<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-------
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
_____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission file number: 0-8176
Southwest Water Company
(Exact name of registrant as specified in its charter)
Delaware 95-1840947
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of principal executive offices) (Zip Code)
(626) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On May 8, 2000, there were
6,480,802 common shares outstanding.
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1. Financial Statements:
Condensed Consolidated Statements of Income-
Three Months Ended March 31, 2000 and 1999 1
Condensed Consolidated Balance Sheets -
As of March 31, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 9
Part II. Other Information:
- -------- ------------------
Item 1. Legal Proceedings 9-10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands except per share data)
Operating Revenues $20,557 $16,649
Operating Expenses:
Direct operating expenses 16,073 12,536
Selling, general and administrative 3,110 2,934
------------------------------------------------------------------------------------------------------------------------
19,183 15,470
Operating Income 1,374 1,179
Other Income (Expense):
Interest expense (788) (759)
Interest income 82 17
Other 49 152
------------------------------------------------------------------------------------------------------------------------
(657) (590)
Income Before Income Taxes 717 589
Provision for income taxes 287 235
------------------------------------------------------------------------------------------------------------------------
Net Income 430 354
Dividends on preferred shares 7 7
------------------------------------------------------------------------------------------------------------------------
Net Income Available for Common Shares $ 423 $ 347
------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share (Note 4):
Basic $ 0.06 $ 0.05
Diluted $ 0.06 $ 0.05
------------------------------------------------------------------------------------------------------------------------
Cash Dividends per Common Share (Note 4) $ 0.06 $ 0.05
------------------------------------------------------------------------------------------------------------------------
Weighted Average Outstanding Common Shares (Note 4):
Basic 6,463 6,378
Diluted 6,749 6,503
------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial
statements.
</TABLE>
1
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Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
- --------------------------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
(unaudited)
(in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 248 $ 4,146
Customers' accounts receivable, net 11,321 10,465
Other current assets 4,505 3,700
- --------------------------------------------------------------------------------------------------------------------------
16,074 18,311
Property, Plant and Equipment:
Utility property, plant and equipment -- at cost 162,538 152,624
Contract operations property, plant and equipment -- at cost 5,815 5,654
- --------------------------------------------------------------------------------------------------------------------------
168,353 158,278
Less accumulated depreciation and amortization 45,864 44,581
- --------------------------------------------------------------------------------------------------------------------------
122,489 113,697
Other Assets 11,240 10,942
- --------------------------------------------------------------------------------------------------------------------------
$ 149,803 $ 142,950
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt and bank notes payable $ 1,592 $ 2,039
Accounts payable 2,679 2,081
Other current liabilities 13,103 12,486
- --------------------------------------------------------------------------------------------------------------------------
17,374 16,606
Other Liabilities and Deferred Credits:
Long-term debt 28,000 28,000
Bank notes payable 10,975 5,454
Advances for construction 8,004 7,930
Contributions in aid of construction 34,651 34,519
Deferred income taxes 6,329 6,146
Other liabilities and deferred credits 3,754 3,818
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 109,087 102,473
Stockholders' Equity
Cumulative preferred stock 517 517
Common stock 65 64
Paid-in capital 31,283 31,080
Retained earnings 8,851 8,816
- --------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 40,716 40,477
- --------------------------------------------------------------------------------------------------------------------------
$ 149,803 $ 142,950
==========================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 430 $ 354
Adjustments to reconcile net income to
net cash provided by operating activities 869 $ 1,438
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,299 1,792
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (9,986) (2,217)
Other investments, net (336) 125
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,322) (2,092)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds (repayments) on bank notes payable 5,074 (103)
Contributions in aid of construction and advances for construction 316 262
Net proceeds from dividend reinvestment plan,
employee stock purchase plan, and stock option plans 199 397
Dividends paid (394) (348)
Payments on advances for construction (70) (42)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities 5,125 166
- -------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,898) (134)
Cash and cash equivalents at beginning of period 4,146 394
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 248 $ 260
===============================================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 900 $ 557
Income taxes $ - $ 275
Depreciation and amortization $ 1,162 $ 1,123
Non-cash contributions in aid of construction
conveyed to Company by developers $ 161 $ 328
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
1. Southwest Water Company ("the Company" or "Registrant") together with its
subsidiaries is in the business of managing all aspects of water and
wastewater systems, and provides its services to more than one million
people in 24 states. Through its wholly owned subsidiary, ECO Resources,
Inc. ("ECO"), the Company operates and manages water and wastewater
treatment facilities owned by cities, municipal utility districts and
private entities. The Company owns and operates water and wastewater
utilities through two wholly owned subsidiaries, Suburban Water Systems
("Suburban") and New Mexico Utilities, Inc. ("NMUI"). The unaudited
condensed consolidated financial statements reflect all adjustments, which,
in the opinion of management, are necessary to present fairly the financial
position of the Company as of March 31, 2000, and the Company's results of
operations for the three months ended March 31, 2000. All such adjustments
are of a normal recurring nature. Certain reclassifications have been made
to the 1999 financial statements to conform to the 2000 presentation.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's Annual
Report on Form 10-K ("the 1999 Annual Report") for the year ended December
31, 1999.
3. There is seasonality to the water services industry; thus, the results
of operations for the three months ended March 31, 2000 do not necessarily
indicate the results to be expected for the full year. Rainfall and weather
conditions affect utility operations, with most water consumption occurring
during the third quarter of each year when weather tends to be hot and dry.
Drought conditions would have the effect of lowering revenue due to
conservation efforts. The Company's contract operations business can also
be seasonal in nature. Heavy rainfall hampers the Company's ability to
perform billable work such as pipeline maintenance, manhole rehabilitation
and other outdoor services. Moderate rainfall may create additional
opportunities for billable work outside the scope of existing contracts.
Drought conditions would not necessarily affect the Company's opportunities
for additional billable work.
4. The Company records earnings per share ("EPS") by computing basic EPS and
diluted EPS. Basic EPS is used to measure the performance of the Company
over the reporting period by dividing net income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is used to measure the performance of the
Company over the reporting period after giving effect to all dilutive
potential common shares that would have been outstanding if the dilutive
common shares had been issued. Stock options give rise to dilutive common
shares.
5. In April 2000, the Company purchased 80 percent of the outstanding shares
of Master Tek International, Inc. ("Master Tek"), a nationwide provider of
utility submetering, billing and collection services for a purchase price
of $4,000,000. The purchase price consisted of a $2,000,000 cash payment
upon closing and a ten-year promissory note. The purchase agreement
provides that the Company has the right to acquire the remaining 20 percent
ownership for a price based on a formula related to the financial
performance of Master Tek over the next ten years. In addition, the Company
entered into an employment agreement, a consulting agreement and a non-
compete agreement with the owner of the remaining 20 percent of Master Tek
as is customary in transactions of this type. Submetering involves the
installation of electronic equipment in apartments, condominiums, mobile
home parks and other multi-family dwellings to allow the measurement of
water, gas and electricity usage for each individual residential unit.
