld and paid over to the appropriate
taxing authority all amounts required to be so withheld and paid over under all
applicable laws in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, partner, member or other third
party; (x) no federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any Taxes
or Tax Returns of the Companies, and as of the date of this Agreement the
Companies have not received a written notice of any pending audits or
proceedings; (xi) no partner, stockholder, member, director or officer (or
employee responsible for Tax matters) of the Companies expects any authority to
assess any additional Taxes with respect to the Companies for any period for
which Tax Returns have been filed; (xii) the federal income Tax Returns of the
Companies have been examined by the Internal Revenue Service ("IRS") (which
examination has been completed) or the statute of limitations for the assessment
of federal income Taxes of the Companies has expired, for all periods through
and including December 31, 1994, and no deficiencies were asserted as a result
of such examinations which have not been resolved and fully paid; (xiii) no
adjustments or deficiencies relating to Tax Returns of the Companies have been
proposed, asserted or assessed by any taxing
20
<PAGE> 246
authority, except for such adjustments or deficiencies which have been fully
paid or finally settled; and (xiv) the Companies have delivered to the Purchaser
true, correct and complete copies of all federal income Tax Returns, examination
reports, and statements of deficiencies assessed against or agreed to by the
Companies since December 31, 1993.
(b) There are no outstanding requests, agreements, consents or
waivers to extend the statute of limitations applicable to the assessment of any
Taxes or deficiencies against the Companies, and no power of attorney granted by
any of the Companies with respect to any Taxes is currently in force. The
Companies have disclosed on their federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of federal income
Tax within the meaning of Section 6662 of the Code. The Companies are not a
party to any agreement providing for the allocation or sharing of Taxes with an
entity that is not directly or indirectly a wholly-owned Subsidiary of one of
the Companies. The Companies have not, with regard to any assets or property
held, acquired or to be acquired by it, filed a consent to the application of
Section 341(f) of the Code, or agreed to have Section 341(f)(2) of the Code
apply to any disposition of a subsection (f) asset (as such term is defined in
Section 341(f)(4) of the Code) owned by the Companies. None of the Companies (i)
has been a member of an affiliate group filing a consolidated federal income Tax
Return (other than a group the common parent of which was one of the Companies)
and (ii) has liability for Taxes of any Person (other than any of the Companies
and their Subsidiaries) under Section 1.1502-6 of the United States Treasury
Regulations (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract, or otherwise.
SECTION 5.13. EMPLOYEE BENEFIT PLANS.
(a) Each Plan and each Benefit Program (as such terms are
defined below) is listed on Schedule 5.13 hereto. No Plan or Benefit Program is
or has been (i) covered by Title IV of the Employer Retirement Income Security
Act of 1974, as amended ("ERISA"), (ii) subject to the minimum funding
requirements of Section 412 of the Code or (iii) a "multi-employer plan" as
defined in Section 3(37) of ERISA, nor have any of the Companies contributed to,
or ever had any obligation to contribute to, any multi-employer plan. Each Plan
and Benefit Program intended to be qualified under Section 401(a) of the Code is
designated as a tax-qualified plan on Schedule 5.13 and is so qualified. No Plan
or Benefit Program provides for any retiree health benefits for any employees or
dependents of any of the Companies other than as required by the Consolidated
Budget Reconciliation Act of 1985, as amended ("COBRA"). There are no claims
pending with respect to, or under, any Plan or any Benefit Program, other than
routine claims for benefits, and there are no disputes or litigation pending or,
to the knowledge of any of the Companies, threatened, with respect to any such
Plans or Benefit Programs.
(b) The Sellers have heretofore delivered to Purchaser true
and correct copies of the following, if any:
21
<PAGE> 247
(i) each Plan and each Benefit Program listed on
Schedule 5.13, all amendments thereto as of the date hereof and all current
summary plan descriptions provided to employees regarding the Plans and Benefit
Programs;
(ii) each trust agreement and annuity contract (or
any other funding instruments) pertaining to any of the Plans or Benefit
Programs, including all amendments to such documents to the date hereof;
(iii) each management or employment contract or
contract for personal services and a complete description of any understanding
or commitment between any of the Companies and any officer, consultant,
director, employee or independent contractor of any of the Companies; and
(iv) a complete description of each other plan,
policy, contract, program, commitment or arrangement providing for bonuses,
deferred compensation, retirement payments, profit sharing, incentive pay,
commissions, hospitalization or medical expenses or insurance (including,
without limitation, health, dental, life and disability insurance) or any other
benefits for any officer, consultant, director, annuitant, employee or
independent contractor of any of the Companies as such or members of their
families (other than directors' and officers' liability policies), whether or
not insured (a "Benefit Program"). For purposes of this Agreement, "Plan" means
an "employee benefit plan" (as defined in Section 3(3) of ERISA) which is or has
been established or maintained, or to which contributions are or have been made,
by any of the Companies or by any trade or business, whether or not
incorporated, which, together with any of the Companies, is under common
control, as described in Section 414(b) or (c) of the Code.
(c) Except as disclosed on Schedule 5.13, to the best
knowledge of the Sellers, each Plan and Benefit Program has been maintained and
administered in compliance with its terms and in accordance with all applicable
laws, rules and regulations. The Companies have no commitment or obligation to
establish or adopt any new or additional Plans or Benefit Programs or to
increase the benefits under any existing Plan or Benefit Program.
(d) Except as set forth on Schedule 5.13, neither the
execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby will (i) result in any payment to be made by
any of the Companies, including, without limitation, severance, unemployment
compensation, golden parachute (defined in Section 280G of the Code) or
otherwise, becoming due to any employee of any of the Companies, or (ii)
increase any benefits otherwise payable under any Plan or any Benefit Program.
(e) As of the date hereof, the Companies do not sponsor any
simplified employee pension plans as described in Section 408(k) of the Code and
there are no claims against any of the Companies for benefits relating to any
such plans.
22
<PAGE> 248
SECTION 5.14. EMPLOYEE AND LABOR MATTERS.
(a) Schedule 5.14 hereto includes a true and complete list,
dated as of August 19, 1999, of all employees of the Companies, listing the
title or position held, base salary or wage rate and, for the period since July
31, 1999, any bonuses, commissions or profit sharing payable to such employees.
(b) Except as set forth on Schedule 5.14, none of the
Companies is a party to or bound by any written employment agreements or
commitments, other than on an at-will basis. The Companies are in compliance
with all applicable laws respecting the employment and employment practices,
terms and conditions of employment and wages and hours of their employees and
are not engaged in any unfair labor practice. To the best knowledge of the
Sellers, all employees of the Companies who work in the United States are
lawfully authorized to work in the United States according to federal
immigration laws. There is no labor strike or labor disturbance pending or, to
the knowledge of the Sellers, threatened against any of the Companies with
respect to the Business and, during the past five years, the Companies have not
experienced a work stoppage.
(c) Except as set forth on Schedule 5.14, (i) none of the
Companies is a party to or bound by the terms of any collective bargaining
agreement or other union contract applicable to any employee of any of the
Companies and no such agreement or contract has been requested by any employee
or group of employees of any of the Companies, nor has there been any discussion
with respect thereto by management of any of the Companies with any employees of
any of the Companies, (ii) the Sellers are not aware of any union organizing
activities or proceedings involving, or any pending petitions for recognition
of, a labor union or association as the exclusive bargaining agent for, or where
the purpose is to organize, any group or groups of employees of any of the
Companies, or (iii) there is not currently pending, with regard to any of its
facilities, any proceeding before the National Labor Relations Board, wherein
any labor organization is seeking representation of any employees of any of the
Companies.
SECTION 5.15. ENVIRONMENTAL MATTERS. Except as set forth on Schedule
5.15 to this Agreement:
(a) None of the Companies nor any of their Business Facilities
(as defined in Exhibit A), is in violation of, or has violated, or has been or
is in non-compliance with, any Environmental Law, including, but not limited to,
the conduct of the business of the Companies or the ownership, use, maintenance
or operation of any of the Business Facilities by the Companies.
(b) Except in compliance with Environmental Laws (including,
without limitation, by obtaining necessary Environmental Permits), (i) no
Materials of Environmental Concern (as defined in Exhibit A) have been used,
generated, extracted, mined, beneficiated, manufactured, stored, treated, or
disposed of, or in any other way released (and no release is threatened) by any
of the Companies, on, under or about any Business Facility or transferred or
transported by any of the Companies to or from any Business Facility, and (ii)
to the knowledge of the Sellers no Materials of Environmental Concern have been
generated, manufactured, stored or treated or disposed of, or in any other way
released (and no release is threatened) by any of the
23
<PAGE> 249
Companies, on, under, about or from any property adjacent to any current
Business Facility;
(c) There are no Environmental Claims known, pending or, to
the knowledge of the Sellers, threatened against any of the Companies or any of
their Business Facilities, and, to the knowledge of the Sellers, there is no
basis for same;
(d) The Companies and all of their Business Facilities have
obtained all Environmental Permits applicable to the operation of the business
of the Companies as presently conducted, and the Companies and their Business
Facilities are in compliance with all terms and conditions of such Environmental
Permits. The Company and all of their Business Facilities have timely filed
applications for renewal of all such Environmental Permits. Regarding all
Environmental Permits for which renewal, amendment, or modification is sought or
pending, no material expenditures, capital improvements, or changes in operation
will be necessary as a condition or as a result of such renewal, amendment, or
modification;
(e) The Companies have all environmental and pollution control
equipment necessary to comply with all Environmental Laws (including, without
limitation, to comply with all applicable Environmental Permits applicable to
the operation of the business of the Companies as presently conducted;
(f) To the knowledge of the Sellers, there are no Materials of
Environmental Concern on any Business Facility of any of the Companies exceeding
any standard or limitation established, published or promulgated pursuant to
Environmental Laws, or which would require reporting to any Governmental
Authority or Remediation to comply with the Requirements of Environmental Laws
(as defined in Exhibit A);
(g) To the knowledge of the Sellers, none of the off-site
locations where Materials of Environmental Concern generated from any Business
Facility of any of the Companies, or for which any of the Companies has arranged
for their disposal, treatment or application, has been nominated or identified
as a facility which is subject to an existing or potential claim under
Environmental Laws;
(h) None of the Companies have been named as a potentially
responsible party under, and no Business Facility of the Companies have been
nominated or identified as a facility which is subject to, an existing or
potential claim under CERCLA or comparable Environmental Laws, and, to the
knowledge of the Sellers, no Business Facility of the Companies is subject to
any Lien arising under Environmental Laws;
24
<PAGE> 250
(i) The Companies have not received any notice of any release
or threatened release of Materials of Environmental Concern, or remedial
obligation under, Environmental Laws or Permits, relating to the ownership, use,
maintenance, operation of any Business Facility of the Companies or in
connection with the business of the Companies, nor, to the knowledge of the
Sellers, is there any basis for any of the foregoing, nor have the Companies
voluntarily undertaken Remediation or other decontamination or cleanup of any
facility or site or entered into any agreement for the payment of costs
associated with such activity;
(j) To the knowledge of the Sellers, there is no Environmental
Law or Requirement of Environmental Laws that will require future compliance
costs on the part of the Companies in excess of One Hundred Thousand Dollars
($100,000) above costs currently expended in the ordinary course of business;
(k) The Companies have filed all notices, notifications,
financial security, waste managements plans, or applications which are required
to be filed by the Companies for the operation of its business or the use or
operation of any Business Facility of any of the Companies; and
(l) Except for sludge and processed by-products, no current
Business Facility (or equipment thereon) of the Companies contains any lead
containing materials, asbestos containing materials or polychlorinated biphenyls
in any form.
For purposes of this Section, the "Companies" shall include any entity which is,
in whole or in part, a predecessor of any of the Companies and all of their
present and former Subsidiaries and their successors of predecessors.
SECTION 5.16. NON-COMPETITION AGREEMENTS. Except as disclosed on
Schedule 5.16 hereto, none of the Companies or the Sellers is a party to any
agreement which purports to restrict or prohibit any of them from, directly or
indirectly, engaging in any business currently engaged in by the Companies. None
of the Sellers' is a party to any agreement which, by virtue of such person's
relationship with one or more of the Companies, restricts the Companies or any
Subsidiary of any of the Companies from, directly or indirectly, engaging in any
of the businesses described above.
SECTION 5.17. TITLE TO ASSETS. Except as disclosed on Schedule 5.17,
the Companies have good and indefeasible title to their assets and valid
leasehold interests in their leased assets and properties, as reflected in the
most recent balance sheet included in the Companies' Financial Statements,
except for properties and assets that have been disposed of in the ordinary
course of the conduct of the Business since the date of the latest balance sheet
included therein, free and clear of all Liens, except (i) Liens for current
taxes, payments of which are not yet delinquent, (ii) such imperfections in
title and easements and encumbrances, if any, as are not substantial in
character, amount or extent and do not interfere with the present use of the
property subject thereto or affected thereby, or otherwise impair the Companies'
business operations (in the manner presently carried on by the Companies), or
(iii) any Lien securing any debt or obligation described on Schedule 5.17 which
is expressly referenced as being secured.
25
<PAGE> 251
All leases under which the Companies lease any real property have been delivered
to Purchaser and are in good standing, valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
default or event which, with notice or lapse of time or both, would become a
default by or on behalf of the Companies or their Subsidiaries, or by or on
behalf of any third party.
SECTION 5.18. CONTRACTS, AGREEMENTS, PLANS AND COMMITMENTS. Schedule
5.18 hereto sets forth a complete list of the following contracts, agreements,
plans and commitments (collectively, the "Contracts") to which any of the
Companies is a party or by which any of the Companies or any of their assets is
bound as of the date hereof:
(a) any contract, commitment or agreement that involves
aggregate expenditures by one or more of the Companies of more than Fifty
Thousand Dollars ($50,000) per year;
(b) any contract or agreement (including any such contracts or
agreements entered into with any Governmental Authority) relating to the
maintenance or operation of the Business that involves aggregate expenditures by
one or more of the Companies of more than Fifty Thousand Dollars ($50,000);
(c) any indenture, loan agreement or note under which any of
the Companies has outstanding indebtedness, obligations or liabilities for
borrowed money;
(d) any lease or sublease for the use or occupancy of real
property;
(e) any non-competition agreement described in Section 5.16;
(f) any guarantee, direct or indirect, by any Person of any
contract, lease or agreement entered into by any of the Companies;
(g) any partnership, joint venture or construction and
operation agreement;
(h) any agreement of surety, guarantee or indemnification with
respect to which any of the Companies is the obligor, outside of the ordinary
course of business;
(i) any contract that requires any of the Companies to pay for
goods or services substantially in excess of its estimated needs for such items
or the fair market value of such items;
(j) any contract, agreement, agreed order or consent agreement
that requires any of the Companies to take any actions or incur any expenses to
remedy non-compliance with any Environmental Law; and
(k) any other contract material to any of the Companies or
their business.
26
<PAGE> 252
True, correct and complete copies of each of such contracts, agreements, plans
and commitments have been delivered to or made available for inspection by
Purchaser. All such contracts, agreements, plans and commitments (i) were duly
and validly executed and delivered by one or more of the Companies and (ii) to
the knowledge of the Sellers, are valid and in full force and effect. Except as
set forth on Schedule 5.18, the Companies have fulfilled all material
obligations required of the Companies under each such contract, agreement, plan
or commitment to have been performed by them prior to the date hereof, including
timely paying all interest on its debt as such interest has become due and
payable. Except as set forth on Schedule 5.18, there are no counterclaims or
offsets under any of such contracts, agreements, plans and commitments.
SECTION 5.19. SUPPLIES. To the knowledge of the Sellers, the Supplies
of the Companies are of a quantity and quality that have been normal for the
Companies in the ordinary course of business of the Companies.
SECTION 5.20. BROKERS AND FINDERS. Except as disclosed on Schedule
5.20, none of the Companies has entered into any contract, arrangement or
understanding with any Person or firm which may result in the obligation of any
of the Companies to pay any finder's fees, brokerage or agent commissions or
other like payments in connection with the transactions contemplated hereby.
There is no claim for payment by any of the Companies of any investment banking
fees, finder's fees, brokerage or agent commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
SECTION 5.21. INTELLECTUAL PROPERTY. To the knowledge of the Sellers,
except as disclosed on Schedule 5.21 hereto, the Companies have rights to use,
whether through ownership, licensing or otherwise, all patents, trademarks,
service marks, trade names, copyrights, software, trade secrets and other
proprietary rights and processes that are material to its business as now
conducted (collectively, the "Company Intellectual Property Rights"). Except as
set forth on Schedule 5.21, the Companies do not own any patents. The Companies
have no knowledge of any infringement by any other Person of any of the Company
Intellectual Property Rights, and, other than within the ordinary course of
business, the Companies have not entered into any agreement to indemnify any
other party against any charge of infringement of any of the Company
Intellectual Property Rights. To the knowledge of the Sellers, the Companies
have not and do not violate or infringe any intellectual property right of any
other Person, and the Companies have not received any communication alleging
that they violated or infringed the intellectual property right of any other
person. The Companies have not been sued for infringing any intellectual
property right of another person. There is no claim or demand of any Person
pertaining to, or any proceeding which is pending or, to the knowledge of any of
the Companies, threatened, that challenges the rights of the Companies in
respect of any Company Intellectual Property Rights, or that claims that any
default exists under any Company Intellectual Property Rights. None of the
Company Intellectual Property Rights is subject to any outstanding order,
ruling, decree, judgment or stipulation by or with any court, tribunal,
arbitrator, or other Governmental Authority.
SECTION 5.22. RELATIONSHIPS. Except as set forth on Schedule 5.22,
since January 1,
27
<PAGE> 253
1999, the Companies have not received notice from any customer, supplier or any
party to any Contract involving more than Fifty Thousand Dollars ($50,000)
annually with one or more of the Companies (each a "Contract Party") that such
Contract Party intends to discontinue doing business with the Companies, and,
since such date, no Contract Party has indicated any intention (a) to terminate
its existing business relationship with any of the Companies or (b) not to
continue its business relationship with any of the Companies, whether as a
result of the transactions contemplated hereby or otherwise. Except as set forth
on Schedule 5.22, the Companies have not entered into or participated in any
related party transaction during the past year.
SECTION 5.23. YEAR 2000. To the knowledge of the Sellers, after
reasonable investigation by the Sellers and except as disclosed on Schedule 5.23
hereto, all emissions monitors and computers controlling the operation of
incinerators used by the Companies are Year 2000 Compliant. "Year 2000
Compliant" means as to any device (including, without limitation, all software,
firmware, microprocessing chips and/or other data processing devices related to
such device) utilized by and material to the business operations of any of the
Companies, that such device will be able to accurately process date data from,
into and between the twentieth and twenty-first centuries when used in
accordance with the applicable documentation setting forth the requirements for
the use of the specific item.
SECTION 5.24. CERTAIN PAYMENTS. To the best knowledge of the Sellers,
none of the Companies nor any stockholder, member, partner, officer, director or
employee of the Companies have paid or received or caused to be paid or
received, directly or indirectly, in connection with any of the businesses of
the Companies (a) any bribe, kickback or other similar payment to or from any
domestic or foreign government or agency thereof or any other Person or (b) any
contribution to any domestic or foreign political party or candidate (other than
from personal funds of such stockholder, member, partner, officer, director or
employee not reimbursed by the Companies or as permitted by applicable law).
SECTION 5.25. BOOKS AND RECORDS. To the knowledge of the Sellers, the
minute books and other organizational records of the Companies are correct and
complete in all material respects and the signatures appearing on all documents
contained therein are the true signatures of the person purporting to have
signed the same. To the knowledge of the Sellers, all actions reflected in said
books and records were duly and validly taken in compliance with the laws of the
applicable jurisdiction and no meeting of the Board of Directors of any of the
Companies or any committee thereof has been held for which minutes have not been
prepared and are not contained in the minute books. All such books and records
are located in the offices of the Companies.
SECTION 5.26. CONDITION AND SUFFICIENCY OF ASSETS. To the knowledge of
the Sellers, except as disclosed on Schedule 5.26 hereto, all buildings,
improvements and equipment owned or leased by the Companies are structurally
sound, in good operating condition and repair (subject to normal wear and tear)
and adequate for the uses to which they are being put, and none of the
buildings, improvements and equipment owned or leased by the Companies is in
need of maintenance or repairs except for ordinary, routine maintenance and
repairs not in excess of $100,000 per repair.
28
<PAGE> 254
ARTICLE VI
CONDUCT OF BUSINESS PENDING CLOSING.
SECTION 6.1. CONDUCT OF BUSINESS BY THE SELLERS PENDING CLOSING. After
the date hereof and prior to the Closing Date, unless Purchaser shall otherwise
agree in writing, the Sellers shall, and the Sellers shall cause the Companies
to:
(a) conduct their businesses in the ordinary and usual course
of business and consistent with past practice;
(b) not (i) amend or propose to amend any of the Companies'
charters or bylaws or other similar documents, (ii) split, combine, reorganize,
reclassify, recapitalize or take any similar action with respect to any of the
Companies' outstanding capital stock or other equity securities or (iii)
declare, set aside or pay any dividend or distribution payable in cash, stock,
property or otherwise;
(c) not issue, sell, pledge or dispose of, or agree to issue,
sell, pledge or dispose of, any additional share of, or any options, warrants or
rights of any kind to acquire any share of, any of the Companies' capital stock
or other equity securities of any class or any debt or equity securities
convertible into or exchangeable for such capital stock or other equity
securities;
(d) not (i) incur or become contingently liable with respect
to any indebtedness for borrowed money, (ii) redeem, purchase, acquire or offer
to redeem, purchase or acquire any shares of any of the Companies' capital stock
or any options, warrants or rights to acquire any of the Companies' capital
stock or other equity securities or any security convertible into or
exchangeable for any of the Companies' capital stock or other equity securities,
(iii) make any acquisition of any assets or businesses other than expenditures
for fixed or capital assets described on Schedule 3.3(d) hereto or in the
ordinary course of business not exceeding $100,000 in any instance or $200,000
in the aggregate, (iv) sell, pledge, dispose of or encumber any assets or
businesses other than sales in the ordinary course of business or (v) enter into
any contract, agreement, commitment or arrangement with respect to any of the
foregoing;
(e) use all reasonable efforts to preserve intact the
Companies' business organization and goodwill, keep available the services of
the Companies' respective present officers and key employees, and preserve the
goodwill and business relationships with customers and others having business
relationships with them and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
29
<PAGE> 255
(f) not enter into or amend any employment, severance, special
pay arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees;
(g) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law or as contemplated hereunder;
(h) use commercially reasonable efforts to maintain with
financially responsible insurance companies insurance on the Companies' tangible
assets and its businesses in such amounts and against such risks and losses as
are consistent with past practice;
(i) not make, change or revoke any material Tax election or
make any material agreement or settlement regarding Taxes with any taxing
authority;
(j) not make any change in the Companies' financial, Tax or
accounting methods, practices or policies, or in any assumption underlying such
a method, practice or policy;
(k) give prompt written notice to Purchaser of the
commencement of any Environmental Claim, or non-routine inspection by any
Governmental Authority with responsibility for enforcing or implementing any
applicable Environmental Laws, and provide to Purchaser such information as
Purchaser may reasonably request regarding any such Environmental Claim, any
developments in connection therewith, and, as applicable, any anticipated or
actual response thereto;
(l) not enter into or assume any contracts or agreements
having a value or imposing an obligation upon any of the Companies in excess of
$100,000 annually and all contracts or agreements having a value to or imposing
an obligation on any of the Companies that have remaining obligations of
$200,000 or more, regardless of the annual payment;
(m) maintain the Companies' books of account and records in
the usual, regular and ordinary manner consistent with past policies and
practice;
(n) not compromise, settle, grant any waiver or release
relating to or otherwise adjust any litigation or claims of any nature
whatsoever pending against any of the Companies; and
(o) not take any action or omit to take any action, which
action or omission would result in a breach of any of the representations and
warranties set forth in this Agreement.
SECTION 6.2. OTHER OFFERS. Except in connection with the transactions
contemplated by this Agreement, from and after the date hereof, and continuing
through the earlier of Closing or
30
<PAGE> 256
the termination of this Agreement in accordance with the terms hereof, the
Sellers shall not, and shall not permit any of the Companies or the Companies'
officers, directors, employees, Affiliates, representatives or agents to,
directly or indirectly, (i) solicit, initiate or knowingly encourage any offer
or proposal for, or any indication of interest in, a merger or business
combination involving any of the Companies or the acquisition of an equity
interest in, or any substantial portion of the assets of, any of the Companies
or (ii) engage in negotiations with or disclose any nonpublic information
relating to any of the Companies or Purchaser, or afford access to the
properties, books or records of any the Companies, to any Person. The Companies
shall promptly notify and provide copies to Purchaser of any offer, proposal,
solicitation or indication of interest, or communication with respect thereto,
delivered to or received from any third party.
SECTION 6.3. ACCESS TO INFORMATION. The Sellers shall, and shall cause
the Companies to, give the Purchaser, its accountants, counsel, financial
advisors, and other representatives (the "Purchaser Representatives") full
access (and shall otherwise fully cooperate, including by making available
copies of all of the following documents which are susceptible to photostatic
reproduction) during normal business hours throughout the period prior to
Closing to all of its respective properties, books, records (including, but not
limited to, Tax Returns and any and all records or documents which are within
the possession of governmental or regulatory authorities, agencies or bodies,
and the disclosure of which the Company can facilitate or control), Contracts,
premises, permits, Environmental Permits, licenses, Governmental Authorizations,
commitments of any nature (whether written or oral) and records, and shall
permit the Purchaser and Purchaser Representatives to make such inspections
(including without limitation environmental inspections, sampling, and analysis)
as they may require and furnish to the Purchaser and Purchaser Representatives
during such period all such information concerning the Companies and their
affairs as the Purchaser may reasonably request.
SECTION 6.4. COMMERCIALLY REASONABLE EFFORTS. The Sellers will use all
reasonable commercial efforts to cause the representations and warranties
contained in Articles IV-A and V hereof to continue to be true and correct
through the Closing Date and to obtain the satisfaction of the conditions to
Closing set forth in Section 8.1 and 8.3 hereof.
31
<PAGE> 257
ARTICLE VII
CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES
SECTION 7.1. CONSENTS. Subsequent to the Closing Date, the Sellers will
use all reasonable commercial efforts, at the request of the Purchaser provided
that the Purchaser reimburses the Sellers for all out of-pocket costs and
expenses, to assist the Purchaser in obtaining all necessary, proper,
appropriate or advisable consents, novations, approvals or waivers which the
Purchaser may reasonably seek from time to time in order to effect, confirm or
document the transactions contemplated by this Agreement, including using their
reasonable commercial efforts to obtain all necessary, proper, appropriate or
advisable consents, novations, approvals or waivers of third parties required in
order to preserve material contractual relationships of the Companies.
SECTION 7.2. FURTHER ASSURANCES. The Parties shall execute and deliver
to the others, after the Closing Date, any other instrument which may be
requested by another Party and which is reasonably appropriate to perfect or
evidence any of the sales, assignments, transfers or conveyances contemplated by
this Agreement or to obtain any consents or licenses necessary for Purchaser to
operate the Business in the manner operated by the Companies prior to the date
hereof.
SECTION 7.3. EXPENSES AND FEES. The Companies shall pay all costs and
expenses incurred by the Companies in connection with this Agreement and the
transactions contemplated hereby, including, without limitation, any and all
broker's commissions, employee bonuses, and the fees and expenses of the
Companies' attorneys and accountants. The Companies will make all necessary
arrangements so that the Purchaser will not be charged with any such costs or
expenses, and all such costs and expenses shall be accrued on the financial
books and records of the Companies prior to Closing and shall be included in the
calculation of Net Working Capital. Each Seller shall be responsible for all
costs and expenses incurred by such Seller in connection with this Agreement and
the transactions contemplated hereby, including, without limitation, the fees
and expenses of the Seller's attorneys. Purchaser shall pay all costs and
expenses incurred by Purchaser in connection with this Agreement and the
transactions contemplated hereby, including without limitation, the fees and
expenses of its attorneys and accountants.
SECTION 7.4. AGREEMENT TO COOPERATE. Subject to the terms and
conditions herein provided, the Parties shall use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including using its reasonable efforts to obtain all necessary, proper or
advisable waivers, consents and approvals under applicable laws and regulations
to consummate and make effective the transactions contemplated by this
Agreement, including using its reasonable efforts to obtain all necessary or
appropriate waivers, consents or approvals of third parties required in order to
preserve material contractual relationships of the Companies.
SECTION 7.5. NOTIFICATION OF CERTAIN MATTERS. Each of the Parties
agrees to give prompt notice to each other Party of, and to use their respective
reasonable efforts to prevent or promptly remedy, (i) the occurrence or failure
to occur or the impending or threatened occurrence or failure to occur, of any
event which occurrence or failure to occur would be likely to cause any of its
representations or warranties in this Agreement to be untrue or inaccurate in
any material
32
<PAGE> 258
respect (or in all respects in the case of any representation or warranty
containing any materiality qualification) at any time from the date hereof to
the Closing and (ii) any material failure (or any failure in the case of any
covenant, condition or agreement containing any materiality qualification) on
its part to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder. The Sellers shall give prompt
written notice to Purchaser of the commencement of any Environmental Claim, or
inspection by any Governmental Authority with responsibility for enforcing or
implementing any applicable Environmental Laws, and provide to Purchaser such
information as Purchaser may reasonably request regarding such Environmental
Claim, any developments in connection therewith, and, as applicable, the
Companies' anticipated or actual response thereto. Notwithstanding the other
provisions of this Section 7.5 and except for those supplements to the
Disclosure Schedules permitted in Section 7.14 hereof, the delivery of any
notice pursuant to this Section shall not limit or otherwise affect the remedies
available hereunder to the Party receiving such notice.
SECTION 7.6. REGISTRATION STATEMENTS.
(a) The Sellers as a group shall be entitled to a maximum of
four demand registrations with respect to Purchaser Shares issued pursuant to
Section 3.4 to the Sellers as Earn Out Payments in accordance with this Section
7.6. Purchaser shall use reasonable efforts to file with the SEC promptly upon
receipt of a written request from all of the Sellers as a group (provided that
(i) the first request may not be made or delivered any earlier than the date
(eleven) 11 months after the first issuance of Purchaser Shares by the Purchaser
to Seller pursuant to Section 3.4, (ii) the Purchaser shall not be obligated to
effect more than one (1) demand registration in any two (2) year period and
(iii) no such requests may be made after December 31, 2009), a Registration
Statement registering all of the Purchaser Shares then held by the Sellers and
shall use reasonable efforts to have the Registration Statement declared
effective by the SEC as promptly as reasonably practicable. Purchaser shall also
take any action required to be taken under applicable state blue sky or
securities laws in connection with the issuance and registration of Purchaser
Shares pursuant hereto. Purchaser and the Sellers shall promptly furnish to each
other all information, and take such other actions, as may reasonably be
requested in connection with any action by any of them in connection with this
Section. Except as otherwise provided in this Section 7.6, no Purchaser Shares
may be transferred or sold during the twelve (12) months following issuance of
such Purchaser Shares. The Registration Statements shall cover the resale of the
Purchaser Shares on Form S-3, if available, and the Purchaser may combine
registrations of Purchaser Shares under this Section 7.6 with registrations of
Purchaser Common Stock required under the Merger Agreement. The Purchaser shall
use its commercially reasonable efforts to cause such shelf Registration
Statement to become effective as soon as practical after such filing, and to
cause the Purchaser Shares to be qualified in such state jurisdictions as the
Sellers may reasonably request. The Purchaser shall use commercially reasonable
efforts to keep the shelf Registration Statement current and effective for one
year after it is first declared effective.
(b) If Purchaser proposes to register for its own account any
of its securities under the Securities Act for sale (other than a registration
statement on Form S-4 or S-8, a registration statement filed in connection with
an exchange offer or an offering of securities
33
<PAGE> 259
solely to Purchaser's existing shareholders, or a registration statement filed
in connection with an exchange offer or an offering of securities by any of the
Purchaser's shareholders), Purchaser shall give written notice to the Sellers of
the Purchaser's intention to effect such a registration not later than 15 days
prior to the anticipated date of filing with the SEC of a Registration
Statement, which notice shall offer the Sellers the opportunity to include in
such Registration Statement any of the Purchaser Shares held by the Sellers that
the Sellers may request be included therein (a "Piggyback Registration").
Notwithstanding the preceding sentence, Purchaser's obligation under this
Section 7.6(b) shall be limited to registrations as to which a Registration
Statement is to be filed (i) during the period beginning on the second
anniversary of the Closing Date and ending on December 31, 2009, and (ii) only
if the Sellers are subject to the volume restrictions set forth in Rule 144 of
the Securities Act. Subject to the provisions of this Agreement, Purchaser will
use its reasonable efforts to cause all the Purchaser Shares for which the
Sellers have requested registration to be registered under the Securities Act to
the extent required to permit the sale by the Sellers of such Purchaser Shares;
provided, that if a Piggyback Registration relates to an underwritten public
offering and the managing underwriter or underwriters believe that the inclusion
of all shares requested to be included in the proposed registration would
adversely affect the marketing of such shares, Purchaser may first include in
such registration all securities Purchaser proposes to sell, and the Sellers
shall accept a reduction (including a total elimination) in the number of shares
to be included in such registration, pro rata (among the Sellers, in accordance
with the percentages set forth in Section 3.2) with the other holders of
Purchaser Common Stock making requests for registration, on the basis of the
number of shares of Purchaser Common Stock so requested to be included by the
Sellers and the other selling shareholders. Nothing in this Section 7.6(b) shall
limit Purchaser's ability to withdraw a Registration Statement it has filed
either before or after effectiveness.
(c) Purchaser shall pay the expenses incurred in connection
with any proposed registration of securities by Purchaser under this Section
7.6, whether or not effected or consummated, including, without limitation, all
registration and filing fees, printing expenses, and fees and disbursements of
counsel and accountants for Purchaser.
SECTION 7.7. PURCHASER'S LIQUIDITY PROGRAM. Notwithstanding any other
provision set forth herein, with respect to all sales by the Sellers of
Purchaser Shares through the NASDAQ or any such other exchange, each Seller may
only sell such shares on any day after the first sale of Purchaser Common Stock
has occurred through the NASDAQ or such other exchange and on such day, Sellers
may only sell 1,000 Purchaser Shares in the aggregate for each 1,000 shares of
Purchaser Common Stock sold by unrelated third parties through the NASDAQ or
such other exchange on such day. In no event shall the plan of distribution of
Purchaser Shares include the use of a contractual underwriter, nor shall
Purchaser have any obligation to enter into an underwriting agreement with any
investment banking firm participating as a broker in the execution of any such
resales. Purchaser agrees that it will furnish to the Sellers such number of
prospectuses, prospectus supplements, or other documents incident to any
registration, qualification or compliance referred to herein as the Sellers from
time to time may reasonably request.
SECTION 7.8. EXCHANGE LISTING. Purchaser shall use its reasonable
efforts to effect, at or
34
<PAGE> 260
before the effective date of a Registration Statement, authorization for listing
on NASDAQ, upon official notice of issuance, of the shares of Purchaser Common
Stock to be issued pursuant to the transactions contemplated by this Agreement.
SECTION 7.9. PUBLIC STATEMENTS. Except as required by law or the
National Association of Securities Dealers ("NASD"), the Parties shall obtain
the written consent of the other Party prior to issuing any press release or any
written public statement with respect to this Agreement or the transactions
contemplated hereby and shall not issue any such press release or written public
statement prior to such consent, which will not be unreasonably withheld.
SECTION 7.10. SECTION 338(h)(10) ELECTION. At the Purchaser's election,
Sellers and Purchaser shall timely make a joint election under Section
338(h)(10) of the Code (and any corresponding elections under state, local or
foreign tax law) (collectively the "Section 338(h)(10) Election") with respect
to the purchase and sale of the stock of the Companies hereunder. Sellers will
pay any Tax imposed on them under the Tax laws as a direct result of the making
of the Section 338(h)(10) Election, and the Purchaser and the Companies will pay
any Tax imposed on them. The value of the assets is hereby agreed to be as
follows: all assets other than depreciable assets will be reflected at net book
value, depreciable assets at net tax basis, and all excess value will be
allocated to good will. Purchaser will prepare the election forms and provide
them to Sellers for Sellers' review at least 30 days before the date the Section
338(h)(10) Election is due. Sellers will execute and return the election forms
to Purchaser at least 15 days before the date the Section 338(h)(10) Election is
due, and Purchaser will file such election forms on or before the respective due
dates for each such election form.
SECTION 7.11. ALLOCATION OF PURCHASE PRICE. Within 60 days following
the Closing Date, Sellers, Purchaser and the Companies shall agree to an
allocation of the Purchase Price and the liabilities of the Companies (plus
other relevant items) among the Companies and (consistent with Section 7.10 and
Section 7.12 to the assets of the Companies for all purposes (including Tax and
financial accounting purposes). Sellers and Purchaser will file all Tax Returns
(including amended returns and claims for refund) and information reports in a
manner consistent with such allocation.
SECTION 7.12. CODE SECTION 754 ADJUSTMENTS. The Sellers agree to
cooperate with the Purchaser to elect under Code Section 754, to the extent
Purchaser deems such cooperation necessary or desirable, in order to elect to
adjust the tax basis of the assets of the Partnerships. The value of the assets
is hereby agreed to be as follows: all assets other than depreciable assets will
be reflected at net book value, depreciable assets at net tax basis, and all
excess value will be allocated to good will. "Partnership" means the Companies
identified as limited partnerships or limited liability companies on Schedule 1.
SECTION 7.13. CONTROL OF TAX RETURNS. Sellers shall be responsible for
preparing and filing all income Tax Returns of the Companies for periods ending
on or before the Closing Date (including short periods ending on the Closing
Date as a result of the application of Section 708, Section 338(h)(10) or
Section 1362 of the Code). The Parties agree to make the election under Section
1362(e)(3) to the extent applicable. Except as provided in the first sentence of
this
35
<PAGE> 261
Section, after the Closing, Purchaser and the Companies shall be responsible for
preparing and filing all Tax Returns of the Companies. The Parties shall provide
each other such information and assistance as may be necessary to prepare and
file the Tax Returns.
SECTION 7.14. SUPPLEMENTS TO DISCLOSURE SCHEDULES. From time to time
prior to the date ten (10) days prior to Closing, the Sellers may update the
Disclosure Schedules to this Agreement in order to make the information set
forth therein complete and accurate, so long as such an update does not disclose
an event, fact or condition which could have a Material Adverse Effect on one or
more of the Companies. In the event such an update discloses an event or
condition which could have a Material Adverse Effect on one or more of the
Companies, then Purchaser may terminate this Agreement if (i) the Purchaser
notified the Seller that Purchaser believed, in its reasonable business
judgment, that the updated information disclosed an event, fact or condition
which could have a Material Adverse Effect on one or more of the Companies, (ii)
the Purchaser negotiated in good faith with the Seller with respect to
adjustments, if any, to the terms of this Agreement as a result of the updated
information, and (iii) the Parties failed to agree on any such adjustments.
ARTICLE VIII
CONDITIONS TO CLOSING.
SECTION 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO CLOSE. The
respective obligations of each Party to close the transactions contemplated
hereby shall be subject to the fulfillment or waiver, if permissible, of the
following conditions on or prior to the Closing Date:
(a) no preliminary or permanent injunction or other order or
decree by any federal or state court which prevents the consummation of the
transactions contemplated hereby shall have been issued and remain in effect
(each Party agreeing to use its reasonable efforts to have any such injunction,
order or decree lifted); and
(b) no action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the consummation of
the transactions contemplated by this Agreement or make the consummation of the
transaction contemplated by this Agreement illegal; and
(c) the transactions contemplated by the Agreement and Plan of
Merger dated the same date as this Agreement by and among Purchaser, RESTEC
Acquisition Corp., Mr. Toretta, NETCO, Mrs. Guerrera, the Estate and the Trust
(the "Merger Agreement") shall have been consummated.
SECTION 8.2. CONDITIONS TO OBLIGATION OF THE SELLERS. Unless waived by
the Sellers, the obligation of the Sellers to close the transactions
contemplated herein shall be subject to the fulfillment of the following
additional conditions on or prior to the Closing Date:
36
<PAGE> 262
(a) Purchaser shall have performed in all material respects
(or in all respects in the case of any agreement containing any materiality
qualification) its agreements contained in this Agreement required to be
performed on or prior to the Closing Date;
(b) the representations and warranties of Purchaser contained
in this Agreement shall be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made and on and as of the
Closing Date as if made at and as of such date;
(c) the Sellers shall have received a certificate executed on
behalf of Purchaser by the President or a Vice President of the Purchaser with
respect to (a) and (b) above;
(d) the Sellers shall have received legal opinions from
in-house legal counsel to the Purchaser, dated the Closing Date, in a form
reasonably satisfactory to the Sellers; and
(e) the Purchaser shall have entered into a Consulting
Agreement with Mr. Toretta, individually, in the form attached hereto as Exhibit
D.