Master Tek serves more than 175,000 dwelling units in 24 states and, in
1999, generated revenues of more than $5,000,000.
4
<PAGE>
6. As discussed in the 1999 Annual Report, Suburban purchased the City of West
Covina's ("West Covina") water distribution system and facilities. On
February 25, 2000, Suburban assumed ownership and operation of the water
system. The transaction added approximately 7,000 connections to Suburban's
customer base, an increase of approximately 11 percent. The purchase of the
West Covina system was funded in part by the reinvestment of approximately
$3,900,000 of proceeds from the sale of surplus land, as described fully in
the Company's 1999 Annual Report. The remaining funds for the purchase were
obtained from line of credit borrowing.
7. As discussed in the 1999 Annual Report, the Company owns a 49 percent
interest in Windermere Utility Company ("Windermere"), a small, regulated
water utility located near Austin, Texas. The Company has an agreement with
the majority shareholder under which the majority shareholder may purchase
the Company's interest in Windermere for an agreed-upon price. The
agreement, as amended, extends to May 31, 2000 the majority shareholder's
right to exercise this purchase option. The Company is currently holding
discussions with the majority shareholder of Windermere to purchase its
interest in Windermere along with two other utilities, also located near
Austin, Texas. The Company anticipates that negotiations will be completed
in 2000.
8. As discussed in the 1999 Annual Report, the City of Albuquerque
("Albuquerque") has initiated an action in eminent domain to acquire the
operations of NMUI. In March 2000, certain members of the Albuquerque city
council introduced a bill directing the city attorney to withdraw the
condemnation and cease negotiations to acquire NMUI. However, in April
2000, the bill was defeated, and the condemnation action remains pending.
At present, Albuquerque is not prosecuting this action and there is no
assurance that a settlement of the legal action or other resolution will be
reached quickly.
9. The Company has two reportable segments as defined under the requirements
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." There was no change in the basis of segmentation or in the
basis of measurement of segment profit or loss from the information
reported in the 1999 Annual Report. The following table sets forth required
disclosure about the Company's reportable segments as required by SFAS No.
131.
<TABLE>
<CAPTION>
Total Total
Non- Segment Consolidated
Regulated Regulated Information Other Information
--------- --------- -------------- -------- ------------
(in thousands)
As of March 31, 2000
- --------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $12,347 $ 8,210 $ 20,557 $ 0 $ 20,557
Segment operating profit 254 2,155 2,409 (1,035) 1,374
Segment assets 13,595 128,287 141,882 7,921 149,803
As of March 31, 1999
- --------------------
Revenues from external customers $ 8,852 $ 7,797 $ 16,649 $ 0 $ 16,649
Segment operating profit 171 2,021 2,192 (1,013) 1,179
Segment assets 9,506 116,501 126,007 4,320 130,327
</TABLE>
5
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and capital resources of the Company are influenced primarily by
construction expenditures at Suburban and NMUI for the addition, replacement and
renovation of water utility facilities. The Company's capital resources may
also be influenced by investments to acquire new business opportunities.
At March 31, 2000, the Company had cash and cash-equivalent balances totaling
$248,000 and three separate unsecured lines of credit from three commercial
banks, with total line of credit capacity of $20,000,000. All of the lines
expire in 2001 and the Company expects to renew expiring lines of credit in the
normal course of business. At March 31, 2000, outstanding borrowing was
$11,667,000, and the unused borrowing capacity was $8,333,000. In the first
quarter of 2000, the Company's outstanding line of credit borrowing increased
$5,074,000 primarily due to additional cash requirements for acquisitions and
investments made by the Company. Under two of the line of credit agreements,
interest is charged at each banks' prime rate less one-quarter percent. The
Company may also borrow at an interest rate that is lower than this rate;
however, the amount borrowed must remain outstanding for a fixed period of time.
Interest charged under the third line of credit is lower than the bank's prime
rate and contains no restrictions as to minimum borrowing or borrowing for a
fixed period of time. Two of the lines of credit require a $6,000 annual fee,
and the remaining line of credit requires no annual fee. Each of the line of
credit agreements, as amended, contains certain financial restrictions. As of
March 31, 2000, the Company was in compliance with all applicable financial
covenants of the line of credit agreements.
In addition to its lines of credit, the Company has existing borrowing capacity
under its First Mortgage Bond Indentures. Under these indentures, the Company
has remaining borrowing capacity of approximately $47,855,000. However, the
amount of additional borrowing available to the Company under its current lines
of credit is limited by financial covenants that restricted additional borrowing
at March 31, 2000 to the unused credit line amount.
During the first quarter of 2000, the Company's additions to property, plant and
equipment were $10,147,000, representing an increase of $3,215,000 from 1999.
The increase was due primarily to the purchase of West Covina's water
distribution system and facilities, which accounted for $9,140,000 of the
additions. Other capital projects accounted for the remaining $1,007,000 of
additions. Developers made contributions in aid of construction ("CIAC"), and
advances totaling $477,000, of which $316,000 was received in cash and $161,000
was received as non-cash contributions of property. Company-financed capital
additions were $9,670,000, funded primarily by borrowing on the lines of credit,
cash flow from operations, and the reinvestment of proceeds from the sale of
surplus land as discussed in Note 6 to the condensed consolidated financial
statements. For the remainder of 2000, the Company estimates that its capital
additions will be approximately $7,200,000, and that cash flow from operations
and CIAC will fund these additions. Line of credit borrowing is also available
to meet construction requirements if needed.
The Company anticipates that its available line of credit borrowing capacity and
the cash flow generated from operations will be sufficient to fund its
activities during the next 12 months, including certain new business
investments. If additional cash were needed, the Company would consider
alternative sources, including long-term financing. The amount and timing of
any future long-term financing would depend on various factors, including the
timeliness and adequacy of rate increases, the availability of capital, and the
Company's ability to meet interest and fixed charge coverage requirements.
Regulatory approval is required for any long-term financing by Suburban or NMUI.
If the Company was unable to renew its existing lines of credit or unable to
obtain additional long-term financing, capital spending or acquisitions would be
reduced or delayed until new financing arrangements were secured. Such
financing arrangements could include seeking equity financing through a private
placement or a public offering. Similarly, if the Company needed additional
cash to fund an acquisition, financing arrangements could include long-term
borrowing or equity financing.
6
<PAGE>
Regulatory Affairs:
Regulation and Regulatory Developments
ECO has two distinct types of contractual relationships: time and material
contracts primarily with municipal utility districts ("MUDs"), and fixed fee
operations and maintenance contracts ("O&Ms"). A MUD is a utility district
created under the rules of the Texas Natural Resource Conservation Commission in
order to provide water, wastewater and drainage services to areas where existing
municipal services are not available. O&M contracts are agreements with cities
and private entities that provide for a specified level of services such as
facility operation and maintenance, meter readings and billing, or management of
the entire water or wastewater system. ECO's pricing is not subject to
regulation by a public utilities commission. Most contracts with MUDs are short-
term contracts and do not generally include inflation adjustments. Changes in
prices are negotiated on a contract-by-contract basis. ECO's O&M contracts are
generally longer-term water and wastewater service contracts, primarily with
cities, and typically include inflation adjustments.