SECTION 8.3. CONDITIONS TO OBLIGATIONS OF PURCHASER. Unless waived by
Purchaser, the obligation of Purchaser to close the transactions contemplated
herein shall be subject to the fulfillment of the following additional
conditions on or prior to the Closing Date:
(a) the Sellers and the Companies shall have performed in all
material respects (or in all respects in the case of any agreement containing
any materiality qualification) their agreements contained in this Agreement
required to be performed on or prior to the Closing Date;
(b) the representations and warranties of the Sellers
contained in this Agreement shall be true and correct in all material respects
(or in all respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made and on and as of the
Closing Date as if made at and as of such date;
(c) since the date hereof, there shall have been no changes
that constitute, and no event or events shall have occurred which have resulted
in or constitute, a Material Adverse Effect;
(d) the Purchaser shall have obtained financing in an amount
and pursuant to terms satisfactory to Purchaser to consummate the transactions
contemplated in this Agreement;
(e) Purchaser shall have received legal opinions from legal
counsel to the Sellers, dated the Closing Date, in a form reasonable
satisfactory to Purchaser, and as described in Section 3.5(a);
37
<PAGE> 263
(f) the Sellers shall have executed Release of Claims
Agreements, in the form attached hereto as Exhibit C;
(g) Mr. Toretta, individually, shall have entered into a
Consulting Agreement, in the form attached hereto as Exhibit D;
(h) Mr. Toretta, individually, and the Grat shall have entered
into Covenant Not to Compete Agreements, in the form attached hereto as Exhibit
E;
(i) the Estate, Mrs. Guerrera, the Trust and the Trucking
Company shall have entered into Covenant Not to Compete Agreements, in the form
attached hereto as Exhibit F;
(j) Purchaser shall have received certificates representing
the certificated Ownership Interests duly endorsed for transfer as described in
Section 3.5(a)(i);
(k) Purchaser shall have received a certificate executed by
each of the Sellers with respect to (a) and (b) above; and
(l) Purchaser shall have entered into employment agreements
with Mark McCormick and Terry Szczesiul.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1. TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby abandoned at any time prior to the Closing in
the following manner:
(a) Any Seller shall have the right to terminate this
Agreement:
(i) if the representations and warranties of
Purchaser shall fail to be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made or, except in the case of
any such representations and warranties made as of a specified date, on and as
of any subsequent date as if made at and as of such subsequent date and such
failure shall not have been cured in all material respects (or in all respects
in the case of any representation or warranty containing any materiality
qualification) within 15 days after written notice of such failure is given to
Purchaser by the Seller;
38
<PAGE> 264
(ii) if the transactions contemplated hereby are not
completed by November 1, 1999, (provided that (a) the right to terminate this
Agreement under this Section 9.1(a)(ii) shall not be available to the Seller if
the failure of the Seller to fulfill any obligation to Purchaser under or in
connection with this Agreement has been the cause of or resulted in the failure
of the transactions contemplated hereby to occur on or before such date and (b)
Purchaser has not exercised its option to extend under Section 9.4);
(iii) if the transactions contemplated hereby are
enjoined by a final, unappealable court order; or
(iv) if Purchaser (A) fails to perform in any
material respect (or in all respects in the case of any covenant containing any
materiality qualification) any of its covenants in this Agreement and (B) does
not cure such default in all material respects (or in all respects in the case
of any covenant containing any materiality qualification) within 15 days after
notice of such default is given to Purchaser by the Seller.
(b) Purchaser shall have the right to terminate this
Agreement:
(i) if the representations and warranties of the
Sellers shall fail to be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made or, except in the case of
any such representations and warranties made as of a specified date, on and as
of any subsequent date as if made at and as of such subsequent date and such
failure shall not have been cured in all material respects (or in all respects
in the case of any representation or warranty containing any materiality
qualification) within 15 days after written notice of such failure is given to
the Sellers by Purchaser;
(ii) if the transactions contemplated hereby are not
completed by November 1, 1999, as such date may be extended pursuant to Section
9.4 below (provided that the right to terminate this Agreement under this
Section 9.1(b)(ii) shall not be available to Purchaser if the failure of
Purchaser to fulfill any obligation to the Sellers under or in connection with
this Agreement has been the cause of or resulted in the failure of the
transactions contemplated hereby to occur on or before such date);
(iii) if the Sellers (A) fail to perform in any
material respect (or in all respects in the case of any covenant containing any
materiality qualification) any of their covenants in this Agreement and (B) do
not cure such default in all material respects (or in all respects in the case
of any covenant containing any materiality qualification) within 15 days after
notice of such default is given to the Sellers by Purchaser; or
(iv) pursuant to Section 7.14.
(c) The Sellers and Purchaser mutually agree in writing.
SECTION 9.2. EFFECT OF TERMINATION. The following provisions shall
apply in the event of a termination of the Agreement:
39
<PAGE> 265
(a) If this Agreement is terminated by either Purchaser or the
Sellers pursuant to the provisions of Section 9.1, this Agreement shall
forthwith become void and there shall be no further obligations on the part of
the Sellers or Purchaser or its stockholders, directors, officers, employees,
agents or representatives. Notwithstanding the preceding sentence or any other
provision set forth herein, nothing in this Section 9.2 shall relieve any Party
from liability for any breach of this Agreement, including, without limitation,
any breach of the prohibition in Section 7.14 against updating the Disclosure
Schedules with information which could have a Material Adverse Effect on one or
more of the Companies.
(b) The Parties acknowledge and agree that Purchaser, as a
result of the actual damages Purchaser would sustain by reason of such negligent
or willful failure of the Sellers to perform their obligations hereunder, could
not be made whole by monetary damages, and it is accordingly agreed that
Purchaser shall have the right to elect, in addition to any and all other
remedies at law or in equity, to enforce specific performance under this
Agreement and the Sellers waive the defense in any such action for specific
performance that a remedy at law would be adequate.
SECTION 9.3. EXTENSIONS; WAIVER. At any time prior to the Closing Date,
the Parties may (a) extend the time for the performance of any of the
obligations or other acts of the other Parties, (b) waive any inaccuracies in
the representations and warranties contained herein or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions herein. Any agreement on the part of a Party to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such Party.
SECTION 9.4. PURCHASER'S OPTION TO EXTEND. At Purchaser's option
(exercised by providing written notice to the Sellers prior to November 1,
1999), the deadline of November 1, 1999 set forth in Sections 9.1(a)(ii) and
9.1(b)(ii), above, may be extended to December 31, 1999; provided, however, that
if the transactions contemplated hereby fail to close by the expiration of such
extended period, Purchaser shall pay to the Companies $300,000 in the aggregate
as reimbursement for the costs and expenses incurred by the Companies in
connection with the negotiation and execution of this Agreement, as well as the
Merger Agreement, unless the Sellers have breached this Agreement or the failure
of any Seller to fulfill any obligation to Purchaser under or in connection with
this Agreement has been the cause of or resulted in the failure of the
transactions contemplated hereby to close before the expiration of such extended
period.
ARTICLE X
INDEMNIFICATION AND LIMITATION ON LIABILITY
SECTION 10.1. THE SELLERS' INDEMNITY OBLIGATIONS.
(a) Each Seller shall, severally but not jointly (except for
the obligations of
40
<PAGE> 266
Mr. Toretta and the Grat, which shall be joint and several obligations of Mr.
Toretta and the Grat), indemnify and hold harmless the Companies (after the
Closing), Purchaser and the Companies' (after the Closing) and the Purchaser's
respective officers, directors, stockholders, partners, members, employees,
agents, representatives and Affiliates (each a "Purchaser Indemnified Party")
from and against any and all claims, actions, causes of action, arbitrations,
proceedings, losses, damages, remediations, liabilities, strict liabilities,
judgments, fines, penalties and expenses (including, without limitation,
reasonable attorneys' fees) (collectively, the "Indemnified Amounts") paid,
imposed on or incurred by a Purchaser Indemnified Party, directly or indirectly,
(i) relating to, resulting from or arising out of (x) any breach or
misrepresentation in any of the representations and warranties made by such
Seller in Article IV-A of this Agreement, or any certificate or instrument
delivered by such Seller in connection with this Agreement, or (y) any violation
or breach by such Seller of, or default by such Seller under, the terms of this
Agreement or any certificate or instrument delivered by such Seller in
connection with this Agreement, or (ii) relating to, resulting from or arising
out of any allegation of a third party of the events described in Sections
10.1(a)(i), above.
(b) The Sellers shall, jointly and severally, indemnify and
hold harmless the Purchaser and the Companies (after the Closing) and the other
Purchaser Indemnified Parties from and against any and all Indemnified Amounts
paid, imposed on or incurred by a Purchaser Indemnified Party, directly or
indirectly, (i) relating to, resulting from or arising out of any breach or
misrepresentation in any of the representations and warranties made by the
Sellers in Article V of this Agreement, including without limitation with
respect to environmental matters, or any certificate or instrument delivered in
connection with this Agreement or (ii) relating to, resulting from or arising
out of any allegation of a third party of the events described in Sections
10.1(b)(i), above.
(c) For purposes of Section 10.1(a) and (b), Indemnified
Amounts shall include without limitation those Indemnified Amounts ARISING OUT
OF THE STRICT LIABILITY (INCLUDING BUT NOT LIMITED TO STRICT LIABILITY ARISING
PURSUANT TO ENVIRONMENTAL LAWS) OR NEGLIGENCE OF ANY OF THE PARTIES, INCLUDING
ANY PURCHASER INDEMNIFIED PARTY, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR
CONCURRENT, ACTIVE OR PASSIVE.
SECTION 10.2. PURCHASER'S INDEMNITY OBLIGATIONS. Purchaser shall
indemnify and hold harmless the Sellers and the Sellers' agents, representatives
and Affiliates (each a "Sellers Indemnified Party") from and against any and all
Indemnified Amounts incurred by a Sellers Indemnified Party as a result of (a)
any breach or misrepresentation in any of the representations and warranties
made by or on behalf of Purchaser in this Agreement or any certificate or
instrument delivered in connection with this Agreement, or (b) any violation or
breach by Purchaser of or default by Purchaser under the terms of this Agreement
or any certificate or instrument delivered in connection with this Agreement.
SECTION 10.3. INDEMNIFICATION PROCEDURES. All claims for
indemnification under this Agreement shall be asserted and resolved as follows:
41
<PAGE> 267
(a) Promptly after receipt by an indemnified party under
Section 10.1 or 10.2 of notice of the commencement of any third-party claim or
claims asserted against it ("Third-Party Claim"), such indemnified party will,
if a claim is to be made against an indemnifying party under such Section, give
notice to the indemnifying party of the commencement of such claim, but the
failure to notify the indemnifying party will not relieve the indemnifying party
of any liability that it may have to any indemnified party, except to the extent
that the indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnifying party's failure to give such notice.
(b) If any Third-Party Claim referred to in Section 10.3(a) is
brought against an indemnified party and it gives notice to the indemnifying
party of the commencement of such Third-Party Claim, the indemnifying party
will, unless the claim involves Taxes, be entitled to participate in such
Third-Party Claim and, to the extent that it wishes (unless (i) the indemnifying
party is also a party to such Third-Party Claim and the indemnified party
determines in good faith that joint representation would be inappropriate, or
(ii) the indemnifying party fails to provide reasonable assurance to the
indemnified party of its financial capacity to defend such Third-Party Claim and
provide indemnification with respect to such Third-Party Claim), to assume the
defense of such Third-Party Claim with counsel satisfactory to the indemnified
party and, after notice from the indemnifying party to the indemnified party of
its election to assume the defense of such Third-Party Claim, the indemnifying
party will not, as long as it diligently conducts such defense, be liable to the
indemnified party under this Article X for any fees of other counsel or any
other expenses with respect to the defense of such Third-Party Claim, in each
case subsequently incurred by the indemnified party in connection with the
defense of such Third-Party Claim, other than reasonable costs of investigation.
If the indemnifying party assumes the defense of a Third-Party Claim, (i) it
will be conclusively established for purposes of this Agreement that the claims
made in that Third-Party Claim are within the scope of and subject to
indemnification; (ii) no compromise or settlement of such claims may be effected
by the indemnifying party without the indemnified party's consent unless (A)
there is no finding or admission of any violation of law, rule, regulation or
other legal requirement or any violation of the rights of any Person and no
effect on any other claims that may be made against the indemnified party, (B)
the indemnified party receives as part of such settlement a legal, binding and
enforceable unconditional satisfaction and/or release, in form and substance
reasonably satisfactory to it, providing that such Third-Party Claim and any
claimed liability of the indemnified party with respect thereto is being fully
satisfied by reason of such compromise or settlement and that the indemnified
party is being released from any and all obligations or liabilities it may have
with respect thereto, and (C) the sole relief provided is monetary damages that
are paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any Third-Party Claim and the indemnifying party does not,
within ten days after the indemnified party's notice is given, give notice to
the indemnified party of its election to assume the defense of such Third-Party
Claim, the indemnifying party will be bound by any determination made in such
Third-Party Claim or any compromise or settlement effected by the indemnified
party.
(c) Notwithstanding the foregoing, if an indemnified party
determines in good
42
<PAGE> 268
faith that there is a reasonable probability that a Third-Party Claim may
adversely affect it or its Affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
indemnified party may, by notice to the indemnifying party, assume the exclusive
right to defend, compromise, or settle such Third-Party Claim, but the
indemnifying party will not be bound by any determination of a Third-Party Claim
so defended or any compromise or settlement effected without its consent (which
may not be unreasonably withheld).
(d) Sellers hereby consent to the non-exclusive jurisdiction
of any court in which a Third-Party Claim is brought against any indemnified
party for purposes of any claim that an indemnified party may have under this
Agreement with respect to such Third-Party Claim or the matters alleged therein,
and agree that process may be served on Sellers with respect to such a claim
anywhere in the world.
(e) In the event any indemnified party should have a claim
against any indemnifying party hereunder that does not involve a Third-Party
Claim, the indemnified party shall transmit to the indemnifying party a written
notice (the "Indemnity Notice") describing in reasonable detail the nature of
the claim, an estimate of the amount of damages attributable to such claim to
the extent feasible (which estimate shall not be conclusive of the final amount
of such claim) and the basis of the indemnified party's request for
indemnification under this Agreement.
SECTION 10.4. LIMITATION OF SELLERS' LIABILITY.
(a) Notwithstanding anything to the contrary contained in
Article X, the aggregate liability of the Estate for any event or occurrence
giving rise to the Estate being required to indemnify Purchaser Indemnified
Parties pursuant to Section 10.1 of this Agreement shall be limited to the cash
portion of the Purchase Price received by the Estate plus any amounts deducted
from such cash portion of the Purchase Price pursuant to Section 3.2(a)(ii)(1)
and (2).
(b) Notwithstanding anything to the contrary contained in
Article X, the aggregate liability of each of Mr. Toretta and the Grat for any
event or occurrence giving rise to such Seller being required to indemnify
Purchaser Indemnified Parties pursuant to Section 10.1 of this Agreement shall
be limited to the combined cash portions of the Purchase Price received by Mr.
Toretta and the Grat plus any amounts deducted from such cash portions of the
Purchase Price pursuant to Section 3.2(a)(ii)(1) and (2).
(c) Purchaser Indemnified Parties are entitled to
indemnification pursuant to Section 10.1 as follows:
(i) until and including the first anniversary of the
Closing Date, only if the amount of any Indemnified Amount, individually or in
the aggregate with all other Indemnified Amounts hereunder and under the terms
of the Merger Agreement, exceeds Two Hundred Fifty Thousand Dollars ($250,000),
and then only to the extent of such excess; and
43
<PAGE> 269
(ii) after the first anniversary of the Closing Date, only if
the amount of any Indemnified Amount, individually or in the aggregate with all
other Indemnified Amounts hereunder and under the terms of the Merger Agreement
since the Closing Date, exceeds Five Hundred Thousand Dollars ($500,000), and
then only to the extent of such excess.
SECTION 10.5. LIMITATION OF PURCHASER'S LIABILITY. Sellers Indemnified
Parties are entitled to indemnification pursuant to Section 10.2 as follows:
(i) until and including the first anniversary of the Closing
Date, only if the amount of any Indemnified Amount, individually or in the
aggregate with all other Indemnified Amounts hereunder and under the terms of
the Merger Agreement, exceeds Two Hundred Fifty Thousand Dollars ($250,000), and
then only to the extent of such excess; and
(ii) after the first anniversary of the Closing Date, only if
the amount of any Indemnified Amount, individually or in the aggregate, with all
other Indemnified Amounts hereunder and under the terms of the Merger Agreement
since the Closing Date, exceeds Five Hundred Thousand Dollars ($500,000), and
then only to the extent of such excess.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1. SURVIVAL. The representations, warranties, covenants and
agreements (including, but not limited to, indemnification obligations) set
forth in this Agreement and in any certificate or instrument delivered in
connection herewith shall be continuing and shall survive the Closing for a
period of two years following the date of Closing; provided, however, that in
the case of all such representations, warranties, covenants and agreements
(including, but not limited to, indemnification obligations) there shall be no
such termination with respect to any such representation, warranty, covenant or
agreement as to which a bona fide claim has been asserted by written notice of
such claim delivered to the Party or Parties making such representation,
warranty, covenant or agreement prior to the expiration of the survival period;
provided, further, that (i) the representations and warranties set forth in
Sections 4A.1 (Ownership), 4A.2 (Authority; Non-Contravention; Approvals) and
5.2 (Capitalization) hereof shall survive the Closing indefinitely, (ii) Section
5.12 (Taxes) shall survive the Closing for the greater of two years or the
statutory survival period applicable to Taxes, (iii) the covenants contained in
this Agreement to be performed after the Closing shall survive until fully
performed; and (iv) the indemnification obligations of the Sellers set forth in
Section 10.1(a) and Section 10.1(b) shall survive the Closing until the
termination of the respective representations and warranties.
44
<PAGE> 270
SECTION 11.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by a
nationally recognized overnight delivery service, mailed by registered or
certified mail (return receipt requested) or sent via facsimile to the Parties
at the following addresses (or at such other address for a Party as shall be
specified by like notice):
(a) If to Purchaser or the Companies (on or after
Closing), to:
Synagro Technologies, Inc.
1800 Bering Drive, Suite 1000
Houston, Texas 77057
Attention: Mark A. Rome
Telecopy: 713/369-1760
with a copy to:
Locke Liddell & Sapp LLP
600 Travis, Suite 3200
Houston, Texas 77002
Attention: Michael T. Peters
Telecopy: 713/223-3717
(b) If to Mr. Toretta or the Companies (prior to
Closing), to:
Paul A. Toretta
30 Lakewood Circle
Greenwich, Connecticut 06830
Telecopy: 203/633-9064
with a copy to:
Edward M. Kane, Esq.
Richards & O'Neil, LLP
43 Arch Street
Greenwich, Connecticut 06830
Telecopy: 203/869-6565
(c) If to Frances A. Guerrera, as
Executrix of the Estate of Richard J. Guerrera
or as Co-Trustee of the Richard J. Guerrera
Revocable Trust, to:
Frances A. Guerrera
31 Munson Road
Middlebury, Connecticut 06762
45
<PAGE> 271
with a copy to:
John J. Palmeri, Esq.
Palmeri, Rock & Talbot, P.C.
100 Hinman Street
P.O. Box 277
Cheshire, Connecticut 06410
Telecopy: 203/250-1795
and
Donald F. Dwyer
c/o Astra Zeneca
725 Chesterbrook Blvd.
Wayne, Pennsylvania 19087
Telecopy: 610/695-4491
(d) If to Frances A. Guerrera, individually, to:
Frances A. Guerrera
31 Munson Road
Middlebury, Connecticut 06762
with a copy to:
Shipman & Goodwin, LLP
One Landmark Square
Stamford, Connecticut 06901
Attention: Steven M. Gold, Esq.
Telecopy: 203/324-8191
and
Donald F. Dwyer
c/o Astra Zeneca
725 Chesterbrook Blvd.
Wayne, Pennsylvania 19087
Telecopy: 610/695-4491
46
<PAGE> 272
(e) If to Robert Dionne, as Co-Trustee of the Richard J.
Guerrera Revocable Trust, to:
Robert Dionne (Personal and Confidential)
c/o R. J. Guerrera, Inc.
P.O. Box 700
Naugatuck, Connecticut 06770
Telecopy: 203/723-5640
with a copy to:
John J. Palmeri, Esq.
Palmeri, Rock & Talbot, P.C.
100 Hinman Street
P.O. Box 277
Cheshire, Connecticut 06410
Telecopy: 203/250-1795
(f) If to Eileen Toretta, as Trustee of the Paul A.
Toretta 1998 Grat, to:
Eileen Toretta
30 Lakewood Circle
Greenwich, Connecticut 06830
Telecopy: 203/633-9064
with a copy to:
Jerome Caulfield, Esq.
Carter, Ledyard & Milburn
Two Wall Street
New York, New York 10005
Telecopy: 212/732-3232
SECTION 11.3. INTERPRETATION. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the
interpretation of this Agreement. In this Agreement, unless a contrary intention
is specifically set forth, (i) the words "herein", "hereof" and "hereunder" and
other words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision and (ii) reference to any
Article or Section means such Article or Section hereof. No provision of this
Agreement shall be interpreted or construed against any Party solely because
such Party or its legal representative drafted such provision.
SECTION 11.4. MISCELLANEOUS. This Agreement (including the documents
and instruments referred to herein and the Schedules and Exhibits attached
hereto) constitutes the
47
<PAGE> 273
entire agreement and supersedes all other prior agreements and understandings,
both written and oral, among the Parties, or any of them, with respect to the
subject matter hereof. Neither this Agreement nor the rights, interests and
obligations arising pursuant to this Agreement (including the documents and
instruments referred to herein and the Schedules and Exhibits attached hereto)
shall not be assigned by operation of law or otherwise except that Purchaser may
assign this Agreement to any other wholly-owned Subsidiary of Purchaser, but no
such assignment shall relieve the Purchaser of its obligations hereunder.
SECTION 11.5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL
RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE
STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE.
SECTION 11.6. BINDING ARBITRATION.
(a) General. Notwithstanding any provision of this Agreement
to the contrary, upon the request of any Party (defined for the purpose of this
provision to include Affiliates, principals and agents of any such Party), any
dispute, controversy or claim arising out of, relating to, or in connection
with, this Agreement or any agreement executed in connection herewith or
contemplated hereby, or the breach, termination, interpretation, or validity
hereof or thereof (hereinafter referred to as a "Dispute"), shall be finally
resolved by mandatory and binding arbitration in accordance with the terms
hereof. Any Party may bring an action in court to compel arbitration of any
Dispute. Any Party who fails or refuses to submit any Dispute to binding
arbitration following a lawful demand by the opposing Party shall bear all costs
and expenses incurred by the opposing Party in compelling arbitration of such
Dispute.
(b) Governing Rules. The arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association in effect at the time of the arbitration, except as they may be
modified herein or by mutual agreement of the Parties. The seat of the
arbitration shall be New York, New York. Notwithstanding Section 11.6, the
arbitration and this clause shall be governed by the Federal Arbitration Act, 9
U.S.C. ss.ss. 1 et seq. (the "Federal Arbitration Act"). The arbitrator shall
award all reasonable and necessary costs (including the reasonable fees and
expenses of counsel) incurred in conducting the arbitration to the prevailing
Party in any such Dispute. The Parties expressly waive all rights whatsoever to
file an appeal against or otherwise to challenge any award by the arbitrators
hereunder; provided, that the foregoing shall not limit the rights of any Party
to bring a proceeding in any applicable jurisdiction to confirm, enforce or
enter judgment upon such award (and the rights of the other Party, if such
proceeding is brought to contest such confirmation, enforcement or entry of
judgment, but only to the extent permitted by the Federal Arbitration Act).
(c) No Waiver; Preservation of Remedies. No provision of, nor
the exercise of any rights under this Agreement shall limit the right of any
Party to apply for injunctive relief or similar equitable relief with respect to
the enforcement of this Agreement or any agreement executed in connection
herewith or contemplated hereby, and any such action shall not be deemed an
election of remedies. Such rights can be exercised at any time except to the
extent
48
<PAGE> 274
such action is contrary to a final award or decision in any arbitration
proceeding. The Parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the Parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof. The institution and maintenance of an action for injunctive relief or
similar equitable relief shall not constitute a waiver of the right of any
Party, including without limitation the plaintiff, to submit any Dispute to
arbitration nor render inapplicable the compulsory arbitration provisions of
this Agreement.
(d) Arbitration Proceeding. In addition to the authority
conferred on the arbitration tribunal by the rules specified above, the
arbitration tribunal shall have the authority to order reasonable discovery,
including the deposition of party witnesses and production of documents. The
arbitral award shall be in writing, state the reasons for the award, and be
final and binding on the Parties with no right of appeal. All statutes of
limitations that would otherwise be applicable shall apply to any arbitration
proceeding. Any attorney-client privilege and other protection against
disclosure of confidential information, including without limitation any
protection afforded the work-product of any attorney, that could otherwise be
claimed by any Party shall be available to and may be claimed by any such Party
in any arbitration proceeding. No Party waives any attorney-client privilege or
any other protection against disclosure of confidential information by reason of
anything contained in or done pursuant to or in connection with this Agreement.
Each Party agrees to keep all Disputes and arbitration proceedings strictly
confidential, except for disclosures of information to the Parties' legal
counsel or auditors or those required by applicable law. The arbitrators shall
determine the matters in dispute in accordance with the substantive law of the
State of Delaware, without regard to conflict of law rules. The obligation to
arbitrate any dispute shall be binding upon the successors and assigns of each
of the Parties.
(e) Appointment of Arbitrators. The arbitration shall be
conducted by three (3) arbitrators. The Party initiating arbitration (the
"Claimant") shall appoint its arbitrator in its request for arbitration (the
"Request"). The other Party (the "Respondent") shall appoint its arbitrator
within 30 days after receipt of the Request and shall notify the Claimant of
such appointment in writing. If the Respondent fails to appoint an arbitrator
within such 30-day period, the arbitrator named in the Request shall decide the
controversy or claim as sole arbitrator. Otherwise, the two (2) arbitrators
appointed by the Parties shall appoint a third (3rd) arbitrator within 30 days
after the Respondent has notified Claimant of the appointment of the
Respondent's arbitrator. When the third (3rd) arbitrator has accepted the
appointment, the two (2) Party-appointed arbitrators shall promptly notify the
Parties of the appointment. If the two (2) arbitrators appointed by the Parties
fail to appoint a third (3rd) arbitrator or so to notify the Parties within the
time period prescribed above, then the appointment of the third (3rd) arbitrator
shall be made by the American Arbitration Association, which shall promptly
notify the Parties of the appointment. The third (3rd) arbitrator shall act as
Chair of the panel.
(f) Other Matters. This arbitration provision constitutes the
entire agreement of the Parties with respect to its subject matter and
supersedes all prior discussions,
49
<PAGE> 275
arrangements, negotiations and other communications on dispute resolution. This
arbitration provision shall survive any termination, amendment, renewal,
extension or expiration of this Agreement or any agreement executed in
connection herewith or contemplated hereby unless the Parties otherwise
expressly agree in writing. The obligation to arbitrate any dispute shall be
binding upon the successors and assigns of each of the Parties.
SECTION 11.7. AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of all of the Parties.
SECTION 11.8. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
SECTION 11.9. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each Party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other Person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 11.10. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 11.11. GUARANTEE. Frances Guerrera, individually and as
Co-Trustee of the Trust, and Robert Dionne, as Co-Trustee of the Trust, jointly
and severally, unconditionally and irrevocably guarantee the full, prompt and
complete performance of all obligations of the Estate and Trust, as the case may
be, under this Agreement and the documents executed and delivered by the Estate
and Trust in connection with the transactions contemplated in this Agreement.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
50
<PAGE> 276
IN WITNESS WHEREOF, the Parties have executed and delivered this
Agreement effective as of the date first written above.
SYNAGRO TECHNOLOGIES, INC.
By: /s/ Ross M. Patten
-------------------------------------
Ross M. Patton, Chairman and Chief
Executive Officer
/s/ Frances A. Guerrera
----------------------------------------
Frances A. Guerrera, individually
THE RICHARD J. GUERRERA REVOCABLE
TRUST
By: /s/ Frances A. Guerrera
-------------------------------------
Frances A. Guerrera, Co-Trustee
By: /s/ Robert Dionne
-------------------------------------
Robert Dionne, Co-Trustee
THE SELLERS:
/s/ Paul A. Toretta
----------------------------------------
Paul A. Toretta, individually
THE ESTATE OF RICHARD J. GUERRERA
By: /s/ Frances A. Guerrera
-------------------------------------
Frances A. Guerrera, Executrix
THE PAUL A. TORETTA 1998 GRAT
By: /s/ Eileen Toretta
-------------------------------------
Eileen Toretta, Trustee
51
<PAGE> 277
EXHIBIT A
GLOSSARY
For purposes of this Agreement, the following terms shall have the
meaning specified or referred to below when capitalized (or if not capitalized,
unless the context clearly requires otherwise) when used in this Agreement.
"Accounting Arbitrator" shall mean an independent accounting firm
selected by mutual agreement of the Auditor and the Earn Out Representative's
independent accounting firm.
"Affiliate(s)" with respect to any Person, means any Person directly or
indirectly controlling, controlled by or under common control with such Person,
and any natural person who is an officer, director or partner of such Person and
any members of their immediate families living within the same household. A
Person shall be deemed to control another Person if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such other Person, whether through the ownership of
voting securities, by contract or otherwise.
"Auditor" shall have the meaning given in Section 3.4.
"Average Purchaser Common Stock Price" means the average of the Daily
Per Share Prices for the twenty(20) consecutive trading days beginning on the
twenty-first (21st) trading day prior to the last day of the applicable calendar
year for purposes of Section 3.4.
"Business Facility" or "Business Facilities" includes any property
(whether real or personal) which the Companies or any of their Subsidiaries
currently lease, operate, or own or manage in any manner or which the Companies
or any of their Subsidiaries or any of their respective organizational
predecessors formerly leased, operated, owned or managed in any manner.
"Code" means the Internal Revenue Code of 1986, as amended, or any
amending or superseding tax laws of the United States of America.
"Daily Per Share Price" means the per share closing price on the NASDAQ
Small Cap Exchange (the "NASDAQ") of Purchaser Common Stock (as reported by The
Wall Street Journal for that day).
"Earn Out Payment" shall have the meaning given in Section 3.4.
"Earn Out Period" shall have the meaning given in Section 3.4.
"Earn Out Representative" means Paul A. Toretta, or, if Mr. Toretta
dies, resigns or for any reason refuses or is unable to act, a substitute
specified in a written notice of substitution
Exhibit A - Page 1
<PAGE> 278
delivered to the Purchaser and signed by the Grat and Mr. Toretta (or his legal
representative, heirs, successors or designees).
"Earnings" shall mean, with respect to any period, the total revenues
of the Companies during such period after deduction for direct operating
expenses, other expenses, interest expense, depreciation and amortization but
before deduction for income taxes; provided, however, that in determining
Earnings there shall be no deduction for (or inclusion as an expense in respect
of) (a) any expenses directed by the Purchaser or its Affiliates in excess of
those reasonably required to operate the Companies in accordance with past
practices (as illustrated generally by the adjusted income statement for the
trailing twelve (12) month period ended July 31, 1999, attached hereto as
Schedule 3.4(j) and subject to normal inflation increases), unless approved in
writing by the Earn Out Representative before being incurred; (b) any management
fees charged by the Purchaser or its Affiliates to the Companies; (c) any
allocation of corporate overhead of the Purchaser or its Affiliates, provided,
however, that the Purchaser may allocate a reasonable amount to the Companies,
consistent with the Companies' past expenditures, for accounting services
(including fifty percent (50%) of the cost of any special accounting services
rendered by the Auditor and Accounting Arbiter pursuant to Section 3.4 hereof);
(d) any expenses incurred in connection with the transactions contemplated by
this Agreement; (e) any amortization of goodwill recognized in connection with
the transactions contemplated by this Agreement or any purchase accounting
adjustments recorded by the Purchaser or its Affiliates in connection with the
transactions contemplated by this Agreement; and (f) any extraordinary or
non-recurring transition expenses resulting from the transactions contemplated
by this Agreement, including, without limitation, lease and insurance
cancellation penalties.
"Earnings Dispute Notice" shall have the meaning given in Section 3.4.
"Environmental Claim(s)" means any claim; litigation; demand; action;
cause of action; suit; loss; cost, including, but not limited to, attorneys'
fees, diminution in value, and expert's fees; damage; punitive damage; fine,
penalty, expense, liability, criminal liability, strict liability, judgment,
governmental or private investigation and testing; notification of status of
being potentially responsible for clean-up of any facility or for being in
violation or in potential violation of any Environmental Law; proceeding;
consent or administrative orders, agreements or decrees; lien; personal injury
or death of any person; or property damage, whether threatened, sought, brought
or imposed, that is related to or that seeks to recover losses, damages, costs,
expenses and/or liabilities related to, or seeks to impose liability for: (i)
improper use or treatment of wetlands, pinelands or other protected land or
wildlife; (ii) noise; (iii) radioactive materials (including naturally occurring
radioactive materials ("NORM")); (iv) explosives; (v) pollution, contamination,
preservation, protection, decontamination, remediation or clean-up of the air,
surface water, groundwater, soil or protected lands; (vi) solid, gaseous or
liquid waste generation, handling, discharge, release, threatened release,
treatment, storage, disposal or transportation; (vii) exposure of persons or
property to Materials or Environmental Concern and the effects thereof; (viii)
the release or threatened release (into the indoor or outdoor environment),
generation, extraction, mining, beneficiating, manufacture, processing,
distribution in commerce, use, transfer, transportation, treatment, storage,
disposal of Remediation of Materials of Environmental Concern; (ix) injury to,
death of or threat to the
Exhibit A - Page 2
<PAGE> 279
health or safety of any person or persons caused directly or indirectly by
Materials of Environmental Concern; (x) destruction caused directly or
indirectly by Materials of Environmental Concern or the release or threatened
release of any Materials of Environmental Concern or any property (whether real
or personal); (xi) the implementation of spill prevention and/or disaster plans
relating to Material of Environmental Concern; (xiii) community right-to-know
and other disclosure laws; or (xiii) maintaining, disclosing or reporting
information to Governmental Authorities of any other third person under any
Environmental Law. The term, "Environmental Claim," also includes, without
limitation, any losses, damages, costs, expenses and/or liabilities incurred in
testing, if such testing confirms the presence of Materials of Environmental
Concern.
"Environmental Law(s)" means any federal, state, local or foreign law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, guidance document, order, consent agreement,
order or consent judgment, decree, injunction, requirement or agreement with any
governmental entity or any judicial or administrative decision relating to (x)
the protection, preservation or restoration of the environment (including,
without limitation, air, water, vapor, surface water, groundwater, drinking
water supply, surface land, subsurface land, plant and animal life or any other
natural resource) or to human health or safety, (y) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, application, production, release or disposal of Materials of
Environmental Concern, in each case as amended from time to time, or (z) health,
worker protection or community's right to know. The term "Environmental Law"
includes, without limitation, (i) the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal Act and the Federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
and the Federal Occupational Safety and Health Act of 1970, each as amended from
time to time, and (ii) any common law or equitable doctrine (including, without
limitation, injunctive relief and tort doctrines such as negligence, nuisance,
trespass and strict liability) that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of,
effects of or exposure to any Materials of Environmental Concern.
"Environmental Permit(s)" means all permits, licenses, certificates,
registrations, identification numbers, applications, consents, approvals,
variances, notices of intent, and exemptions necessary for the ownership, use
and/or operation of any current Business Facility or to conduct the Companies'
business as currently conducted in compliance with Requirements of Environmental
Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"GAAP" means U.S. generally accepted accounting principals applied on a
consistent basis.
Exhibit A - Page 3
<PAGE> 280
"Governmental Authority" or "Governmental Authorities" means any nation
or government, any state or political subdivision thereof and any agency or
entity exercising executive, legislative, judicial, regulatory or administrative
functions of, or pertaining to, government.
"Indebtedness" means the aggregate long-term indebtedness, net of
sinking fund and other cash reserves described on Schedule 3.2 hereto that are
not included in Net Working Capital, and other long-term liabilities of the
Companies determined in accordance with GAAP.
"Lien(s)" means any mortgage, pledge, hypothecation, security interest,
encumbrance, claim, right of first refusal, option, lien, charge, condition,
restriction or burden of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof and the filing of, or agreement to give, any financing
statement under the Uniform Commercial Code of any jurisdiction).
When used in this Agreement in connection with the Companies and their
Subsidiaries, or the Purchaser and its Subsidiaries, as the case may be,
"Material Adverse Effect" means any event, occurrence, fact, condition, change,
development or effect that is or could reasonably be anticipated to be
materially adverse to the business, assets (including intangible assets),
liabilities, financial condition, results of operations, properties (including
intangible properties) or business prospects of the Companies and all of their
Subsidiaries or the Purchaser and all of its Subsidiaries, as applicable, taken
as a whole.
"Materials of Environmental Concern" means: (i) those substances
included within the statutory and/or regulatory definitions or listings of
"hazardous substance," "medical waste," "special waste," "hazardous waste,"
"extremely hazardous substance," "regulated substance," "solid waste,"
"hazardous materials," or "toxic substances," under any Environmental Law; (ii)
any material, waste or substance which is or contains: (A) petroleum, oil or a
fraction thereof, (B) explosives, or (C) radioactive materials (including
naturally occurring radioactive materials); and (iii) such other substances,
materials, or wastes that are or become classified or regulated as hazardous or
toxic under any applicable federal, state or local law or regulation.
"Net Working Capital" means the aggregate current assets of the
Companies less the aggregate current liabilities of the Companies determined in
accordance with GAAP.
"New England" means Connecticut, Maine, Massachusetts, New Hampshire,
Rhode Island and Vermont.
"Person" means any individual, partnership, joint venture, corporation,
limited liability company, association, trust, unincorporated organization,
government or agency or subdivision thereof or any other entity.
"Purchaser Common Stock" means validly issued, fully paid and
nonassessable shares of common stock, par value $.002 per share, of Purchaser.
Exhibit A - Page 4
<PAGE> 281
"Purchaser Shares" means the shares of Purchaser Common Stock issuable
to Mr. Toretta as determined pursuant to Section 3.4 of the Agreement.
"Remediation" means any action necessary to: (i) comply with and ensure
compliance with the Requirements of Environmental Laws and (ii) the taking of
all reasonably necessary precautions to protect against and/or respond to,
remove or remediate or monitor the release or threatened release of Materials of
Environmental Concern at, on, in, about, under, within or near the air, soil,
surface water, groundwater or soil vapor at any Business Facility of the
Companies or any of their Subsidiaries or of any property affected by the
business, operations, acts omissions, or Materials of Environmental Concern of
the Companies or any of their Subsidiaries.
"Requirement(s) of Environmental Law(s)" means all requirements,
conditions, restrictions or stipulations of Environmental Laws imposed upon or
related to the Companies or any of their Subsidiaries or the assets, Business
Facilities and/or the business of the Companies or any of their Subsidiaries.
"Subsidiary" or "Subsidiaries" shall mean, when used with reference to
an entity, any other entity of which securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions, or a majority of the outstanding
voting securities of which, are owned directly or indirectly by such entity.
"Supplies" means all office supplies, kitchen supplies, laundry
supplies, medical supplies, spare parts, safety equipment, maintenance supplies,
other supplies used or consumed in the Business and other similar items which
exist on the Closing Date.
"Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise, real
or personal property, sales, withholding, social security, occupation, use,
severance, environmental, license, net worth, payroll, employment, franchise,
transfer and recording taxes, fees and charges, imposed by the IRS or any other
taxing authority (whether domestic or foreign including, without limitation, any
state, county, local or foreign government or any subdivision or taxing agency
thereof (including a United States possession)), whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest whether paid or received, fines, penalties or additional amounts
attributable to, or imposed upon, or with respect to, any such taxes, charges,
fees, levies or other assessments.