The California Public Utilities Commission ("CPUC") and the New Mexico Public
Regulation Commission ("NMPRC") regulate the rates and operations of Suburban
and NMUI, respectively. The rates allowed are intended to provide the utilities
an opportunity to recover costs and earn a reasonable return on common equity.
Although neither utility is currently seeking any rate increase, future
construction expenditures and increased operating expenses may require periodic
requests for rate increases. As discussed in the 1999 Annual Report, the CPUC
has directed Suburban to file a general rate application by July 1, 2001.
Regulatory Developments:
The Company closely monitors legislative, CPUC and NMPRC developments. The
various water industry associations in which the Company actively participates
also monitor these developments. The Company does not know the future possible
legislative, CPUC or NMPRC changes that will be enacted or the terms of such
changes if enacted. Therefore, management cannot predict the impact, if any, of
future legislative changes, CPUC or NMPRC developments or changes on the
Company's financial position or results of operations.
Environmental Affairs:
As a contract operator, ECO does not own any of the water sources, water
production facilities, or water distribution systems that it operates for its
clients, nor does ECO own any of the wastewater collection systems or wastewater
treatment facilities that it operates for its clients. Although not the owner,
ECO is responsible for operating these water and wastewater facilities in
compliance with all federal, state and local health standards and regulations.
Suburban and NMUI operations fall under the regulatory jurisdiction of the CPUC
and the NMPRC, respectively. The responsibilities of both regulatory agencies
are to ensure an adequate supply of affordable, healthful, potable water to
residents of their respective states. The Company's operations are also subject
to water and wastewater pollution prevention standards and water and wastewater
quality regulations of the Environmental Protection Agency ("EPA") and various
state regulatory agencies. Both the EPA and state regulatory agencies require
periodic testing and sampling of water. Costs associated with the testing of
the Company's water supplies have increased and are expected to increase further
as the regulatory agencies adopt additional monitoring requirements. The
Company believes that future incremental costs of complying with governmental
regulations, including capital expenditures, will be recoverable through
increased rates and contract operations revenues. However, there is no
assurance that recovery of such costs will be allowed. To date, the Company has
not experienced any material adverse effects upon its operations resulting from
compliance with governmental regulations.
As discussed in the Company's 1999 Annual Report, the Company has been named in
several complaints alleging water contamination in the Main San Gabriel Basin in
Southern California. In September 1999, the California 2nd District Court of
Appeal ordered that the lawsuits be dismissed. The
7
<PAGE>
California Supreme Court has agreed to review this decision. The Company
anticipates that the Supreme Court will hear the case during 2000.
As discussed in the Company's 1999 Annual Report, in March 1998, the CPUC issued
an order instituting investigation ("OII") directed to all Class A and B water
utilities in California, including Suburban. The purpose of the OII is to
address a series of questions dealing with the safety of current drinking water
standards and compliance with those standards. In February 2000, the CPUC issued
a draft opinion finding that the California Department of Health Services
("DOHS") requirements governing drinking water quality adequately protect the
public health and safety, and that the regulated water utilities have complied
with past and present drinking water quality requirements. While the CPUC
continues to investigate the issues concerned with water quality, the Company
and Suburban are unable to predict what final actions, if any, will be taken by
the CPUC and/or the DOHS as the result of this investigation, or their impact on
the operations or financial position of the Company and Suburban.
Risk Factors:
Certain statements contained in this Report on Form 10-Q for the quarter ended
March 31, 2000 ("the March Report") that are not based on historical fact are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are only projections. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company to be materially different from any performance or achievements planned,
expressed or implied by such forward-looking statements. Although the Company
believes that its expectations are based on reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results will not differ materially from its expectations.
The March Report should be read in conjunction with the Company's 1999 Annual
Report for a more detailed description of the risk factors affecting the Company
which include, but are not limited to, expectations regarding new contracts and
potential acquisitions, weather conditions, water quality issues, regulatory
changes, legal and other contingencies.
Results of Operations:
Three Months Ended March 31, 2000 Compared To Three Months Ended March 31, 1999
Diluted earnings per common share were $.06 in 2000, an increase of 20%,
compared to $.05 during the same period in 1999.
Operating income
Operating income increased $195,000 or 17%, and, as a percentage of operating
revenues, was 7% in both 2000 and 1999. ECO's operating income increased
$83,000, due to the addition of new contracts and an increase in the amount of
project work performed outside the scope of existing contracts primarily in the
central Texas region. Operating income at the utilities increased $134,000, due
primarily to a 5% increase in water consumption by Suburban's customers during a
mild and dry first quarter, which contributed to a 7% increase in utility
operating income. Parent company expenses increased $22,000, due primarily to
an increase in payroll and benefit-related costs.
Operating revenues
Operating revenues increased $3,908,000 in the first quarter of 2000 compared
with the same period in 1999. ECO's revenues increased $3,495,000 or 39%, due
primarily to new contracts and to an increase in the amount of project work
performed outside the scope of existing contracts. Utility revenues increased
$413,000. Suburban's revenues increased 6% due primarily to increased customer
water consumption because of mild first quarter weather. NMUI increased its
number of customers by 311, contributing to a 16% increase in water consumption,
and a 9% increase in water revenue.
8
<PAGE>
Direct operating expenses
Direct operating expenses increased $3,537,000 or 28%. As a percentage of
operating revenues, these expenses were 78% in 2000 and 75% in 1999. ECO's
direct operating expenses increased $3,409,000, primarily as a result of new
contracts and the increase in the amount of project work performed outside the
scope of existing contracts. Suburban's direct operating expenses increased
$151,000, primarily due to increased water purchases resulting from higher
customer water consumption. NMUI's direct operating expenses decreased $23,000
due to lower production and distribution expenses.
Selling, general and administrative
Selling, general and administrative expenses for the first quarter of 2000
increased $176,000 as compared with the same period in 1999. As a percentage of
operating revenues, these expenses were 15% in 2000 and 18% in 1999. General
and administrative expenses at the utilities increased $154,000, because of a
decrease in the amount of capitalized administrative overhead at both Suburban
and NMUI. As discussed above, general and administrative expenses of the parent
company increased $22,000.
Other
Interest expense increased $29,000 as a result of the increase in line of credit
borrowing in late February to finance the West Covina acquisition. The increase
also reflects higher interest rates in 2000 compared to 1999.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
As discussed in the Company's 1999 Annual Report, ECO was named as a defendant
in four lawsuits alleging injury and damages as the result of a sewage spill,
which occurred at an Austin, Texas sewage pumping station. The case is presently
in the discovery stage. No oral depositions have been taken and there have been
no court hearings. The Company and ECO intend to vigorously defend against these
claims and have requested defense and indemnification by their insurance
carrier. At this time, the Company does not believe this matter will have a
material adverse effect on the Company's financial position or results of
operations.