"Tax Return(s)" shall mean any report, return, document, declaration or
other information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including, without
limitation, information returns and documents (i) with respect to or
accompanying payments of estimated Taxes or (ii) with respect to or accompanying
requests for the extension of time in which to file any such report, return,
document, declaration or other information, including any schedule or attachment
thereto and any amendment thereof.
Exhibit A - Page 5
<PAGE> 282
Friday, January 07, 2000
Paul A. Toretta
Don F. Dwyer
Residual Technologies
55 Old Field Point Road
Greenwich, CT 06830
Subject: Termination Extensions
================================================================================
Dear Paul and Don:
This letter (the "Letter Agreement") is intended to amend the following
agreements:
o Purchase and Sale Agreement (the "Sale Agreement"), dated as of
October 20, 1999, by and among Synagro Technologies, Inc. (the
"Purchaser"), Paul A. Toretta, Eileen Toretta as Trustee of the
Paul A. Toretta 1998 GRAT (the "GRAT"), Frances A. Guerrera,
Frances A. Guerrera as Executrix of the Estate of Richard J.
Guerrera, and Frances A. Guerrera and Robert Dionne as
Co-Trustees of the Richard J. Guerrera Revocable Trust Under
Agreement dated November 2, 1998 (collectively, the
"Shareholders"), and
o Agreement and Plan of Merger (the "Merger Agreement"), dated
October 20, 1999, by and among Synagro Technologies, Inc., ResTec
Acquisition Corp., New England Treatment Company, Inc. ("NETCO"),
Paul A. Toretta, Frances A. Guerrera, Frances A. Guerrera,
Frances A. Guerrera as Executrix of the Estate of Richard J.
Guerrera, and Frances A. Guerrera and Robert Dionne as
Co-Trustees of the Richard J. Guerrera Revocable Trust Under
Agreement dated November 2, 1998
This Letter Agreement is to confirm and give effect to the following
agreements between the Purchaser and the Shareholders:
<PAGE> 283
1. The optional extension date of December 31, 1999 set forth in
Section 9.4 of the Sale Agreement and Section 9.4 of the Merger Agreement,
including the obligation to pay the $300,000 breakup fee referred to
therein, is hereby extended to January 31, 2000. It is anticipated that the
actual closings of the Sale Agreement and the Merger Agreement will take
place during the week of January 10, 2000.
In consideration for this extension, the Purchaser and the
Shareholders agree to the following:
2. It is hereby agreed that the number of shares of Parent Common
Stock to be issued in accordance with Section 3.1(a)(i) of the Merger
Agreement shall be fixed at 325,000. However, this number shall be reduced
by the amount of any Indebtedness that NETCO has at closing and the amount,
if any, by which NETCO's Net Working Capital as of closing is less than
$910,000. The reduction in shares shall be calculated by dividing the sum
of NETCO's Indebtedness at closing and the shortfall in Net Working Capital
by 6.1538. It is also agreed that (i) the "amount of cash and liabilities"
in Section 3.3(d) of the Merger Agreement shall be changed to $910,000 from
$260,000, (ii) the "amount of cash and liabilities" in Section 3.3(d) of
the Sale Agreement shall be changed to $400,000 from $1,050,000, and (iii)
the "Net Working Capital" amount in Section 3.2(i) of the Sale Agreement
shall be changed to $490,000 from $1,140,000.
3. The Purchaser agrees to permit NETCO to issue shares of its
nonvoting common stock to Janet Cordano, Mark McCormick, and Terry
Szczesiul, in lieu of a portion of the bonus payments otherwise payable to
such employees in connection with the consummation of the transactions
contemplated by the Merger Agreement. These shares of nonvoting common
stock shall be subject to exchange pursuant to the terms of the Merger
Agreement on a pro rata basis.
4. Section 3.2(i) of the Sale Agreement shall be amended to increase
the initial cash amount to Forty-Four Million Six Hundred Thousand Dollars
($44,600,000) to reflect the parties' estimate of the difference in the tax
payable by the Shareholders as a result of closing the Sale Agreement and
the Merger Agreement in 2000 rather than in 1999 (the "Tax Payment"). If
the actual Tax Payment is less than $600,000, the Shareholders shall remit
such excess to the Purchaser.
<PAGE> 284
5. The Purchaser agrees, if requested by Mr. Toretta, to work with
GTCR Golder Rauner, LLC to provide a $3 million loan to Mr. Toretta and the
GRAT three days prior to the closing day for payment of bonuses to selected
ResTec employees. The loan shall be repaid prior to funding the Sale
Agreement or shall be netted against the cash consideration due under the
Sale Agreement.
6. Section 2(e) of the Covenant Not to Compete Agreement to be entered
into by Mr. Toretta and the Purchaser shall be amended to read, in its
entirety, as follows:
(e) "Business" means the management of municipal sewage sludge,
including, but not limited to, the collection, treatment,
transportation, land application, incineration, disposal, and/or
composting of such municipal sewage sludge.
7. Notwithstanding Section 7.14 of the Sale Agreement and Section 7.14
of the Merger Agreement, the Shareholders and NETCO may deliver updates to
the Disclosure Schedules to the Sale Agreement and Merger Agreement at
least through January 17, 2000.
8. The Purchaser hereby consents to ResTec's transfer of its recently
acquired centrifuges to NETCO.
9. The Purchaser hereby consents to Providence Soils, LLC's entry into
agreements with the Rhode Island Resource Recovery Corporation and the
Narragansett Bay Commission for the construction and operation of a
facility in Rhode Island.
10. To the extent any provision in this Letter Agreement is
inconsistent with the Sale Agreement or the Merger Agreement, this Letter
Agreement shall control and shall constitute an amendment to those
Agreements. As amended by this Letter Agreement, both the Sale Agreement
and the Merger Agreement shall continue in full force and effect.
Capitalized terms used, but not defined, herein shall have the meanings
ascribed to them in those Agreements.
<PAGE> 285
Please indicate your agreement with the foregoing by executing this letter
in the space provided below and returning it to me.
Synagro Technologies, Inc.
/s/ Mark A. Rome
- -------------------------------------------
By: Mark A. Rome, Executive Vice President
<PAGE> 286
ACCEPTED AND AGREED TO:
/s/ Paul A. Toretta
- -----------------------------------------------
Paul A. Toretta, Individually
THE PAUL A. TORETTA 1998 GRAT
/s/ Eileen Toretta
- -----------------------------------------------
Eileen Toretta, Trustee
THE RICHARD J. GUERRERA REVOCABLE TRUST
/s/ Donald F. Dwyer for Frances A. Guerrera
- -----------------------------------------------
Frances A. Guerrera, Co-Trustee
/s/ Donald F. Dwyer for Robert Dionne
- -----------------------------------------------
Robert Dionne, Co-Trustee
THE ESTATE OF RICHARD J. GUERRERA
/s/ Donald F. Dwyer for Frances A. Guerrera
- -----------------------------------------------
Frances A. Guerrera, Executrix
/s/ Donald F. Dwyer for Frances A. Guerrera
- -----------------------------------------------
Francis A. Guerrera, Individually
<PAGE> 287
SECOND AMENDMENT
TO PURCHASE AND SALE AGREEMENT
THIS SECOND AMENDMENT ("Amendment") is entered into as of January 26,
2000, by and between SYNAGRO TECHNOLOGIES, INC., a Delaware corporation
("Purchaser"), PAUL A. TORETTA, individually ("Mr. Toretta"), EILEEN TORETTA, as
Trustee of the Paul A. Toretta 1998 Grat (the "Grat"), FRANCES A. GUERRERA,
individually ("Mrs. Guerrera"), FRANCES A. GUERRERA, as Executrix of the Estate
of Richard J. Guerrera (the "Estate"), and FRANCES A. GUERRERA and ROBERT
DIONNE, as Co-Trustees of the Richard J. Guerrera Revocable Trust under
agreement dated November 2, 1998 (the "Trust") (collectively, the "Parties").
RECITALS
WHEREAS, the Parties entered into that certain Purchase and Sale
Agreement dated October 20, 1999, as amended by a letter agreement dated January
7, 2000 (as amended, the "Agreement");
WHEREAS, the Parties now desire to amend the Agreement to provide,
among other things, that the cash portion of the Purchase Price is reduced by an
amount equal to certain bonuses which Purchaser has agreed to pay to certain
employees of the Companies, as more fully set forth herein; and
WHEREAS, capitalized terms used herein shall have the meanings ascribed
to them herein or in the Agreement, and references to Sections herein shall mean
the corresponding Sections of the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable and consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
1. Adoption of Letter Agreement. The parties hereto hereby consent to,
confirm, approve and adopt the letter agreement dated January 7, 2000,
among Parent, Mr. Toretta, the Grat, the Trust, the Estate, and Mrs.
Guerrera.
2. NETCO-Waterbury Systems, Inc. The Sellers jointly and severally
represent to the Purchaser that all of the capital stock of
NETCO-Waterbury Systems, Inc., a Delaware corporation ("Waterbury"), is
pledged to First Union Bank (the "Trustee") pursuant to that certain
Pledge and Security Agreement (the "Pledge and Security Agreement")
dated June 30, 1995, between the Trustee, Mr. Toretta and Richard J.
Guerrera, in connection with a loan agreement dated June 1, 1995,
between the Connecticut Development Authority and NETCO-Waterbury
Limited Partnership, a Delaware limited partnership. Upon execution and
delivery of this Amendment and subject to any liens created by the
Pledge and Security Agreement, the Sellers hereby convey, assign,
transfer, set over and deliver all right, title and interest in and to
all of the capital stock of Waterbury to the Purchaser. In the event
either Seller receives any stock certificate(s) representing capital
stock of Waterbury, whether from the Trustee or otherwise, such Seller
shall immediately deliver such stock certificate(s) to the Purchaser.
<PAGE> 288
3. Amendments to Agreement.
a. Section 3.2(i) of the Agreement is hereby amended to read
in its entirety:
(i) cash equal to Forty-Four Million Six
Hundred Thousand Dollars ($44,600,000) minus (1) the
Companies' Indebtedness as of Closing, plus or minus
(2) the amount, if any, by which the Companies' Net
Working Capital as of Closing is greater than or less
than Four Hundred Ninety Thousand Dollars ($490,000),
minus (3) the amount, if any, of the Employee Bonuses
(as defined in Section 3.3(e)). The amount, if any,
by which the cash portion of the Purchase Price is
adjusted pursuant to this Section 3.2(i) (i.e., the
sum of (1), (2) and (3) above) is referred to herein
as the "Adjustment Amount"; and
b. Section 3.3 of the Agreement is hereby amended to add a new
subparagraph (e), as follows:
(e) As soon as practicable after
Closing, the Companies shall pay in the aggregate a
bonus of $423,394.50 to Janet Cordano; a bonus of
$1,129,052.00 to Mark McCormick; and a bonus of
$705,657.50 to Terry Szczesiul (collectively, the
"Employee Bonuses"). The parties acknowledge that
such bonuses were awarded prior to Closing. The cash
portion of the Purchase Price shall be reduced by the
total dollar amount of the Employee Bonuses as set
forth in Section 3.2, and such Employee Bonuses shall
be excluded from the computations of Indebtedness and
Net Working Capital for purposes of this Agreement.
4. No Other Amendments to Agreement. Except as specifically set forth
in this Amendment, the Agreement shall remain in full force and effect,
without any amendment or modification thereto.
5. Counterparts and Facsimile Signatures. This Amendment may be
executed in any number of counterparts, and signature pages may be
delivered by telecopy, with the original executed signature pages to be
furnished promptly thereafter.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 289
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day first written above.
SYNAGRO TECHNOLOGIES, INC.
By: /s/ Mark A. Rome
----------------------------------------
Mark A. Rome, Executive Vice President
/s/ Paul A. Toretta
----------------------------------------
Paul A. Toretta, individually
THE PAUL A. TORETTA 1998 GRAT
By: /s/ Eileen Toretta
----------------------------------------
Eileen Toretta, Trustee
<PAGE> 290
/s/ Frances A. Guerrera
----------------------------------------
Frances A. Guerrera, individually
THE ESTATE OF RICHARD J. GUERRERA
By: /s/ Frances A. Guerrera
----------------------------------------
Frances A. Guerrera, Executrix
THE RICHARD J. GUERRERA REVOCABLE TRUST
By: /s/ Frances A. Guerrera
----------------------------------------
Frances A. Guerrera, Co-Trustee
By: /s/ Robert Dionne
----------------------------------------
Robert Dionne, Co-Trustee
<PAGE> 291
EXHIBIT F
MERGER AGREEMENT
F-1
<PAGE> 292
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SYNAGRO TECHNOLOGIES, INC.,
RESTEC ACQUISITION CORP.,
NEW ENGLAND TREATMENT COMPANY, INC.,
PAUL A. TORETTA,
FRANCES A. GUERRERA,
FRANCES A. GUERRERA,
AS EXECUTRIX OF THE ESTATE OF
RICHARD J. GUERRERA
AND
FRANCES A. GUERRERA AND ROBERT DIONNE,
AS CO-TRUSTEES OF THE
RICHARD J. GUERRERA REVOCABLE TRUST
UNDER AGREEMENT DATED NOVEMBER 2, 1998
OCTOBER 20, 1999
<PAGE> 293
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
THE MERGER...............................................................................................2
Section 1.1. The Merger..................................................................2
Section 1.2. Effective Time of the Merger................................................2
ARTICLE II
THE SURVIVING CORPORATION................................................................................2
Section 2.1. Certificate of Incorporation................................................2
Section 2.2. Bylaws......................................................................2
Section 2.3. Directors...................................................................2
Section 2.4. Officers....................................................................2
ARTICLE III
CONVERSION OF SHARES.....................................................................................3
Section 3.1. Effect on Capital Stock.....................................................3
Section 3.2. Exchange of Certificates....................................................4
Section 3.3. Purchase Price Adjustment...................................................4
Section 3.4. Stock Transfer Books........................................................6
Section 3.5. No Further Ownership Rights in Company Common Stock.........................6
Section 3.6. Tax and Accounting Consequences.............................................6
Section 3.7. Taking of Necessary Action; Further Action..................................6
Section 3.8. Closing.....................................................................6
Section 3.9. Closing Deliveries..........................................................6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER......................................................8
Section 4.1. Organization and Qualification..............................................8
Section 4.2. Capitalization..............................................................8
Section 4.3. Authority; Non-Contravention; Approvals.....................................9
Section 4.4. Registration Statements....................................................10
Section 4.5. Reports and Financial Statements...........................................10
Section 4.6. Brokers and Finders........................................................11
ARTICLE IV-A
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS CONCERNING THE TRANSACTION...........................11
Section 4A.1. Ownership..................................................................11
Section 4A.2. Authority; Non-Contravention; Approvals....................................11
Section 4A.3. Brokers and Finders........................................................12
Section 4A.4. Registration Statements....................................................12
Section 4A.5. Investment Representations.................................................12
</TABLE>
i
<PAGE> 294
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS CONCERNING THE
COMPANY.................................................................................................14
Section 5.1. Organization and Qualification.............................................14
Section 5.2. Capitalization.............................................................14
Section 5.3. Authority; Non-Contravention; Approvals....................................15
Section 5.4. Subsidiaries...............................................................15
Section 5.5. Financial Statements.......................................................16
Section 5.6. Absence of Undisclosed Liabilities.........................................16
Section 5.7. Absence of Certain Changes or Events.......................................16
Section 5.8. Litigation.................................................................16
Section 5.9. Accounts Receivable........................................................17
Section 5.10. No Violation of Law; Compliance with Agreements............................17
Section 5.11. Insurance..................................................................17
Section 5.12. Taxes......................................................................17
Section 5.13. Employee Benefit Plans.....................................................19
Section 5.14. Employee and Labor Matters.................................................20
Section 5.15. Environmental Matters......................................................21
Section 5.16. Non-Competition Agreements.................................................22
Section 5.17. Title to Assets............................................................23
Section 5.18. Contracts, Agreements, Plans and Commitments...............................23
Section 5.19. Supplies...................................................................24
Section 5.20. Brokers and Finders........................................................24
Section 5.21. Intellectual Property......................................................24
Section 5.22. Relationships..............................................................25
Section 5.23. Year 2000..................................................................25
Section 5.24. Certain Payments...........................................................25
Section 5.25. Books and Records..........................................................26
Section 5.26. Condition and Sufficiency of Assets........................................26
ARTICLE VI
CONDUCT OF BUSINESS PENDING CLOSING.....................................................................26
Section 6.1. Conduct of Business by the Company Pending the Merger......................26
Section 6.2. Other Offers...............................................................28
Section 6.3. Access to Information......................................................28
Section 6.4. Commercially Reasonable Efforts............................................28
</TABLE>
ii
<PAGE> 295
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE VII
CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES....................................................28
Section 7.1. Consents...................................................................28
Section 7.2. Further Assurances.........................................................29
Section 7.3. Expenses and Fees..........................................................29
Section 7.4. Agreement to Cooperate.....................................................29
Section 7.5. Notification of Certain Matters............................................29
Section 7.6. Registration Statements....................................................30
Section 7.7. Purchaser's Liquidity Program..............................................31
Section 7.8. Exchange Listing...........................................................31
Section 7.9. Public Statements..........................................................31
Section 7.10. Supplements to Disclosure Schedules........................................32
ARTICLE VIII
CONDITIONS TO CLOSING...................................................................................32
Section 8.1. Conditions to Each Party's Obligation to Effect the Merger.................32
Section 8.2. Conditions to Obligation of the Company and the
Shareholders to Effect the Merger..........................................32
Section 8.3. Conditions to Obligations of Parent to Effect the Merger...................33
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER.......................................................................34
Section 9.1. Termination................................................................34
Section 9.2. Effect of Termination......................................................35
Section 9.3. Extensions; Waiver.........................................................36
Section 9.4. Parent's Option to Extend..................................................36
ARTICLE X
INDEMNIFICATION AND LIMITATION ON LIABILITY.............................................................36
Section 10.1. The Shareholders' Indemnity Obligations....................................36
Section 10.2. Parent's Indemnity Obligations.............................................37
Section 10.3. Indemnification Procedures.................................................37
Section 10.4. Limitation of Shareholders' Liability......................................39
Section 10.5. Limitation of Parent's Liability...........................................39
ARTICLE XI
GENERAL PROVISIONS......................................................................................40
Section 11.1. Survival...................................................................40
Section 11.2. Notices....................................................................40
Section 11.3. Interpretation.............................................................43
Section 11.4. Miscellaneous..............................................................43
Section 11.5. Governing Law..............................................................43
</TABLE>
iii
<PAGE> 296
<TABLE>
<CAPTION>
<S> <C> <C>
Section 11.6. Binding Arbitration........................................................43
Section 11.7. Amendment..................................................................45
Section 11.8. Counterparts...............................................................45
Section 11.9. Parties in Interest........................................................45
Section 11.10. Validity...................................................................45
Section 11.11. Guarantee..................................................................45
</TABLE>
iv
<PAGE> 297
EXHIBITS:
Exhibit A Glossary
Exhibit B Form of Estimated Adjustment Amount Worksheet
Exhibit C Form of Release of Claims Agreement
Exhibit D Form of Consulting Agreement
Exhibit E Form of Covenant Not to Compete Agreement
Exhibit F Form of Covenant Not to Compete Agreement
SCHEDULES:
Schedule 1 Ownership of the Company
Schedule 2.3 Directors of the Surviving Corporation
Schedule 2.4 Officers of the Surviving Corporation
Schedule 3.3(d) Projects
Schedule 3.9 Guarantees and Surety Obligations
Schedule 4A.3 Shareholders' Brokers and Finders
Schedule 5.2(b) Capitalization
Schedule 5.3 Authority; Non-Contravention; Approvals
Schedule 5.4 Subsidiaries
Schedule 5.5 Financial Statements
Schedule 5.6 Absence of Undisclosed Liabilities
Schedule 5.7 Absence of Certain Changes or Events
Schedule 5.8 Litigation
Schedule 5.10 No Violation of Law; Compliance with Agreements
Schedule 5.12 Taxes
Schedule 5.13 Employee Benefit Plans
Schedule 5.14 Employee and Labor Matters
Schedule 5.15 Environmental Matters
Schedule 5.16 Non-Competition Agreements
Schedule 5.17 Title to Assets
Schedule 5.18 Contracts, Agreements, Plans and Commitments
Schedule 5.20 Company's Brokers and Finders
Schedule 5.21 Intellectual Property
Schedule 5.22 Relationships
Schedule 5.23 Year 2000 Compliance
Schedule 5.26 Condition and Sufficiency of Assets
v
<PAGE> 298
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of October 20, 1999 (the
"Agreement"), is by and among SYNAGRO TECHNOLOGIES, INC., a Delaware corporation
("Parent"), RESTEC ACQUISITION CORP., a Rhode Island corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), NEW ENGLAND TREATMENT COMPANY,
INC., a Rhode Island corporation ("Company"), PAUL A. TORETTA, individually
("Mr. Toretta"), FRANCES A. GUERRERA, individually ("Mrs. Guerrera"), FRANCES A.
GUERRERA, as Executrix of the Estate of Richard J. Guerrera (the "Estate"), and
FRANCES A. GUERRERA and ROBERT DIONNE, as Co-Trustees of the Richard J. Guerrera
Revocable Trust under agreement dated November 2, 1998 (the "Trust"). Each of
Mr. Toretta and the Estate is a "Shareholder" and, collectively, they are
sometimes referred to as the "Shareholders". The Parent, Merger Sub, Company and
each of the other signatories to this Agreement is a "Party" and, collectively,
they are sometimes referred to as the "Parties." Mrs. Guerrera, individually and
in her capacity as Co-Trustee of the Trust, and Robert Dionne, in his capacity
as Co-Trustee of the Trust, join this Agreement for purposes of guaranteeing the
performance by the Estate and Trust, as the case may be, of their respective
joint and several obligations under this Agreement, as further set forth in
Section 11.11 of this Agreement.
W I T N E S S E T H:
WHEREAS, Parent, Merger Sub, the Company and the Shareholders desire
that Merger Sub merge with and into the Company (the "Merger");
WHEREAS, Parent, Merger Sub and the Company intend the Merger to
qualify as a tax-free reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder;
WHEREAS, the Company, the Shareholders, Mrs. Guerrera and the Trust are
making certain representations, warranties, covenants, agreements and
indemnities herein, as inducement to Parent and Merger Sub to enter into this
Agreement; and
WHEREAS, capitalized terms used but not otherwise defined herein shall
have the meanings ascribed to them in the Glossary attached as Exhibit A.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements stated herein, the receipt
and sufficiency of which are hereby acknowledged, the Parties, intending to be
legally bound, covenant and agree as follows:
<PAGE> 299
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions
of this Agreement, at the Effective Time (as defined in Section 1.2) in
accordance with the Rhode Island Business Corporation Act, the Merger Sub shall
be merged with and into the Company and the separate existence of the Merger Sub
shall thereupon cease. The Company shall be the surviving corporation in the
Merger and is hereinafter sometimes referred to as the "Surviving Corporation."
SECTION 1.2. EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at such time (the "Effective Time") as articles of merger are filed
with the Secretary of State of the State of Rhode Island in accordance with the
Rhode Island Business Corporation Act (the "Merger Filing"). The Merger Filing
shall be made simultaneously with or as soon as practicable after the Closing
(as defined in Section 3.8) in accordance with Article III. The Parties
acknowledge that it is their mutual desire and intent to consummate the Merger
as soon as practicable after the date hereof, and in any event within five (5)
business days after the satisfaction, or waiver, of all conditions to Closing
set forth in Article VIII hereof, subject to the terms and conditions hereof.
Accordingly, subject to the provisions hereof, the Parties shall use all
reasonable efforts to consummate, as soon as practicable, the transactions
contemplated by this Agreement in accordance with Article VIII.
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1. CERTIFICATE OF INCORPORATION. The Articles of
Incorporation of Merger Sub as in effect immediately prior to the Effective Time
shall be the Articles of Incorporation of the Surviving Corporation after the
Effective Time, as the same may thereafter be amended in accordance with its
terms and as provided under the Rhode Island Business Corporation Act.
SECTION 2.2. BYLAWS. The Bylaws of Merger Sub as in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation
after the Effective Time, as the same may thereafter be amended in accordance
with their terms and as provided by the Articles of Incorporation of the
Surviving Corporation and the Rhode Island Business Corporation Act.
SECTION 2.3. DIRECTORS. The directors of the Surviving Corporation
shall be as designated in Schedule 2.3, and such directors shall serve in
accordance with the Bylaws of the Surviving Corporation until their respective
successors are duly elected or appointed and qualified.
SECTION 2.4. OFFICERS. The officers of the Surviving Corporation shall
be as designated in Schedule 2.4, and such officers shall serve in accordance
with the Bylaws of the Surviving Corporation until their respective successors
are duly elected or appointed and qualified.
2
<PAGE> 300
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1. EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue
of the Merger and without any action on the part of the Parent, Merger Sub, the
Company or the Shareholders:
(a) CONVERSION OF SECURITIES. All of the Company's common
stock, $1.00 par value per share (the "Company Common Stock"), issued and
outstanding immediately prior to the Effective Time (excluding any shares of the
Company Common Stock to be canceled pursuant to Section 3.1(b)) shall be
converted, subject to Section 3.1(e), into the right to receive at Closing, in
the aggregate, the sum of:
(i) the number of validly issued, fully paid and
nonassessable shares of common stock, par value $.002 per
share, of Parent ("Parent Common Stock"), determined by
dividing (x) $2,000,000 less (1) the Company's Indebtedness as
of Closing and (2) the amount, if any, by which the Company's
Net Working Capital as of Closing is less than $260,000 by (y)
the Average Parent Common Stock Price; and
(ii) 1,000,000 shares of Parent Common Stock;
provided, however, for purposes of this Section 3.1(a)(ii) (1)
in the event the Average Parent Common Stock Price is less
than $3.00, Parent will issue to the Shareholders, in the
aggregate, the number of shares of Parent Common Stock
determined by dividing Three Million Dollars ($3,000,000) by
the Average Parent Common Stock Price, and (2) in the event
the Average Parent Common Stock Price is more than $7.50,
Parent will issue to the Shareholders, in the aggregate, the
number of shares of Parent Common Stock determined by dividing
Seven Million Five Hundred Thousand Dollars ($7,500,000) by
the Average Parent Common Stock Price.
(iii) Shares issued under Section 3.1(a)(i) and (ii)
to the Shareholders are referred to herein as the "Parent
Shares." Each Shareholder shall be entitled to receive
one-half of the aggregate consideration issuable pursuant to
this Section 3.1(a).
(b) CANCELLATION. Each share of Company Common Stock held in
the treasury of the Company and each share of Company Common Stock held by any
direct or indirect wholly-owned Subsidiary of the Company, if any, immediately
prior to the Effective Time shall, by virtue of the Merger and without any
action on the part of the holder thereof, cease to be outstanding, be canceled
and retired without payment of any consideration therefor and cease to exist.
(c) CAPITAL STOCK OF MERGER SUB. Each share of common stock,
$.01 par value per share, of Merger Sub ("Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of common
stock, $.01 par value per share, of the Surviving Corporation.
3
<PAGE> 301
(d) ADJUSTMENTS TO MERGER CONSIDERATION. The Merger
Consideration (as defined in Section 3.2(a)) shall be appropriately adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend of securities convertible into Parent Common Stock),
reorganization, reclassification, recapitalization or other similar change with
respect to Parent Common Stock occurring (including the record date thereof)
after the date hereof and prior to the Effective Time. In no event shall the
number of shares of Parent Common Stock issued pursuant to Section 3.1(a) exceed
twenty percent (20%) of the total outstanding shares of Parent Common Stock at
the time of Closing.
(e) FRACTIONAL SHARES. No certificates or scrip representing
less than one share of Parent Common Stock shall be issued upon the surrender
for exchange of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock (the
"Certificates"). In lieu of any such fractional share, each holder of shares of
Company Common Stock who would otherwise have been entitled to a fraction of a
share of Parent Common Stock upon surrender of Certificates for exchange shall
be paid upon such surrender cash (without interest) in an amount equal to such
fraction multiplied by the Average Parent Common Stock Price on the Closing
Date.
SECTION 3.2. EXCHANGE OF CERTIFICATES.
(a) Immediately after the Effective Time, Parent will deliver
to each Shareholder upon surrender of all such Certificates for cancellation
together with such other customary documents as may be required, and the
Shareholders shall be entitled to receive in exchange therefor, (A) certificates
evidencing that number of whole shares of Parent Common Stock in immediately
available funds which such holder has the right to receive in accordance with
Section 3.1 hereof in respect of the shares of Company Common Stock formerly
evidenced by such Certificate, and (B) cash in respect of fractional shares as
provided in Section 3.1(e) (the shares of Parent Common Stock and cash being,
collectively, the "Merger Consideration"), and the Certificates so surrendered
shall forthwith be canceled.
(b) Parent shall be entitled to deduct and withhold from the
Merger Consideration otherwise payable pursuant to this Agreement to any holder
of Company Common Stock such amounts as Parent is required to deduct and
withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by Parent, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of the shares of Company Common
Stock in respect of which such deduction and withholding was made by Parent.
SECTION 3.3. PURCHASE PRICE ADJUSTMENT.
(a) Prior to the Closing Date, Mr. Toretta shall deliver to
the Parent a worksheet, in the form attached as Exhibit B hereto, setting forth
a reasonable estimate of the Indebtedness and Net Working Capital as of the
Closing Date, as well as a computation of the estimated Adjustment Amount (the
"Estimated Adjusted Amount"). The worksheet shall be prepared by Mr. Toretta,
with a copy provided to the Estate, and shall be reasonably acceptable to the
Parent. If the Estimated Adjustment Amount is a positive number, the Merger
4
<PAGE> 302
Consideration payable at Closing to the Shareholders shall be decreased in an
amount equal to the number of validly issued, fully paid and nonassessable
shares of Parent Common Stock determined by dividing the positive Estimated
Adjustment Amount by the Average Parent Common Stock Price. If the Estimated
Adjustment Amount is a negative number, the Merger Consideration payable at
Closing to the Shareholders shall be increased in an amount equal to the number
of validly issued, fully paid and nonassessable shares of Parent Common Stock
determined by dividing the negative Estimated Adjustment Amount by the Average
Parent Common Stock Price.
(b) Within 90 days after the Closing, Parent shall cause the
Company to prepare a consolidated balance sheet of the Company as of the Closing
Date (the "Closing Date Balance Sheet"), including a computation of the actual
Adjustment Amount of the Companies as of the Closing Date (the "Actual
Adjustment Amount"). If within 15 days following delivery of the Closing Date
Balance Sheet the Shareholders do not object in writing thereto, then the Actual
Adjustment Amount shall be as computed on such Closing Date Balance Sheet. If
the Shareholders do object in writing to the computation within such 15-day
period, then the Parent and the Shareholders shall negotiate in good faith and
attempt to resolve their disagreement. Should such negotiations not result in an
agreement within 20 days, then the matter shall be submitted to an independent
accounting firm of national reputation mutually acceptable to the Parent and the
Shareholders (the "Neutral Auditors"). If the Parent and the Shareholders are
unable to agree on the Neutral Auditors, then they shall request the American
Arbitration Association to appoint the Neutral Auditors. All fees and expenses
relating to appointment of the Neutral Auditors and the work, if any, to be
performed by the Neutral Auditors will be borne equally by the Parent and the
Shareholders. The Neutral Auditors will deliver to the Parent and the
Shareholders a written determination (such determination to include a worksheet
setting forth all material calculations used in arriving at such determination
and to be based solely on information provided to the Neutral Auditors by the
Parent and the Shareholders, or their respective affiliates) of the disputed
items within 30 days of receipt of the disputed items, which determination will
be final, binding and conclusive on the Parties.
(c) Promptly following agreement on or delivery of the final,
binding and conclusive Closing Date Balance Sheet setting forth the Actual
Adjustment Amount, the Parent and the Shareholders shall account to each other
as provided for in this Section 3.3(c). If the Estimated Adjustment Amount less
the Actual Adjustment Amount is a positive number, the Shareholders shall have a
right to receive a cash payment equal to such excess. If the Estimated
Adjustment Amount less the Actual Adjustment Amount is a negative number, Parent
shall be entitled to receive a cash payment from the Shareholders equal to such
deficit. Any such excess or deficit payment shall be due and payable within
three (3) business days after the Actual Adjustment Amount is determined
pursuant to this Section 3.3. Any payments due from or to the Shareholders
pursuant to this Section 3.3(c) shall be payable or paid fifty percent (50%) by
or to each Shareholder.
(d) For purposes of determining the Net Working Capital
pursuant to this Section 3.3, any cash payments made or current liabilities
incurred on or after August 1, 1999, and prior to Closing with respect to the
projects described on Schedule 3.3(d) hereto, up to an
5
<PAGE> 303
aggregate amount of cash and current liabilities of $260,000, shall not be
deducted in the Net Working Capital computation.
SECTION 3.4. STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed, and there shall be no further
registration of transfers of the Company Common Stock thereafter on the records
of the Company.
SECTION 3.5. NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. The
Merger Consideration delivered upon the surrender for exchange of shares of
Company Common Stock in accordance with the terms hereof shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Company Common Stock, and there shall be no further registration of transfers on
the records of the Surviving Corporation of shares of Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled.
SECTION 3.6. TAX AND ACCOUNTING CONSEQUENCES. It is intended by the
Parties that the Merger shall constitute a reorganization within the meaning of
Section 368 of the Code. The Parties hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
SECTION 3.7. TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of
Parent, Merger Sub, each of the Shareholders and the Company will take all such
reasonable and lawful action as may be necessary or appropriate in order to
effectuate the Merger in accordance with this Agreement as promptly as possible.
If, at any time after the Effective Time, any such further action is necessary
or desirable to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company and Merger
Sub, the officers and directors of the Company and Merger Sub in office
immediately prior to the Effective Time are fully authorized in the name of
their respective corporations or otherwise to take, and will take, all such
lawful and necessary action.
SECTION 3.8. CLOSING. Subject to the terms and provisions of Article
IX, the closing of the transactions provided for herein (the "Closing") shall
take place at the offices of RICHARDS & O'NEIL, LLP, 43 Arch Street, Greenwich,
Connecticut as promptly as practicable (but in any event within five (5)
business days) following the date on which the last of the conditions set forth
in Article VIII is fulfilled or waived, or at such other time and place as the
Parties shall agree. The date on which the Closing occurs is referred to in this
Agreement as the "Closing Date."
SECTION 3.9. CLOSING DELIVERIES.
(a) At the Closing, the Shareholders shall deliver to the
Parent:
(i) certificates representing the Company Common
Stock, duly endorsed for transfer to the Parent or accompanied by duly
executed assignment
6
<PAGE> 304
documents, which shall transfer to the Parent good and valid title to the
Company Common Stock, free and clear of all Liens;
(ii) Release of Claims Agreements executed by the
officers, directors and stockholders of the Company releasing the
Company from any and all prior claims of such officers, directors and
stockholders, in the form attached hereto as Exhibit C;
(iii) all corporate, accounting, business and tax
records of the Company;
(iv) a legal opinion from Richards & O'Neil, LLP,
counsel to Mr. Toretta and the Company, in a form reasonably
satisfactory to Parent;
(v) a legal opinion from Palmeri, Rock & Talbot,
P.C., counsel to Frances Guerrera, individually, the Estate and the
Trust, in a form reasonably satisfactory to Parent;
(vi) a Consulting Agreement between the Parent and
Mr. Toretta, individually, in the form attached as Exhibit D hereto; -
(vii) a Covenant Not to Compete Agreement between the
Parent and Mr. Toretta, individually, in the form attached as Exhibit E
hereto;
(viii) Covenant Not to Compete Agreements between the
Parent and each of Mrs. Guerrera, individually, the Estate, the Trust
and R. J. Guerrera Trucking Company, Inc. (the "Trucking Company"), in
the form attached as Exhibit F hereto; and
(ix) such other documents, including certificates of
the Shareholders, as may be required by this Agreement or reasonably
requested by the Parent.
(b) At the Closing, the Parent shall deliver to:
(i) the Shareholders, the Merger Consideration
determined in accordance with Section 3.2;
(ii) Mr. Toretta, individually, a Consulting
Agreement, in the form attached as Exhibit D;
(iii) Mr. Toretta, individually, a Covenant Not to
Compete Agreement, in the form attached as Exhibit E;
(iv) each of the Estate, Mrs. Guerrera, individually,
the Trust and the Trucking Company, a Covenant Not to Compete
Agreement, in the form attached as Exhibit F; and
7
<PAGE> 305
(v) documents relating to the removal of the
Shareholders from any and all personal guarantees and/or surety
obligations in connection with the Company's debts or operations listed
on Schedule 3.9; and
(vi) legal opinions from in-house legal counsel to
the Parent, dated the Closing Date, in a form reasonably satisfactory
to the Sellers.
ARTICLE IV
REPRESENTATIONS AND
WARRANTIES OF PARENT AND MERGER
Parent and Merger Sub each represent and warrant to the Shareholders as
follows, except as set forth in the Parent's Form 10-K for the fiscal year ended
December 31, 1998, all quarterly reports on Form 10-Q filed with the SEC since
January 1, 1999, and all amendments to any of the foregoing.
SECTION 4.1. ORGANIZATION AND QUALIFICATION. Each of Parent and Merger
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the state of its incorporation and has the requisite corporate power
and authority to own, lease and operate its assets and properties and to carry
on its business as it is now being conducted. Parent is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the properties owned, leased, or operated by it or the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified and in good standing would not have, or could not
reasonably be anticipated to have, individually or in the aggregate, a Material
Adverse Effect (as defined in Exhibit A).
SECTION 4.2. CAPITALIZATION.
(a) As of June 30, 1999, the authorized capital stock of
Parent consisted of 100,000,000 shares of Parent Common Stock, of which
17,392,790 shares were issued and outstanding, and 10,000,000 shares of
preferred stock, par value $.002 per share, of which 500,000 shares have been
designated as "Preferred Stock-Junior Participating Series A" and reserved for
issuance upon exercise of rights evidenced by the certificates representing all
outstanding shares of Parent Common Stock, but no such shares are issued and
outstanding. All of the issued and outstanding shares of Parent Common Stock
were validly issued and are fully paid, nonassessable and free of preemptive
rights.
(b) As of June 30, 1999, except for 4,020,393 options granted
pursuant to Parent incentive or option plans (or to current or former employees
of Parent), warrants to acquire 770,000 shares of Parent Common Stock and shares
issuable in connection with proposed acquisitions, if any, there are no
outstanding (i) securities of Parent convertible into or exchangeable for shares
of capital stock or voting securities of Parent or (ii) options or other rights
to acquire from Parent or other obligations of Parent to issue, any capital
stock, voting
8
<PAGE> 306
securities or securities convertible into or exchangeable for capital stock or
voting securities of Parent.
(c) All of the shares of capital stock of Merger Sub are owned
beneficially and of record by Parent.
(d) The shares of Parent Common Stock to be issued as part of
the Merger Consideration have been duly authorized and when issued and delivered
in accordance with the terms of this Agreement, will have been validly issued
and will be fully paid and non-assessable, and the issuance thereof is not
subject to any preemptive or other similar right.
SECTION 4.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Parent and Merger Sub each have full corporate power and
authority to execute and deliver this Agreement and, subject to the Parent
Required Statutory Approvals (as defined in Section 4.3(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the Board
of Directors of the Parent and no other corporate proceedings on the part of
Parent are necessary to authorize the execution and delivery of this Agreement
or the consummation by Parent of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by each of Parent and Merger Sub,
and, assuming the due authorization, execution and delivery hereof by the other
Parties, constitutes a valid and legally binding agreement of each of Parent and
Merger Sub enforceable against each of them in accordance with its terms, except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles.
(b) The execution and delivery of this Agreement by each of
Parent and Merger Sub and the consummation by them of the transactions
contemplated hereby do not and will not violate or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any Lien, upon,
any of the properties or assets of Parent or any of its Subsidiaries under any
of the terms, conditions or provisions of (i) the respective charters or bylaws
of Parent or any of its Subsidiaries, (ii) any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any
court or Governmental Authority applicable to Parent or any of its Subsidiaries
or any of their respective properties or assets (assuming compliance with the
matters referred to in Section 4.3(c)) or (iii) any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind to which Parent
or any of its Subsidiaries is now a party or by which Parent or any of its
Subsidiaries or any of their respective properties or assets may be bound or
affected, except, in the case of clauses (ii) and (iii), for matters as would
not have, or could not reasonably be anticipated to have, individually or in the
aggregate, a Material Adverse Effect or materially impair the ability of Parent
to consummate the transactions contemplated by this Agreement.
9
<PAGE> 307
(c) Except for (i) the filing of the Registration Statements
(as defined in Section 4.4) with the Securities and Exchange Commission (the
"SEC") pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), and the declaration of the effectiveness thereof by the SEC and filings
with various state blue sky authorities, and (ii) the making of the Merger
Filing with the Secretary of State of Rhode Island in connection with the Merger
(the filings and approvals referred to in clauses (i) and (ii) are collectively
referred to as the "Parent Required Statutory Approvals"), no declaration,
filing or registration with, or notice to, or authorization, consent or approval
of, any governmental or regulatory body or authority is necessary for the
execution and delivery of this Agreement by Parent or Merger Sub or the
consummation by Parent or Merger Sub of the transactions contemplated hereby,
other than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be, would
not, have, or could not reasonably be anticipated to have, individually or in
the aggregate, a Material Adverse Effect or materially impair the ability of
Parent or Merger Sub to consummate the transactions contemplated by this
Agreement.
SECTION 4.4. REGISTRATION STATEMENTS. None of the information to be
supplied by Parent or its Subsidiaries for inclusion in the Registration
Statements on Form S-3 to be filed under the Securities Act with the SEC by
Parent pursuant to Section 7.6 of this Agreement for the purpose of registering
the Parent Shares (as amended or supplemented, the "Registration Statements")
will, at the time they become effective, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
SECTION 4.5. REPORTS AND FINANCIAL STATEMENTS.
(a) Since January 1, 1999, Parent has filed with the SEC all
material forms, statements, reports and documents (including all exhibits,
amendments and supplements thereto) required to be filed by it under each of the
Securities Act, the Securities Exchange Act of 1934, as amended, and the
respective rules and regulations thereunder, all of which complied in all
material respects with all applicable requirements of the appropriate acts and
the rules and regulations thereunder.
(b) Parent has previously made available or delivered to the
Company or the Shareholders copies of Parent's (a) Annual Reports on Form 10-K
for the fiscal year ended December 31, 1998, and for the immediately preceding
fiscal year, as filed with the SEC, (b) proxy and information statements
relating to (i) all meetings of its shareholders (whether annual or special) and
(ii) any actions by written consent in lieu of a shareholders' meeting from
January 1, 1999, until the date hereof, and (c) all other reports, including
quarterly reports, or registration statements filed by Parent with the SEC since
January 1, 1999 (other than Registration Statements filed on Form S-8) (the
documents referred to in clauses (a), (b) and (c), including the exhibits
thereto, are collectively referred to as the "Parent SEC Reports").
(c) As of their respective dates, the Parent SEC Reports did
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
10
<PAGE> 308
(d) The audited consolidated financial statements and
unaudited interim consolidated financial statements of Parent included in such
reports (collectively, the "Parent Financial Statements") have been prepared in
accordance with GAAP (except as may be indicated therein or in the notes
thereto) and fairly present in all material respects the consolidated financial
position of Parent and its Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended, subject, in the case of the unaudited interim financial statements, to
normal year-end and audit adjustments and any other adjustments described
therein.
SECTION 4.6. BROKERS AND FINDERS. Parent has not entered into any
contract, arrangement or understanding with any Person or firm which may result
in the obligation of Parent to pay any finder's fees, brokerage or agent
commissions or other like payments in connection with the transactions
contemplated hereby. There is no claim for payment by Parent of any investment
banking fees, finder's fees, brokerage or agent commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
ARTICLE IV-A
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
CONCERNING THE TRANSACTION
Each Shareholder and the Company, severally but not jointly, represent
and warrant to the Parent and Merger Sub as follows:
SECTION 4A.1 OWNERSHIP.
(a) The Shareholder holds of record and beneficially all of
the capital stock of the Company shown as owned by the Shareholder on Schedule 1
free and clear of any Liens (except for Liens arising under Federal and state
securities laws and restrictions arising under the Company's organizational
documents which have been waived).
(b) There are no outstanding subscriptions, options, calls,
contracts, commitments, understandings, restrictions, arrangements, rights or
warrants, including any right of conversion or exchange under any outstanding
security, debenture, instrument or other agreement obligating the Shareholder to
deliver or sell, or cause to be delivered or sold, any capital stock in the
Company, or obligating the Shareholder to grant, extend or enter into any such
agreement or commitment. There are no voting trusts, proxies or other agreements
or understandings to which the Shareholder is a party or is bound with respect
to the voting of any ownership interest of the Company.
SECTION 4A.2 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Shareholder has full power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been approved by the Board of Directors and shareholders of the Company, and
no other proceedings on the part of the Shareholder are necessary to authorize
the execution and delivery of this
11
<PAGE> 309
Agreement by the Shareholder or the consummation by the Shareholder of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Shareholder, and, assuming the due authorization, execution and
delivery hereof by the other Parties, constitutes a valid and legally binding
agreement of the Shareholder, enforceable against the Shareholder in accordance
with its terms, except that such enforcement may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally, and (ii) general
equitable principles.
(b) The execution and delivery of this Agreement by the Shareholder and
the consummation by the Shareholder of the transactions contemplated hereby do
not and will not violate or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any Lien upon any of the
properties or assets of the Shareholder under any of the terms, conditions or
provisions of (i) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any court or Governmental
Authority applicable to the Shareholder, or any of its properties or assets, or
(ii) any note, bond, mortgage, indenture, deed of trust, license, franchise,
permit, concession, contract, lease or other instrument, obligation or agreement
of any kind to which the Shareholder is now a party or by which the Shareholder
or any of the Shareholder's properties or assets may be bound or affected.
(c) No declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority is necessary for the execution and delivery of this Agreement by the
Shareholder or the consummation by the Shareholder of the transactions
contemplated hereby.
SECTION 4A.3 BROKERS AND FINDERS. Except as disclosed on Schedule 4A.3,
the Shareholder has not entered into any contract, arrangement or understanding
with any Person or firm which may result in the obligation of the Company to pay
any finder's fees, brokerage or agent commissions or other like payments in
connection with the transactions contemplated hereby.
SECTION 4A.4 REGISTRATION STATEMENTS. None of the information to be
supplied by the Shareholder for inclusion in the Registration Statements will
contain any untrue statement of any material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
SECTION 4A.5 INVESTMENT REPRESENTATIONS. The Shareholder acknowledges,
represents and agrees that:
(a) (i) Parent has made available to the Shareholder the
information and documents described in Section 4.5 hereof, (ii) the Shareholder
understands the risks associated with ownership of Parent Common Stock, and
(iii) the Shareholder is capable of bearing the financial risks associated with
such ownership;
12
<PAGE> 310
(b) The Parent Shares included within the Merger Consideration
have not been registered under the Securities Act or registered or qualified
under any applicable state securities laws;
(c) The Parent Shares are being issued to the Shareholder in
reliance upon exemptions from such registration or qualification requirements,
and the availability of such exemptions depends in part upon the Shareholder's
bona fide investment intent with respect to the Parent Shares;
(d) The Shareholder's acquisition of the Parent Shares is
solely for the Shareholder's own account for investment, and the Shareholder is
not acquiring such Parent Shares for the account of any other Person or with a
view toward resale, assignment, fractionalization, or distribution thereof;
(e) The Shareholder shall not offer for sale, sell, transfer,
pledge, hypothecate or otherwise dispose of any of the Parent Shares except in
accordance with this Agreement and (A) the registration requirements of the
Securities Act and applicable state securities laws or (B) upon delivery to
Parent of an opinion of legal counsel reasonably satisfactory to Parent that an
exemption from registration is available or pursuant to an effective
registration statement covering the Parent Shares to be sold;
(f) The Shareholder has such knowledge and experience in
financial and business matters that the Shareholder is capable of evaluating the
merits and risks of an investment in the Parent Shares, and to make an informed
investment decision with respect thereto;
(g) The Shareholder has had the opportunity to ask questions
of, and receive answers from, Parent's officers and directors concerning the
Shareholder's acquisition of the Parent Shares and to obtain such other
information concerning Parent and the Parent Shares, to the extent Parent's
officers and directors possessed the same or could acquire it without
unreasonable effort or expense, as the Shareholder deemed necessary in
connection with making an informed investment decision; and
(h) In addition to any other legends required by law or the
other agreements entered into in connection herewith, each certificate
evidencing the Parent Shares will bear a conspicuous restrictive legend
substantially as follows:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED ("ACT"), OR UNDER ANY APPLICABLE STATE
SECURITIES LAWS, AND THEY CANNOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED, PLEDGED OR OTHERWISE HYPOTHECATED
EXCEPT IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF THE ACT
13
<PAGE> 311
AND SUCH OTHER STATE LAWS OR UPON DELIVERY TO THIS
CORPORATION OF AN OPINION OF LEGAL COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION THAT AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE SHAREHOLDERS CONCERNING THE COMPANY.
The Company and the Shareholders, jointly and severally, represent and
warrant to Parent and Merger Sub as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. The Company is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the properties owned, leased, or operated by it or the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified and in good standing would not have, or could not
reasonably be anticipated to have, individually or in the aggregate, a Material
Adverse Effect. True, accurate and complete copies of the Company's articles or
certificates of incorporation, as amended, and the Company's bylaws, in each
case as in effect on the date hereof, including all amendments thereto, have
heretofore been delivered to Parent.
SECTION 5.2. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
8,000 shares of Company Common Stock. As of the date of this Agreement there
are, and as of Closing there will be, 250 shares of Company Common Stock issued
and outstanding and no other shares of capital stock of the Company issued and
outstanding. All of such issued and outstanding shares of Company Common Stock
are validly issued and are fully paid, nonassessable and free of preemptive
rights and are owned beneficially and of record as set forth on Schedule 1, free
and clear of all Liens. No Subsidiary of the Company, other than as described on
Schedule 1, holds any shares of the capital stock of the Company.
(b) Except as set forth on Schedule 5.2(b), there are no
outstanding (i) subscriptions, options, calls, contracts, commitments,
understandings, restrictions, arrangements, rights or warrants, including any
right of conversion or exchange under any outstanding security, debenture,
instrument or other agreement obligating the Company to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of the capital stock
of the Company, or obligating the Company to grant, extend or enter into any
such agreement or commitment or (ii) obligations of the Company to repurchase,
redeem or otherwise acquire any
14
<PAGE> 312
securities referred to in clause (i) above. There are no voting trusts, proxies
or other agreements or understandings to which the Company is a party or is
bound with respect to the voting of any shares of capital stock of the
Companies.
SECTION 5.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to
execute and deliver this Agreement and, subject to the Company Required
Statutory Approvals (as defined in Section 5.3(c), to consummate the
transactions contemplated hereby. This Agreement has been approved by the Board
of Directors and Shareholders of the Company, and no other corporate proceedings
on the part of the Company are necessary to authorize the execution and delivery
of this Agreement or the consummation by the Company and the Shareholders of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Company, and, assuming the due authorization, execution and
delivery hereof by the other Parties, constitutes a valid and legally binding
agreement of the Company enforceable against the Company in accordance with its
terms.
(b) Except as disclosed on Schedule 5.3 hereto, the execution
and delivery of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby do not and will not violate or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Lien upon any of the properties or assets of the Company under
any of the terms, conditions or provisions of (i) charters or bylaws of the
Company, (ii) any statute, law, ordinance, rule, regulation, judgment, decree,
order, injunction, writ, permit or license of any court or Governmental
Authority applicable to the Company, or any of its respective properties or
assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which the Company is now a party or by which any of
the Company or any of its respective properties or assets may be bound or
affected.
(c) Except for the Merger Filing with the Secretary of State
of the State of Rhode Island in connection with the Merger (the "Company
Required Statutory Approval") or as disclosed on Schedule 5.3 hereto, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by the Company or the
Shareholders or the consummation by the Company or the Shareholders of the
transactions contemplated hereby.
SECTION 5.4. SUBSIDIARIES. Except as set forth on Schedule 5.4, the
Company does not have any Subsidiaries, nor does the Company hold any equity
interest in or control (directly or indirectly, through the ownership of
securities, by contract, by proxy, alone or in combination with others, or
otherwise) any corporation, limited liability company, partnership, business
organization or other Person.
15
<PAGE> 313
SECTION 5.5. FINANCIAL STATEMENTS. The audited financial statements of
the Company for the fiscal year ended December 31, 1998, attached as part of
Schedule 5.5, have been prepared in accordance with GAAP (except as may be
indicated therein or in the notes thereto) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of its operations and cash flows for the periods then ended. The
unaudited interim financial statements of the Company for the seven (7) months
ended July 31, 1999, also attached as part of Schedule 5.5 (and together with
the audited financial statements described in the preceding sentence, the
"Company's Financial Statements"), have been prepared in accordance with the
accrual method of accounting and fairly present in all material respects the
financial position of the Company as of the dates thereof and the results of its
operations and cash flows for the seven (7) month period then ended, subject to
normal year-end adjustments and any other adjustments described therein.
SECTION 5.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on
Schedule 5.6, the Company has not incurred any liabilities or contingencies
(whether absolute, accrued, contingent or otherwise) of any nature, except
liabilities (i) which are accrued or reserved against the Company's Financial
Statements or reflected in the notes thereto or (ii) which were incurred after
December 31, 1998, and were incurred in the ordinary course of business and
consistent with past practices.
SECTION 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since July 31, 1999,
and except as described on Schedule 5.7, (i) the Company has not declared or set
aside or paid any dividend or made any other distribution with respect to any
outstanding securities or ownership interests, or, directly or indirectly,
purchased, redeemed or otherwise acquired any of its securities or ownership
interests and (ii) the Company has not granted any general increase in the
compensation of any of its officers, directors or employees (including any
increase pursuant to any bonus, pension, profit-sharing or other plan or
commitment) and has not paid any bonuses to any officers, directors or
employees. Since December 31, 1998, and except as described on Schedule 5.7, (i)
the Company has not adopted, entered into or amended any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law; (ii) the Company has not made
any amendment to any of the articles of incorporation, certificates of
partnership, regulations, bylaws, partnership agreements, operating agreements
or other similar documents or changed the character of any of its businesses in
any manner; (iii) the businesses of the Company have been conducted in the
ordinary course of business consistent with past practices; and (iv) there has
not been any event, occurrence, development or state of circumstances or facts
which has had, or could reasonably be anticipated to have, individually or in
the aggregate, a Material Adverse Effect.
SECTION 5.8. LITIGATION. Except as described on Schedule 5.8, there are
no claims, suits, actions, Environmental Claims, inspections, investigations or
proceedings pending or, to the knowledge of the Company, threatened against,
relating to or affecting the Company before any court, governmental department,
commission, agency, instrumentality, authority, or any
16
<PAGE> 314
mediator or arbitrator. Except as described on Schedule 5.8, the Company is not
subject to any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality, authority, or any
mediator or arbitrator.
SECTION 5.9. ACCOUNTS RECEIVABLE. All accounts receivable reflected on
the Company's Financial Statements represent sales actually made in the ordinary
course of business and are collectible in the ordinary course of business.
SECTION 5.10. NO VIOLATION OF LAW; COMPLIANCE WITH AGREEMENTS.
(a) Except as disclosed on Schedule 5.10, the Company is not
in violation of and has been given notice or been charged with any violation of,
any law, statute, order, rule, regulation, ordinance or judgment (including,
without limitation, any applicable Environmental Law) of any governmental or
regulatory body or authority. To the knowledge of the Shareholders, no
investigation or review by any governmental or regulatory body or authority is
pending or threatened, nor has any governmental or regulatory body or authority
indicated an intention to conduct the same. Except as disclosed on Schedule
5.10, the Company has all permits (including without limitation Environmental
Permits), licenses, franchises, variances, exemptions, orders and other
governmental authorizations, consents and approvals required or necessary to
conduct its business as presently conducted (collectively, the "Company
Permits"). The Company is not in violation of the terms of the Company Permits.
(b) Except as disclosed on Schedule 5.10, the Company is not
in breach or violation of or in default in the performance or observance of any
term or provision of, and no event has occurred which, with lapse of time or
action by a third party, could result in a default under, (i) the charter,
bylaws or similar organizational instruments of the Company or (ii) any
contract, commitment, agreement, indenture, mortgage, loan agreement, note,
lease, bond, license, approval or other instrument to which the Company is a
party or by which it is bound or to which any of its property is subject.
SECTION 5.11. INSURANCE. The Shareholders have heretofore delivered to
the Parent true and correct copies of all insurance policies owned by the
Company or by which the Company or any of its properties or assets is covered
against present losses, all of which are now in full force and effect. No
insurance has been refused with respect to any operations, properties or assets
of the Company nor has coverage of any insurance been limited by any insurance
carrier that has carried, or received any application for, any such insurance
during the last three years. No insurance carrier has denied any claims made
against any of the Company's policies.
SECTION 5.12. TAXES.
(a) Except as set forth on Schedule 5.12, (i) the Company has
(x) duly filed (or there has been filed on its behalf) with the appropriate
taxing authorities all Tax Returns (as hereinafter defined) required to be filed
by it on or prior to the date hereof, and (y) duly paid in full or made adequate
provision therefor on the Company's Financial Statements in accordance with GAAP
(or there has been paid or adequate provision has been made on its behalf) for
the payment of all Taxes (as hereinafter defined) for all periods ending through
the date hereof; (ii)
17
<PAGE> 315
all such Tax Returns filed by or on behalf of the Company are true, correct and
complete in all material respects; (iii) the Company is not the beneficiary of
any extension of time within which to file any Tax Return; (iv) no claim has
been made since January 1, 1997 by any authority in a jurisdiction where the
Company does not file Tax Returns that it is or may be subject to taxation by
that jurisdiction; (v) the liabilities and reserves for Taxes reflected in the
most recent balance sheet included in the Company's Financial Statements to
cover all Taxes for all periods ending at or prior to the date of such balance
sheet have been determined in accordance with GAAP, and there is no material
liability for Taxes for any period beginning after such date other than Taxes
arising in the ordinary course of business; (vi) there are no Liens for Taxes
upon any property or assets of the Company, except for Liens for Taxes not yet
due; (vii) the Company has not made any change in accounting methods since
December 31, 1998; (viii) the Company has not received a ruling from any taxing
authority or signed an agreement with any taxing authority; (ix) the Company has
complied in all respects with all applicable laws, rules and regulations
relating to the payment and withholding of Taxes (including, without limitation,
withholding of Taxes pursuant to Sections 1441 and 1442 of the Code, as amended
or similar provisions under any foreign laws) and has, within the time and the
manner prescribed by law, withheld and paid over to the appropriate taxing
authority all amounts required to be so withheld and paid over under all
applicable laws in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, partner, member or other third
party; (x) no federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any Taxes
or Tax Returns of the Company, and as of the date of this Agreement the Company
has not received a written notice of any pending audits or proceedings; (xi) no
partner, stockholder, member, director or officer (or employee responsible for
Tax matters) of the Company expects any authority to assess any additional Taxes
with respect to the Company for any period for which Tax Returns have been
filed; (xii) the federal income Tax Returns of the Company have been examined by
the Internal Revenue Service ("IRS") (which examination has been completed) or
the statute of limitations for the assessment of federal income Taxes of the
Company has expired, for all periods through and including December 31, 1994,
and no deficiencies were asserted as a result of such examinations which have
not been resolved and fully paid; (xiii) no adjustments or deficiencies relating
to Tax Returns of the Company have been proposed, asserted or assessed by any
taxing authority, except for such adjustments or deficiencies which have been
fully paid or finally settled; and (xiv) the Company has delivered to the Parent
true, correct and complete copies of all federal income Tax Returns, examination
reports, and statements of deficiencies assessed against or agreed to by the
Company since December 31, 1993.
(b) There are no outstanding requests, agreements, consents or
waivers to extend the statute of limitations applicable to the assessment of any
Taxes or deficiencies against the Company, and no power of attorney granted by
the Company with respect to any Taxes is currently in force. The Company has
disclosed on its federal income Tax Returns all positions taken therein that
could give rise to a substantial understatement of federal income Tax within the
meaning of Section 6662 of the Code. The Company is not a party to any agreement
providing for the allocation or sharing of Taxes with an entity that is not
directly or indirectly a wholly-owned Subsidiary of the Company. The Company has
not, with regard to any assets or property held, acquired or to be acquired by
it, filed a consent to the application of Section 341(f) of the Code, or agreed
to have Section 341(f)(2) of the Code apply to any disposition of a
18
<PAGE> 316
subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code)
owned by the Company. The Company (i) has not been a member of an affiliate
group filing a consolidated federal income Tax Return (other than a group the
common parent of which was the Company) and (ii) has no liability for Taxes of
any Person (other than any of the Company and its Subsidiaries) under Section
1.1502-6 of the United States Treasury Regulations (or any similar provision of
state, local or foreign law), as a transferee or successor, by contract, or
otherwise.
SECTION 5.13. EMPLOYEE BENEFIT PLANS.
(a) Each Plan and each Benefit Program (as such terms are
defined below) is listed on Schedule 5.13 hereto. No Plan or Benefit Program is
or has been (i) covered by Title IV of the Employer Retirement Income Security
Act of 1974, as amended ("ERISA"), (ii) subject to the minimum funding
requirements of Section 412 of the Code or (iii) a "multi-employer plan" as
defined in Section 3(37) of ERISA, nor has the Company contributed to, or ever
had any obligation to contribute to, any multi-employer plan. Each Plan and
Benefit Program intended to be qualified under Section 401(a) of the Code is
designated as a tax-qualified plan on Schedule 5.13 and is so qualified. No Plan
or Benefit Program provides for any retiree health benefits for any employees or
dependents of the Company other than as required by the Consolidated Budget
Reconciliation Act of 1985, as amended ("COBRA"). There are no claims pending
with respect to, or under, any Plan or any Benefit Program, other than routine
claims for benefits, and there are no disputes or litigation pending or, to the
knowledge of the Companies, threatened, with respect to any such Plans or
Benefit Programs.
(b) The Shareholders have heretofore delivered to Parent true
and correct copies of the following, if any:
(i) each Plan and each Benefit Program listed on
Schedule 5.13, all amendments thereto as of the date hereof and all
current summary plan descriptions provided to employees regarding the
Plans and Benefit Programs;
(ii) each trust agreement and annuity contract (or
any other funding instruments) pertaining to any of the Plans or
Benefit Programs, including all amendments to such documents to the
date hereof;
(iii) each management or employment contract or
contract for personal services and a complete description of any
understanding or commitment between the Company and any officer,
consultant, director, employee or independent contractor of the
Company; and
(iv) a complete description of each other plan,
policy, contract, program, commitment or arrangement providing for
bonuses, deferred compensation, retirement payments, profit sharing,
incentive pay, commissions, hospitalization or medical expenses or
insurance (including, without limitation, health, dental, life and
disability insurance) or any other benefits for any officer,
consultant, director, annuitant, employee or independent contractor of
the Company as such or members of their families (other than directors'
and officers' liability policies), whether or not insured (a "Benefit
19
<PAGE> 317
Program"). For purposes of this Agreement, "Plan" means an "employee
benefit plan" (as defined in Section 3(3) of ERISA) which is or has
been established or maintained, or to which contributions are or have
been made, by the Company or by any trade or business, whether or not
incorporated, which, together with the Company, is under common
control, as described in Section 414(b) or (c) of the Code.
(c) Except as disclosed on Schedule 5.13, to the best
knowledge of the Shareholders, each Plan and Benefit Program has been maintained
and administered in compliance with its terms and in accordance with all
applicable laws, rules and regulations. The Company has no commitment or
obligation to establish or adopt any new or additional Plans or Benefit Programs
or to increase the benefits under any existing Plan or Benefit Program.
(d) Except as set forth on Schedule 5.13, neither the
execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby will (i) result in any payment to be made by
the Company, including, without limitation, severance, unemployment
compensation, golden parachute (defined in Section 280G of the Code) or
otherwise, becoming due to any employee of the Company, or (ii) increase any
benefits otherwise payable under any Plan or any Benefit Program.
(e) As of the date hereof, the Company does not sponsor any
simplified employee pension plans as described in Section 408(k) of the Code and
there are no claims against the Company for benefits relating to any such plans.
SECTION 5.14. EMPLOYEE AND LABOR MATTERS.
(a) Schedule 5.14 hereto includes a true and complete list,
dated as of August 19, 1999, of all employees of the Company, listing the title
or position held, base salary or wage rate and, for the period since July 31,
1999, any bonuses, commissions or profit sharing payable to such employees.
(b) Except as set forth on Schedule 5.14, the Company is not a
party to or bound by any written employment agreements or commitments, other
than on an at-will basis. The Company is in compliance with all applicable laws
respecting the employment and employment practices, terms and conditions of
employment and wages and hours of its employees and are not engaged in any
unfair labor practice. To the best knowledge of the Shareholders, all employees
of the Company who work in the United States are lawfully authorized to work in
the United States according to federal immigration laws. There is no labor
strike or labor disturbance pending or, to the knowledge of the Company or the
Shareholders, threatened against the Company with respect to the Business and,
during the past five years, the Company has not experienced a work stoppage.
(c) Except as set forth on Schedule 5.14, (i) the Company is
not a party to or bound by the terms of any collective bargaining agreement or
other union contract applicable to any employee of the Company and no such
agreement or contract has been requested by any employee or group of employees
of the Company, nor has there been any discussion with respect thereto by
management of the Company with any employees of any of the Companies, (ii)
20
<PAGE> 318
neither the Company nor either of the Shareholders is aware of any union
organizing activities or proceedings involving, or any pending petitions for
recognition of, a labor union or association as the exclusive bargaining agent
for, or where the purpose is to organize, any group or groups of employees of
the Company, or (iii) there is not currently pending, with regard to any of its
facilities, any proceeding before the National Labor Relations Board, wherein
any labor organization is seeking representation of any employees of the
Company.
SECTION 5.15. ENVIRONMENTAL MATTERS. Except as set forth on Schedule
5.15 to this Agreement:
(a) Neither the Company nor any of its Business Facilities (as
defined in Exhibit A) is in violation of, or has violated, or has been or is in
non-compliance with, any Environmental Law, including, but not limited to, the
conduct of the business of the Company or the ownership, use, maintenance or
operation of any of the Business Facilities by the Company.
(b) Except in compliance with Environmental Laws (including,
without limitation, by obtaining necessary Environmental Permits), (i) no
Materials of Environmental Concern (as defined in Exhibit A) have been used,
generated, extracted, mined, beneficiated, manufactured, stored, treated, or
disposed of, or in any other way released (and no release is threatened) by the
Company, on, under or about any Business Facility or transferred or transported
by the Company to or from any Business Facility, and (ii) to the knowledge of
the Shareholders no Materials of Environmental Concern have been generated,
manufactured, stored or treated or disposed of, or in any other way released
(and no release is threatened) by the Company, on, under, about or from any
property adjacent to any current Business Facility;
(c) There are no Environmental Claims known, pending or, to
the knowledge of the Shareholders, threatened against the Company or any of its
Business Facilities, and, to the knowledge of the Shareholders, there is no
basis for same;
(d) The Company and all of its Business Facilities have
obtained all Environmental Permits applicable to the operation of the business
of the Company as presently conducted, and the Company and its Business
Facilities are in compliance with all terms and conditions of such Environmental
Permits. The Company and all of its Business Facilities have timely filed
applications for renewal of all such Environmental Permits. Regarding all
Environmental Permits for which renewal, amendment, or modification is sought or
pending, no material expenditures, capital improvements, or changes in operation
will be necessary as a condition or as a result of such renewal, amendment, or
modification;
(e) The Company has all environmental and pollution control
equipment necessary to comply with all Environmental Laws (including, without
limitation, to comply with all applicable Environmental Permits applicable to
the operation of the business of the Company as presently conducted);
(f) To the knowledge of the Shareholders, there are no
Materials of Environmental Concern on any Business Facility of the Company
exceeding any standard or limitation established, published or promulgated
pursuant to Environmental Laws, or which
21
<PAGE> 319
would require reporting to any Governmental Authority or Remediation to comply
with the Requirements of Environmental Laws (as defined in Exhibit A);
(g) To the knowledge of the Shareholders, none of the off-site
locations where Materials of Environmental Concern generated from any Business
Facility of the Company, or for which the Company has arranged for their
disposal, treatment or application, has been nominated or identified as a
facility which is subject to an existing or potential claim under Environmental
Laws;
(h) The Company has not been named as a potentially
responsible party under, and no Business Facility of the Company has been
nominated or identified as a facility which is subject to, an existing or
potential claim under CERCLA or comparable Environmental Laws, and, to the
knowledge of the Shareholders, no Business Facility of the Company is subject to
any Lien arising under Environmental Laws;
(i) The Company has not received any notice of any release or
threatened release of Materials of Environmental Concern, or remedial obligation
under, Environmental Laws or Permits, relating to the ownership, use,
maintenance, operation of any Business Facility of the Company or in connection
with the business of the Company, nor, to the knowledge of the Shareholders, is
there any basis for any of the foregoing, nor has the Company voluntarily
undertaken Remediation or other decontamination or cleanup of any facility or
site or entered into any agreement for the payment of costs associated with such
activity;
(j) To the knowledge of the Shareholders, there is no
Environmental Law or Requirement of Environmental Laws that will require future
compliance costs on the part of the Company in excess of One Hundred Thousand
Dollars ($100,000) above costs currently expended in the ordinary course of
business;
(k) The Company has filed all notices, notifications,
financial security, waste managements plans, or applications which are required
to be filed by the Company for the operation of its business or the use or
operation of any Business Facility of the Company; and (l) Except for sludge and
processed by-products, no current Business Facility (or equipment thereon) of
the Company contains any lead containing materials, asbestos containing
materials or polychlorinated biphenyls in any form.
For purposes of this Section, the "Company" shall include any entity which is,
in whole or in part, a predecessor of the Company and all of its present and
former Subsidiaries and their successors of predecessors.
SECTION 5.16. NON-COMPETITION AGREEMENTS. Except as disclosed on
Schedule 5.16 hereto, neither the Company nor either of the Shareholders is a
party to any agreement which purports to restrict or prohibit any of them from,
directly or indirectly, engaging in any business currently engaged in by the
Company. None of the Shareholders is a party to any agreement which, by virtue
of such person's relationship with the Company, restricts the Company or any
22
<PAGE> 320
Subsidiary of the Company from, directly or indirectly, engaging in any of the
businesses described above.
SECTION 5.17. TITLE TO ASSETS. Except as disclosed on Schedule 5.17,
the Company has good and indefeasible title to its assets and valid leasehold
interests in its leased assets and properties, as reflected in the most recent
balance sheet included in the Company's Financial Statements, except for
properties and assets that have been disposed of in the ordinary course of the
conduct of the Business since the date of the latest balance sheet included
therein, free and clear of all Liens, except (i) Liens for current taxes,
payments of which are not yet delinquent, (ii) such imperfections in title and
easements and encumbrances, if any, as are not substantial in character, amount
or extent and do not interfere with the present use of the property subject
thereto or affected thereby, or otherwise impair the Company's business
operations (in the manner presently carried on by the Company), or (iii) any
Lien securing any debt or obligation described on Schedule 5.17 which is
expressly referenced as being secured. All leases under which the Company leases
any real property have been delivered to Parent and are in good standing, valid
and effective in accordance with their respective terms, and there is not, under
any of such leases, any existing default or event which, with notice or lapse of
time or both, would become a default by or on behalf of the Company or its
Subsidiaries, or by or on behalf of any third party.
SECTION 5.18. CONTRACTS, AGREEMENTS, PLANS AND COMMITMENTS. Schedule
5.18 hereto sets forth a complete list of the following contracts, agreements,
plans and commitments (collectively, the "Contracts") to which the Company is a
party or by which the Company or any of its assets is bound as of the date
hereof:
(a) any contract, commitment or agreement that involves
aggregate expenditures by the Company of more than Fifty Thousand Dollars
($50,000) per year;
(b) any contract or agreement (including any such contracts or
agreements entered into with any Governmental Authority) relating to the
maintenance or operation of the Business that involves aggregate expenditures by
the Company of more than Fifty Thousand Dollars ($50,000);
(c) any indenture, loan agreement or note under which the
Company has outstanding indebtedness, obligations or liabilities for borrowed
money;
(d) any lease or sublease for the use or occupancy of real
property;
(e) any non-competition agreement described in Section 5.16;
(f) any guarantee, direct or indirect, by any Person of any
contract, lease or agreement entered into by the Company;
(g) any partnership, joint venture or construction and
operation agreement;
23
<PAGE> 321
(h) any agreement of surety, guarantee or indemnification with
respect to which the Company is the obligor, outside of the ordinary course of
business;
(i) any contract that requires the Company to pay for goods or
services substantially in excess of its estimated needs for such items or the
fair market value of such items;
(j) any contract, agreement, agreed order or consent agreement
that requires the Company to take any actions or incur any expenses to remedy
non-compliance with any Environmental Law; and
(k) any other contract material to the Company or its
business.
True, correct and complete copies of each of such contracts, agreements, plans
and commitments have been delivered to or made available for inspection by
Parent. All such contracts, agreements, plans and commitments (i) were duly and
validly executed and delivered by the Company and (ii) to the knowledge of the
Shareholders, are valid and in full force and effect. Except as set forth on
Schedule 5.18, the Company has fulfilled all material obligations required of
the Company under each such contract, agreement, plan or commitment to have been
performed by it prior to the date hereof, including timely paying all interest
on its debt as such interest has become due and payable. Except as set forth on
Schedule 5.18, there are no counterclaims or offsets under any of such
contracts, agreements, plans and commitments.
The consummation of the Merger will vest in the Surviving Corporation
all rights and benefits under the Contracts and the right to operate the
Company's business and assets under the terms of the Contracts and the manner
currently operated and used by the Company.
SECTION 5.19. SUPPLIES. To the knowledge of the Shareholders, the
Supplies of the Company are of a quantity and quality that have been normal for
the Company in the ordinary course of business of the Company.
SECTION 5.20. BROKERS AND FINDERS. Except as disclosed on Schedule
5.20, the Company has not entered into any contract, arrangement or
understanding with any Person or firm which may result in the obligation of the
Company to pay any finder's fees, brokerage or agent commissions or other like
payments in connection with the transactions contemplated hereby. There is no
claim for payment by the Company of any investment banking fees, finder's fees,
brokerage or agent commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby.
SECTION 5.21. INTELLECTUAL PROPERTY. To the knowledge of the
Shareholders, except as disclosed on Schedule 5.21 hereto, the Company has
rights to use, whether through ownership, licensing or otherwise, all patents,
trademarks, service marks, trade names, copyrights, software, trade secrets and
other proprietary rights and processes that are material to its business as now
24
<PAGE> 322
conducted (collectively, the "Company Intellectual Property Rights"). Except as
set forth on Schedule 5.21, the Company does not own any patents. The Company
has no knowledge of any infringement by any other Person of any of the Company
Intellectual Property Rights, and, other than within the ordinary course of
business, the Company has not entered into any agreement to indemnify any other
party against any charge of infringement of any of the Company Intellectual
Property Rights. To the knowledge of the Shareholders, the Company has not and
does not violate or infringe any intellectual property right of any other
Person, and the Company has not received any communication alleging that they
violated or infringed the intellectual property right of any other person. The
Companies have not been sued for infringing any intellectual property right of
another person. There is no claim or demand of any Person pertaining to, or any
proceeding which is pending or, to the knowledge of the Company, threatened,
that challenges the rights of the Company in respect of any Company Intellectual
Property Rights, or that claims that any default exists under any Company
Intellectual Property Rights. None of the Company Intellectual Property Rights
is subject to any outstanding order, ruling, decree, judgment or stipulation by
or with any court, tribunal, arbitrator, or other Governmental Authority.
SECTION 5.22. RELATIONSHIPS. Except as set forth on Schedule 5.22,
since January 1, 1999, the Company has not received notice from any customer,
supplier or any party to any Contract involving more than Fifty Thousand Dollars
($50,000) annually with the Company (each a "Contract Party") that such Contract
Party intends to discontinue doing business with the Company, and, since such
date, no Contract Party has indicated any intention (a) to terminate its
existing business relationship with any of the Companies or (b) not to continue
its business relationship with the Company, whether as a result of the
transactions contemplated hereby or otherwise. Except as set forth on Schedule
5.22, the Company has not entered into or participated in any related party
transaction during the past year.
SECTION 5.23. YEAR 2000. To the knowledge of the Shareholders, after
reasonable investigation by the Shareholders and except as disclosed on Schedule
5.23 hereto, all emissions monitors and computers controlling the operation of
incinerators used by the Company are Year 2000 Compliant. "Year 2000 Compliant"
means as to any device (including, without limitation, all software, firmware,
microprocessing chips and/or other data processing devices related to such
device) utilized by and material to the business operations of the Company, that
such device will be able to accurately process date data from, into and between
the twentieth and twenty-first centuries when used in accordance with the
applicable documentation setting forth the requirements for the use of the
specific item.
SECTION 5.24. CERTAIN PAYMENTS. To the best knowledge of the
Shareholders, neither the Company nor any stockholder, officer, director or
employee of the Company has paid or received or caused to be paid or received,
directly or indirectly, in connection with any of the business of the Company
(a) any bribe, kickback or other similar payment to or from any domestic or
foreign government or agency thereof or any other Person or (b) any contribution
to any domestic or foreign political party or candidate (other than from
personal funds of such stockholder, officer, director or employee not reimbursed
by the Company or as permitted by applicable law).
25
<PAGE> 323
SECTION 5.25. BOOKS AND RECORDS. To the knowledge of the Shareholders,
the corporate minute books and other organizational records of the Company are
correct and complete in all material respects and the signatures appearing on
all documents contained therein are the true signatures of the person purporting
to have signed the same. To the knowledge of the Shareholders, all actions
reflected in said books and records were duly and validly taken in compliance
with the laws of the applicable jurisdiction and no meeting of the Board of
Directors of the Company or any committee thereof has been held for which
minutes have not been prepared and are not contained in the minute books. All
such books and records are located in the offices of the Company.
SECTION 5.26. CONDITION AND SUFFICIENCY OF ASSETS. To the knowledge of
the Shareholders and the Company, except as disclosed on Schedule 5.26 hereto,
all buildings, improvements and equipment owned or leased by the Company is
structurally sound, in good operating condition and repair (subject to normal
wear and tear) and adequate for the uses to which they are being put, and none
of the buildings, improvements and equipment owned or leased by the Company is
in need of maintenance or repairs except for ordinary, routine maintenance and
repairs not in excess of $100,000 per repair.
ARTICLE VI
CONDUCT OF BUSINESS PENDING CLOSING
SECTION 6.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
After the date hereof and prior to the Closing Date, unless Parent shall
otherwise agree in writing, the Company shall, and the Shareholders shall cause
the Company to:
(a) conduct its businesses in the ordinary and usual course of
business and consistent with past practice;
(b) not (i) amend or propose to amend its charter or bylaw,
(ii) split, combine, reorganize, reclassify, recapitalize or take any similar
action with respect to its outstanding capital stock or (iii) declare, set aside
or pay any dividend or distribution payable in cash, stock, property or
otherwise;
(c) not issue, sell, pledge or dispose of, or agree to issue,
sell, pledge or dispose of, any additional share of, or any options, warrants or
rights of any kind to acquire any share of, its capital stock of any class or
any debt or equity securities convertible into or exchangeable for such capital
stock;
(d) not (i) incur or become contingently liable with respect
to any indebtedness for borrowed money, (ii) redeem, purchase, acquire or offer
to redeem, purchase or acquire any shares of its capital stock or any options,
warrants or rights to acquire any of its capital stock or any security
convertible into or exchangeable for its capital stock, (iii) make any
acquisition of any assets or businesses other than expenditures for fixed or
capital assets described on Schedule 3.3(d) hereto or in the ordinary course of
business not exceeding $100,000 in any instance or $200,000 in the aggregate,
(iv) sell, pledge, dispose of or encumber
26
<PAGE> 324
any assets or businesses other than sales in the ordinary course of business or
(v) enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing;
(e) use all reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of its respective present
officers and key employees, and preserve the goodwill and business relationships
with customers and others having business relationships with them and not engage
in any action, directly or indirectly, with the intent to adversely impact the
transactions contemplated by this Agreement;
(f) not enter into or amend any employment, severance, special
pay arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees;
(g) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law or as contemplated hereunder;
(h) use commercially reasonable efforts to maintain with
financially responsible insurance companies insurance on its tangible assets and
its businesses in such amounts and against such risks and losses as are
consistent with past practice;
(i) not make, change or revoke any material Tax election or
make any material agreement or settlement regarding Taxes with any taxing
authority;
(j) not make any change in the Company's financial, Tax or
accounting methods, practices or policies, or in any assumption underlying such
a method, practice or policy;
(k) give prompt written notice to Parent of the commencement
of any Environmental Claim, or non-routine inspection by any Governmental
Authority with responsibility for enforcing or implementing any applicable
Environmental Laws, and provide to Parent such information as Parent may
reasonably request regarding any such Environmental Claim, any developments in
connection therewith, and, as applicable, any anticipated or actual response
thereto;
(l) not enter into or assume any contracts or agreements
having a value or imposing an obligation upon the Company in excess of $100,000
annually and all contracts or agreements having a value to or imposing an
obligation on the Company that have remaining obligations of $200,000 or more,
regardless of the annual payment;
(m) maintain its books of account and records in the usual,
regular and ordinary manner consistent with past policies and practice;
27
<PAGE> 325
(n) not compromise, settle, grant any waiver or release
relating to or otherwise adjust any litigation or claims of any nature
whatsoever pending against the Company; and
(o) not take any action or omit to take any action, which
action or omission would result in a breach of any of the representations and
warranties set forth in this Agreement.