As discussed in the Company's 1999 Annual Report, the Company has been named in
several complaints alleging water contamination in the Main San Gabriel Basin in
Southern California (the "Main Basin"). In September 1999, the California 2nd
District Court of Appeal ordered that the lawsuits be dismissed. The California
Supreme Court has agreed to review this decision. The Company anticipates that
the California Supreme Court will hear the oral argument during 2000. The
Company and Suburban have requested defense and indemnification from their
liability insurance carriers for these lawsuits. Several of the liability
insurance carriers are currently contributing to the costs of defense of the
lawsuits. Two additional lawsuits similar to those described in this paragraph
were filed in April 2000 by approximately 240 plaintiffs against Suburban, the
Company, other water producers in the Main Basin and a number of alleged
industrial polluters. The actions have not yet been served on the Company or
Suburban. The Company expects to defend the new actions on the same basis as
the earlier actions. Based upon information available at this time, management
does not expect that these actions will have a material adverse effect on the
Company's financial position or results of operations.
As discussed in the Company's 1999 Annual Report, in October 1998 the Company
and ECO were sued in an action in Texas arising out of a fatal auto accident.
The Company believes that its maximum exposure in this action is limited to the
self-insured retention under its umbrella liability policy. Based on the
information available at this time, management does not expect that this action
will have a material adverse effect on the Company's financial position or
results of operations.
As discussed in Note eight to the condensed consolidated financial statements,
Albuquerque initiated an action in eminent domain to acquire the operations of
NMUI. The Company believes that the fair market value of NMUI is substantially
in excess of the amount offered in Albuquerque's complaint. Under New
9
<PAGE>
Mexico state law, there are procedures that would allow Albuquerque to take
possession prior to a resolution of the fair market value issue; however, the
Company believes that it has adequate defenses should Albuquerque choose to
pursue these procedures. Presently, Albuquerque is not prosecuting this action
and there is no assurance that a settlement of the legal action or any other
resolution will be reached quickly.
The Company and its subsidiaries are the subjects of certain litigation arising
from the ordinary course of operations. The Company believes the ultimate
resolution of such matters will not materially affect its consolidated financial
position, results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
10.15B Modification Agreement between New Mexico Utilities, Inc. and
First Security Bank of New Mexico, N.A., dated April 10, 2000,
filed herewith.
10.19 Stock Purchase Agreement between Registrant and Milton R.
DiGregorio, Beverly A. DiGregorio, and the Milton R. DiGregorio
and Beverly A. DiGregorio 2000 Irrevocable Family Trust dated
April 3, 2000, filed herewith.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: May 12, 2000 /s/ PETER J. MOERBEEK
- ------------------- ---------------------
Peter J. Moerbeek
Chief Financial Officer
Dated: May 12, 2000 /s/THOMAS C. TEKULVE
- ------------------- ---------------------
Thomas C. Tekulve
Chief Accounting Officer
11
<PAGE>
EXHIBIT 10.15B
First
Security
Bank MODIFICATION AGREEMENT
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C>
$4,000,000 04-10-2001 9001 0032687 45917
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C>
Borrower: New Mexico Utilities, Inc. Lender: First Security Bank of New Mexico, N.A.
4700 Irving Blvd., Suite 201 Corporate Banking
Albuquerque, NM 87114 40 First Plaza Center NW
Albuquerque, NM 87102
</TABLE>
First Security Bank of New Mexico, N.A. ("Lender") has extended the credit (the
"Loan") to New Mexico Utilities, Inc. (individually and collectively "Borrower")
pursuant to a promissory note dated December 10, 1997 (the "Note") in the stated
principal amount of $4,000,000.00. The Loan is unsecured.
The Note and any loan agreements, guaranties, subordinations, Collateral
Documents and other instruments and documents executed in connection therewith,
together with any previous modifications to any of these instruments or
documents shall be referred to as the "Loan Documents".
Borrower has requested certain modifications to the Loan Documents and Lender is
willing to grant such modifications on the following terms and conditions:
1. Provided that all conditions stated herein are satisfied, the terms of
the Loan Documents are hereby modified as follows:
Modifications to the Terms of the Note
--------------------------------------
The maturity date of the Note is extended to April 10, 2001,
The interest rate under the Note is modified effective April 10, 2000.
The interest rate on this Agreement is subject to change from time to
time based on changes in an index which is the British Bankers
Association quoted through Telerate System (the "Index"). The Index
is that interest rate determined by Lender as the rate quoted by the
British Bankers Association through the Dow Jones Telerate System
Report (or such other similar source as may be selected by Lender) as
the London Interbank Offered Rate (LIBOR) for deposits of United
States dollars for one month maturity. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that
Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each day. The Index currently
is 6.132% per annum. The interest rate to be applied to the unpaid
principal balance of this agreement will be at 1.250 percentage points
over the Index, resulting in an initial rate of 7.382% per annum.
NOTICE: Under no circumstances will the interest rate on this
Agreement be more than the maximum rate allowed by applicable law.
This Agreement does not constitute a repayment or extinguishments of
the Note, but only a modification thereof.
2. As preconditions to the terms of this Agreement, Borrower shall
complete or provide the following
Borrower shall pay or shall have paid all reasonable fees, costs, and
expenses, of whatever kind or nature, incurred by Lender in connection
with this Agreement, including but not limited to attorney's fees,
lien search fees, title reports and pollicies, and recording and
filing fees.
<PAGE>
3. It is the intention and agreement of Borrower and Lender that: (I) all
collateral security in which Lender has acquired a security interest
or other lien pursuant to the Loan Documents shall continue to serve
as collateral security for payment and performance of all the
obligations of the Borrower under the Loan Documents, and (iii) all
agreements, representations, warranties and covenants contained in the
Loan Documents are hereby reaffirmed in full by borrower except as
specifically modified by this Agreement
4. Borrower hereby acknowledges that: (I) the Loan Documents are in full
force and effect, as modified by this Agreement, and (ii) by entering
into this Agreement, Lender does not waive any existing default or any
default hereafter occurring or become obligated to waive any condition
or obligation under the Loan Documents.
5. Borrower hereby acknowledges that Borrower has no claim, demand,
lawsuit, cause of action, claim for relief, remedy, or defense against
enforcement of the Loan Documents that could be asserted against
Lender, its affiliates, directors, officers, employees, or
representations, commitments, statements or warranties, including
without limitation any such conduct arising out of or in any way
connected with the Loan Documents. Notwithstanding the foregoing,
Borrower hereby waives, releases and relinquishes any and all claims,
demands, lawsuits, causes of action, claims for relief, remedies or
defenses against enforcement of the Loan Documents that could be
asserted against Lender, its affiliates, directors, officers,
employees or agents, whether known or unknown.