SECTION 6.2. OTHER OFFERS. Except in connection with the transactions
contemplated by this Agreement, from and after the date hereof, and continuing
through the earlier of Closing or the termination of this Agreement in
accordance with the terms hereof, the Shareholders and the Company shall not,
and shall not permit the Company's officers, directors, employees, Affiliates,
representatives or agents to, directly or indirectly, (i) solicit, initiate or
knowingly encourage any offer or proposal for, or any indication of interest in,
a merger or business combination involving the Company or the acquisition of an
equity interest in, or any substantial portion of the assets of the Company or
(ii) engage in negotiations with or disclose any nonpublic information relating
to the Company or Parent, or afford access to the properties, books or records
of the Company, to any Person. The Company shall promptly notify and provide
copies to Parent of any offer, proposal, solicitation or indication of interest,
or communication with respect thereto, delivered to or received from any third
party.
SECTION 6.3. ACCESS TO INFORMATION. The Shareholders and the Company
shall give the Parent and Merger Sub, and their respective accountants, counsel,
financial advisors, and other representatives (the "Parent Representatives")
full access (and shall otherwise fully cooperate, including by making available
copies of all of the following documents which are susceptible to photostatic
reproduction) during normal business hours throughout the period prior to
Closing to all of the Company's respective properties, books, records
(including, but not limited to, Tax Returns and any and all records or documents
which are within the possession of governmental or regulatory authorities,
agencies or bodies, and the disclosure of which the Company can facilitate or
control), Contracts, premises, permits, Environmental Permits, licenses,
Governmental Authorizations, commitments of any nature (whether written or oral)
and records, and shall permit the Parent, Merger Sub and/or Parent
Representatives to make such inspections (including without limitation
environmental inspections, sampling, and analysis) as they may require and
furnish to the Parent, Merger Sub and/or Parent Representatives during such
period all such information concerning the Company and its affairs as the Parent
may reasonably request.
SECTION 6.4. COMMERCIALLY REASONABLE EFFORTS. The Shareholders and
Company will use all reasonable commercial efforts to cause the representations
and warranties contained in Articles IV-A and V hereof to continue to be true
and correct through the Closing Date and to obtain the satisfaction of the
conditions to Closing set forth in Section 8.1 and 8.3 hereof.
ARTICLE VII
CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES
SECTION 7.1. CONSENTS. Subsequent to the Closing Date, the Shareholders
will use all reasonable commercial efforts, at the request of the Parent or
Merger Sub provided that the
28
<PAGE> 326
Parent reimburses the Shareholders for all out of-pocket costs and expenses, to
assist the Parent or Merger Sub in obtaining all necessary, proper, appropriate
or advisable consents, novations, approvals or waivers which the Parent or
Merger Sub may reasonably seek from time to time in order to effect, confirm or
document the transactions contemplated by this Agreement, including using their
reasonable commercial efforts to obtain all necessary, proper, appropriate or
advisable consents, novations, approvals or waivers of third parties required in
order to preserve material contractual relationships of the Company.
SECTION 7.2. FURTHER ASSURANCES. The Parties shall execute and deliver
to the others, after the Closing Date, any other instrument which may be
requested by another Party and which is reasonably appropriate to perfect or
evidence any of the sales, assignments, transfers or conveyances contemplated by
this Agreement or to obtain any consents or licenses necessary to operate the
Business in the manner operated by the Company prior to the date hereof.
SECTION 7.3. EXPENSES AND FEES. The Company shall pay all costs and
expenses incurred by the Company in connection with this Agreement and the
transactions contemplated hereby, including, without limitation, any and all
broker's commissions, employee bonuses, and the fees and expenses of the
Company' attorneys and accountants. The Company will make all necessary
arrangements so that Parent or Merger Sub will not be charged with any such
costs or expenses, and all such costs and expenses shall be accrued on the
financial books and records of the Company prior to Closing and shall be
included in the calculation of Net Working Capital. Each Shareholder shall be
responsible for all costs and expenses incurred by such Shareholder in
connection with this Agreement and the transactions contemplated hereby,
including, without limitation, the fees and expenses of the Shareholder's
attorneys. Parent shall pay all costs and expenses incurred by Parent and Merger
Sub in connection with this Agreement and the transactions contemplated hereby,
including without limitation, the fees and expenses of their attorneys and
accountants.
SECTION 7.4. AGREEMENT TO COOPERATE. Subject to the terms and
conditions herein provided, the Parties shall use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including using its reasonable efforts to obtain all necessary, proper or
advisable waivers, consents and approvals under applicable laws and regulations
to consummate and make effective the transactions contemplated by this
Agreement, including using its reasonable efforts to obtain all necessary or
appropriate waivers, consents or approvals of third parties required in order to
preserve material contractual relationships of the Company.
SECTION 7.5. NOTIFICATION OF CERTAIN MATTERS. Each of the Parties
agrees to give prompt notice to each other Party of, and to use their respective
reasonable best efforts to prevent or promptly remedy, (i) the occurrence or
failure to occur or the impending or threatened occurrence or failure to occur,
of any event which occurrence or failure to occur would be likely to cause any
of its representations or warranties in this Agreement to be untrue or
inaccurate in any material respect (or in all respects in the case of any
representation or warranty containing any materiality qualification) at any time
from the date hereof to the Closing and (ii) any material failure (or any
failure in the case of any covenant, condition or agreement containing any
29
<PAGE> 327
materiality qualification) on its part to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder. The
Shareholders shall give prompt written notice to Parent of the commencement of
any Environmental Claim, or inspection by any Governmental Authority with
responsibility for enforcing or implementing any applicable Environmental Laws,
and provide to Parent such information as Parent may reasonably request
regarding such Environmental Claim, any developments in connection therewith,
and, as applicable, the Company' anticipated or actual response thereto.
Notwithstanding the other provisions of this Section 7.5 and except for those
supplements to the Disclosure Schedules permitted in Section 7.10 hereof, the
delivery of any notice pursuant to this Section shall not limit or otherwise
affect the remedies available hereunder to the Party receiving such notice.
SECTION 7.6. REGISTRATION STATEMENTS.
(a) Parent shall use reasonable efforts to file with the SEC
promptly upon receipt of a written request from all of the Shareholders as a
group (provided that such request may be made or delivered no earlier than
August 31, 2000), the Registration Statement registering all of the Parent
Shares and shall use reasonable efforts to have the Registration Statement
declared effective by the SEC as promptly as reasonably practicable. Parent
shall also take any action required to be taken under applicable state blue sky
or securities laws in connection with the issuance and registration of Parent
Shares pursuant hereto. Parent and the Shareholders shall promptly furnish to
each other all information, and take such other actions, as may reasonably be
requested in connection with any action by any of them in connection with this
Section. Except as otherwise provided in this Section 7.6, no Parent Shares may
be transferred or sold during the twelve (12) months following Closing. The
Registration Statement shall cover the resale of the Parent Shares on Form S-3,
if available, and the Parent may combine registrations of Parent Shares under
this Section 7.6 with registrations of Parent Common Stock required under the
Purchase and Sale Agreement. The Parent shall use its commercially reasonable
efforts to cause such shelf Registration Statement to become effective as soon
as practical after such filing, and to cause the Parent Shares to be qualified
in such state jurisdictions as the Shareholders may reasonably request. The
Parent shall use commercially reasonable efforts to keep the shelf Registration
Statement current and effective for one year after it is first declared
effective.
(b) If Parent proposes to register for its own account any of
its securities under the Securities Act for sale (other than a registration
statement on Form S-4 or S-8, a registration statement filed in connection with
an exchange offer or an offering of securities solely to Parent's existing
shareholders, or a registration statement filed in connection with an exchange
offer or an offering of securities by any of the Parent's shareholders), Parent
shall give written notice to the Shareholders of the Parent's intention to
effect such a registration not later than 15 days prior to the anticipated date
of filing with the SEC of a Registration Statement, which notice shall offer the
Shareholders the opportunity to include in such Registration Statement any of
the Parent Shares held by the Shareholders that the Shareholders may request be
included therein (a "Piggyback Registration"). Notwithstanding the preceding
sentence, Parent's obligation under this Section 7.6(b) shall be limited to
registrations as to which a Registration Statement is to be filed (i) during the
period beginning on the first anniversary of the Closing Date and ending on the
fifth anniversary of the Closing Date, and (ii) only if the
30
<PAGE> 328
Shareholders are subject to the volume restrictions set forth in Rule 144 of the
Securities Act. Subject to the provisions of this Agreement, Parent will use its
reasonable efforts to cause all the Parent Shares for which the Shareholders
have requested registration to be registered under the Securities Act to the
extent required to permit the sale by the Shareholders of such Parent Shares;
provided, that if a Piggyback Registration relates to an underwritten public
offering and the managing underwriter or underwriters believe that the inclusion
of all shares requested to be included in the proposed registration would
adversely affect the marketing of such shares, Parent may first include in such
registration all securities Parent proposes to sell, and The Shareholders shall
accept a reduction (including a total elimination) in the number of shares to be
included in such registration, pro rata with the other holders of Parent Common
Stock making requests for registration, on the basis of the number of shares of
Parent Common Stock so requested to be included by the Shareholders and the
other selling shareholders. Nothing in this Section 7.6(b) shall limit Parent's
ability to withdraw a Registration Statement it has filed either before or after
effectiveness.
(c) Parent shall pay the expenses incurred in connection with
any proposed registration of securities by Parent under this Section 7.6,
whether or not effected or consummated, including, without limitation, all
registration and filing fees, printing expenses, and fees and disbursements of
counsel and accountants for Parent.
SECTION 7.7. PURCHASER'S LIQUIDITY PROGRAM. Notwithstanding any other
provision set forth herein, with respect to all sales by the Shareholders of
Parent Shares through the NASDAQ or any such other exchange, the Shareholders
may only sell such shares on any day after the first sale of Parent Common Stock
has occurred through the NASDAQ or such other exchange and on such day, the
Shareholders may only sell 1,000 Parent Shares in the aggregate for each 1,000
shares of Parent Common Stock sold by unrelated third parties through the NASDAQ
or such other exchange on such day. In no event shall the plan of distribution
of Parent Shares include the use of a contractual underwriter, nor shall Parent
have any obligation to enter into an underwriting agreement with any investment
banking firm participating as a broker in the execution of any such resales.
Parent agrees that it will furnish to the Shareholders such number of
prospectuses, prospectus supplements, or other documents incident to any
registration, qualification or compliance referred to herein as the Shareholders
from time to time may reasonably request.
SECTION 7.8. EXCHANGE LISTING. Parent shall use its reasonable efforts
to effect, at or before the effective date of a Registration Statement,
authorization for listing on NASDAQ, upon official notice of issuance, of the
shares of Parent Common Stock to be issued pursuant to the transactions
contemplated by this Agreement.
SECTION 7.9. PUBLIC STATEMENTS. Except as required by law or the
National Association of Securities Dealers ("NASD"), the Parties shall obtain
the written consent of the other Parties prior to issuing any press release or
any written public statement with respect to this Agreement or the transactions
contemplated hereby and shall not issue any such press release or written public
statement prior to such consent, which will not be unreasonably withheld.
31
<PAGE> 329
SECTION 7.10. SUPPLEMENTS TO DISCLOSURE SCHEDULES. From time to time
prior to the date ten (10) days prior to Closing, the Shareholders may update
the Disclosure Schedules to this Agreement in order to make the information set
forth therein complete and accurate, so long as such an update does not disclose
an event, fact or condition which could have a Material Adverse Effect on the
Company. In the event such an update discloses an event or condition which could
have a Material Adverse Effect on the Company, then Parent may terminate this
Agreement if (i) the Parent notified the Shareholders that Parent believed, in
its reasonable business judgment, that the updated information disclosed an
event, fact or condition which could have a Material Adverse Effect on the
Company, (ii) the Parent negotiated in good faith with the Shareholders with
respect to adjustments, if any, to the terms of this Agreement as a result of
the updated information, and (iii) the Parties failed to agree on any such
adjustments.
ARTICLE VIII
CONDITIONS TO CLOSING
SECTION 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each Party to effect the Merger shall be
subject to the fulfillment or waiver, if permissible, of the following
conditions on or prior to the Effective Time:
(a) no preliminary or permanent injunction or other order or
decree by any federal or state court which prevents the consummation of the
Merger shall have been issued and remain in effect (each Party agreeing to use
its reasonable efforts to have any such injunction, order or decree lifted); and
(b) no action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the consummation of
the Merger or make the consummation of the Merger illegal; and
(c) the transactions contemplated by the Purchase and Sale
Agreement dated the same date as this Agreement by and among Parent, Mr.
Toretta, Mrs. Guerrera, the Estate, the Trust and Eileen Toretta, as Trustee of
the Paul A. Toretta 1998 Grat (the "Purchase and Sale Agreement"), shall have
been consummated.
SECTION 8.2. CONDITIONS TO OBLIGATION OF THE COMPANY AND THE
SHAREHOLDERS TO EFFECT THE MERGER. Unless waived by the Company and the
Shareholders, the obligations of the Company and the Shareholders to effect the
Merger shall be subject to the fulfillment of the following additional
conditions on or prior to the Closing Date:
(a) Parent and Merger Sub shall have performed in all material
respects (or in all respects in the case of any agreement containing any
materiality qualification) their agreements contained in this Agreement required
to be performed on or prior to the Effective Time;
32
<PAGE> 330
(b) the representations and warranties of Parent and Merger
Sub contained in this Agreement shall be true and correct in all material
respects (or in all respects in the case of any representation or warranty
containing any materiality qualification) on and as of the date made and on and
as of the Closing Date as if made at and as of such date;
(c) the Shareholders shall have received certificates executed
on behalf of Parent and Merger Sub by the President or a Vice President of the
Parent and Merger Sub with respect to (a) and (b) above;
(d) the Shareholders shall have received legal opinions from
in-house legal counsel to the Parent, dated the Closing Date, in a form
reasonably satisfactory to the Sellers; and
(e) the Parent shall have entered into a Consulting Agreement
with Mr. Toretta, in the form attached hereto as Exhibit D.
SECTION 8.3. CONDITIONS TO OBLIGATIONS OF PARENT TO EFFECT THE MERGER.
Unless waived by Parent and Merger Sub, the obligations of Parent and Merger Sub
to effect the Merger shall be subject to the fulfillment of the following
additional conditions on or prior to the Effective Time:
(a) the Shareholders and the Company shall have performed in
all material respects (or in all respects in the case of any agreement
containing any materiality qualification) their agreements contained in this
Agreement required to be performed on or prior to the Closing Date;
(b) the representations and warranties of the Shareholders and
the Company contained in this Agreement shall be true and correct in all
material respects (or in all respects in the case of any representation or
warranty containing any materiality qualification) on and as of the date made
and on and as of the Closing Date as if made at and as of such date;
(c) since the date hereof, there shall have been no changes
that constitute, and no event or events shall have occurred which have resulted
in or constitute, a Material Adverse Effect;
(d) Parent shall have received legal opinions from legal
counsel to the Shareholders and the Company, dated the Closing Date, in a form
reasonable satisfactory to Parent, and as described in Section 3.8(a);
(e) the Shareholders shall have executed Release of Claims
Agreements, in the form attached hereto as Exhibit C;
(f) Mr. Toretta, individually, shall have entered into a
Consulting Agreement, in the form attached hereto as Exhibit D;
33
<PAGE> 331
(g) Mr. Toretta, individually, shall have entered into a
Covenant Not to Compete Agreement, in the form attached hereto as Exhibit E;
(h) the Estate, Mrs. Guerrera, individually, the Trust and the
Trucking Company shall have entered into Covenant Not to Compete Agreements, in
the form attached hereto as Exhibit F;
(i) Parent shall have received certificates representing the
Company Common Stock duly endorsed for transfer as described in Section
3.8(a)(i);
(j) Parent shall have received a certificate executed by each
of the Shareholders with respect to (a) and (b) above; and
(k) Parent shall have entered into employment agreements with
Mark McCormick and Terry Szczesiul.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1. TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby abandoned at any time prior to the Effective
Time in the following manner:
(a) Any Shareholder shall have the right to terminate this
Agreement:
(i) if the representations and warranties of Parent
and Merger Sub shall fail to be true and correct in all material
respects (or in all respects in the case of any representation or
warranty containing any materiality qualification) on and as of the
date made or, except in the case of any such representations and
warranties made as of a specified date, on and as of any subsequent
date as if made at and as of such subsequent date and such failure
shall not have been cured in all material respects (or in all respects
in the case of any representation or warranty containing any
materiality qualification) within 15 days after written notice of such
failure is given to Parent by the Shareholders;
(ii) if the Merger is not completed by November 1,
1999 (provided that (a) the right to terminate this Agreement under
this Section 9.1(a)(ii) shall not be available to the Shareholder if
the failure of the Shareholder to fulfill any obligation to Parent or
Merger Sub under or in connection with this Agreement has been the
cause of or resulted in the failure of the Merger to occur on or before
such date and (b) Parent has not exercised its option to extend under
Section 9.4);
(iii) if the Merger is enjoined by a final,
unappealable court order; or
(iv) if Parent or Merger Sub (A) fails to perform in
any material respect (or in all respects in the case of any covenant
containing any materiality qualification) any of its covenants in this
Agreement and (B) does not cure such default in all material
34
<PAGE> 332
respects (or in all respects in the case of any covenant containing
any materiality qualification) within 15 days after notice of such
default is given to Parent by the Shareholder.
(b) Parent shall have the right to terminate this Agreement;
(i) if the representations and warranties of the
Company or the Shareholders shall fail to be true and correct in all
material respects (or in all respects in the case of any representation
or warranty containing any materiality qualification) on and as of the
date made or, except in the case of any such representations and
warranties made as of a specified date, on and as of any subsequent
date as if made at and as of such subsequent date and such failure
shall not have been cured in all material respects (or in all respects
in the case of any representation or warranty containing any
materiality qualification) within 15 days after written notice of such
failure is given to the Shareholders by Parent;
(ii) if the Merger is not completed by November 1,
1999, as such date may be extended pursuant to Section 9.4 below
(provided that the right to terminate this Agreement under this Section
9.1(b)(ii) shall not be available to Parent if the failure of Parent to
fulfill any obligation to the Shareholders under or in connection with
this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date);
(iii) if the Shareholders or the Company (A) fail to
perform in any material respect (or in all respects in the case of any
covenant containing any materiality qualification) any of their
covenants in this Agreement and (B) do not cure such default in all
material respects (or in all respects in the case of any covenant
containing any materiality qualification) within 15 days after notice
of such default is given to the Shareholders by Parent; or
(iv) pursuant to Section 7.10.
(c) The Shareholders and Parent mutually agree in writing.
SECTION 9.2. EFFECT OF TERMINATION. The following provisions shall
apply in the event of a termination of the Agreement:
(a) If this Agreement is terminated by either Parent or the
Shareholders pursuant to the provisions of Section 9.1, this Agreement shall
forthwith become void and there shall be no further obligations on the part of
the Shareholders, Parent, Company or Merger Sub, or their respective
stockholders, directors, officers, employees, agents or representatives.
Notwithstanding the preceding sentence or any other provision set forth herein,
nothing in this Section 9.2 shall relieve any Party from liability for any
breach of this Agreement, including, without limitation, any breach of the
prohibition in Section 7.10 against updating the Disclosure Schedules with
information which could have a Material Adverse Effect on the Company.
35
<PAGE> 333
(b) The Parties acknowledge and agree that Parent, as a result
of the actual damages Parent would sustain by reason of such negligent or
willful failure of the Company or the Shareholders to perform their obligations
hereunder, could not be made whole by monetary damages, and it is accordingly
agreed that Parent shall have the right to elect, in addition to any and all
other remedies at law or in equity, to enforce specific performance under this
Agreement and the Company or the Shareholders waive the defense in any such
action for specific performance that a remedy at law would be adequate.
SECTION 9.3. EXTENSIONS; WAIVER. At any time prior to the Effective
Time, the Parties may (a) extend the time for the performance of any of the
obligations or other acts of the other Parties, (b) waive any inaccuracies in
the representations and warranties contained herein or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions herein. Any agreement on the part of a Party to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such Party.
SECTION 9.4. PARENT'S OPTION TO EXTEND. At Parent's option (exercised
by providing written notice to the Shareholders prior to November 1, 1999), the
deadline of November 1, 1999 set forth in Sections 9.1(a)(ii) and 9.1(b)(ii),
above, may be extended to December 31, 1999; provided, however, that if the
transactions contemplated hereby fail to close by the expiration of such
extended period, Parent shall pay the reimbursement payment set forth in Section
9.4 of the Purchase and Sale Agreement as reimbursement for the costs and
expenses incurred by the Company in connection with the negotiation and
execution of this Agreement, as well as the Purchase and Sale Agreement, unless
the Shareholders have breached this Agreement or the failure of any Shareholder
to fulfill any obligation to Purchaser under or in connection with this
Agreement has been the cause of or resulted in the failure of the transactions
contemplated hereby to close before the expiration of such extended period.
ARTICLE X
INDEMNIFICATION AND LIMITATION ON LIABILITY
SECTION 10.1. THE SHAREHOLDERS' INDEMNITY OBLIGATIONS.
(a) Each Shareholder shall, severally but not jointly,
indemnify and hold harmless the Company (after the Closing), Parent and the
Company's (after the Closing) and the Parent's respective officers, directors,
stockholders, employees, agents, representatives and Affiliates (each a "Parent
Indemnified Party") from and against any and all claims, actions, causes of
action, arbitrations, proceedings, losses, damages, remediations, liabilities,
strict liabilities, judgments, fines, penalties and expenses (including, without
limitation, reasonable attorneys' fees) (collectively, the "Indemnified
Amounts") paid, imposed on or incurred by a Parent Indemnified Party, directly
or indirectly, (i) relating to, resulting from or arising out of (x) any breach
or misrepresentation in any of the representations and warranties made by such
Shareholder in Article IV-A of this Agreement, or any certificate or instrument
delivered by such Shareholder in connection with this Agreement, or (y) any
violation or breach by such Shareholder of, or default by such Shareholder
under, the terms of this Agreement or any certificate or instrument delivered by
such Shareholder in connection with this Agreement, or (ii)
36
<PAGE> 334
relating to, resulting from or arising out of any allegation of a third party of
the events described in Sections 10.1(a)(i), above.
(b) The Shareholders shall, jointly and severally, indemnify
and hold harmless the Parent and the Company (after the Closing) and the other
Parent Indemnified Parties from and against any and all Indemnified Amounts
paid, imposed on or incurred by a Parent Indemnified Party, directly or
indirectly, (i) relating to, resulting from or arising out of (x) any breach or
misrepresentation in any of the representations and warranties made by the
Company or the Shareholders in Article V of this Agreement, including without
limitation with respect to environmental matters, or any certificate or
instrument delivered in connection with this Agreement, or (y) any violation or
breach by the Company of, or default by the Company under, the terms of this
Agreement or any certificate or instrument delivered by the Company in
connection with this Agreement, or (ii) relating to, resulting from or arising
out of any allegation of a third party of the events described in Sections
10.1(b)(i), above.
(c) For purposes of Section 10.1(a) and (b), Indemnified
Amounts shall include without limitation those Indemnified Amounts ARISING OUT
OF THE STRICT LIABILITY (INCLUDING BUT NOT LIMITED TO STRICT LIABILITY ARISING
PURSUANT TO ENVIRONMENTAL LAWS) OR NEGLIGENCE OF ANY OF THE PARTIES, INCLUDING
ANY PARENT INDEMNIFIED PARTY, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR
CONCURRENT, ACTIVE OR PASSIVE.
SECTION 10.2. PARENT'S INDEMNITY OBLIGATIONS. Parent shall indemnify
and hold harmless the Shareholders and the Shareholders' agents, representatives
and Affiliates (each a "Shareholders Indemnified Party") from and against any
and all Indemnified Amounts incurred by a Shareholders Indemnified Party as a
result of (a) any breach or misrepresentation in any of the representations and
warranties made by or on behalf of Parent in this Agreement or any certificate
or instrument delivered in connection with this Agreement, or (b) any violation
or breach by Parent or Merger Sub of or default by Parent or Merger Sub under
the terms of this Agreement or any certificate or instrument delivered in
connection with this Agreement.
SECTION 10.3. INDEMNIFICATION PROCEDURES. All claims for
indemnification under this Agreement shall be asserted and resolved as follows:
(a) Promptly after receipt by an indemnified party under
Section 10.1 or 10.2 of notice of the commencement of any third party claim or
claims asserted against it ("Third-Party Claim"), such indemnified party will,
if a claim is to be made against an indemnifying party under such Section, give
notice to the indemnifying party of the commencement of such claim, but the
failure to notify the indemnifying party will not relieve the indemnifying party
of any liability that it may have to any indemnified party, except to the extent
that the indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnifying party's failure to give such notice.
(b) If any Third-Party Claim referred to in Section 10.3(a) is
brought against an indemnified party and it gives notice to the indemnifying
party of the commencement of such Third-Party Claim, the indemnifying party
will, unless the claim involves Taxes, be entitled to
37
<PAGE> 335
participate in such Third-Party Claim and, to the extent that it wishes (unless
(i) the indemnifying party is also a party to such Third-Party Claim and the
indemnified party determines in good faith that joint representation would be
inappropriate, or (ii) the indemnifying party fails to provide reasonable
assurance to the indemnified party of its financial capacity to defend such
Third-Party Claim and provide indemnification with respect to such Third-Party
Claim), to assume the defense of such Third-Party Claim with counsel
satisfactory to the indemnified party and, after notice from the indemnifying
party to the indemnified party of its election to assume the defense of such
Third-Party Claim, the indemnifying party will not, as long as it diligently
conducts such defense, be liable to the indemnified party under this Article X
for any fees of other counsel or any other expenses with respect to the defense
of such Third-Party Claim, in each case subsequently incurred by the indemnified
party in connection with the defense of such Third-Party Claim, other than
reasonable costs of investigation. If the indemnifying party assumes the defense
of a Third-Party Claim, (i) it will be conclusively established for purposes of
this Agreement that the claims made in that Third-Party Claim are within the
scope of and subject to indemnification; (ii) no compromise or settlement of
such claims may be effected by the indemnifying party without the indemnified
party's consent unless (A) there is no finding or admission of any violation of
law, rule, regulation or other legal requirement or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, (B) the indemnified party receives as part of such settlement
a legal, binding and enforceable unconditional satisfaction and/or release, in
form and substance reasonably satisfactory to it, providing that such
Third-Party Claim and any claimed liability of the indemnified party with
respect thereto is being fully satisfied by reason of such compromise or
settlement and that the indemnified party is being released from any and all
obligations or liabilities it may have with respect thereto, and (C) the sole
relief provided is monetary damages that are paid in full by the indemnifying
party; and (iii) the indemnified party will have no liability with respect to
any compromise or settlement of such claims effected without its consent. If
notice is given to an indemnifying party of the commencement of any Third-Party
Claim and the indemnifying party does not, within ten days after the indemnified
party's notice is given, give notice to the indemnified party of its election to
assume the defense of such Third-Party Claim, the indemnifying party will be
bound by any determination made in such Third-Party Claim or any compromise or
settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
Third-Party Claim may adversely affect it or its Affiliates other than as a
result of monetary damages for which it would be entitled to indemnification
under this Agreement, the indemnified party may, by notice to the indemnifying
party, assume the exclusive right to defend, compromise, or settle such
Third-Party Claim, but the indemnifying party will not be bound by any
determination of a Third-Party Claim so defended or any compromise or settlement
effected without its consent (which may not be unreasonably withheld).
(d) Shareholders hereby consent to the non-exclusive
jurisdiction of any court in which a Third-Party Claim is brought against any
indemnified party for purposes of any claim that an indemnified party may have
under this Agreement with respect to such Third-Party Claim or the matters
alleged therein, and agree that process may be served on Shareholders with
respect to such a claim anywhere in the world.
38
<PAGE> 336
(e) In the event any indemnified party should have a claim
against any indemnifying party hereunder that does not involve a Third-Party
Claim, the indemnified party shall transmit to the indemnifying party a written
notice (the "Indemnity Notice") describing in reasonable detail the nature of
the claim, an estimate of the amount of damages attributable to such claim to
the extent feasible (which estimate shall not be conclusive of the final amount
of such claim) and the basis of the indemnified party's request for
indemnification under this Agreement.
(f) The Shareholders may satisfy any claim for indemnification
hereunder by the delivery of Parent Shares to the Parent which Parent Shares
shall be valued at the average of the Daily Per Share Prices for the twenty (20)
consecutive trading days beginning on the twenty-first (21st) trading day prior
to delivery by the Shareholders to the Parent pursuant to this Article X.
SECTION 10.4. LIMITATION OF SHAREHOLDERS' LIABILITY.
(a) Notwithstanding anything to the contrary contained in
Article X, the aggregate liability of the Estate for any event or occurrence
giving rise to the Estate being required to indemnify Parent Indemnified Parties
pursuant to Section 10.1 of this Agreement shall be limited to $3,500,000.
(b) Notwithstanding anything to the contrary contained in
Article X, the aggregate liability of Mr. Toretta for any event or occurrence
giving rise to Mr. Toretta being required to indemnify Parent Indemnified
Parties pursuant to Section 10.1 of this Agreement shall be limited to
$3,500,000.
(c) Parent Indemnified Parties are entitled to indemnification
pursuant to Section 10.1 as follows:
(i) until and including the first anniversary of the
Closing Date, only if the amount of any Indemnified Amount,
individually or in the aggregate with all other Indemnified Amounts
hereunder and under the terms of the Purchase and Sale Agreement,
exceeds Two Hundred Fifty Thousand Dollars ($250,000), and then only to
the extent of such excess; and
(ii) after the first anniversary of the Closing Date,
only if the amount of any Indemnified Amount, individually or in the
aggregate with all other Indemnified Amounts hereunder and under the
terms of the Purchase and Sale Agreement since the Closing Date,
exceeds Five Hundred Thousand Dollars ($500,000), and then only to the
extent of such excess.
SECTION 10.5. LIMITATION OF PARENT'S LIABILITY. Shareholders
Indemnified Parties are entitled to indemnification pursuant to Section 10.2 as
follows:
(i) until and including the first anniversary of the
Closing Date, only if the amount of any Indemnified Amount,
individually or in the aggregate with all other Indemnified Amounts
hereunder and under the terms of the Purchase and Sale Agreement,
39
<PAGE> 337
exceeds Two Hundred Fifty Thousand Dollars ($250,000), and then only to the
extent of such excess; and
(ii) after the first anniversary of the Closing Date, only if
the amount of any Indemnified Amount, individually or in the aggregate with all
other Indemnified Amounts hereunder and under the terms of the Purchase and Sale
Agreement since the Closing Date, exceeds Five Hundred Thousand Dollars
($500,000), and then only to the extent of such excess.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1. SURVIVAL. The representations, warranties, covenants and
agreements (including, but not limited to, indemnification obligations) set
forth in this Agreement and in any certificate or instrument delivered in
connection herewith shall be continuing and shall survive the Closing for a
period of two years following the date of Closing; provided, however, that in
the case of all such representations, warranties, covenants and agreements
(including, but not limited to, indemnification obligations) there shall be no
such termination with respect to any such representation, warranty, covenant or
agreement as to which a bona fide claim has been asserted by written notice of
such claim delivered to the Party or Parties making such representation,
warranty, covenant or agreement prior to the expiration of the survival period;
provided, further, that (i) the representations and warranties set forth in
Sections 4A.1 (Ownership), 4A.2 (Authority; Non-Contravention; Approvals) and
5.2 (Capitalization) hereof shall survive the Closing indefinitely, (ii) Section
5.12 (Taxes) shall survive the Closing for the greater of two years or the
statutory survival period applicable to Taxes, (iii) the covenants contained in
this Agreement to be performed after the Closing shall survive until fully
performed; and (iv) the indemnification obligations of the Shareholders set
forth in Section 10.1(a) and Section 10.1(b) shall survive the Closing until the
termination of the respective representations and warranties.
SECTION 11.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by a
nationally recognized overnight delivery service, mailed by registered or
certified mail (return receipt requested) or sent via facsimile to the Parties
at the following addresses (or at such other address for a Party as shall be
specified by like notice):
(a) If to Parent, Merger Sub or the Company (on or after
Closing), to:
Synagro Technologies, Inc.
1800 Bering Drive, Suite 1000
Houston, Texas 77057
Attention: Mark A. Rome
Telecopy: 713/369-1760
40
<PAGE> 338
with a copy to:
Locke Liddell & Sapp LLP
600 Travis, Suite 3200
Houston, Texas 77002
Attention: Michael T. Peters
Telecopy: 713/223-3717
(b) If to Mr. Toretta or the Company (prior to Closing),
to:
Paul A. Toretta
30 Lakewood Circle
Greenwich, Connecticut 06830
Telecopy: 203/622-9064
with a copy to:
Edward M. Kane, Esq.
Richards & O'Neil, LLP
43 Arch Street
Greenwich, Connecticut 06830
Telecopy: 203/869-6565
(c) If to Frances A. Guerrera, as
Executrix of the Estate of Richard J. Guerrera
or as Co-Trustee of the Richard J. Guerrera
Revocable Trust, to:
Frances A. Guerrera
31 Munson Road
Middlebury, Connecticut 06762
with a copy to:
John J. Palmeri, Esq.
Palmeri, Rock & Talbot, P.C.
100 Hinman Street
P.O. Box 277
Cheshire, Connecticut 06410
Telecopy: 203/250-1795
and
41
<PAGE> 339
Donald F. Dwyer
c/o Astra Zeneca
725 Chesterbrook Blvd.
Wayne, Pennsylvania 19087
Telecopy: 610/695-4491
(d) If to Frances A. Guerrera, individually, to:
Frances A. Guerrera
31 Munson Road
Middlebury, Connecticut 06762
with a copy to:
Shipman & Goodwin, LLP
One Landmark Square
Stamford, Connecticut 06901
Attention: Steven M. Gold, Esq.
Telecopy: 203/324-8191
and
Donald F. Dwyer
c/o Astra Zeneca
725 Chesterbrook Blvd.
Wayne, Pennsylvania 19087
Telecopy: 610/695-4491
(e) If to Robert Dionne, as Co-Trustee of the Richard J.
Guerrera Revocable Trust, to:
Robert Dionne (Personal and Confidential)
c/o R. J. Guerrera, Inc.
P.O. Box 700
Naugatuck, Connecticut 06770
Telecopy: 203/723-5640
with a copy to:
John J. Palmeri, Esq.
Palmeri, Rock & Talbot, P.C.
100 Hinman Street
P.O. Box 277
Cheshire, Connecticut 06410
Telecopy: 203/250-1795
42
<PAGE> 340
SECTION 11.3. INTERPRETATION. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the
interpretation of this Agreement. In this Agreement, unless a contrary intention
is specifically set forth, (i) the words "herein", "hereof" and "hereunder" and
other words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision and (ii) reference to any
Article or Section means such Article or Section hereof. No provision of this
Agreement shall be interpreted or construed against any Party solely because
such Party or its legal representative drafted such provision.
SECTION 11.4. MISCELLANEOUS. This Agreement (including the documents
and instruments referred to herein and the Schedules and Exhibits attached
hereto) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the Parties, or any
of them, with respect to the subject matter hereof. Neither this Agreement nor
the rights, interests and obligations arising pursuant to this Agreement
(including the documents and instruments referred to herein and the Schedules
and Exhibits attached hereto) shall not be assigned by operation of law or
otherwise except that Merger Sub or Parent may assign this Agreement to any
other wholly-owned Subsidiary of Parent, but no such assignment shall relieve
the Parent or the Merger Sub, as the case may be, of its obligations hereunder.
SECTION 11.5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL
RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE
STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE.
SECTION 11.6. BINDING ARBITRATION.
(a) General. Notwithstanding any provision of this Agreement
to the contrary, upon the request of any Party (defined for the purpose of this
provision to include Affiliates, principals and agents of any such Party), any
dispute, controversy or claim arising out of, relating to, or in connection
with, this Agreement or any agreement executed in connection herewith or
contemplated hereby, or the breach, termination, interpretation, or validity
hereof or thereof (hereinafter referred to as a "Dispute"), shall be finally
resolved by mandatory and binding arbitration in accordance with the terms
hereof. Any Party may bring an action in court to compel arbitration of any
Dispute. Any Party who fails or refuses to submit any Dispute to binding
arbitration following a lawful demand by the opposing Party shall bear all costs
and expenses incurred by the opposing Party in compelling arbitration of such
Dispute.
(b) Governing Rules. The arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association in effect at the time of the arbitration, except as they may be
modified herein or by mutual agreement of the Parties. The seat of the
arbitration shall be New York, New York. Notwithstanding Section 11.6, the
arbitration and this clause shall be governed by the Federal Arbitration Act, 9
U.S.C. Section 1 et seq.
43
<PAGE> 341
(the "Federal Arbitration Act"). The arbitrator shall award all reasonable and
necessary costs (including the reasonable fees and expenses of counsel) incurred
in conducting the arbitration to the prevailing Party in any such Dispute. The
Parties expressly waive all rights whatsoever to file an appeal against or
otherwise to challenge any award by the arbitrators hereunder; provided, that
the foregoing shall not limit the rights of any Party to bring a proceeding in
any applicable jurisdiction to confirm, enforce or enter judgment upon such
award (and the rights of the other Party, if such proceeding is brought to
contest such confirmation, enforcement or entry of judgment, but only to the
extent permitted by the Federal Arbitration Act).
(c) No Waiver; Preservation of Remedies. No provision of, nor the
exercise of any rights under this Agreement shall limit the right of any Party
to apply for injunctive relief or similar equitable relief with respect to the
enforcement of this Agreement or any agreement executed in connection herewith
or contemplated hereby, and any such action shall not be deemed an election of
remedies. Such rights can be exercised at any time except to the extent such
action is contrary to a final award or decision in any arbitration proceeding.
The Parties agree that irreparable damage would occur in the event that any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
Parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof. The
institution and maintenance of an action for injunctive relief or similar
equitable relief shall not constitute a waiver of the right of any Party,
including without limitation the plaintiff, to submit any Dispute to arbitration
nor render inapplicable the compulsory arbitration provisions of this Agreement.
(d) Arbitration Proceeding. In addition to the authority conferred on
the arbitration tribunal by the rules specified above, the arbitration tribunal
shall have the authority to order reasonable discovery, including the deposition
of party witnesses and production of documents. The arbitral award shall be in
writing, state the reasons for the award, and be final and binding on the
Parties with no right of appeal. All statutes of limitations that would
otherwise be applicable shall apply to any arbitration proceeding. Any
attorney-client privilege and other protection against disclosure of
confidential information, including without limitation any protection afforded
the work-product of any attorney, that could otherwise be claimed by any Party
shall be available to and may be claimed by any such Party in any arbitration
proceeding. No Party waives any attorney-client privilege or any other
protection against disclosure of confidential information by reason of anything
contained in or done pursuant to or in connection with this Agreement. Each
Party agrees to keep all Disputes and arbitration proceedings strictly
confidential, except for disclosures of information to the Parties' legal
counsel or auditors or those required by applicable law. The arbitrators shall
determine the matters in dispute in accordance with the substantive law of the
State of Delaware, without regard to conflict of law rules. The obligation to
arbitrate any dispute shall be binding upon the successors and assigns of each
of the Parties.