6. In addition to this Agreement, the Loan Documents, and any additional
documents that this Agreement requires, this finance transaction may
include other written closing documentation such as resolutions,
waivers, certificates, financing statements, filings, statements
closing or escrow instructions, loan purpose statements, and other
documents that Lender may customarily use in such transactions. Such
documents are incorporated herein by this reference. All the documents
to which this paragraph makes reference express, embody and supercede
any previous understandings, agreements, or promises (whether oral or
written) with respect to this finance transaction, and represent the
final expression of the agreement between Lender and Borrower, the
terms and conditions of which cannot hereafter by contradicted by any
oral understanding (if any) not reduced to writing and identified
above.
WRITTEN AGREEMENTS. Borrower acknowledges that Borrower is aware of the
provisions of Section 58-6-5 NMSA 1978 Comp, which requires a contact,
promise or commitment to loan money or to grant, extend, or renew credit or
any modification thereof, in an amount greater that twenty-five thousand
dollars ($25,000), not primarily for personal, family or household
purposes, to be in wiring and signed by the party to be charged or that
party's authorized representative.
Effective as of April 10, 2000.
LENDER:
First Security Bank of New Mexico, N.A.
By: /s/ J. CHESLEY STEEL
----------------------
Authorized Officer
BORROWERS:
New Mexico Utilities, Inc.
By: /s/ ROBERT L. SWARTWOUT By: /s/ WILLIAM C. JASURA
--------------------------- -----------------------------------
Robert L. Swartwout, President William C. Jasura, Secretary
<PAGE>
AFFIRMATION OF GUARANTORS, GRANTORS, AND SUBORDINATORS
Each of the following Guarantors, Grantors, Subordinators, and other
parties to the Loan Documents hereby acknowledges and consents to the
foregoing Modification Agreement and affirms and restates each of their
respective liabilities, obligations, and agreements set forth in the Loan
Documents. In addition, the following specifically agree to continuing
their respective guaranties and subordinations as to any increase in the
principal amount of the Loan and specifically agree that the Collateral
Documents secure any increase in the principal amount of the Loan. Each of
the following also hereby give the same assurances, representations,
waivers, releases, and relinquishments given by Borrower in paragraph 5 of
the Modification Agreement as if it were restated as part of this
affirmation.
GUARANTORS:
Southwest Water Company
By: /s/ PETER J. MOERBEEK
-------------------------
Peter J. Moerbeek, Vice President Finance/Chief Financial Officer
By: /s/ STEPHEN J. MUZI
-----------------------
Stephen J. Muzi, Corporate Controller
<PAGE>
EXHIBIT 10.19
STOCK PURCHASE AGREEMENT
among
SOUTHWEST WATER COMPANY,
as Buyer,
MILTON R. DIGREGORIO,
BEVERLY A. DIGREGORIO
and
MILTON R. DIGREGORIO AND BEVERLY A. DIGREGORIO
2000 IRREVOCABLE FAMILY TRUST
as Sellers
April 3, 2000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
1. Definitions................................................................. 1
2. Purchase and Sale of Company Shares......................................... 4
(a) Basic Transaction.................................................. 4
(b) Purchase Price..................................................... 4
(c) The Closing........................................................ 4
3. Representations and Warranties Concerning the Transaction................... 5
(a) Representations and Warranties of the Sellers...................... 5
(b) Representations and Warranties of the Buyer........................ 6
4. Representations and Warranties Concerning the Company....................... 7
(a) Organization, Qualification, and Corporate Power................... 7
(b) Capitalization..................................................... 8
(c) Noncontravention................................................... 8
(d) Brokers' Fees...................................................... 8
(e) Title to Assets.................................................... 9
(f) Financial Statements............................................... 9
(g) Events Subsequent to Most Recent Fiscal Year End................... 9
(h) Undisclosed Liabilities............................................ 11
(i) Legal Compliance................................................... 11
(j) Tax Matters........................................................ 11
(k) Intellectual Property.............................................. 13
(l) Tangible Assets.................................................... 15
(m) Inventory.......................................................... 15
(n) Contracts.......................................................... 15
(o) Notes and Accounts Receivable...................................... 17
(p) Powers of Attorney................................................. 17
(q) Insurance.......................................................... 17
(r) Litigation......................................................... 17
(s) Product Warranty................................................... 18
(t) Product Liability.................................................. 18
(u) Employees.......................................................... 18
(v) Employee Benefits.................................................. 19
(w) Guaranties......................................................... 20
(x) Certain Transactions............................................... 20
(y) Disclosure......................................................... 21
5. Pre-Closing Covenants....................................................... 21
(a) General............................................................ 21
(b) Notices and Consents............................................... 21
(c) Operation of Business.............................................. 21
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(d) Preservation of Business.................................................... 21
(e) Full Access................................................................. 22
(f) Notice of Developments...................................................... 22
(g) Exclusivity................................................................. 22
6. Post-Closing Covenants............................................................... 22
(a) General..................................................................... 22
(b) Transition.................................................................. 22
(c) Confidentiality............................................................. 23
(d) Covenant Not to Compete..................................................... 23
(e) Continued Employment........................................................ 23
(f) Sellers' Vehicles........................................................... 23
7. Conditions to Obligation to Close.................................................... 24
(a) Conditions to Obligation of the Buyer....................................... 24
(b) Conditions to Obligation of the Sellers..................................... 25
8. Remedies for Breaches of This Agreement.............................................. 26
(a) Survival of Representations, Warranties and Covenants....................... 26
(b) Indemnification Provisions for Benefit of the Buyer......................... 26
(c) Indemnification Provisions for Benefit of the Sellers....................... 26
(d) Indemnification Procedures.................................................. 27
(e) Rights of Offset............................................................ 29
(f) Other Indemnification Provisions............................................ 30
9. Tax Matters.......................................................................... 30
(a) Section 338(h)(10) Election................................................. 30
(b) Tax Periods Ending on or Before the Closing Date............................ 31
(c) Tax Periods Beginning Before and Ending After the Closing Date.............. 31
(d) Cooperation on Tax Matters.................................................. 31
(e) Certain Taxes............................................................... 32
(f) Changes in Accounting Methods............................................... 32
10. Termination.......................................................................... 32
(a) Termination of Agreement.................................................... 32
(b) Effect of Termination....................................................... 33
11. Miscellaneous........................................................................ 33
(a) Press Releases and Public Announcements..................................... 33
(b) No Third-Party Beneficiaries................................................ 33
(c) Entire Agreement............................................................ 33
(d) Succession and Assignment................................................... 33
(e) Counterparts................................................................ 34
(f) Headings.................................................................... 34
(g) Notices..................................................................... 34
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(h) Governing Law; Jurisdiction; Venue................................... 35
(i) Attorneys Fees....................................................... 35
(j) Amendments and Waivers............................................... 36
(k) Severability......................................................... 36
(l) Expenses............................................................. 36
(m) Construction......................................................... 36
(n) Incorporation of Exhibits and Schedules.............................. 36
</TABLE>
Schedule 1 -- Purchase Price
Disclosure Schedule -- Exceptions to Representations and Warranties Concerning
the Company
iii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made as of April 3, 2000, by
---------
and among SOUTHWEST WATER COMPANY, a Delaware corporation ("Buyer"), and MILTON
-----
R. DIGREGORIO, BEVERLY A. DIGREGORIO and the MILTON R. DIGREGORIO AND BEVERLY A.
DIGREGORIO 2000 IRREVOCABLE FAMILY TRUST (the "2000 Trust" and collectively the
----------
"Sellers"). Milton R. DiGregorio and Beverly A. DiGregorio are referred to
-------
collectively herein as the "DiGregorios"), and the Buyer and the Sellers are
-----------
referred to collectively herein as the "Parties."
-------
The Sellers in the aggregate own all of the outstanding capital stock of
Master Tek International, Inc., a Colorado corporation ("Company").
-------
This Agreement contemplates a transaction in which the Buyer will purchase
from the Sellers, and the Sellers will sell to the Buyer, eighty percent (80%)
of the outstanding capital stock of the Company in return for Two Million
Dollars ($2,000,000) cash and Two Million Dollars ($2,000,000) in the form of a
promissory note.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
1. Definitions.
-----------
"Adverse Consequences" means all actions, suits, proceedings,
--------------------
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs,
amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses,
expenses, and fees, including court costs and reasonable attorneys' fees and
expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
---------
promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of
----------------
Code Section 1504(a).
"Basis" means any past or present fact, situation, circumstance,
-----
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"Buyer" has the meaning set forth in the preface above.
-----
"Closing" has the meaning set forth in Section 2(c) below.
-------
"Closing Date" has the meaning set forth in Section 2(c) below.
------------
"Code" means the Internal Revenue Code of 1986, as amended.
----
<PAGE>
"Company" has the meaning set forth in the preface above.
-------
"Company Share" means any share of the Common Stock, no par value, of
-------------
the Company.
"Confidential Information" means any information concerning the
------------------------
businesses and affairs of the Company that is not already generally available to
the public.
"Controlled Group of Corporations" has the meaning set forth in Code
--------------------------------
Section 1563.
"Disclosure Schedule" has the meaning set forth in Section 4 below.
-------------------
"Fiduciary" has the meaning set forth in ERISA ss.3(21).
---------
"Financial Statement" has the meaning set forth in Section 4(f)
-------------------
below.
"GAAP" means United States generally accepted accounting principles
----
as in effect from time to time.
"Indemnified Party" has the meaning set forth in Section 8(d) below.
-----------------
"Indemnifying Party" has the meaning set forth in Section 8(d) below.
------------------
"Intellectual Property" means (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (b) all trademarks, service marks, trade
dress, logos, trade names, and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all goodwill
associated therewith, and all applications, registrations, and renewals in
connection therewith, (c) all copyrightable works, all copyrights, and all
applications, registrations, and renewals in connection therewith, (d) all mask
works and all applications, registrations, and renewals in connection therewith,
(e) all trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals), (f) all computer software
(including data and related documentation), (g) all other proprietary rights,
and (h) all copies and tangible embodiments thereof (in whatever form or
medium).
"Knowledge" or "know" means actual knowledge or where facts
--------- ----
are present that a person of reasonable prudence should know about the matter in
question.
"Liability" means any liability (whether known or unknown,
---------
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
2
<PAGE>
"Most Recent Balance Sheet" means the balance sheet contained within
-------------------------
the Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth in
--------------------------------
Section 4(f) below.
"Most Recent Fiscal Month End" has the meaning set forth in Section
4(f) below.
"Most Recent Fiscal Year End" has the meaning set forth in Section
4(f) below.
"Multiemployer Plan" has the meaning set forth in ERISA ss.3(37).
------------------
"Ordinary Course of Business" means the ordinary course of business
---------------------------
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" has the meaning set forth in the preface above.
-----
"PBGC" means the Pension Benefit Guaranty Corporation.
----
"Person" means an individual, a partnership, a corporation, an
------
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Prohibited Transaction" has the meaning set forth in ERISA ss.406
----------------------
and Code ss.4975.
"Promissory Note" has the meaning set forth in Section 2(b) below.
---------------
"Purchase Price" has the meaning set forth in Section 2(b) below.
--------------
"Reportable Event" has the meaning set forth in ERISA ss.4043.
----------------
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
-----------------
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for Taxes not yet due and payable, (c) purchase
money liens and liens securing rental payments under capital lease arrangements,
and (d) other liens arising in the Ordinary Course of Business and not incurred
in connection with the borrowing of money.
"Seller" has the meaning set forth in the preface above.
------
"Sellers' Vehicles" has the meaning set forth in Section 2(e) below.
-----------------
3
<PAGE>
"Subsidiary" means any corporation with respect to which a specified
----------
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Tax" means any federal, state, local, or foreign income, gross
---
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code ss.59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
----------
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 8(d) below.
-----------------
2. Purchase and Sale of Company Shares.
-----------------------------------
(a) Basic Transaction. On and subject to the terms and conditions of
-----------------
this Agreement, the Buyer agrees to purchase from each of the Sellers, and each
of the Sellers agrees to sell to the Buyer, an aggregate of twenty thousand
(20,000) Company Shares, which constitutes eighty percent (80%) of all of the
issued and outstanding Company Shares, and certain "Call Rights" as set forth in
that certain Master Tek Shareholder Agreement among the Company, SWC, the
DiGregorios and the 2000 Trust of even date herewith (the "Shareholders
------------
Agreement"), for the Purchase Price specified in Section 2(b) and in accordance
- ---------
with Schedule 1 attached hereto.
(b) Purchase Price. The Buyer agrees to pay to the Sellers at the
--------------
Closing Four Million Dollars ($4,000,000) (the "Purchase Price") by delivery of
--------------
(i) a promissory note (the "Promissory Note") in the form of Exhibit A
--------------- ---------
attached hereto in the principal amount of Two Million Dollars ($2,000,000) and
(ii) cash for the balance of the Purchase Price payable by wire transfer or
delivery of other immediately available funds.