(e) Appointment of Arbitrators. The arbitration shall be conducted by
three (3) arbitrators. The Party initiating arbitration (the "Claimant") shall
appoint its arbitrator in its request for arbitration (the "Request"). The other
Party (the "Respondent") shall appoint its arbitrator within 30 days after
receipt of the Request and shall notify the Claimant of such
44
<PAGE> 342
appointment in writing. If the Respondent fails to appoint an arbitrator within
such 30-day period, the arbitrator named in the Request shall decide the
controversy or claim as sole arbitrator. Otherwise, the two (2) arbitrators
appointed by the Parties shall appoint a third (3rd) arbitrator within 30 days
after the Respondent has notified Claimant of the appointment of the
Respondent's arbitrator. When the third (3rd) arbitrator has accepted the
appointment, the two (2) Party-appointed arbitrators shall promptly notify the
Parties of the appointment. If the two (2) arbitrators appointed by the Parties
fail to appoint a third (3rd) arbitrator or so to notify the Parties within the
time period prescribed above, then the appointment of the third (3rd) arbitrator
shall be made by the American Arbitration Association, which shall promptly
notify the Parties of the appointment. The third (3rd) arbitrator shall act as
Chair of the panel.
(f) Other Matters. This arbitration provision constitutes the entire
agreement of the Parties with respect to its subject matter and supersedes all
prior discussions, arrangements, negotiations and other communications on
dispute resolution. This arbitration provision shall survive any termination,
amendment, renewal, extension or expiration of this Agreement or any agreement
executed in connection herewith or contemplated hereby unless the Parties
otherwise expressly agree in writing. The obligation to arbitrate any dispute
shall be binding upon the successors and assigns of each of the Parties.
SECTION 11.7. AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of all of the Parties.
SECTION 11.8. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
SECTION 11.9. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each Party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other Person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 11.10. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 11.11. GUARANTEE. Frances Guerrera, individually and as
Co-Trustee of the Trust, and Robert Dionne, as Co-Trustee of the Trust, jointly
and severally, unconditionally and irrevocably guarantee the full, prompt and
complete performance of all obligations of the Estate and Trust, as the case may
be, under this Agreement and the documents executed and delivered by the Estate
and Trust in connection with the transactions contemplated in this Agreement.
45
<PAGE> 343
IN WITNESS WHEREOF, the Parties have executed and delivered this
Agreement effective as of the date first written above.
SYNAGRO TECHNOLOGIES, INC.
By: /s/ Ross M. Patten
---------------------------------------
Ross M. Patten, Chairman and Chief
Executive Officer
RESTEC ACQUISITION CORP.
By: /s/ Ross M. Patten
---------------------------------------
Ross M. Patten, Chairman and Chief
Executive Officer
NEW ENGLAND TREATMENT COMPANY,
INC.
By: /s/ Paul A. Toretta
---------------------------------------
Paul A. Toretta, President
/s/ Frances A. Guerrera
---------------------------------------
Frances A. Guerrera, individually
THE RICHARD J. GUERRERA
REVOCABLE TRUST
By: /s/ Frances A. Guerrera
---------------------------------------
Frances A. Guerrera, Co-Trustee
By: /s/ Robert Dionne
---------------------------------------
Robert Dionne, Co-Trustee
THE SHAREHOLDERS:
/s/ Paul A. Toretta
---------------------------------------
Paul A. Toretta, individually
THE ESTATE OF RICHARD J. GUERRERA
By: /s/ Frances A. Guerrera
---------------------------------------
Frances A. Guerrera, Executrix
46
<PAGE> 344
EXHIBIT A
GLOSSARY
For purposes of this Agreement, the following terms shall have the
meaning specified or referred to below when capitalized (or if not capitalized,
unless the context clearly requires otherwise) when used in this Agreement.
"Affiliate(s)" with respect to any Person, means any Person directly or
indirectly controlling, controlled by or under common control with such Person,
and any natural person who is an officer, director or partner of such Person and
any members of their immediate families living within the same household. A
Person shall be deemed to control another Person if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such other Person, whether through the ownership of
voting securities, by contract or otherwise.
"Average Parent Common Stock Price" means the average of the Daily Per
Share Prices for the twenty (20) consecutive trading days beginning on the
twenty-first (21st) trading day prior to the date of this Agreement.
"Business Facility" or "Business Facilities" includes any property
(whether real or personal) which the Company or any of their Subsidiaries
currently lease, operate, or own or manage in any manner or which the Company or
any of their Subsidiaries or any of their respective organizational predecessors
formerly leased, operated, owned or managed in any manner.
"Code" means the Internal Revenue Code of 1986, as amended, or any
amending or superseding tax laws of the United States of America.
"Daily Per Share Price" means the per share closing price on the NASDAQ
Small Cap Exchange (the "NASDAQ") of Parent Common Stock (as reported by The
Wall Street Journal for that day).
"Environmental Claim(s)" means any claim; litigation; demand; action;
cause of action; suit; loss; cost, including, but not limited to, attorneys'
fees, diminution in value, and expert's fees; damage; punitive damage; fine,
penalty, expense, liability, criminal liability, strict liability, judgment,
governmental or private investigation and testing; notification of status of
being potentially responsible for clean-up of any facility or for being in
violation or in potential violation of any Environmental Law; proceeding;
Exhibit A - Page 1
<PAGE> 345
consent or administrative orders, agreements or decrees; lien; personal injury
or death of any person; or property damage, whether threatened, sought, brought
or imposed, that is related to or that seeks to recover losses, damages, costs,
expenses and/or liabilities related to, or seeks to impose liability for: (i)
improper use or treatment of wetlands, pinelands or other protected land or
wildlife; (ii) noise; (iii) radioactive materials (including naturally occurring
radioactive materials ("NORM")); (iv) explosives; (v) pollution, contamination,
preservation, protection, decontamination, remediation or clean-up of the air,
surface water, groundwater, soil or protected lands; (vi) solid, gaseous or
liquid waste generation, handling, discharge, release, threatened release,
treatment, storage, disposal or transportation; (vii) exposure of persons or
property to Materials or Environmental Concern and the effects thereof; (viii)
the release or threatened release (into the indoor or outdoor environment),
generation, extraction, mining, beneficiating, manufacture, processing,
distribution in commerce, use, transfer, transportation, treatment, storage,
disposal of Remediation of Materials of Environmental Concern; (ix) injury to,
death of or threat to the health or safety of any person or persons caused
directly or indirectly by Materials of Environmental Concern; (x) destruction
caused directly or indirectly by Materials of Environmental Concern or the
release or threatened release of any Materials of Environmental Concern or any
property (whether real or personal); (xi) the implementation of spill prevention
and/or disaster plans relating to Material of Environmental Concern; (xiii)
community right-to-know and other disclosure laws; or (xiii) maintaining,
disclosing or reporting information to Governmental Authorities of any other
third person under any Environmental Law. The term, "Environmental Claim," also
includes, without limitation, any losses, damages, costs, expenses and/or
liabilities incurred in testing, if such testing confirms the presence of
Materials of Environmental Concern.
"Environmental Law(s)" means any federal, state, local or foreign law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, guidance document, order, consent agreement,
order or consent judgment, decree, injunction, requirement or agreement with any
governmental entity or any judicial or administrative decision relating to (x)
the protection, preservation or restoration of the environment (including,
without limitation, air, water, vapor, surface water, groundwater, drinking
water supply, surface land, subsurface land, plant and animal life or any other
natural resource) or to human health or safety, (y) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, application, production, release or disposal of Materials of
Environmental Concern, in each case as amended from time to time, or (z) health,
worker protection or community's right to know. The term "Environmental Law"
includes, without limitation, (i) the Federal Comprehensive Environmental
Response
Exhibit A - Page 2
<PAGE> 346
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal Act and the Federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
and the Federal Occupational Safety and Health Act of 1970, each as amended from
time to time, and (ii) any common law or equitable doctrine (including, without
limitation, injunctive relief and tort doctrines such as negligence, nuisance,
trespass and strict liability) that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of,
effects of or exposure to any Materials of Environmental Concern.
"Environmental Permit(s)" means all permits, licenses, certificates,
registrations, identification numbers, applications, consents, approvals,
variances, notices of intent, and exemptions necessary for the ownership, use
and/or operation of any current Business Facility or to conduct the Company'
business as currently conducted in compliance with Requirements of Environmental
Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"GAAP" means U.S. generally accepted accounting principals applied on a
consistent basis.
"Governmental Authority" or "Governmental Authorities" means any nation
or government, any state or political subdivision thereof and any agency or
entity exercising executive, legislative, judicial, regulatory or administrative
functions of, or pertaining to, government.
"Indebtedness" means the aggregate long-term indebtedness, net of
sinking fund and other cash reserves, if any, that are not included in Net
Working Capital, and other long-term liabilities of the Companies determined in
accordance with GAAP.
"Lien(s)" means any mortgage, pledge, hypothecation, security interest,
encumbrance, claim, right of first refusal, option, lien, charge, condition,
restriction or burden of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof and the filing of, or agreement to give, any financing
statement under the Uniform Commercial Code of any jurisdiction).
Exhibit A - Page 3
<PAGE> 347
When used in this Agreement in connection with the Company and their
Subsidiaries, or the Parent and its Subsidiaries, as the case may be, "Material
Adverse Effect" means any event, occurrence, fact, condition, change,
development or effect that is or could reasonably be anticipated to be
materially adverse to the business, assets (including intangible assets),
liabilities, financial condition, results of operations, properties (including
intangible properties) or business prospects of the Company and all of their
Subsidiaries or the Parent and all of its Subsidiaries, as applicable, taken as
a whole.
"Materials of Environmental Concern" means: (i) those substances
included within the statutory and/or regulatory definitions or listings of
"hazardous substance," "medical waste," "special waste," "hazardous waste,"
"extremely hazardous substance," "regulated substance," "solid waste,"
"hazardous materials," or "toxic substances," under any Environmental Law; (ii)
any material, waste or substance which is or contains: (A) petroleum, oil or a
fraction thereof, (B) explosives, or (C) radioactive materials (including
naturally occurring radioactive materials); and (iii) such other substances,
materials, or wastes that are or become classified or regulated as hazardous or
toxic under any applicable federal, state or local law or regulation.
"Net Working Capital" means the aggregate current assets of the Company
less the aggregate current liabilities of the Company determined in accordance
with GAAP.
"Person" means any individual, partnership, joint venture, corporation,
limited liability company, association, trust, unincorporated organization,
government or agency or subdivision thereof or any other entity.
"Parent Common Stock" means validly issued, fully paid and
nonassessable shares of common stock, par value $.002 per share, of Parent.
"Parent Shares" means the shares of Parent Common Stock issuable to the
Shareholders as determined pursuant to Section 3.1 of the Agreement.
"Remediation" means any action necessary to: (i) comply with and ensure
compliance with the Requirements of Environmental Laws and (ii) the taking of
all reasonably necessary precautions to protect against and/or respond to,
remove or remediate or monitor the release or threatened release of Materials of
Environmental Concern at, on, in, about, under, within or near the air, soil,
surface water, groundwater or soil vapor at any Business Facility of the Company
or any of their Subsidiaries or of any
Exhibit A - Page 4
<PAGE> 348
property affected by the business, operations, acts omissions, or Materials of
Environmental Concern of the Company or any of their Subsidiaries.
"Requirement(s) of Environmental Law(s)"means all requirements,
conditions, restrictions or stipulations of Environmental Laws imposed upon or
related to the Company or any of their Subsidiaries or the assets, Business
Facilities and/or the business of the Company or any of their Subsidiaries.
"Subsidiary" or "Subsidiaries" shall mean, when used with reference to
an entity, any other entity of which securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions, or a majority of the outstanding
voting securities of which, are owned directly or indirectly by such entity.
"Supplies" means all office supplies, kitchen supplies, laundry
supplies, medical supplies, spare parts, safety equipment, maintenance supplies,
other supplies used or consumed in the Business and other similar items which
exist on the Closing Date.
"Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise, real
or personal property, sales, withholding, social security, occupation, use,
severance, environmental, license, net worth, payroll, employment, franchise,
transfer and recording taxes, fees and charges, imposed by the IRS or any other
taxing authority (whether domestic or foreign including, without limitation, any
state, county, local or foreign government or any subdivision or taxing agency
thereof (including a United States possession)), whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest whether paid or received, fines, penalties or additional amounts
attributable to, or imposed upon, or with respect to, any such taxes, charges,
fees, levies or other assessments.
"Tax Return(s)" shall mean any report, return, document, declaration or
other information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including, without
limitation, information returns and documents (i) with respect to or
accompanying payments of estimated Taxes or (ii) with respect to or accompanying
requests for the extension of time in which to file any such report, return,
document, declaration or other information, including any schedule or attachment
thereto and any amendment thereof.
Exhibit A - Page 5
<PAGE> 349
Friday, January 07, 2000
Paul A. Toretta
Don F. Dwyer
Residual Technologies
55 Old Field Point Road
Greenwich, CT 06830
Subject: Termination Extensions
================================================================================
Dear Paul and Don:
This letter (the "Letter Agreement") is intended to amend the following
agreements:
o Purchase and Sale Agreement (the "Sale Agreement"), dated as of
October 20, 1999, by and among Synagro Technologies, Inc. (the
"Purchaser"), Paul A. Toretta, Eileen Toretta as Trustee of the
Paul A. Toretta 1998 GRAT (the "GRAT"), Frances A. Guerrera,
Frances A. Guerrera as Executrix of the Estate of Richard J.
Guerrera, and Frances A. Guerrera and Robert Dionne as
Co-Trustees of the Richard J. Guerrera Revocable Trust Under
Agreement dated November 2, 1998 (collectively, the
"Shareholders"), and
o Agreement and Plan of Merger (the "Merger Agreement"), dated
October 20, 1999, by and among Synagro Technologies, Inc., ResTec
Acquisition Corp., New England Treatment Company, Inc. ("NETCO"),
Paul A. Toretta, Frances A. Guerrera, Frances A. Guerrera,
Frances A. Guerrera as Executrix of the Estate of Richard J.
Guerrera, and Frances A. Guerrera and Robert Dionne as
Co-Trustees of the Richard J. Guerrera Revocable Trust Under
Agreement dated November 2, 1998
This Letter Agreement is to confirm and give effect to the following
agreements between the Purchaser and the Shareholders:
<PAGE> 350
1. The optional extension date of December 31, 1999 set forth in
Section 9.4 of the Sale Agreement and Section 9.4 of the Merger Agreement,
including the obligation to pay the $300,000 breakup fee referred to
therein, is hereby extended to January 31, 2000. It is anticipated that the
actual closings of the Sale Agreement and the Merger Agreement will take
place during the week of January 10, 2000.
In consideration for this extension, the Purchaser and the
Shareholders agree to the following:
2. It is hereby agreed that the number of shares of Parent Common
Stock to be issued in accordance with Section 3.1(a)(i) of the Merger
Agreement shall be fixed at 325,000. However, this number shall be reduced
by the amount of any Indebtedness that NETCO has at closing and the amount,
if any, by which NETCO's Net Working Capital as of closing is less than
$910,000. The reduction in shares shall be calculated by dividing the sum
of NETCO's Indebtedness at closing and the shortfall in Net Working Capital
by 6.1538. It is also agreed that (i) the "amount of cash and liabilities"
in Section 3.3(d) of the Merger Agreement shall be changed to $910,000 from
$260,000, (ii) the "amount of cash and liabilities" in Section 3.3(d) of
the Sale Agreement shall be changed to $400,000 from $1,050,000, and (iii)
the "Net Working Capital" amount in Section 3.2(i) of the Sale Agreement
shall be changed to $490,000 from $1,140,000.
3. The Purchaser agrees to permit NETCO to issue shares of its
nonvoting common stock to Janet Cordano, Mark McCormick, and Terry
Szczesiul, in lieu of a portion of the bonus payments otherwise payable to
such employees in connection with the consummation of the transactions
contemplated by the Merger Agreement. These shares of nonvoting common
stock shall be subject to exchange pursuant to the terms of the Merger
Agreement on a pro rata basis.
4. Section 3.2(i) of the Sale Agreement shall be amended to increase
the initial cash amount to Forty-Four Million Six Hundred Thousand Dollars
($44,600,000) to reflect the parties' estimate of the difference in the tax
payable by the Shareholders as a result of closing the Sale Agreement and
the Merger Agreement in 2000 rather than in 1999 (the "Tax Payment"). If
the actual Tax Payment is less than $600,000, the Shareholders shall remit
such excess to the Purchaser.
<PAGE> 351
5. The Purchaser agrees, if requested by Mr. Toretta, to work with
GTCR Golder Rauner, LLC to provide a $3 million loan to Mr. Toretta and the
GRAT three days prior to the closing day for payment of bonuses to selected
ResTec employees. The loan shall be repaid prior to funding the Sale
Agreement or shall be netted against the cash consideration due under the
Sale Agreement.
6. Section 2(e) of the Covenant Not to Compete Agreement to be entered
into by Mr. Toretta and the Purchaser shall be amended to read, in its
entirety, as follows:
(e) "Business" means the management of municipal sewage sludge,
including, but not limited to, the collection, treatment,
transportation, land application, incineration, disposal, and/or
composting of such municipal sewage sludge.
7. Notwithstanding Section 7.14 of the Sale Agreement and Section 7.14
of the Merger Agreement, the Shareholders and NETCO may deliver updates to
the Disclosure Schedules to the Sale Agreement and Merger Agreement at
least through January 17, 2000.
8. The Purchaser hereby consents to ResTec's transfer of its recently
acquired centrifuges to NETCO.
9. The Purchaser hereby consents to Providence Soils, LLC's entry into
agreements with the Rhode Island Resource Recovery Corporation and the
Narragansett Bay Commission for the construction and operation of a
facility in Rhode Island.
10. To the extent any provision in this Letter Agreement is
inconsistent with the Sale Agreement or the Merger Agreement, this Letter
Agreement shall control and shall constitute an amendment to those
Agreements. As amended by this Letter Agreement, both the Sale Agreement
and the Merger Agreement shall continue in full force and effect.
Capitalized terms used, but not defined, herein shall have the meanings
ascribed to them in those Agreements.
<PAGE> 352
Please indicate your agreement with the foregoing by executing this letter
in the space provided below and returning it to me.
Synagro Technologies, Inc.
/s/ Mark A. Rome
- -------------------------------------------
By: Mark A. Rome, Executive Vice President
<PAGE> 353
ACCEPTED AND AGREED TO:
/s/ Paul A. Toretta
- -----------------------------------------------
Paul A. Toretta, Individually
THE PAUL A. TORETTA 1998 GRAT
/s/ Eileen Toretta
- -----------------------------------------------
Eileen Toretta, Trustee
THE RICHARD J. GUERRERA REVOCABLE TRUST
/s/ Donald F. Dwyer for Frances A. Guerrera
- -----------------------------------------------
Frances A. Guerrera, Co-Trustee
/s/ Donald F. Dwyer for Robert Dionne
- -----------------------------------------------
Robert Dionne, Co-Trustee
THE ESTATE OF RICHARD J. GUERRERA
/s/ Donald F. Dwyer for Frances A. Guerrera
- -----------------------------------------------
Frances A. Guerrera, Executrix
/s/ Donald F. Dwyer for Frances A. Guerrera
- -----------------------------------------------
Francis A. Guerrera, Individually
<PAGE> 354
SECOND AMENDMENT
TO AGREEMENT AND PLAN OF MERGER
THIS SECOND AMENDMENT ("Amendment") is entered into as of January 26,
2000, by and between SYNAGRO TECHNOLOGIES, INC., a Delaware corporation
("Parent"), RESTEC ACQUISITION CORP., a Rhode Island corporation and a
wholly-owned subsidiary of Parent ("Rhode Island Merger Sub"), NEW ENGLAND
TREATMENT COMPANY, INC., a Rhode Island corporation ("Company"), PAUL A.
TORETTA, individually ("Mr. Toretta"), FRANCES A. GUERRERA, individually ("Mrs.
Guerrera"), FRANCES A. GUERRERA, as Executrix of the Estate of Richard J.
Guerrera (the "Estate"), FRANCES A. GUERRERA and ROBERT DIONNE, as Co-Trustees
of the Richard J. Guerrera Revocable Trust under agreement dated November 2,
1998 (the "Trust") (collectively, the "Merger Parties") and RESTEC ACQUISITION
CORP., a Delaware corporation and a wholly-owned subsidiary of Parent ("Delaware
Merger Sub").
RECITALS
WHEREAS, the Merger Parties entered into that certain Agreement and
Plan of Merger dated October 20, 1999, as amended by a letter agreement dated
January 7, 2000 (as amended, the "Agreement"), under the terms of which Rhode
Island Merger Sub was, upon satisfaction or waiver of the conditions to Closing
set forth in the Agreement, and at the Effective Time, to merge with and into
the Company (the "Merger");
WHEREAS, the Merger Parties now desire to amend the Agreement to
provide, among other things, that Delaware Merger Sub, rather than Rhode Island
Merger Sub, will, upon satisfaction or waiver of the conditions to Closing set
forth in the Agreement, and at the Effective Time, merge with and into the
Company, and that the Company will issue shares of nonvoting stock prior to the
Merger, as more fully set forth herein; and
WHEREAS, capitalized terms used herein shall have the meanings ascribed
to them herein or in the Agreement, and references to Sections herein shall mean
the corresponding Sections of the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable and consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
1. Adoption of Letter Agreement. The parties hereto hereby consent to,
confirm, approve and adopt the letter agreement dated January 7, 2000,
among Parent, Mr. Toretta, the Grat, the Trust, the Estate, and Mrs.
Guerrera.
2. Amendments to Agreement.
a. Any and all references in the Agreement (including any
Exhibits or Schedules thereto, any documents required for the
consummation of the transactions contemplated by the
Agreement, and any amendments to the
<PAGE> 355
Agreements other than this Amendment) to RESTEC Acquisition
Corp., a Rhode Island corporation, are hereby amended to be
references to RESTEC Acquisition Corp., a Delaware
corporation, and, as a result of this Amendment, the defined
term "Merger Sub" as used in the Agreement (including any
Exhibits or Schedules thereto, any documents required for the
consummation of the transactions contemplated by the
Agreement, and any amendments to the Agreements other than
this Amendment) for RESTEC Acquisition Corp., a Rhode Island
corporation, is now a reference to RESTEC Acquisition Corp., a
Delaware corporation.
b. The first complete sentence of Section 1.1 of the Agreement
is hereby amended to read:
Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in
Section 1.2) in accordance with the Rhode Island
Business Corporation Act and the General Corporation
Law of the State of Delaware, the Merger Sub shall be
merged with and into the Company and the separate
existence of the Merger Sub shall thereupon cease.
c. The first complete sentence of Section 1.2 of the Agreement
is hereby amended to read:
The Merger shall become effective at such time (the
"Effective Time") as (i) articles of merger are filed
with the Secretary of State of the State of Rhode
Island in accordance with the Rhode Island Business
Corporation Act and (ii) a certificate of merger is
filed with the Secretary of State of the State of
Delaware in accordance with the General Corporation
Law of the State of Delaware (collectively, the
"Merger Filing").
d. Section 2.1 of the Agreement is hereby amended to read in
its entirety:
SECTION 2.1. CERTIFICATE OF INCORPORATION. The
Articles of Incorporation of the Company as in effect
immediately prior to the Effective Time shall be the
Articles of Incorporation of the Surviving
Corporation after the Effective Time, as the same may
thereafter be amended in accordance with its terms
and as provided under the Rhode Island Business
Corporation Act.
e. The last sentence of Section 3.1(a) of the Agreement is
hereby amended to read in its entirety:
Each Shareholder and each of Mark McCormick, Terry
Szczesiul and Janet Cordano (as new shareholders of
the Company) shall be
<PAGE> 356
entitled to receive the percentages of the aggregate
consideration issuable pursuant to this Section
3.1(a) as set forth on Schedule 1 to this Amendment.
3. No Other Amendments to Agreement. Except as specifically set forth
in this Amendment, the Agreement shall remain in full force and effect,
without any amendment or modification thereto.
4. Counterparts and Facsimile Signatures. This Amendment may be
executed in any number of counterparts, and signature pages may be
delivered by telecopy, with the original executed signature pages to be
furnished promptly thereafter.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 357
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day first written above.
SYNAGRO TECHNOLOGIES, INC.
By: /s/ Mark A. Rome
---------------------------------------
Mark A. Rome, Executive Vice President
RESTEC ACQUISITION CORP.,
a Rhode Island corporation
By: /s/ Mark A. Rome
---------------------------------------
Mark A. Rome, Vice President
RESTEC ACQUISITION CORP.,
a Delaware corporation
By: /s/ Mark A. Rome
---------------------------------------
Mark A. Rome, Vice President
NEW ENGLAND TREATMENT COMPANY, INC.
By: /s/ Paul A. Toretta
---------------------------------------
Paul A. Toretta, President
/s/ Paul A. Toretta
------------------------------------------
Paul A. Toretta, individually
<PAGE> 358
/s/ Frances A. Guerrera
------------------------------------------
Frances A. Guerrera, individually
THE RICHARD J. GUERRERA REVOCABLE TRUST
By: /s/ Frances A. Guerrera
---------------------------------------
Frances A. Guerrera, Co-Trustee
By: /s/ Robert Dionne
---------------------------------------
Robert Dionne, Co-Trustee
THE ESTATE OF RICHARD J. GUERRERA
By: /s/ Frances A. Guerrera
---------------------------------------
Frances A. Guerrera, Executrix
<PAGE> 359
SCHEDULE 1 TO SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
Paul A. Toretta 46%
Estate of Richard J. Guerrera 46%
Mark McCormick 4%
Terry Szczesiul 2.5%
Janet Cordano 1.5%
<PAGE> 360
EXHIBIT G
ECOSYSTEMATICS PURCHASE AGREEMENT
G-1
<PAGE> 361
STOCK PURCHASE AGREEMENT
BY AND AMONG
SYNAGRO TECHNOLOGIES, INC.,
CHRISTOPHER J. SCHRADER
AND
KATHLEEN A. SCHRADER
OCTOBER 20, 1999
<PAGE> 362
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS..............................................................................1
Section 1.1. Accounting Terms............................................1
Section 1.2. Defined Terms...............................................1
ARTICLE II CLOSING.................................................................................2
Section 2.1. Closing.....................................................2
ARTICLE III SALE OF STOCK..........................................................................2
Section 3.1. Company Common Stock........................................2
Section 3.2. Purchase Price..............................................2
Section 3.3. Purchase Price Adjustment...................................3
Section 3.4. Closing Deliveries..........................................3
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER.............................................5
Section 4.1. Organization and Qualification..............................5
Section 4.2. Authority; Binding Agreement................................5
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS.......................................6
Section 5.1. Organization and Qualification..............................6
Section 5.2. Capitalization..............................................6
Section 5.3. Authority; Non-Contravention; Approvals.....................6
Section 5.4. Subsidiaries................................................7
Section 5.5. Financial Statements........................................7
Section 5.6. Absence of Undisclosed Liabilities..........................7
Section 5.7. Absence of Certain Changes or Events........................7
Section 5.8. Litigation..................................................8
Section 5.9. Accounts Receivable.........................................8
Section 5.10. No Violation of Law; Compliance with Agreements.............8
Section 5.11. Insurance...................................................8
Section 5.12. Taxes.......................................................9
Section 5.13. Employee Benefit Plans.....................................10
Section 5.14. Employee and Labor Matters.................................11
Section 5.15. Environmental Matters......................................12
Section 5.16. Non-Competition Agreements.................................15
Section 5.17. Title to Assets............................................15
Section 5.18. Contracts, Agreements, Plans and Commitments...............15
Section 5.19. Supplies...................................................16
Section 5.20. Brokers and Finders........................................16
Section 5.21. Intellectual Property......................................17
Section 5.22. Relationships..............................................17
Section 5.23. Certain Payments...........................................17
Section 5.24. Books and Records..........................................17
Section 5.25. Condition and Sufficiency of Assets........................18
Section 5.26. Disclosure.................................................18
</TABLE>
i
<PAGE> 363
<TABLE>
<S> <C> <C>
ARTICLE VI CONDUCT OF BUSINESS PENDING CLOSING.....................................................18
Section 6.1. Conduct of Business by the Shareholders Pending Closing.....18
Section 6.2. Other Offers................................................20
Section 6.3. Access to Information; Environmental Due Diligence..........20
Section 6.4. Best Efforts................................................20
ARTICLE VII CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES...................................21
Section 7.1. Confidentiality.............................................21
Section 7.2. Further Assurances..........................................21
Section 7.3. Expenses and Fees...........................................21
Section 7.4. Agreement to Cooperate......................................21
Section 7.5. Public Statements...........................................22
Section 7.6. Notification of Certain Matters.............................22
Section 7.7. Notice of Environmental Claims..............................22
Section 7.8. Tax Matters.................................................22
ARTICLE VIII CONDITIONS TO CLOSING.................................................................24
Section 8.1. Conditions to Each Party's Obligation to Close..............24
Section 8.2. Conditions to Obligation of the Shareholders...............24
Section 8.3. Conditions to Obligations of Purchaser......................25
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER.......................................................26
Section 9.1. Termination.................................................26
Section 9.2. Effect of Termination.......................................27
Section 9.3. Extensions; Waiver..........................................27
ARTICLE X INDEMNIFICATION..........................................................................28
Section 10.1. The Shareholders' Indemnity Obligations....................28
Section 10.2. Purchaser's Indemnity Obligations..........................28
Section 10.3. Indemnification Procedures.................................28
Section 10.4. Limitation of Shareholders' Liability......................30
Section 10.5. Limitation of Purchaser's Liability........................30
Section 10.6. Limitation on Indemnified Amounts..........................31
ARTICLE XI GENERAL PROVISIONS......................................................................31
Section 11.1. Survival...................................................31
Section 11.2. Notices....................................................31
Section 11.3. Interpretation.............................................32
Section 11.4. Miscellaneous..............................................32
Section 11.5. Governing Law..............................................32
Section 11.6. Binding Arbitration........................................33
Section 11.7. Amendment..................................................34
Section 11.8. Counterparts...............................................34
Section 11.9. Parties in Interest........................................34
Section 11.10. Validity...................................................35
</TABLE>
ii
<PAGE> 364
Exhibits
- --------
Exhibit A Glossary
Exhibit B Estimated Adjustment Amount
Exhibit C Release of Claims Agreement
Exhibit D Employment and Covenant Not to Compete Agreements
Exhibit E Lease
Schedules
- ---------
Schedule 3.2 Shareholder Consideration
Schedule 3.4(b)(iii) Guarantees or Surety Obligations
Schedule 5.2 Capitalization
Schedule 5.5 Financial Statements
Schedule 5.6 Absence of Undisclosed Liabilities
Schedule 5.7 Absence of Certain Changes or Events
Schedule 5.8 Litigation
Schedule 5.11 Insurance Policies
Schedule 5.12 Taxes
Schedule 5.13 Employee Benefit Plans
Schedule 5.14 Employee and Labor Matters
Schedule 5.15 Environmental Matters
Schedule 5.17 Title to Assets
Schedule 5.18 Contracts, Agreements, Plans and Commitments
Schedule 5.21 Intellectual Property
Schedule 5.22 Relationships
iii
<PAGE> 365
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of October 20, 1999 (the
"Agreement"), is by and among SYNAGRO TECHNOLOGIES, INC., a Delaware
corporation (the "Purchaser"), and CHRISTOPHER J. SCHRADER and KATHLEEN A.
SCHRADER (collectively, the "Shareholders"). The Purchaser and each of the
Shareholders are a "Party" and, collectively, they are sometimes referred to as
the "Parties."
W I T N E S S E T H:
WHEREAS, the Shareholders own 100 shares of the issued and outstanding
shares of common stock, $1.00 par value per share, of Ecosystematics, Inc., a
Florida corporation (the "Company"), which constitutes all of the issued and
outstanding capital stock of the Company ("Company Common Stock") as of the
date hereof;
WHEREAS, the Company is in the business of wastewater treatment
operations and associated laboratory testing (the "Business");
WHEREAS, Purchaser desires to purchase from the Shareholders, and the
Shareholders desire to sell to the Purchaser, the Company Common Stock upon the
terms and conditions set forth herein; and
WHEREAS, the Shareholders are making certain representations,
warranties and indemnities herein, as an inducement to Purchaser to enter into
this Agreement.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements stated herein, the
receipt and sufficiency of which are hereby acknowledged, the Parties,
intending to be legally bound, covenant and agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles ("GAAP") and on a basis not inconsistent with those
applied in the preparation of the financial statements referred to in Section
5.5 hereof.
SECTION 1.2. DEFINED TERMS. As used in this Agreement, certain words
and terms have the meanings ascribed to them in the Glossary attached hereto as
Exhibit A. Other capitalized terms have the meanings ascribed to them elsewhere
in this Agreement.
<PAGE> 366
ARTICLE II
CLOSING
SECTION 2.1. CLOSING. Subject to the terms and provisions of Article
IX, the purchase and sale of the Company Common Stock (the "Closing") provided
for in this Agreement shall take place at a location mutually agreeable to the
parties hereto in Monroe County, Florida, as promptly as practicable (but in
any event within (5) five business days) following the date on which the last
of the conditions set forth in Article VIII is fulfilled or waived, or at such
other time and place as the Parties shall agree; provided, that the Closing
shall take place no later than November 1, 1999 unless mutually agreed by the
Parties in writing. The date on which the Closing occurs is referred to in this
Agreement as the "Closing Date."
ARTICLE III
SALE OF STOCK
SECTION 3.1. COMPANY COMMON STOCK. Subject to the terms and conditions
of this Agreement, the Shareholders will sell, transfer and deliver to the
Purchaser, and the Purchaser will purchase and tender the Purchase Price (as
hereinafter defined) for, the Company Common Stock on the Closing Date.
SECTION 3.2. PURCHASE PRICE.
(a) The aggregate purchase price (the "Purchase Price") for
the Company Common Stock and the representations, warranties, covenants and
agreements referenced herein shall be an amount paid in cash at Closing equal
to One Million Three Hundred Twenty-Seven Thousand Three Hundred and Fifty-Two
Dollars ($1,327,352) less (1) the Company's Indebtedness as of Closing and (2)
the amount, if any, by which the Company's Net Working Capital as of Closing is
less than One Hundred Seventy-Three Thousand Three Hundred and Seven Dollars
($173,307). The amount, if any, by which the cash portion of the Purchase Price
is reduced pursuant to this Section 3.2(a) (i.e., the sum of (1) and (2) above)
is referred to herein as the "Adjustment Amount." The aggregate consideration
payable to each Shareholder is set forth opposite each Shareholder's name on
Schedule 3.2.
(b) The capitalized terms used in this Section shall have the
following meanings:
"Indebtedness" means the aggregate long-term
indebtedness and other long-term liabilities of the Company determined in
accordance with GAAP. To the extent the promissory note in favor of the Small
Business Administration in the principal amount of $322,800 is paid in full by
the Company at Closing, such Indebtedness shall not be deducted a second time
from the Purchase Price.
"Net Working Capital" means the aggregate current
assets of the Company less the aggregate current liabilities of the Company
determined in accordance with GAAP.
2
<PAGE> 367
SECTION 3.3. PURCHASE PRICE ADJUSTMENT.
(a) Prior to the Closing Date, the Shareholders shall deliver
to the Purchaser a worksheet as of the Closing Date, which shall be attached as
Exhibit B hereto, setting forth a reasonable estimate of the Indebtedness and
Net Working Capital as of the Closing Date as well as a computation of the
estimated Adjustment Amount (the "Estimated Adjustment Amount"). The worksheet
shall be prepared by the Shareholders and accepted by the Purchaser in its
reasonable discretion. If the worksheet is not accepted by the Purchaser, the
worksheet shall be promptly submitted with Purchaser's comments to the
Shareholders, and both Purchaser and the Shareholders shall endeavor to
promptly address such comments so as to not delay the Closing. If the Estimated
Adjustment Amount is a positive number, the Purchase Price payable at Closing
shall be decreased in an amount equal to the positive Estimated Adjustment
Amount.
(b) Within 90 days after the Closing, Purchaser shall cause
the Company to prepare a consolidated balance sheet of the Company as of the
Closing Date (the "Closing Date Balance Sheet"), including a computation of the
actual Adjustment Amount of the Company as of the Closing Date (the "Actual
Adjustment Amount"). If within 15 days following delivery of the Closing Date
Balance Sheet the Shareholders do not object in writing thereto, then the
Actual Adjustment Amount shall be as computed on such Closing Date Balance
Sheet. If the Shareholders object in writing to the computation, then the
Purchaser and the Shareholders shall negotiate in good faith and attempt to
resolve their disagreement. Should such negotiations not result in an agreement
within 20 days, then the matter shall be submitted to PricewaterhouseCoopers
(the "Neutral Auditor"). All fees and expenses relating to appointment of the
Neutral Auditor and the work, if any, to be performed by the Neutral Auditor
will be borne equally by the Purchaser and the Shareholders. The Neutral
Auditor will deliver to the Purchaser and the Shareholders a written
determination (such determination to include a worksheet setting forth all
material calculations used in arriving at such determination and to be based
solely on information provided to the Neutral Auditor by the Purchaser and the
Shareholders, or their respective affiliates) of the disputed items within 30
days of receipt of the disputed items, which determination will be final,
binding and conclusive on the Parties.
(c) Promptly following agreement on or delivery of the final,
binding and conclusive Closing Date Balance Sheet setting forth the Actual
Adjustment Amount, the Purchaser and the Shareholders shall account to each
other as provided for in this Section 3.3(c). If the Estimated Adjustment
Amount less the Actual Adjustment Amount is a positive number, the Shareholders
shall have a right to receive a cash payment equal to such excess as an
increase in the Purchase Price. If the Estimated Adjustment Amount less the
Actual Adjustment Amount is a negative number, Purchaser shall be entitled to
receive a cash payment from the Shareholders equal to such deficit. Any such
excess or deficit payment shall be due and payable within three (3) business
days after the Actual Adjustment Amount is determined pursuant to this Section
3.3.
SECTION 3.4. CLOSING DELIVERIES.
(a) At the Closing, the Shareholders shall deliver to the
Purchaser:
(i) certificates representing the Company Common
Stock, duly endorsed for transfer to the Purchaser or accompanied by duly
executed assignment documents, which shall
3
<PAGE> 368
transfer to the Purchaser good and valid title to the Company Common Stock,
free and clear of all liens, claims, restrictions and encumbrances of any
nature whatsoever;
(ii) evidence of consents, if any, as shall be
required to enable Purchaser to continue to enjoy the benefit of any
governmental authorization, lease, license, permit, contract or other agreement
or instrument to or of which the Company is a party or a beneficiary and which
can, by its terms (with consent) and consistent with applicable law, be so
enjoyed after the transfer of the Company Common Stock to Purchaser. If there
is in existence any lease, license, permit or other governmental authorization
that by its terms or applicable law expires, terminates or is otherwise
rendered invalid upon the transfer of the Company Common Stock to Purchaser and
is required in order for any of the business of the Company to continue to be
conducted following the transfer of the Company Common Stock in the same manner
as conducted previously, the Shareholders shall have delivered to Purchaser an
equivalent of that lease, license, permit or other governmental authorization,
effective as of and after the Closing Date;
(iii) Release of Claims Agreements executed by the
Shareholders, officers and directors of the Company releasing the Company from
any and all prior claims of such officers, directors and stockholders in the
form attached hereto as Exhibit C;
(iv) all corporate, accounting, business and tax
records of the Company;
(v) a legal opinion from Patrick C. Barthet, P.A.,
counsel to the Shareholders, in a form customary to such transactions and
reasonably satisfactory to Purchaser;
(vi) Employment and Covenant Not to Compete
Agreements between the Purchaser and each of the Shareholders, attached as
Exhibit D hereto;
(vii) new real property lease with respect to
properties owned by the Shareholders, or affiliates of the Shareholders, in the
form attached hereto as Exhibit E;
(viii) evidence of approval by the Board of
Directors and the Shareholders of the Seller of the Agreement and the closing
of the transactions contemplated herein; and
(ix) such other documents, including certificates of
the Shareholders, as may be required by this Agreement or reasonably requested
by the Purchaser.
(b) At the Closing Date, the Purchaser shall deliver the
following to the Shareholders:
(i) the Purchase Price set forth in Section 3.2;
(ii) Employment and Covenant Not to Compete
Agreements between the Purchaser and each of the Shareholders, attached as
Exhibit D;
4
<PAGE> 369
(iii) documents relating to the removal of the
Shareholders from any and all personal guaranties and/or surety obligations in
connection with the Company's debts or operations listed on Schedule
3.4(b)(iii);
(iv) evidence of approval by the Board of Directors
of the Purchaser of this Agreement and the Closing of the transactions
contemplated herein;
(v) a legal opinion from the Purchaser in a form
customary to such transactions and reasonably satisfactory to the Shareholders;
and
(vi) such other documents, including certificates of
the Company, as may be required by this Agreement or reasonably requested by
the Shareholders.