(c) The Closing. The closing of the transactions contemplated by this
-----------
Agreement (the "Closing") shall take place at the offices of Buyer in West
Covina, California, on April 17, 2000 or such other date as the Buyer and the
Sellers may mutually determine (the "Closing Date"). At the Closing:
------------
(i) the Sellers will deliver to the Buyer the various
certificates, instruments, and documents referred to in Section 7(a)
below ;
(ii) the Buyer will deliver to the Sellers the various
certificates, instruments, and documents referred to in Section 7(b)
below;
4
<PAGE>
(iii) each of the Sellers will deliver to the Buyer stock
certificates representing all of his or her Company Shares, endorsed
in blank or accompanied by duly executed assignment documents;
(iv) the Buyer will deliver to the Sellers the consideration
specified in Section 2(b) above;
(v) title to the following vehicles (collectively, "Sellers'
-------
Vehicles") shall be transferred to the DiGregorios "as is, where is:"
--------
(1) a 1997 Mercedes Benz S500, (2) a 1999 Volvo S80; (3) a 2000 Toyota
Tundra; and (4) a 1998 Toyota 4 Runner;
(vi) The entire amount has been paid to the DiGregorios to
repay in full their loan to the Company (recorded as a note payable)
within the seven (7) days prior to the Closing Date;
(vii) Sellers will ensure there is an amount of cash on the
Closing Date equal to all of the outstanding checks written on all of
the Company's bank accounts as of the Closing Date;
(viii) Sellers shall have funded all payroll and payroll-related
costs and expenses, and all benefit costs and expenses for the middle
of the month of April payroll cycle; and
(ix) Any cash remaining in the Company on the Closing Date
that is not needed to repay the loan referred to in Section 2(c)(vi),
to cover the outstanding checks under Section 2(c)(vii), and to fund
the payroll and related costs under Section 2(c)(viii), less any
required withholdings, shall be paid out to the DiGregorios as
compensation.
3. Representations and Warranties Concerning the Transaction.
---------------------------------------------------------
(a) Representations and Warranties of the Sellers. The Sellers jointly
---------------------------------------------
and severally represent and warrant to the Buyer that the statements contained
in this Section 3(a) are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made then and
as though the Closing Date were substituted for the date of this Agreement
throughout this Section 3(a)) with respect to each of the Sellers.
(i) Authorization of Transaction. The Seller has full power
----------------------------
and authority to execute and deliver this Agreement and to perform
their obligations hereunder. This Agreement constitutes the valid and
legally binding obligation of the Seller, enforceable in accordance
with its terms and conditions. The Seller need not give any notice to,
make any filing with, or obtain any authorization, consent, or
approval of any person, entity, government or governmental agency in
order to consummate the transactions contemplated by this Agreement.
(ii) Noncontravention. Neither the execution and the delivery
----------------
of this Agreement, nor the consummation of the transactions
contemplated hereby, will
5
<PAGE>
(A) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Seller is
subject or (B) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument, or
other arrangement to which the Seller is a party or by which he is
bound or to which any of his assets is subject.
(iii) Brokers' Fees. The Seller has no Liability or obligation
-------------
to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement.
(iv) Company Shares. The Seller holds of record and owns
--------------
beneficially only the number of Company Shares set forth next to his
name in Section 4(b) of the Disclosure Schedule. These Company Shares
are owned free and clear of any restrictions on transfer (other than
any restrictions under the Securities Act and state securities laws),
Taxes, Security Interests, options, warrants, purchase rights,
contracts, commitments, equities, claims, and demands. The Seller is
not a party to any option, warrant, purchase right, shareholder
agreement or other contract or commitment that could require the
Seller to sell, transfer, or otherwise dispose of any capital stock of
the Company (other than this Agreement and the Master Tek Shareholder
Agreement). The Seller is not a party to any voting trust, proxy,
shareholder agreement or other agreement or understanding with respect
to the voting of any capital stock of the Company.
(v) No Claims Against the Company. The Seller has no claims
-----------------------------
or rights against the Company, and the Company is not obligated in any
way to the Seller, except as are created through this Agreement or
through one of the Agreements executed on even date herewith in
conjunction with the transactions contemplated by this Agreement.
(b) Representations and Warranties of the Buyer. The Buyer represents
-------------------------------------------
and warrants to the Sellers that the statements contained in this Section 3(b)
are correct and complete as of the date of this Agreement and will be correct
and complete as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this
Section 3(b)).
(i) Organization of the Buyer. The Buyer is a corporation
-------------------------
duly organized, validly existing, and in good standing under the laws
of the jurisdiction of its incorporation.
(ii) Authorization of Transaction. The Buyer has full power
----------------------------
and authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding
obligation of the Buyer, enforceable in accordance with its terms and
conditions. The Buyer need not give any notice to,
6
<PAGE>
make any filing with, or obtain any authorization, consent, or
approval of any person, entity, government or governmental agency in
order to consummate the transactions contemplated by this Agreement.
(iii) Noncontravention. Neither the execution and the delivery
----------------
of this Agreement, nor the consummation of the transactions
contemplated hereby, will (A) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court
to which the Buyer is subject or any provision of its charter or
bylaws or (B) conflict with or result in a breach of Buyer's Articles
or Bylaws.
(iv) Brokers' Fees. The Buyer has no Liability or obligation
-------------
to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement, except for
a payment to be made to Dale Shaffer which shall be Buyer's sole
obligation and responsibility to pay.
(v) Investment. The Buyer is not acquiring the Company Shares
----------
with a view to or for sale, resale, distribution or division in
connection with any distribution thereof within the meaning of the
Securities Act.
4. Representations and Warranties Concerning the Company. The DiGregorios
jointly and severally represent and warrant to the Buyer that the statements
contained in this Section 4 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 4), except as set forth in the disclosure
schedule delivered by the Sellers to the Buyer on the date hereof and attached
hereto (the "Disclosure Schedule"). Nothing in the Disclosure Schedule shall be
-------------------
deemed adequate to disclose an exception to a representation or warranty made
herein, however, unless the Disclosure Schedule identifies the exception with
particularity and describes the relevant facts in detail. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein (unless the representation or warranty
has to do with the existence of the document or other item itself). The
Disclosure Schedule will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this Section 4.
(a) Organization, Qualification, and Corporate Power. Section
------------------------------------------------
4(a) of the Disclosure Schedule lists the state of incorporation for the
Company. The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the Colorado. The Company is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required. The Company has full corporate power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and in which it presently proposes to
engage and to own and use the properties owned and used by it. Section 4(a) of
the Disclosure Schedule lists the directors and officers of the Company.
Complete copies of the charter and bylaws of the Company (as amended to date)
are attached to the Disclosure Schedule. The minute books (containing the
records of meetings of the stockholders, the board of directors, and any
committees of the board of directors), the stock certificate books, and the
stock record books of
7
<PAGE>
the Company, in the forms made available to the Buyer for review, are correct
and complete. The Company is not in default under or in violation of any
provision of its charter or bylaws.
(b) Capitalization. The entire authorized capital stock of the Company
--------------
consists of 50,000 Company Shares, of which 25,000 Company Shares are issued and
outstanding and no Company Shares are held in treasury. All of the issued and
outstanding Company Shares have been duly authorized, are validly issued, fully
paid, and nonassessable, and are held of record by the respective Sellers as set
forth in Section 4(b) of the Disclosure Schedule. There are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, shareholder agreement or other contracts or commitments
that could require the Company to issue, sell, or otherwise cause to become
outstanding any of its capital stock. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect to the Company. There are no voting trusts, proxies, or other agreements
or understandings with respect to the voting of the capital stock of the
Company.
(c) Noncontravention. Neither the execution and the delivery of this
----------------
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Company is subject or any provision
of the charter or bylaws of the Company or (ii) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument, or other
arrangement to which the Company is a party or by which it is bound or to which
any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets). The Company does not need to give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any person, entity, government or governmental agency in order for the Parties
to consummate the transactions contemplated by this Agreement.
(d) Brokers' Fees. The Company does not have any Liability or
-------------
obligation to pay any fees or commissions to any broker,finder, or agent
with respect to the transactions contemplated by this Agreement.
(e) Title to Assets. The Company has 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 Most Recent Balance Sheet or acquired after
the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of the Most Recent Balance Sheet.
(f) Financial Statements. Attached to the Disclosure Schedule are the
---------------------
following financial statements (collectively the "Financial Statements"): (i)
--------------------
unaudited balance sheets and statements of income as of and for the fiscal years
ended September 30, 1998 and September 30, 1999 (the "Most Recent Fiscal Year
End") for the Company; and (ii) unaudited balance sheets and statements of
income (the "Most Recent Financial Statements") as of and for the four months
--------------------------------
ended January 31, 2000 (the "Most Recent Fiscal Month End") for the Company. The
----------------------------
Financial Statements have been prepared on a consistent basis throughout the
periods covered thereby, are correct and complete, and are consistent with the
books and records of the Company (which
8
<PAGE>
books and records are correct and complete); provided, however, that the Most
Recent Financial Statements are subject to normal year-end adjustments (which
will not be material individually or in the aggregate under the method of
accounting that has been consistently applied by the Company). The Financial
Statements have not been prepared in accordance with GAAP and do not contain
footnotes.
(g) Events Subsequent to Most Recent Fiscal Year End. Since the
------------------------------------------------
Most Recent Fiscal Year End, and except as shown in the Most Recent Financial
Statements and Disclosure Schedule there has not been any material adverse
change in the business, financial condition, operations, results of operations,
or future prospects of the Company. Without limiting the generality of the
foregoing, since that date:
(i) the Company has not sold, leased, transferred, or
assigned any of its assets, tangible or intangible, other than for a
fair consideration in the Ordinary Course of Business except pursuant
to this Agreement;
(ii) the Company has not entered into any agreement,
contract, lease, or license (or series of related agreements,
contracts, leases, and licenses) either involving more than One
Hundred Thousand Dollars ($100,000) or outside the Ordinary Course of
Business;
(iii) no party (including the Company) has accelerated,
terminated, modified, or cancelled any agreement, contract, lease, or
license (or series of related agreements, contracts, leases, and
licenses) involving more than Twenty Five Thousand Dollars ($25,000)
to which the Company is a party or by which it is bound;
(iv) the Company has not imposed any Security Interest
upon any of its assets, tangible or intangible;
(v) the Company has not made any capital expenditure (or
series of related capital expenditures) either involving more than One
Hundred Thousand Dollars ($100,000) or outside the Ordinary Course of
Business;
(vi) the Company has not made any capital investment in,
any loan to, or any acquisition of the securities or assets of, any
other Person (or series of related capital investments, loans, and
acquisitions);
(vii) the Company has not issued any note, bond, or other
debt security or created, incurred, assumed, or guaranteed any
indebtedness for borrowed money or capitalized lease obligation;
(viii) the Company has not delayed or postponed the payment
of accounts payable and other Liabilities;
(ix) the Company has not cancelled, compromised, waived,
or released any right or claim (or series of related rights and
claims) either involving more
9
<PAGE>
than Twenty Five Thousand Dollars ($25,000) or outside the Ordinary
Course of Business;
(x) the Company has not granted any license or sublicense of
any rights under or with respect to any Intellectual Property;
(xi) there has been no change made or authorized in the
charter or bylaws of the Company;
(xii) the Company has not issued, sold, or otherwise disposed
of any of its capital stock, or granted any options, warrants, or
other rights to purchase or obtain (including upon conversion,
exchange, or exercise) any of its capital stock;
(xiii) the Company has not declared, set aside, or paid any
dividend or made any distribution with respect to its capital stock
(whether in cash or in kind) or redeemed, purchased, or otherwise
acquired any of its capital stock;
(xiv) the Company has not experienced any damage, destruction,
or loss in excess of $10,000 (whether or not covered by insurance) to
its property;
(xv) the Company has not made any loan to, or entered into any
other transaction with, any of its directors, officers, and employees;
(xvi) the Company has not entered into any employment contract
or collective bargaining agreement, written or oral, or modified the
terms of any existing such contract or agreement;
(xvii) the Company has not granted any increase in the base
compensation of any of its directors, officers, and employees;
(xviii) the Company has not adopted, amended, modified, or
terminated any bonus, profit-sharing, incentive, severance, or other
plan, contract, or commitment for the benefit of any of its directors,
officers, and employees (or taken any such action with respect to any
other Employee Benefit Plan as defined in Section 4(v));
(xix) the Company has not made any other change in employment
terms for any of its directors, officers, and employees;
(xx) the Company has not made or pledged to make any
charitable or other capital contribution which individually or in the
aggregate exceeds $5,000;
(xxi) there has not been any other material occurrence, event,
incident, action, failure to act, or transaction outside the Ordinary
Course of Business involving the Company, with the exception of the
Company's distribution of the Sellers' Vehicles to the Sellers at or
immediately prior to the Closing; and
(xxii) the Company has not committed to any of the foregoing.
10
<PAGE>
(h) Undisclosed Liabilities. The Company does not have any Liability
-----------------------
(and there is no Basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against any of them
giving rise to any Liability), except for (i) Liabilities set forth on the face
of the Most Recent Balance Sheet and (ii) Liabilities which have arisen after
the Most Recent Fiscal Month End in the Ordinary Course of Business (none of
which results from, arises out of, relates to, is in the nature of, or was
caused by any breach of contract, breach of warranty, tort, infringement, or
violation of law).
(i) Legal Compliance. Each of the Company and its respective
----------------
predecessors and Affiliates has complied with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof), and no action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or notice has been
filed or commenced against any of them alleging any failure so to comply.
(j) Tax Matters.
-----------
(i) The Company has filed all Tax Returns that it was
required to file. All such Tax Returns were correct and complete in
all respects. All Taxes owed by the Company (whether or not shown on
any Tax Return) have been paid. The Company currently is not the
beneficiary of any extension of time within which to file any Tax
Return. No claim has ever been made by an authority in a jurisdiction
where the Company does not file Tax Returns that it is or may be
subject to taxation by that jurisdiction. There are no Security
Interests on any of the assets of the Company that arose in connection
with any failure (or alleged failure) to pay any