ARTICLE IV
REPRESENTATIONS AND
WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Shareholders as follows:
SECTION 4.1. ORGANIZATION AND QUALIFICATION. Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of Delaware and has the requisite corporate power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. Purchaser is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the
properties owned, leased, or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified and in good standing would not have, or could not reasonably be
anticipated to have, individually or in the aggregate, a Material Adverse
Effect (as defined in Exhibit A).
SECTION 4.2. AUTHORITY; BINDING AGREEMENT. Purchaser has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Purchaser and, assuming the due authorization,
execution and delivery hereof by the Shareholders, constitutes a valid and
legally binding agreement of Purchaser and is enforceable against Purchaser in
accordance with its terms, except that such enforcement may be subject to
bankruptcy, insolvency, reorganization or other similar laws affecting or
relating to enforcement of creditors' rights generally.
5
<PAGE> 370
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE SHAREHOLDERS
The Shareholders, jointly and severally, represent and warrant to
Purchaser as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Florida and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. The Company is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the properties owned, leased, or operated by it or the nature of the
business conducted by it makes such qualification necessary. True, accurate and
complete copies of the Company's articles of incorporation and bylaws, in each
case as in effect on the date hereof, including all amendments thereto, have
heretofore been delivered to Purchaser.
SECTION 5.2. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
100 shares of Company Common Stock, of which 100 shares are issued and
outstanding, and no other shares of capital stock of the Company are issued and
outstanding. All of the issued and outstanding shares of Company Common Stock
were validly issued and are fully paid, nonassessable and free of preemptive
rights and are owned beneficially and of record as set forth on Schedule 5.2,
free and clear of all restrictions, liens, claims and encumbrances. No
Subsidiary of the Company holds any shares of the capital stock of the Company.
(b) Except as set forth on Schedule 5.2, there are no
outstanding (i) subscriptions, options, calls, contracts, commitments,
understandings, restrictions, arrangements, rights or warrants, including any
right of conversion or exchange under any outstanding security, debenture,
instrument or other agreement obligating the Company or any Shareholder to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of the Company or obligating the Company or any
Shareholder to grant, extend or enter into any such agreement or commitment or
(ii) obligations of the Company or any Shareholder to repurchase, redeem or
otherwise acquire any securities referred to in clause (i) above. There are no
voting trusts, proxies or other agreements or understandings to which the
Company or any Shareholder is a party or is bound with respect to the voting of
any shares of capital stock of the Company.
SECTION 5.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Shareholders have full power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been approved by the Board of Directors and no other
corporate proceedings on the part of the Company are necessary to authorize the
execution and delivery of this Agreement or the consummation by the
Shareholders of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by the Shareholders, and, assuming the due
authorization, execution and delivery hereof by Purchaser, constitutes a valid
and legally binding agreement of the Shareholders, enforceable against the
Shareholders in accordance with its terms.
(b) The execution and delivery of this Agreement by the
Shareholders and the consummation by the Shareholders of the transactions
contemplated hereby do not and will not violate or result in a breach of any
provision of, or constitute a default (or an event which, with
6
<PAGE> 371
notice or lapse of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required by, or result in
a right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company or the Shareholders under any of the terms, conditions or
provisions of (i) the articles of incorporation or bylaws of the Company, (ii)
any statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any court or governmental authority
applicable to the Company or the Shareholders, or any of their respective
properties or assets, or (iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which the Company or any of
the Shareholders is now a party or by which the Company or the Shareholders or
any of their respective properties or assets may be bound or affected.
(c) No declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by the Shareholders or the consummation by the Shareholders of the transactions
contemplated hereby.
SECTION 5.4. SUBSIDIARIES. The Company does not have any Subsidiaries,
nor does the Company hold any equity interest in or control (directly or
indirectly, through the ownership of securities, by contract, by proxy, alone
or in combination with others, or otherwise) any corporation, limited liability
company, partnership, business organization or other Person.
SECTION 5.5. FINANCIAL STATEMENTS. The financial statements of the
Company attached as Schedule 5.5 (the "Company Financial Statements") have been
prepared in accordance with the accrual basis of accounting and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of its operations and cash flows for the periods then
ended, subject, in the case of the unaudited interim financial statements, to
normal year-end adjustments and any other adjustments described therein.
SECTION 5.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed
in Schedule 5.6, the Company has not incurred any liabilities or obligations
(whether absolute, accrued, contingent or otherwise) of any nature, except
liabilities, obligations or contingencies (i) which are accrued or reserved
against the Company Financial Statements or reflected in the notes thereto or
(ii) which were incurred after June 30, 1999, and were incurred in the ordinary
course of business and consistent with past practices.
SECTION 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as provided
in Schedule 5.7, since August 31, 1999, (i) the Company has not declared or set
aside or paid any dividend or made any other distribution with respect to its
outstanding securities, or, directly or indirectly, purchased, redeemed or
otherwise acquired any of its securities; (ii) the Company has not granted any
general increase in the compensation of its officers, directors or employees
(including any increase pursuant to any bonus, pension, profit-sharing or other
plan or commitment) and has not paid any bonuses to any officers, directors or
employees; (iii) the Company has not adopted, entered into or amended any
bonus, profit sharing, compensation, stock option, pension, retirement,
deferred compensation,
7
<PAGE> 372
health care, employment or other employee benefit plan, agreement, trust fund
or arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law; (iv) the Company has not
made any amendment to its articles of incorporation or bylaws or changed the
character of its business in any manner; (v) the business of the Company has
been conducted in the ordinary course of business consistent with past
practices; and (vi) there has not been any event, occurrence, development or
state of circumstances or facts which has had, or could reasonably be
anticipated to have, individually or in the aggregate, a Material Adverse
Effect.
SECTION 5.8. LITIGATION. Except as described in Schedule 5.8, there
are no claims, suits, actions, Environmental Claims, inspections,
investigations or proceedings pending or, to the knowledge of the Shareholders,
threatened against, relating to or affecting the Company before any court,
governmental department, commission, agency, instrumentality, authority, or any
mediator or arbitrator and there is no basis for the same. Except as described
in Schedule 5.8, the Company is not subject to any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality, authority, or any mediator or arbitrator.
SECTION 5.9. ACCOUNTS RECEIVABLE. All accounts receivable reflected on
the Company Financial Statements represent sales actually made in the ordinary
course of business and are collectible within 90 days after the applicable
billing date which is fifteen (15) days after the date on the invoice.
SECTION 5.10. NO VIOLATION OF LAW; COMPLIANCE WITH AGREEMENTS.
(a) The Company is not in violation of and has not been given
notice or been charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment (including, without limitation, any
applicable Environmental Law) of any governmental or regulatory body or
authority. No investigation or review by any governmental or regulatory body or
authority is pending or threatened, nor has any governmental or regulatory body
or authority indicated an intention to conduct the same. The Company has all
permits (including without limitation Environmental Permits), licenses,
franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals required or necessary to conduct its
business as presently conducted (collectively, the "Company Permits"). The
Company is not in violation of the terms of any of the Company Permits.
(b) The Company and each of the Shareholders are not in
breach or violation of or in default in the performance or observance of any
term or provision of, and no event has occurred which, with lapse of time or
action by a third party, could result in a default under, (a) the charter,
bylaws or similar organizational instruments of the Company or (b) any
contract, commitment, agreement, indenture, mortgage, loan agreement, note,
lease, bond, license, approval or other instrument to which the Company is a
party or by which it is bound or to which any of its property is subject.
SECTION 5.11. INSURANCE. Schedule 5.11 hereto sets forth a list of all
insurance policies owned by the Company or by which the Company or any of its
properties or assets is covered against present losses, all of which are now in
full force and effect. No insurance has been refused
8
<PAGE> 373
with respect to any operations, properties or assets of the Company nor has
coverage of any insurance been limited by any insurance carrier that has
carried, or received any application for, any such insurance during the last
three years. No insurance carrier has denied any claims made against any of the
policies listed on Schedule 5.11 hereto other than as noted on such Schedule.
SECTION 5.12. TAXES.
(a) Except as set forth on Schedule 5.12, (i) the Company has
(x) duly filed (or there has been filed on its behalf) with the appropriate
taxing authorities all Tax Returns (as hereinafter defined) required to be
filed by it on or prior to the date hereof, and (y) duly paid in full or made
adequate provision therefor on the Company Financial Statements in accordance
with GAAP (or there has been paid or adequate provision has been made on its
behalf) for the payment of all Taxes (as hereinafter defined) for all periods
ending through the date hereof (whether or not shown on any Tax Return); (ii)
all such Tax Returns filed by or on behalf of the Company are true, correct and
complete in all material respects; (iii) the Company is not the beneficiary of
any extension of time within which to file any Tax Return; (iv) no claim has
ever been made by any authority in a jurisdiction where the Company does not
file Tax Returns that it is or may be subject to taxation by that jurisdiction;
(v) the liabilities and reserves for Taxes reflected in the most recent balance
sheet included in the Company Financial Statements to cover all Taxes for all
periods ending at or prior to the date of such balance sheet have been
determined in accordance with GAAP, and there is no material liability for
Taxes for any period beginning after such date other than Taxes arising in the
ordinary course of business; (vi) there are no liens for Taxes upon any
property or assets of the Company, except for liens for Taxes not yet due;
(vii) the Company has not made any change in accounting methods since December
31, 1998; (viii) the Company has not received a ruling from any taxing
authority or signed an agreement with any taxing authority; (ix) the Company
has complied in all respects with all applicable laws, rules and regulations
relating to the payment and withholding of Taxes (including, without
limitation, withholding of Taxes pursuant to Sections 1441 and 1442 of the
Code, as amended or similar provisions under any foreign laws) and has, within
the time and the manner prescribed by law, withheld and paid over to the
appropriate taxing authority all amounts required to be so withheld and paid
over under all applicable laws in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party;
(x) no federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any Taxes
or Tax Returns of the Company, and as of the date of this Agreement the Company
has not received a written notice of any pending audits or proceedings; (xi) no
shareholder or director or officer (or employee responsible for Tax matters) of
the Company expects any authority to assess any additional Taxes for any period
for which Tax Returns have been filed; (xii) the federal income Tax Returns of
the Company have not been examined by the Internal Revenue Service ("IRS")
(which examination has been completed) or the statute of limitations for the
assessment of federal income Taxes of the Company has expired, for all periods
through and including September 30, 1995, and no deficiencies have been
asserted as a result of such examinations which have not been resolved and
fully paid; (xiii) no adjustments or deficiencies relating to Tax Returns of
the Company have been proposed, asserted or assessed by any taxing authority,
except for such adjustments or deficiencies which have been fully paid or
finally settled; (xiv) the Company has delivered to the Purchaser true, correct
and complete copies of all federal income Tax Returns, examination reports, and
statements of
9
<PAGE> 374
deficiencies assessed against or agreed to by the Company since December 31,
1994; (xv) the Company has been a validly electing S corporation within the
meaning of Sections 1361 and 1362 of the Code at all times since October 1,
1997, and the Company will be an S corporation up to and including the Closing
Date; (xvi) prior to October 1, 1997, the Company operated and filed its income
tax returns as a regular Subchapter C corporation; (xvii) after September 30,
1997, the Company has operated and filed or will file its income tax returns as
an S corporation through the Closing Date; (xviii) notwithstanding anything to
the contrary in this Section 5.12, (A) during the time the Company has operated
as a Subchapter S corporation, no tax provision has been or will be made on the
Company's books or the Company's Financial Statements; (B) the Company's
Financial Statements are not prepared in accordance with GAAP with respect to
depreciation and accumulated depreciation; (C) the Company's Financial
Statements provide that depreciation and accumulated depreciation are
maintained on the tax basis of accounting; and (D) the Company files its tax
returns on the cash basis; (xix) neither the Company nor any qualified
subchapter S subsidiary of the Company has, in the past ten years, (i) acquired
assets from another corporation in a transaction which the Company's Tax basis
for the acquired assets was determined, in whole or in part, by reference to
the Tax basis of the acquired assets (or any other property) in the hands of
the transferor or (ii) acquired the stock of any corporation which is a
qualified subchapter S subsidiary; (xx) the Company has timely filed tax
returns on extension; and (xxi) the Company will be liable for Taxes under
Section 1274 of the Code if its assets (or the assets of any qualified
Subchapter S Subsidiary) were sold for their fair market value as of the
Closing Date.
(b) There are no outstanding requests, agreements, consents
or waivers to extend the statute of limitations applicable to the assessment of
any Taxes or deficiencies against the Company, and no power of attorney granted
by the Company with respect to any Taxes is currently in force. The Company has
disclosed on its federal income Tax Returns all positions taken therein that
could give rise to a substantial understatement of federal income Tax within
the meaning of Section 6662 of the Code. The Company is not a party to any Tax
allocation or sharing Agreement. The Company has not made any payments, is not
obligated to make any payments and is not a party to any agreement that under
certain circumstances could obligate it to make any payments that will not be
deductible under Section 280G of the Code. The Company has not, with regard to
any assets or property held, acquired or to be acquired by it, filed a consent
to the application of Section 341(f) of the Code, or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
such term is defined in Section 341(f)(4) of the Code) owned by the Company.
The Company (i) has not been a member of an affiliate group filing a
consolidated federal income Tax Return (other than a group the common parent of
which was the Company) and (ii) has no liability for Taxes of any Person (other
than any of the Company and its Subsidiaries) under Section 1.1502-6 of the
United States Treasury Regulations (or any similar provision of state, local or
foreign law), as a transferee or successor, by contract, or otherwise.
SECTION 5.13. EMPLOYEE BENEFIT PLANS.
(a) Each Plan and each Benefit Program (as such terms are
defined below) is listed on Schedule 5.13 hereto. No Plan or Benefit Program is
or has been (i) covered by Title IV of the Employer Retirement Income Security
Act of 1974, as amended ("ERISA"), (ii) subject to the minimum funding
requirements of Section 412 of the Code or (iii) a "multi-employer plan" as
10
<PAGE> 375
defined in Section 3(37) of ERISA, nor has the Company contributed to, or ever
had any obligation to contribute to, any multi-employer plan. Each Plan and
Benefit Program intended to be qualified under Section 401(a) of the Code is
designated as a tax-qualified plan on Schedule 5.13 and is so qualified. No
Plan or Benefit Program provides for any retiree health benefits for any
employees or dependents of the Company other than as required by COBRA (as
hereinafter defined). There are no claims pending with respect to, or under,
any Plan or any Benefit Program, other than routine claims for benefits, and
there are no disputes or litigation pending or, to the knowledge of the
Company, threatened, with respect to any such Plans or Benefit Programs.
(b) The Shareholders have heretofore delivered to Purchaser
true and correct copies of the following, if any:
(i) each Plan and each Benefit Program listed on
Schedule 5.13, all amendments thereto as of the date hereof and all current
summary plan descriptions provided to employees regarding the Plans and Benefit
Programs; and
(ii) each management or employment contract or
contract for personal services and a complete description of any understanding
or commitment between the Company and any officer, consultant, director,
employee or independent contractor of the Company.
(c) Each Plan and Benefit Program has been maintained and
administered in compliance with its terms and in accordance with all applicable
laws, rules and regulations. The Company has no commitment or obligation to
establish or adopt any new or additional Plans or Benefit Programs or to
increase the benefits under any existing Plan or Benefit Program.
(d) Except as set forth in Schedule 5.13, neither the
execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby will (i) result in any payment to be made by
the Company, including, without limitation, severance, unemployment
compensation, golden parachute (defined in Section 280G of the Code) or
otherwise, becoming due to any employee of the Company, or (ii) increase any
benefits otherwise payable under any Plan or any Benefit Program.
(e) As of the date hereof, the Company does not sponsor any
simplified employee pension plans as described in Section 408(k) of the Code
and there are no claims against the Company for benefits relating to any such
plans.
SECTION 5.14. EMPLOYEE AND LABOR MATTERS.
(a) Shareholders have provided Purchaser with a true and
complete list dated as of August 31, 1999 (the "Employee Schedule") of all
employees of the Company listing the title or position held, base salary or
wage rate and any bonuses, commissions, profit sharing, the Company's vehicles,
club memberships or other compensation or perquisites payable, all employee
benefits received by such employees and any other material terms of any written
agreement with the Company. As of the date of this Agreement, the combined
projected annual payroll for the calendar year ending May 31, 1998 of the
Company required to operate its business is not materially different
11
<PAGE> 376
from that as listed on the Employee Schedule, and the Company has not entered
into any agreement or agreements pursuant to which the combined annual payroll
of the Company, including projected pay increases, overtime and fringe benefit
costs, required to operate its business (including all administrative and
support personnel) would be greater than as listed on the Employee Schedule.
Set forth on Schedule 5.14 is a detailed description of all health, dental,
life and disability insurance plans of the Company and a description of the
cost per employee under each such plan for individual coverage as well as for
coverage of such employee's dependents.
(b) Except as set forth on Schedule 5.14, the Company is not
a party to or bound by any written employment agreements or commitments, other
than on an at-will basis. The Company is in compliance with all applicable laws
respecting the employment and employment practices, terms and conditions of
employment and wages and hours of its employees and is not engaged in any
unfair labor practice. All employees of the Company who work in the United
States are lawfully authorized to work in the United States according to
federal immigration laws. There is no labor strike or labor disturbance pending
or, to the knowledge of the Shareholders, threatened against the Company with
respect to the Business and, during the past five years, the Company has not
experienced a work stoppage.
(c) Except as set forth on Schedule 5.14, (i) the Company is
not a party to or bound by the terms of any collective bargaining agreement or
other union contract applicable to any employee of the Company and no such
agreement or contract has been requested by any employee or group of employees
of the Company, nor has there been any discussion with respect thereto by
management of the Company with any employees of the Company, (ii) the
Shareholders are not aware of any union organizing activities or proceedings
involving, or any pending petitions for recognition of, a labor union or
association as the exclusive bargaining agent for, or where the purpose is to
organize, any group or groups of employees of the Company, or (iii) there is
not currently pending, with regard to any of its facilities, any proceeding
before the National Labor Relations Board, wherein any labor organization is
seeking representation of any employees of the Company.
SECTION 5.15. ENVIRONMENTAL MATTERS. Without in any manner limiting
any other representations and warranties set forth in this Agreement:
(a) Neither the Company nor, to the knowledge of the
Shareholders, its Business Facility, is in violation of, or has violated, or
has been or is in non-compliance with, any Environmental Laws, including, but
not limited to, the conduct of the business of the Company or the ownership,
use, maintenance or operation of the Business Facility by the Company. The
Shareholders are not aware of any pending or currently proposed changes to any
Environmental Laws and regulations which, when implemented or effective may
affect the operations of the Business in any material manner.
(b) Without in any manner limiting the generality of (a)
above:
(i) Except in compliance with Environmental Laws
(including, without limitation, by obtaining necessary Environmental Permits),
no Materials of Environmental Concern
12
<PAGE> 377
(as defined in Exhibit A) have been used, generated, extracted, mined,
beneficiated, manufactured, stored, treated, or disposed of, or in any other
way released (and no release is threatened) by the Company, on, under or about
the Business Facility (as defined in Exhibit A) or transferred or transported
by the Company to or from the Business Facility, and to the knowledge of the
Shareholders no Materials of Environmental Concern have been generated,
manufactured, stored or treated or disposed of, or in any other way released
(and no release is threatened) by the Company, on, under, about or from any
property adjacent to the current Business Facility;
(ii) To the knowledge of the Shareholders, the
Company is not now, and will not be in the future, as a result of the conduct,
operation or condition of the business of the Company on or prior to the date
hereof, and as of the date of Closing, subject to any: (a) contingent liability
in connection with any release or threatened release of any Materials of
Environmental Concern into the environment whether on or off the Business
Facility; (b) reclamation, decontamination or Remediation (as defined in
Exhibit A) requirements under Environmental Laws, or any reporting requirements
related thereto; or (c) consent order, compliance order or administrative order
relating to or issued under any Environmental Law;
(iii) There are no Environmental Claims known,
pending or threatened against the Company or, to the knowledge of the
Shareholders, its Business Facility, and the Company and the Shareholders are
not aware that there is any basis for the same;
(iv) The Company has, and its Business Facility has,
all Environmental Permits necessary to comply with all Environmental Laws
applicable to the operations of the business of the Company as presently
conducted, and the Company and its Business Facility is in compliance with all
terms and conditions of such Environmental Permits. The Company further
represents and warrants that it and its Business Facility has environmental and
pollution control equipment necessary to comply with all Environmental Laws
(including, without limitation, to comply with all applicable Environmental
Permits) applicable to the operation of the business of the Company as
presently conducted. Exhibit 5.15 lists each such permit, license or other
authorization in the possession of the Business;
(v) The Company has received no notice and has no
knowledge that any occupant or tenant of the Business Facility (a) is in
violation of any Environmental Law; (b) is the subject of any Environmental
Claims; or (c) does not have or has not renewed any Environmental Permits
applicable to its assets or operations;
(vi) To the Company's and Shareholders' knowledge,
there are no, nor have there ever been any, storage tanks or solid waste
management units located on or under the Business Facility of the Company, and,
to the knowledge of the Shareholders, there are no Materials of Environmental
Concern on the Business Facility of the Company exceeding any standard or
limitation established, published or promulgated pursuant to Environmental
Laws, or which would require reporting to any governmental authority or
Remediation to comply with the Requirements of Environmental Laws (as defined
in Exhibit A);
13
<PAGE> 378
(vii) To the knowledge of the Shareholders, none of
the off-site locations where Materials of Environmental Concern generated from
the Business Facility of the Company or for which the Company has arranged for
their disposal, treatment or application has been nominated or identified as a
facility which is subject to an existing or potential claim under Environmental
Laws;
(viii) The Company has not been named as a
potentially responsible party under, and no Business Facility of the Company
has been nominated or identified as a facility which is subject to an existing
or potential claim under CERCLA or comparable Environmental Laws, and no
Business Facility of the Company is subject to any lien arising under
Environmental Laws;
(ix) The Company has not received any notice of any
release or threatened release of Materials of Environmental Concern, or of any
violation of, noncompliance with, or remedial obligation under, Environmental
Laws or Permits, relating to the ownership, use, maintenance, operation of the
Business Facility of the Company or in connection with the business of the
Company, nor is the Company aware of any basis for any of the foregoing, nor
has the Company voluntarily undertaken Remediation or other decontamination or
cleanup of any facility or site or entered into any agreement for the payment
of costs associated with such activity;
(x) Except as set forth on Schedule 5.15, there are
no present or past events, conditions, circumstances, activities, practices,
incidents, actions or plans known to the Company and its Shareholders which may
interfere with or prevent continued compliance by the Company with
Environmental Laws or which may give rise to any common law or statutory
liability under Environmental Laws or form the basis of an Environmental Claim
against the Company relating to the ownership, use, maintenance or operation of
the Business Facility by the Company or in connection with the conduct of the
business of the Company;
(xi) There are no obligations, undertakings or
liabilities arising out of or relating to Environmental Laws which the Company
has agreed to, assumed or retained, by contract or otherwise;
(xii) To the extent they are required, the Company
has filed all notices, notifications, financial security, waste managements
plans, or applications which are required to be obtained or filed by the
Company for the operation of its business or the use or operation of the
Business Facility of the Company; and
(xiii) To the Company's or Shareholders' knowledge,
no current Business Facility (or equipment thereon) of the Company contains any
asbestos containing materials or polychlorinated biphenyls in any form nor any
wetland areas or other land subject to restricted development under
Environmental Laws.
For purposes of this Section, the "Company" shall include any entity which is,
in whole or in part, a predecessor of the Company and all of its present and
former Subsidiaries and their predecessors.
14
<PAGE> 379
SECTION 5.16. NON-COMPETITION AGREEMENTS. Neither the Company nor any
Shareholder is a party to any agreement which purports to restrict or prohibit
any of them from, directly or indirectly, engaging in any business currently
engaged in by the Company. None of the Company's shareholders, officers,
directors, or key employees is a party to any agreement which, by virtue of
such person's relationship with the Company, restricts the Company or any
Subsidiary of the Company from, directly or indirectly, engaging in any of the
businesses described above.
SECTION 5.17. TITLE TO ASSETS. The Company has good and marketable
title to all its assets and valid leasehold interests in their leased assets
and properties, as reflected in the most recent balance sheet included in the
Company Financial Statements, except for properties and assets that have been
disposed of in the ordinary course of business since the date of the latest
balance sheet included therein, free and clear of all mortgages, liens,
pledges, charges or encumbrances of any nature whatsoever, except (i) liens for
current taxes, payments of which are not yet delinquent, (ii) such
imperfections in title and easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not detract from the value,
or interfere with the present use or marketability of the property subject
thereto or affected thereby, or otherwise impair the Company's business
operations (in the manner presently carried on by the Company), or (iii) any
lien securing any debt or obligation described on Schedule 5.17 which is
expressly referenced as being secured. All leases under which the Company
leases any real property have been delivered to Purchaser and are in good
standing, valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any existing default or event which
with notice or lapse of time or both would become a default by or on behalf of
the Company or its Subsidiaries, or by or on behalf of any third party.
SECTION 5.18. CONTRACTS, AGREEMENTS, PLANS AND COMMITMENTS. Schedule
5.18 hereto sets forth a complete list of the following contracts, agreements,
plans and commitments (collectively, the "Contracts") to which the Company is a
party or by which the Company or any of their assets is bound as of the date
hereof:
(a) any contract, commitment or agreement that involves
aggregate expenditures by the Company of more than $10,000 per year;
(b) any contract or agreement (including any such contracts
or agreements entered into with any Governmental Authority) relating to the
maintenance or operation of the business that involves aggregate expenditures
by the Company of more than $10,000;
(c) any indenture, loan agreement or note under which the
Company has outstanding indebtedness, obligations or liabilities for borrowed
money;
(d) any lease or sublease for the use or occupancy of real
property;
(e) any agreement that restricts the right of the Company to
engage in any type of business;
15
<PAGE> 380
(f) any guarantee, direct or indirect, by any person of any
contract, lease or agreement entered into by the Company;
(g) any partnership, joint venture or construction and
operation agreement;
(h) any agreement of surety, guarantee or indemnification
with respect to which the Company is the obligor, outside of the ordinary
course of business;
(i) any contract that requires the Company to pay for goods
or services substantially in excess of its estimated needs for such items or
the fair market value of such items;
(j) any contract, agreement, agreed order or consent
agreement that requires the Company to take any actions or incur expenses to
remedy non-compliance with any Environmental Law; and
(k) any other contract material to the Company or its
business.
True, correct and complete copies of each of such contracts, agreements, plans
and commitments have been delivered to or made available for inspection by
Purchaser. All such contracts, agreements, plans and commitments (i) were duly
and validly executed and delivered by the Company and the other parties thereto
and (ii) are valid and in full force and effect. Except as set forth on
Schedule 5.18, the Company has fulfilled all material obligations required of
the Company under each such contract, agreement, plan or commitment to have
been performed by it prior to the date hereof, including timely paying all
interest on its debt as such interest has become due and payable. Except as set
forth on Schedule 5.18, there are no counterclaims or offsets under any of such
contracts, agreements, plans and commitments.
The consummation of the transactions contemplated herein will vest in
the Purchaser all rights and benefits under the Contracts and the right to
operate the Company's business and assets under the terms of the Contracts in
the manner currently operated and used by the Company.
SECTION 5.19. SUPPLIES. The Supplies of the Company are of a quantity
and quality that have been normal for the Company in the ordinary course of
business of the Company and are owned by the Company free and clear of any
Liens.
SECTION 5.20. BROKERS AND FINDERS. Neither the Company nor the
Shareholders have entered into any contract, arrangement or understanding with
any person or firm which may result in the obligation of the Company to pay any
finder's fees, brokerage or agent commissions or other like payments in
connection with the transactions contemplated hereby. There is no claim for
payment by the Company of any investment banking fees, finder's fees, brokerage
or agent commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
16
<PAGE> 381
SECTION 5.21. INTELLECTUAL PROPERTY. Set forth on Schedule 5.21 is a
complete list of all registered patents, trademarks, service marks, trade names
and copyrights, and applications for and licenses (to or from the Company) with
respect to any of the foregoing (collectively, "Registered Intellectual
Property"), owned by the Company or with respect to which the Company has any
rights. The Company has the sole and exclusive right to use all Registered
Intellectual Property and other computer software and software licenses,
intellectual property, proprietary information, trade secrets, trademarks,
trade names, copyrights, material and manufacturing specifications, drawings
and designs (collectively, "Intellectual Property") used by the Company or
necessary in connection with the operation of the Company's business, without
infringing on or otherwise acting adversely to the rights or claimed rights of
any Person, and neither the Company nor any Shareholder is obligated to pay any
royalty or other consideration to any Person in connection with the use of any
such Intellectual Property. To the knowledge of the Company or the
Shareholders, no other Person is infringing the rights of the Company in any of
its Intellectual Property.
SECTION 5.22. RELATIONSHIPS. Except as set forth on Schedule 5.22,
since December 31, 1998, the Company has not received notice from any customer,
supplier or any party to any Contract involving more than $10,000 annually with
the Company (each a "Contract Party") that such customer, supplier or Contract
Party intends to discontinue doing business with the Company, and, since such
date, no customer, supplier or Contract Party has indicated any intention (a)
to terminate its existing business relationship with the Company or (b) not to
continue its business relationship with the Company, whether as a result of the
transactions contemplated hereby or otherwise. Except as set forth on Schedule
5.22, the Company has not entered into or participated in any related party
transaction during the past three years.
SECTION 5.23. CERTAIN PAYMENTS. Neither the Company nor any
shareholder, officer, director or employee of the Company has paid or received
or caused to be paid or received, directly or indirectly, in connection with
the business of the Company (a) any bribe, kickback or other similar payment to
or from any domestic or foreign government or agency thereof or any other
person or (b) any contribution to any domestic or foreign political party or
candidate (other than from personal funds of such shareholder, officer,
director or employee not reimbursed by the Company or as permitted by
applicable law).
SECTION 5.24. BOOKS AND RECORDS. The corporate minute books and other
corporate records of the Company are correct and complete in all material
respects and the signatures appearing on all documents contained therein are
the true signatures of the person purporting to have signed the same. All
actions reflected in said books and records were duly and validly taken in
compliance with the laws of the applicable jurisdiction and no meeting of the
board of directors of the Company or any committee thereof has been held for
which minutes have not been prepared and are not contained in the minute books.
To the extent that they exist, all personnel files, reports, strategic planning
documents, financial forecasts, accounting and tax records and all other
records of every type and description that relate to the business of the
Company have been prepared and maintained
17
<PAGE> 382
in accordance with good business practices and, where applicable, in
substantial conformity with GAAP and applicable laws and regulations. All such
books and records are located in the offices of the Company.
SECTION 5.25. CONDITION AND SUFFICIENCY OF ASSETS. All buildings,
improvements and equipment owned or leased by the Company are structurally
sound, in good operating condition and repair (subject to normal wear and tear)
and adequate for the uses to which they are being put, and none of the
buildings, improvements and equipment owned or leased by the Company is in need
of maintenance or repairs except for ordinary, routine maintenance and repairs
consistent with past practice.
SECTION 5.26. DISCLOSURE. To the best knowledge of the Shareholders,
there is no fact known to the Company or the Shareholders (other than general
economic conditions or prospective state, county or local business
developments) that would have a Material Adverse Effect that has not been set
forth in this Agreement or in the schedules attached hereto or to be delivered
in connection with this Agreement.
ARTICLE VI
CONDUCT OF BUSINESS PENDING CLOSING
SECTION 6.1. CONDUCT OF BUSINESS BY THE SHAREHOLDERS PENDING CLOSING.
After the date hereof and prior to the Closing Date, unless Purchaser shall
otherwise agree in writing, the Shareholders shall, and the Shareholders shall
cause the Company to:
(a) conduct its businesses in the ordinary and usual course
of business and consistent with past practice;
(b) not (i) amend or propose to amend its charter or bylaws,
(ii) split, combine, reorganize, reclassify, recapitalize or take any similar
action with respect to their outstanding capital stock or (iii) declare, set
aside or pay any dividend or distribution payable in cash, stock, property or
otherwise;
(c) not issue, sell, pledge or dispose of, or agree to issue,
sell, pledge or dispose of, any additional share of, or any options, warrants
or rights of any kind to acquire any share of, its capital stock of any class
or any debt or equity securities convertible into or exchangeable for such
capital stock;
(d) not (i) incur or become contingently liable with respect
to any indebtedness for borrowed money, (ii) redeem, purchase, acquire or offer
to redeem, purchase or acquire any shares of its capital stock or any options,
warrants or rights to acquire any of its capital stock or any security
convertible into or exchangeable for its capital stock, (iii) make any
acquisition of any assets or businesses other than expenditures for fixed or
capital assets in the ordinary course of business not exceeding $10,000 in any
instance or $50,000 in the aggregate, (iv) sell, pledge, dispose of or encumber
any assets or businesses other than sales in the ordinary course of business or
(v) enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing;
18
<PAGE> 383
(e) use reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of their respective
present officers and key employees, and preserve the goodwill and business
relationships with customers and others having business relationships with them
and not engage in any action, directly or indirectly, with the intent to
adversely impact the transactions contemplated by this Agreement;
(f) not enter into or amend any employment, severance,
special pay arrangement with respect to termination of employment or other
similar arrangements or agreements with any directors, officers or key
employees;
(g) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law or as contemplated hereunder;
(h) use commercially reasonable efforts to maintain with
financially responsible insurance companies insurance on its tangible assets
and its businesses in such amounts and against such risks and losses as are
consistent with past practice;
(i) not make, change or revoke any material Tax election or
make any material agreement or settlement regarding Taxes with any taxing
authority;
(j) not make any change in the Company's financial, Tax or
accounting methods, practices or policies, or in any assumption underlying such
a method, practice or policy;
(k) give prompt written notice to Purchaser of the
commencement of any Environmental Claim, or non-routine inspection by any
governmental authority with responsibility for enforcing or implementing any
applicable Environmental Laws, and provide to Purchaser such information as
Purchaser may reasonably request regarding such Environmental Claim, any
developments in connection therewith, and, as applicable, the Company's
anticipated or actual response thereto;
(l) not enter into or assume any contracts or agreements
having a value or imposing an obligation upon the Company in excess of $10,000
annually and all contracts or agreements having a value to or imposing an
obligation on the Company that have remaining obligations of $50,000 or more,
regardless of the annual payment;
(m) maintain its books of account and records in the usual,
regular and ordinary manner consistent with past policies and practice;
(n) not compromise, settle, grant any waiver or release
relating to or otherwise adjust any litigation or claims of any nature
whatsoever pending against the Company; and
19
<PAGE> 384
(o) not intentionally take any action or omit to take any
action, which action or omission would result in a breach of any of the
representations and warranties set forth in this Agreement.
SECTION 6.2. OTHER OFFERS. Except in connection with the transactions
contemplated by this Agreement and the Business Premises, from and after the
date hereof, and continuing through the earlier of Closing or the termination
of this Agreement in accordance with the terms hereof, the Company and the
Shareholders shall not, and shall not permit any of the Company's officers,
directors, employees, Affiliates, representatives or agents to, directly or
indirectly, (i) solicit, initiate or knowingly encourage any offer or proposal
for, or any indication of interest in, a merger or business combination
involving the Company or the acquisition of an equity interest in, or any
substantial portion of the assets of, the Company or (ii) engage in
negotiations with or disclose any nonpublic information relating to the Company
or Purchaser, or afford access to the properties, books or records of the
Company, to any Person. The Company shall promptly notify and provide copies to
Purchaser of any offer, proposal or indication of interest, or communication
with respect thereto, delivered to or received from any third party.
SECTION 6.3. ACCESS TO INFORMATION; ENVIRONMENTAL DUE DILIGENCE. The
Shareholders shall, and shall cause the Company to, give the Purchaser, its
accountants, counsel, financial advisors, and other representatives (the
"Purchaser Representatives") full access (and shall otherwise fully cooperate,
including by making available copies of all of the following documents which
are susceptible to photostatic reproduction) during normal business hours
throughout the period prior to Closing to all of its respective properties,
books, records (including, but not limited to, Tax Returns and any and all
records or documents which are within the possession of governmental or
regulatory authorities, agencies or bodies, and the disclosure of which the
Company can facilitate or control), Contracts, premises, permits, Environmental
Permits, licenses, Governmental Authorizations, commitments of any nature
(whether written or oral) and records, and shall permit the Purchaser and
Purchaser Representatives to make such inspections (including without
limitation environmental inspections, sampling, and analysis) as they may
require and furnish to the Purchaser and Purchaser Representatives during such
period all such information concerning the Company and its affairs as they may
reasonably request. The Purchaser and the Company acknowledge the existence and
continuance of the Confidentiality Agreement previously entered into which
shall govern the management of information or records of the Company and the
conduct of the due diligence by Purchaser hereunder. The Shareholders shall
provide to Purchaser copies of all (aa) Permits, (bb) reports or results of all
inspections, audits, assessments, and analytical data and (cc) such other
information as Purchaser may reasonably request in the possession or control of
the Shareholders regarding any of Company's current or prior Business
Facilities or operations and relating to (i) compliance with applicable
requirements of Environmental Laws or (ii) the exposure to, presence, release,
or any aspect of management, handling, or use of Materials of Environmental
Concern. The Purchaser shall be responsible to leave the Business Premises in
the same condition in which it found them if the Purchaser does not close this
transaction.
SECTION 6.4. BEST EFFORTS. The Shareholders will use their best
efforts to cause the representations and warranties contained in Article V
hereof to continue to be true and correct
20
<PAGE> 385
through the Closing Date and to obtain the satisfaction of the conditions to
Closing set forth in Section 8.3 hereof.
ARTICLE VII
CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES
SECTION 7.1. CONFIDENTIALITY. Without the express written consent of
the Parties, each of the Parties agrees to maintain in confidence and not
disclose to any other Person the terms of the transactions contemplated hereby
or the information delivered in connection with the proposed due diligence
investigation, other than disclosures required to obtain the approvals for the
transactions contemplated hereby, disclosures to those professionals and
advisors who have a need to know, disclosures of information already available
to the public or any other disclosures required by applicable law or the rules
of the NASD. In the event that the Purchaser, the Company or the Shareholders
is at any time requested or required (by oral questions, interrogatories,
request for information or documents, subpoena or other similar process) to
disclose any information supplied to it in connection with this transaction,
such Party agrees to provide the other Parties prompt notice of such request so
that an appropriate protective order may be sought and/or such other party may
waive the first Party's compliance with the terms of this Section 7.1.
SECTION 7.2. FURTHER ASSURANCES. The Shareholders and Purchaser shall
execute and deliver to the other, after the Closing Date, any other instrument
which may be reasonably requested by the other and which is reasonably
appropriate to perfect or evidence any of the sales, assignments, transfers or
conveyances contemplated by this Agreement or to obtain any consents or
licenses necessary for Purchaser to operate the Business in the manner operated
by the Company prior to the Closing Date.
SECTION 7.3. EXPENSES AND FEES. The Shareholders shall pay all costs
and expenses incurred by the Company and the Shareholders in connection with
this Agreement and the transactions contemplated hereby, including, without
limitation, any and all broker's commissions, employee bonuses and the fees and
expenses of the Company's and the Shareholders' attorneys and accountants, and
will make all necessary arrangements so that the Purchaser will not be charged
with any such cost or expense. Purchaser shall pay all costs and expenses
incurred by Purchaser in connection with this Agreement and the transactions
contemplated hereby, including without limitation, the fees and expenses of
their attorneys and accountants.
SECTION 7.4. AGREEMENT TO COOPERATE. Subject to the terms and
conditions herein provided, the Parties hereto shall use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including using all reasonable efforts to obtain all necessary, proper or
advisable waivers, consents and approvals under applicable laws and regulations
to consummate and make effective the transactions contemplated by this
Agreement, including using all reasonable efforts to obtain all
21
<PAGE> 386
necessary or appropriate waivers, consents or approvals of third parties
required in order to preserve material contractual relationships of the
Company.
SECTION 7.5. PUBLIC STATEMENTS. Except as required by law or the NASD,
the Parties shall obtain the written consent of the other prior to issuing any
press release or any written public statement with respect to this Agreement or
the transactions contemplated hereby and shall not issue any such press release
or written public statement prior to such consent, which will not be
unreasonably withheld.
SECTION 7.6. NOTIFICATION OF CERTAIN MATTERS. Each of the
Shareholders, the Company and the Purchaser agree to give prompt notice to each
other of, and to use their respective reasonable best efforts to prevent or
promptly remedy, (i) the occurrence or failure to occur or the impending or
threatened occurrence or failure to occur, of any event which occurrence or
failure to occur would be likely to cause any of its or another's
representations or warranties in this Agreement to be untrue or inaccurate in
any material respect (or in all respects in the case of any representation or
warranty containing any materiality qualification) at any time from the date
hereof to the Closing and (ii) any material failure (or any failure in the case
of any covenant, condition or agreement containing any materiality
qualification) on its or another's part to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
shall not limit or otherwise affect the remedies available hereunder to the
Party receiving such notice.
SECTION 7.7. NOTICE OF ENVIRONMENTAL CLAIMS. The Shareholders shall
give prompt written notice to Purchaser of the commencement of any
Environmental Claim, or inspection by any Governmental Authority with
responsibility for enforcing or implementing any applicable Environmental Laws,
and provide to Purchaser such information as Purchaser may reasonably request
regarding such Environmental Claim, any developments in connection therewith,
and, as applicable, the Shareholders' anticipated or actual response thereto.
SECTION 7.8. TAX MATTERS. The following provisions shall govern the
allocation of responsibility as between the Purchaser and the Shareholders for
certain tax matters following the Closing Date:
(a) Tax Periods Ending on or Before the Closing Date. Shareholders
shall prepare or cause to be prepared and file or cause to be filed all Tax
Returns for the Company for all periods ending on or prior to the Closing Date
which are filed after the Closing Date. Shareholders shall permit the Purchaser
to review and comment on each such Tax Return described in the preceding
sentence prior to filing. It is contemplated by the Parties that the Company
will file as an S Corporation for the period from January 1, 1999 to the
Closing Date and shall be prepared in a manner consistent with the prior
practice of the Company. The Shareholders shall reimburse the Company with
respect to such periods within fifteen (15) days after payment by the Company
of such Taxes paid by the Company to the extent such Taxes are not reflected in
the reserve for Taxes (rather than any reserve for deferred Taxes established
to reflect timing differences between book and Tax income) shown on the face of
the latest Company Financial Statements as adjusted for operations and
transactions through the Closing Date in accordance with the past custom and
22
<PAGE> 387
practice of the Company. The Shareholders shall not reimburse the Company with
respect to any taxes paid by them as shareholders of a Subchapter S corporation
or income reflected in their individual income tax returns.
(b) Tax Periods Beginning Before and Ending After the Closing Date.
Purchaser shall prepare or cause to be prepared and file or cause to be filed
any Tax Returns of the Company for Tax periods which begin before the Closing
Date and end after the Closing Date, if any. It is contemplated by the Parties
that the Company will no longer by eligible for S Corporation status and will
file as a regular Subchapter C corporation beginning the day after the Closing
Date. The Shareholders shall pay to the Company within fifteen (15) days after
the date on which Taxes are paid with respect to such periods an amount equal
to the portion of such Taxes which relates to the portion of such Taxable
period ending on the Closing Date to the extent such Taxes are not reflected in
the reserve for Taxes (rather than any reserve for deferred Taxes established
to reflect timing differences between book and Tax income) shown on the face of
the latest Company Financial Statements as adjusted for operations and
transactions through the Closing Date in accordance with the past custom and
practice of the Company. For purposes of this section, in the case of any Taxes
that are imposed on a periodic basis and are payable for a Taxable period which
includes (but does not end on) the Closing Date, the portion of such Tax which
relates to the portion of such Taxable period ending on the Closing Date shall
(i) in the case of any Taxes other than Taxes based upon or related to income
or receipts, be deemed to be the amount of such Tax for the entire Taxable
period multiplied by a fraction, the numerator of which is the number of days
in the Taxable period ending on the Closing Date and the denominator of which
is the number of days in the entire Taxable period, and (ii) in the case of any
Tax based upon or related to income or receipts be deemed equal to the amount
which would be payable if the relevant Taxable period ending on the Closing
Date. Any credits relating to a Taxable period which begins before and ends
after the Closing Date shall be taken into account as though the relevant
Taxable period ended on the Closing Date. All determinations necessary to give
effect to the foregoing allocation shall be made in a manner consistent with
prior practice of the Company.
(c) Cooperation on Tax Matters. Purchaser, the Company and the
Shareholders shall cooperate fully, as and to the extent reasonably requested
by the other Party, in connection with the filing of Tax Returns pursuant to
this section and any audit, litigation or other proceeding with respect to
Taxes. Such cooperation shall include the retention and (upon the other party's
request) the provision of records and information which are reasonably relevant
to any such audit, litigation or other proceeding and making employees
available on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder. The Company and the
Shareholders agree (i) to retain all books and records with respect to Tax
matters pertinent to the Company relating to any taxable period beginning
before the Closing Date until the expiration of the statute of limitations
(and, to the extent notified by Purchaser or the Shareholders, any extensions
thereof) of the respective taxable periods, and to abide by all the record
retention agreements entered into with any taxing authority, and (ii) to give
the other party reasonable written notice prior to the transferring, destroying
or discarding any such books and records and, if the other party so requests,
the Company or the Shareholders, as the case may be, shall allow the other
party to take possession of such books and records. Purchaser and the
Shareholders further agree, upon request, to use their best efforts to obtain
any certificate or other document from any Governmental Authority or any
23
<PAGE> 388
other Person as may be necessary to mitigate, reduce or eliminate any Tax that
could be imposed (including but not limited to with respect to the transactions
contemplated hereby). Purchaser and the Shareholders further agree, upon
request, to provide the other party with all information that either party may
be required to report pursuant to Section 6043 of the Code and all Treasury
Department Regulations promulgated thereunder.
(d) Tax Sharing Agreements. All tax sharing agreements or similar
agreements with respect to or involving the Company shall be terminated as of
the Closing Date and, after the Closing Date, the Company shall not be bound
thereby or have any liability thereunder.
(e) Certain Taxes. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement shall be paid by the
Shareholders when due, and the Shareholders will, at their own expense, file
all necessary Tax Returns and other documentation with respect to all such
transfer, documentary, sales, use, stamp, registration and other Taxes and
fees, and, if required by applicable law, Purchaser will, and will cause its
affiliates to, join in the execution of any such Tax Returns and other
documentation.
ARTICLE VIII
CONDITIONS TO CLOSING
SECTION 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO CLOSE. The
respective obligations of each party to close the transactions contemplated
hereby shall be subject to the fulfillment or waiver, if permissible, of the
following conditions on or prior to the Closing Date:
(a) no preliminary or permanent injunction or other order or
decree by any federal or state court which prevents the consummation of the
transactions contemplated hereby shall have been issued and remain in effect
(each party agreeing to use its reasonable efforts to have any such injunction,
order or decree lifted);
(b) no action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the consummation
of the transactions contemplated by this Agreement or make the consummation of
the transaction contemplated by this Agreement illegal; and
(c) all necessary governmental and regulatory consents and
approvals, if any, shall have been obtained.
SECTION 8.2. CONDITIONS TO OBLIGATION OF THE SHAREHOLDERS. Unless
waived by the Shareholders, the obligation of the Shareholders to close the
transactions contemplated herein shall be subject to the fulfillment of the
following additional conditions on or prior to the Closing Date:
(a) Purchaser shall have performed in all material respects
(or in all respects in the case of any agreement containing any materiality
qualification) their agreements contained in this Agreement required to be
performed on or prior to the Closing Date;
24
<PAGE> 389
(b) the representations and warranties of Purchaser contained
in this Agreement shall be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made and on and as of the
Closing Date as if made at and as of such date;
(c) the Shareholders shall have received a legal opinion from
the Purchaser, dated as of the Closing Date, in a form customary to such
transactions and reasonably satisfactory to Purchaser; and
(d) the Shareholders shall have received a certificate
executed on behalf of Purchaser by the President or a Vice President of the
Purchaser with respect to (a) and (b) above.
SECTION 8.3. CONDITIONS TO OBLIGATIONS OF PURCHASER. Unless waived by
Purchaser, the obligation of Purchaser to close the transactions contemplated
herein shall be subject to the fulfillment of the following additional
conditions on or prior to the Closing Date:
(a) the Shareholders and the Company shall have performed in
all material respects (or in all respects in the case of any agreement
containing any materiality qualification) its agreements contained in this
Agreement required to be performed on or prior to the Closing Date;
(b) the representations and warranties of the Company and
Shareholders contained in this Agreement shall be true and correct in all
material respects (or in all respects in the case of any representation or
warranty containing any materiality qualification) on and as of the date made
and on and as of the Closing Date as if made at and as of such date;
(c) since the date hereof, there shall have been no changes
that constitute, and no event or events shall have occurred which have resulted
in or constitute, a Material Adverse Effect;
(d) Purchaser shall have received a legal opinion from legal
counsel to the Shareholders, dated as of the Closing Date, in a form customary
to such transactions and reasonably satisfactory to Purchaser;
(e) each of the Shareholders, officers and directors of the
Company shall have executed a Release of Claims Agreement, in the form attached
hereto as Exhibit C;
(f) Each of the Shareholders shall have entered into an
Employment and Non-Competition Agreement, in the form attached hereto as
Exhibit D;
(g) The Parties shall have entered into real property leases,
in the form attached hereto as Exhibit E;
(h) The Company shall have paid in full at Closing the
promissory note in favor of the Small Business Administration in the principal
amount of $322,800;
25
<PAGE> 390
(i) Purchaser shall have received a certificate or
certificates representing the Company Common Stock purchased at the Closing, in
definitive form representing the Shareholders' shares, registered in the name
of Purchaser and duly executed by the Company; and
(j) Purchaser shall have received a certificate executed by
each of the Shareholders with respect to (a) through (c) above.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1. TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby abandoned at any time prior to the Closing in
the following manner:
(a) The Shareholders shall have the right to terminate this
Agreement:
(i) if the representations and warranties of
Purchaser shall fail to be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made or, except in the case of
any such representations and warranties made as of a specified date, on and as
of any subsequent date as if made at and as of such subsequent date and such
failure shall not have been cured in all material respects (or in all respects
in the case of any representation or warranty containing any materiality
qualification) within thirty (30) days after written notice of such failure is
given to Purchaser by the Shareholders;
(ii) if the transactions completed hereby are not
completed by November 1, 1999;
(iii) if the transactions contemplated hereby are
enjoined by a final, unappealable court order; or
(iv) if Purchaser (A) fails to perform in any
material respect (or in all respects in the case of any covenant containing any
materiality qualification) any of its covenants in this Agreement and (B) does
not cure such default in all material respects (or in all respects in the case
of any covenant containing any materiality qualification) within 15 days after
notice of such default is given to Purchaser by the Shareholders.
(b) Purchaser shall have the right to terminate this
Agreement;
(i) if the representations and warranties of the
Shareholders shall fail to be true and correct in all material respects (or in
all respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made or, except in the case of
any such representations and warranties made as of a specified date, on and as
of any subsequent date as if made at and as of such subsequent date and such
failure shall not have been cured in all
26
<PAGE> 391
material respects (or in all respects in the case of any representation or
warranty containing any materiality qualification) within 30 days after written
notice of such failure is given to the Shareholders by Purchaser;
(ii) if the transactions contemplated hereby are not
completed by November 1, 1999 (provided that the right to terminate this
Agreement under this Section 9.1(b)(ii) shall not be available to Purchaser if
the failure of Purchaser to fulfill any obligation to the Shareholders under or
in connection with this Agreement has been the cause of or resulted in the
failure of the transactions contemplated hereby to occur on or before such
date); or
(iii) if the Shareholders (A) fail to perform in any
material respect (or in all respects in the case of any covenant containing any
materiality qualification) any of their covenants in this Agreement and (B) do
not cure such default in all material respects (or in all respects in the case
of any covenant containing any materiality qualification) within 15 days after
notice of such default is given to the Shareholders by Purchaser.
(c) The Shareholders and Purchaser mutually agree in writing.
SECTION 9.2. EFFECT OF TERMINATION. The following provisions shall
apply in the event of a termination of the Agreement:
(a) If this Agreement is terminated by either Purchaser or
the Shareholders pursuant to the provisions of Section 9.1, this Agreement
shall forthwith become void and there shall be no further obligations on the
part of the Shareholders, or Purchaser or its stockholders, directors,
officers, employees, agents or representatives (except as set forth in Sections
11.5 and 11.6, each of which shall survive termination in its entirety).
Notwithstanding the preceding sentence or any other provision set forth herein,
nothing in this Section 9.2 shall relieve any party from liability for any
breach of this Agreement.
(b) The parties hereto acknowledge and agree that Purchaser,
as a result of the actual damages Purchaser would sustain by reason of such
negligent or willful failure of the Shareholders to perform their obligations
hereunder, shall have the right to all remedies at law under this Agreement.
SECTION 9.3. EXTENSIONS; WAIVER. At any time prior to the Closing
Date, the Parties may (a) extend the time for the performance of any of the
obligations or other acts of the other Parties, (b) waive any inaccuracies in
the representations and warranties contained herein or in any document
delivered pursuant thereto and (c) waive compliance with any of the agreements
or conditions herein. Any agreement on the part of a Party to any such
extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such Party.
27
<PAGE> 392
ARTICLE X
INDEMNIFICATION AND LIMITATION ON LIABILITY
SECTION 10.1. THE SHAREHOLDERS' INDEMNITY OBLIGATIONS. The
Shareholders shall, jointly and severally, indemnify and hold harmless the
Company (after the Closing), the Purchaser and the Purchaser's subsidiaries
(each a "Purchaser Indemnified Party") from and against any and all claims
(including without limitation, Environmental Claims), actions, causes of
action, arbitrations, proceedings, losses, damages, remediations, liabilities,
strict liabilities, judgments, fines, penalties and expenses (including,
without limitation, reasonable attorneys' fees) (collectively, the "Indemnified
Amounts") paid, imposed on or incurred by a Purchaser Indemnified Party,
directly or indirectly, (i) relating to, resulting from or arising out of (a)
any breach or misrepresentation in any of the representations and warranties
made by or on behalf of one or more of the Shareholders in this Agreement,
including without limitation with respect to environmental matters, or any
certificate or instrument delivered in connection with this Agreement, (b) any
violation or breach by one or more of the Shareholders of, or default by one or
more of the Shareholders under, the terms of this Agreement or any certificate
or instrument delivered in connection with this Agreement, (c) any
Environmental Claim and/or any violation of any Requirements of Environmental
Law if such Environmental Claim or violation relates, directly or indirectly,
to events, conditions, operations, facts or circumstances which occurred or
commenced on or prior to the Closing Date and were the result of an intentional
or wrongful act of the Shareholders, or (d) any Taxes incurred by the
Shareholders or the Company as a result of the consummation of the transactions
contemplated by this Agreement or (ii) relating to, resulting from or arising
out of any allegation of a third party of the events described in Sections
10.1(a), (b), (c) or (d) above. For purposes of this Section 10.1, Indemnified
Amounts shall include without limitation those Indemnified Amounts ARISING OUT
OF THE STRICT LIABILITY (INCLUDING BUT NOT LIMITED TO STRICT LIABILITY ARISING
PURSUANT TO ENVIRONMENTAL LAWS) OR NEGLIGENCE OF THE COMPANY OR ANY SHAREHOLDER
INDEMNIFIED PARTY WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, ACTIVE
OR PASSIVE.
SECTION 10.2. PURCHASER'S INDEMNITY OBLIGATIONS. Purchaser shall
indemnify and hold harmless the Shareholders and the Shareholders' agents,
representatives and Affiliates (each a "Shareholders' Indemnified Party") from
and against any and all Indemnified Amounts incurred by a Shareholders'
Indemnified Party as a result of (a) any breach or misrepresentation in any of
the representations and warranties made by or on behalf of Purchaser in this
Agreement or any certificate or instrument delivered in connection with this
Agreement, or (b) any violation or breach by Purchaser of or default by
Purchaser under the terms of this Agreement or any certificate or instrument
delivered in connection with this Agreement.
SECTION 10.3. INDEMNIFICATION PROCEDURES. All claims for
indemnification under this Agreement shall be asserted and resolved as follows:
(a) Any of the Parties claiming indemnification under this
Agreement (an "Indemnified Party") shall with reasonable promptness (i) notify
the Party from whom indemnification is sought (the "Indemnifying Party") of any
third-party claim or claims asserted against the Indemnified Party
("Third-Party Claim") for which indemnification is sought and (ii) transmit to
the Indemnifying Party a copy of all papers served with respect to such claim
(if any) and a written notice ("Claim Notice") containing a description in
reasonable detail of the nature of the
28
<PAGE> 393
Third-Party Claim, an estimate of the amount of damages attributable to the
Third-Party Claim to the extent feasible (which estimate shall not be
conclusive of the final amount of such claim) and the basis of the Indemnified
Party's request for indemnification under this Agreement.
Within 15 days after receipt of any Claim Notice (the "Election
Period"), the Indemnifying Party shall notify the Indemnified Party (i) whether
the Indemnifying Party disputes its potential liability to the Indemnified
Party with respect to such Third-Party Claim and (ii) whether the Indemnifying
Party desires, at the sole cost and expense of the Indemnifying Party, to
defend the Indemnified Party against such Third-Party Claim.
If the Indemnifying Party notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third-Party Claim, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, such Third-Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 10.3(a). The Indemnifying
Party shall have full control of such defense and proceedings. To the extent
the Indemnifying Party fails to defend the Indemnified Party, the Indemnified
Party is hereby authorized, at the sole cost and expense of the Indemnifying
Party, to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party shall reasonably deem necessary or
appropriate to protect its interests. If requested by the Indemnifying Party,
the Indemnified Party agrees to cooperate with the Indemnifying Party and its
counsel in contesting any Third-Party Claim that the Indemnifying Party elects
to contest, including, without limitation, the making of any related
counterclaim against the person asserting the Third-Party Claim or any
cross-complaint against any person. Except as otherwise provided herein, the
Indemnified Party may participate in, but not control, any defense or
settlement of any Third-Party Claim controlled by the Indemnifying Party
pursuant to this Section 10.3 and shall bear its own costs and expenses with
respect to such participation.
If the Indemnifying Party fails to notify the Indemnified Party within
the Election Period that the Indemnifying Party elects to defend the
Indemnified Party pursuant to the preceding paragraph, or if the Indemnifying
Party elects to defend the Indemnified Party but fails to reasonably prosecute
or settle the Third-Party Claim as herein provided or if the Indemnified Party
reasonably objects to such election on the grounds that counsel for such
Indemnifying Party cannot represent both the Indemnified Party and the
Indemnifying Parties because such representation would be reasonably likely to
result in a conflict of interest, then the Indemnified Party shall have the
right to defend, at the sole cost and expense of the Indemnifying Party, the
Third-Party Claim by all appropriate proceedings, which proceedings shall be
promptly and reasonably prosecuted by the Indemnified Party to a final
conclusion or settled. In such a situation, the Indemnified Party shall have
full control of such defense and proceedings and the Indemnifying Party may
participate in, but not control, any defense or settlement controlled by the
Indemnified Party pursuant to this Section 10.3, and the Indemnifying Party
shall bear its own costs and expenses with respect to such participation.
29
<PAGE> 394
The Indemnifying Party shall not settle or compromise any Third-Party
Claim unless (i) the terms of such compromise or settlement require no more
than the payment of money (i.e., such compromise or settlement does not require
the Indemnified Party to admit any wrongdoing or take or refrain from taking
any action), (ii) the full amount of such monetary compromise or settlement
will be paid by the Indemnifying Party, and (iii) the Indemnified Party
receives as part of such settlement a legal, binding and enforceable
unconditional satisfaction and/or release, in form and substance reasonably
satisfactory to it, providing that such Third-Party Claim and any claimed
liability of the Indemnified Party with respect thereto is being fully
satisfied by reason of such compromise or settlement and that the Indemnified
Party is being released from any and all obligations or liabilities it may have
with respect thereto. The Indemnified Party shall not settle or admit liability
to any Third-Party Claim without the prior written consent of the Indemnifying
Party unless (x) the Indemnifying Party has disputed its potential liability to
the Indemnified Party, and such dispute either has not been resolved or has
been resolved in favor of the Indemnifying Party or (y) the Indemnifying Party
has failed to respond to the Indemnified Party's Claim Notice.
(b) In the event any Indemnified Party should have a claim
against any Indemnifying Party hereunder that does not involve a Third-Party
Claim, the Indemnified Party shall transmit to the Indemnifying Party a written
notice (the "Indemnity Notice") describing in reasonable detail the nature of
the claim, an estimate of the amount of damages attributable to such claim to
the extent feasible (which estimate shall not be conclusive of the final amount
of such claim) and the basis of the Indemnified Party's request for
indemnification under this Agreement.
(c) Notwithstanding anything to the contrary within this
Section or Agreement, both the Indemnifying Party and the Indemnified Party
agree to reasonably cooperate in resolving any dispute or claim which triggers
this Indemnification provision.
SECTION 10.4. LIMITATION OF SHAREHOLDERS' LIABILITY.
(a) Notwithstanding anything to the contrary contained in
Article X, the aggregate liability of the Shareholders for any event or
occurrence giving rise to the Shareholders being required to indemnify
Purchaser Indemnified Parties pursuant to Section 10.1 of this Agreement shall
be limited to the Purchase Price.
(b) Purchaser Indemnified Parties are entitled to
indemnification pursuant to Section 10.1 only to the extent that the amount of
any Indemnified Amount, individually or in the aggregate, exceeds $15,000 and
then to the full amount of such Indemnified Amount, not to exceed the
limitations described in Section 10.4(a).
SECTION 10.5. LIMITATION OF PURCHASER'S LIABILITY.
(a) Notwithstanding anything to the contrary contained in
Article X, the aggregate liability of Purchaser for any event or occurrence
giving rise to Purchaser being required to indemnify Shareholders' Indemnified
Parties pursuant to Section 10.2 shall be limited to the Purchase Price.
30
<PAGE> 395
(b) Company Indemnified Parties are entitled to
indemnification pursuant to Section 10.2 only to the extent that the amount of
any Indemnified Amount, individually or in the aggregate, exceeds $15,000 and
then to the full amount of such Indemnified Amount, not to exceed the
limitations described in Section 10.5(a).
SECTION 10.6. LIMITATION ON INDEMNIFIED AMOUNTS. Notwithstanding any
provision of this Article X to the contrary, Indemnified Amounts owed by an
Indemnifying Party to an Indemnified Party shall be reduced by the amount of
any mitigating recovery (net of reasonable expenses and taxes and other costs
incurred in obtaining such recovery) an Indemnified Party shall have received
or otherwise enjoyed with respect thereto from any recovery under any insurance
policies. If such a mitigating recovery set forth in this Section 10.6 is
received by an Indemnified Party after it receives payment or other credit
under this Agreement with respect to Indemnified Amounts, then a refund equal
in aggregate amount to the mitigating recovery, net of reasonable expenses and
tax or other costs incurred in obtaining recovery, shall be made promptly to
the Indemnifying Party.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1. SURVIVAL. The representations, warranties, covenants and
agreements (including, but not limited to, indemnification obligations) set
forth in this Agreement and in any certificate or instrument delivered in
connection herewith shall be continuing and shall survive the Closing for a
period of two (2) years following the date of Closing; provided, however, that
in the case of all such representations, warranties, covenants and agreements
(including, but not limited to, indemnification obligations) there shall be no
such termination with respect to any such representation, warranty, covenant or
agreement as to which a bona fide claim has been asserted by written notice of
such claim delivered to the Party or Parties making such representation,
warranty, covenant or agreement prior to the expiration of the survival period.
SECTION 11.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed
by registered or certified mail (return receipt requested) or sent via
facsimile to the Parties at the following addresses (or at such other address
for a Party as shall be specified by like notice):
(a) If to Purchaser, to:
Synagro Technologies, Inc.
1800 Bering Drive, Suite 1000
Houston, Texas 77057
Attention: Mark A. Rome
Telecopy: 713/369-1760
31
<PAGE> 396
with a copy to:
Locke Liddell & Sapp LLP
600 Travis, Suite 3200
Houston, Texas 77002
Attention: Michael T. Peters
Telecopy: 713/223-3717
(b) If to Shareholders, to:
Christopher and Kathleen A. Schrader
203 Apache Street
Tavernier, Florida 33070
with a copy to:
Patrick C. Barthet, P.A.
200 South Biscayne Boulevard, Suite 1800
Miami, Florida 33131
Telecopy: 305/377-8695
SECTION 11.3. INTERPRETATION. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the
interpretation of this Agreement. In this Agreement, unless a contrary
intention is specifically set forth, (i) the words "herein", "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a
whole and not to any particular Article, Section or other subdivision and (ii)
reference to any Article or Section means such Article or Section hereof. No
provision of this Agreement shall be interpreted or construed against any Party
solely because such Party or its legal representative drafted such provision.
SECTION 11.4. MISCELLANEOUS. This Agreement (including the documents
and instruments referred to herein and the Schedules and Exhibits attached
hereto) (a) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the Parties, or any
of them, with respect to the subject matter hereof, and (b) shall not be
assigned by operation of law or otherwise except that Purchaser may assign this
Agreement to any other wholly-owned Subsidiary of Purchaser, but no such
assignment shall relieve the Purchaser of its obligations hereunder.
SECTION 11.5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL
RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE
STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE.
32
<PAGE> 397
SECTION 11.6. BINDING ARBITRATION.
(a) General. Notwithstanding any provision of this Agreement
to the contrary, upon the request of any Party (defined for the purpose of this
provision to include Affiliates, principals and agents of any such Party), any
dispute, controversy or claim arising out of, relating to, or in connection
with, this Agreement or any agreement executed in connection herewith or
contemplated hereby, or the breach, termination, interpretation, or validity
hereof or thereof (hereinafter referred to as a "Dispute"), shall be finally
resolved by mandatory and binding arbitration in accordance with the terms
hereof. Any Party may bring an action in court to compel arbitration of any
Dispute. Any Party who fails or refuses to submit any Dispute to binding
arbitration following a lawful demand by the opposing Party shall bear all
costs and expenses incurred by the opposing Party in compelling arbitration of
such Dispute.
(b) Governing Rules. The arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association in effect at the time of the arbitration, except as they may be
modified herein or by mutual agreement of the Parties. The seat of the
arbitration shall be Miami, Florida. Notwithstanding Section 11.6, the
arbitration and this clause shall be governed by the Federal Arbitration Act, 9
U.S.C. Sections 1 et seq. (the "Federal Arbitration Act"). The arbitrator shall
award all reasonable and necessary costs (including the reasonable fees and
expenses of counsel) incurred in conducting the arbitration to the prevailing
Party in any such Dispute. The Parties expressly waive all rights whatsoever to
file an appeal against or otherwise to challenge any award by the arbitrators
hereunder; provided, that the foregoing shall not limit the rights of any Party
to bring a proceeding in any applicable jurisdiction to confirm, enforce or
enter judgment upon such award (and the rights of the other Party, if such
proceeding is brought to contest such confirmation, enforcement or entry of
judgment, but only to the extent permitted by the Federal Arbitration Act).
(c) No Waiver; Preservation of Remedies. No provision of, nor
the exercise of any rights under this Agreement shall limit the right of any
Party to apply for injunctive relief or similar equitable relief with respect
to the enforcement of this Agreement or any agreement executed in connection
herewith or contemplated hereby, and any such action shall not be deemed an
election of remedies. Such rights can be exercised at any time except to the
extent such action is contrary to a final award or decision in any arbitration
proceeding. The Parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the Parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof. The institution and maintenance of an action for injunctive relief or
similar equitable relief shall not constitute a waiver of the right of any
Party, including without limitation the plaintiff, to submit any Dispute to
arbitration nor render inapplicable the compulsory arbitration provisions of
this Agreement.
(d) Arbitration Proceeding. In addition to the authority
conferred on the arbitration tribunal by the rules specified above, the
arbitration tribunal shall have the authority to order reasonable discovery,
including the deposition of party witnesses and production of documents. The
arbitral award shall be in writing, state the reasons for the award, and be
final and binding on the Parties with no right of appeal. All statutes of
limitations that would otherwise be applicable shall apply to any arbitration
proceeding. Any attorney-client privilege and other
33
<PAGE> 398
protection against disclosure of confidential information, including without
limitation any protection afforded the work-product of any attorney, that could
otherwise be claimed by any Party shall be available to and may be claimed by
any such Party in any arbitration proceeding. No Party waives any
attorney-client privilege or any other protection against disclosure of
confidential information by reason of anything contained in or done pursuant to
or in connection with this Agreement. Each Party agrees to keep all Disputes
and arbitration proceedings strictly confidential, except for disclosures of
information to the Parties' legal counsel or auditors or those required by
applicable law. The arbitrators shall determine the matters in dispute in
accordance with the substantive law of Delaware, without regard to conflict of
law rules. The obligation to arbitrate any dispute shall be binding upon the
successors and assigns of each of the Parties.
(e) Appointment of Arbitrators. The arbitration shall be
conducted by three (3) arbitrators. The Party initiating arbitration (the
"Claimant") shall appoint its arbitrator in its request for arbitration (the
"Request"). The other Party (the "Respondent") shall appoint its arbitrator
within thirty (30) days after receipt of the Request and shall notify the
Claimant of such appointment in writing. If the Respondent fails to appoint an
arbitrator within such thirty (30) day period, the arbitrator named in the
Request shall decide the controversy or claim as sole arbitrator. Otherwise,
the two (2) arbitrators appointed by the Parties shall appoint a third (3rd)
arbitrator within thirty (30) days after the Respondent has notified Claimant
of the appointment of the Respondent's arbitrator. When the third (3rd)
arbitrator has accepted the appointment, the two (2) Party-appointed
arbitrators shall promptly notify the Parties of the appointment. If the two
(2) arbitrators appointed by the Parties fail to appoint a third (3rd)
arbitrator or so to notify the Parties within the time period prescribed above,
then the appointment of the third (3rd) arbitrator shall be made by the
American Arbitration Association, which shall promptly notify the Parties of
the appointment. The third (3rd) arbitrator shall act as Chair of the panel.
(f) Other Matters. This arbitration provision constitutes the
entire agreement of the Parties with respect to its subject matter and
supersedes all prior discussions, arrangements, negotiations and other
communications on dispute resolution. This arbitration provision shall survive
any termination, amendment, renewal, extension or expiration of this Agreement
or any agreement executed in connection herewith or contemplated hereby unless
the Parties otherwise expressly agree in writing. The obligation to arbitrate
any dispute shall be binding upon the successors and assigns of each of the
Parties.
SECTION 11.7. AMENDMENT. This Agreement may not be amended except by
an instrument in writing signed on behalf of all of the Parties.
SECTION 11.8. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
SECTION 11.9. PARTIES IN INTEREST. This Agreement shall be binding
upon and inure solely to the benefit of each Party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
34
<PAGE> 399
SECTION 11.10. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
35
<PAGE> 400
IN WITNESS WHEREOF, Purchaser and the Shareholders have executed and
delivered this Agreement effective as of the date first written above.
PURCHASER:
SYNAGRO TECHNOLOGIES, INC.
By: /s/ MARK A. ROME
--------------------------------------
Mark A. Rome, Executive Vice President
THE SHAREHOLDERS:
/s/ CHRISTOPHER J. SCHRADER
------------------------------------------
Christopher J. Schrader
/s/ KATHLEEN A. SCHRADER
------------------------------------------
Kathleen A. Schrader
<PAGE> 401
EXHIBIT A
GLOSSARY
For purposes of this Agreement, the following terms shall have the
meaning specified or referred to below when capitalized (or if not capitalized,
unless the context clearly requires otherwise) when used in this Agreement.
"Affiliate(s)" with respect to any Person, means any Person directly or
indirectly controlling, controlled by or under common control with such Person,
and any natural Person who is an officer, director or partner of such Person and
any members of their immediate families living within the same household. A
Person shall be deemed to control another Person if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such other Person, whether through the ownership of
voting securities, by contract or otherwise.
"Benefit Program" means any plan, policy, contract, program, commitment
or arrangement providing for bonuses, deferred compensation, retirement
payments, profit sharing, incentive pay, commissions, hospitalization or medical
expenses or insurance or any other benefits for any officer, consultant,
director, annuitant, employee or independent contractor of the Company as such
or members of their families (other than directors' and officers' liability
policies), whether or not insured.
"Business Facility" or "Business Facilities" is that certain real
property located at 89111 Overseas Highway, Tavernier, Florida.
"Code" means the Internal Revenue Code of 1986, as amended, or any
amending or superseding tax laws of the United States of America.
"Environmental Claim(s)" means any claim; litigation; demand; action;
cause of action; suit; loss; cost, including, but not limited to, attorneys'
fees, diminution in value, and expert's fees; damage; punitive damage; fine,
penalty, expense, liability, criminal liability, strict liability, judgment,
governmental or private investigation and testing; notification of status of
being potentially responsible for clean-up of any facility or for being in
violation or in potential violation of any Environmental Law; proceeding;
consent or administrative orders, agreements or decrees; lien; personal injury
or death of any person; or property damage, whether threatened, sought, brought
or imposed, that is related to or that seeks to recover losses, damages, costs,
expenses and/or liabilities related to, or seeks to impose liability for: (i)
improper use or treatment of wetlands, pinelands or other protected land or
wildlife; (ii) noise; (iii) radioactive materials (including naturally occurring
radioactive materials ("NORM")); (iv) explosives; (v) pollution, contamination,
preservation, protection, decontamination, remediation or clean-up of the air,
surface water, groundwater, soil or protected lands; (vi) solid, gaseous or
liquid waste generation, handling, discharge, release, threatened release,
treatment, storage, disposal or transportation; (vii) exposure of persons or
property to Materials or Environmental Concern and the effects thereof; (viii)
the release or threatened release (into the indoor or outdoor environment),
generation, extraction, mining, beneficiating, manufacture, processing,
distribution in commerce, use, transfer,
EXHIBIT A - PAGE 1
<PAGE> 402
transportation, treatment, storage or disposal of Remediation of Materials of
Environmental Concern; (ix) injury to, death of or threat to the health or
safety of any person or persons caused directly or indirectly by Materials of
Environmental Concern; (x) destruction caused directly or indirectly by
Materials of Environmental Concern or the release or threatened release of any
Materials of Environmental Concern of any property (whether real or personal);
(xi) the implementation of spill prevention and/or disaster plans relating to
Material of Environmental Concern; (xiii) community right-to-know and other
disclosure laws; or (xiii) maintaining, disclosing or reporting information to
Governmental Authorities of any other third person under any Environmental Law.
The term, "Environmental Claim," also includes, without limitation, any losses,
damages, costs, expenses and/or liabilities incurred in testing, if such testing
confirms the presence of Materials of Environmental Concern.
"Environmental Law(s)" means any federal, state, local or foreign law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, guidance document, order, consent agreement,
order or consent judgment, decree, injunction, requirement or agreement with any
governmental entity or any judicial or administrative decision relating to (x)
the protection, preservation or restoration of the environment (including,
without limitation, air, water, vapor, surface water, groundwater, drinking
water supply, surface land, subsurface land, plant and animal life or any other
natural resource) or to human health or safety, (y) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, application, production, release or disposal of Materials of
Environmental Concern, in each case as amended from time to time, or (z) health,
worker protection or community's right to know. The term "Environmental Law"
includes, without limitation, (i) the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal Act and the Federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
the Federal Safe Drinking Water Act and the Federal Occupational Safety and
Health Act of 1970, each as amended from time to time, and (ii) any common law
or equitable doctrine (including, without limitation, injunctive relief and tort
doctrines such as negligence, nuisance, trespass and strict liability) that may
impose liability or obligations for injuries or damages due to, or threatened as
a result of, the presence of, effects of or exposure to any Materials of
Environmental Concern.
"Environmental Permit(s)" means all permits, licenses, certificates,
registrations, identification numbers, applications, consents, approvals,
variances, notices of intent, and exemptions necessary for the ownership, use
and/or operation of any current Business Facility or to conduct the Company's
business as currently conducted in compliance with Requirements of Environmental
Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"GAAP" means generally accepted accounting principals applied on a
consistent basis.
EXHIBIT A - PAGE 2
<PAGE> 403
"Governmental Authority" or "Governmental Authorities" means any nation
or government, any state or political subdivision thereof and any agency or
entity exercising executive, legislative, judicial, regulatory or administrative
functions of, or pertaining to, government.
"Lien(s)" means any mortgage, pledge, hypothecation, security interest,
encumbrance, right of first refusal, option, lien, charge, condition,
restriction or burden of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof and the filing of, or agreement to give, any financing
statement under the Uniform Commercial Code of any jurisdiction).
"Material Adverse Effect" means any event, occurrence, fact, condition,
change, development or effect that is or could reasonably be anticipated to be
materially adverse to the business, assets (including intangible assets),
liabilities, financial condition, results of operations, properties (including
intangible properties) or business prospects of the Company and all of its
Subsidiaries or the Purchaser and all of its Subsidiaries, as applicable, taken
as a whole.
"Materials of Environmental Concern" means: (i) those substances
included within the statutory and/or regulatory definitions or listings of
"hazardous substance," "medical waste," "special waste," "hazardous waste,"
"sludges," "sewage sludge," "extremely hazardous substance," "regulated
substance," "solid waste," "hazardous materials," or "toxic substances," under
any Environmental Law; (ii) any material, waste or substance which is or
contains: (A) petroleum, oil or a fraction thereof, (B) explosives, or (C)
radioactive materials (including naturally occurring radioactive materials); and
(iii) such other substances, materials, or wastes that are or become classified
or regulated as hazardous or toxic under any applicable federal, state or local
law or regulation. To the extent that the laws or regulations of any applicable
state or local jurisdiction establish a meaning for any term defined herein
through reference to federal Environmental Laws which is broader than the
meaning under such federal Environmental Laws, such broader meaning shall apply.
"Person" means any individual, partnership, joint venture, corporation,
limited liability company, association, trust, unincorporated organization,
government or agency or subdivision thereof or any other entity.
"Plan" means an "employee benefit plan" (as defined in Section 3(3) of
ERISA) which is or has been established or maintained, or to which contributions
are or have been made, by the Company or by any trade or business, whether or
not incorporated, which, together with the Company, is under common control, as
described in Section 414(b) or (c) of the Code.
"Remediation" means any action necessary to: (i) comply with and ensure
compliance with the Requirements of Environmental Laws and (ii) the taking of
all reasonably necessary precautions to protect against and/or respond to,
remove or remediate or monitor the release or threatened release of Materials of
Environmental Concern at, on, in, about, under, within or near the air, soil,
surface water, groundwater or soil vapor at any Business Facility of the Company
or any of its Subsidiaries or of any property affected by the business,
operations, acts omissions, or Materials of Environmental Concern of the Company
or any of its Subsidiaries.
EXHIBIT A - PAGE 3
<PAGE> 404
"Requirement(s) of Environmental Law(s)" means all requirements,
conditions, restrictions or stipulations of Environmental Laws imposed upon or
related to the Company or any of its Subsidiaries or the assets, Business
Facilities and/or the business of the Company or any of its Subsidiaries.
"Subsidiary" or "Subsidiaries" shall mean, when used with reference to
an entity, any other entity of which securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions, or a majority of the outstanding
voting securities of which, are owned directly or indirectly by such entity.
"Supplies" means all office supplies, kitchen supplies, laundry
supplies, medical supplies, spare parts, safety equipment, maintenance supplies,
other supplies used or consumed in the Business and other similar items which
exist on the Closing Date.
"Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise, real
or personal property, sales, withholding, social security, occupation, use,
severance, environmental, license, net worth, payroll, employment, franchise,
transfer and recording taxes, fees and charges, imposed by the IRS or any other
taxing authority (whether domestic or foreign including, without limitation, any
state, county, local or foreign government or any subdivision or taxing agency
thereof (including a United States possession)), whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest whether paid or received, fines, penalties or additional amounts
attributable to, or imposed upon, or with respect to, any such taxes, charges,
fees, levies or other assessments.
"Tax Return(s)" shall mean any report, return, document, declaration or
other information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including, without
limitation, information returns and documents (i) with respect to or
accompanying payments of estimated Taxes or (ii) with respect to or accompanying
requests for the extension of time in which to file any such report, return,
document, declaration or other information, including any schedule or attachment
thereto and any amendment thereof.
EXHIBIT A - PAGE 4
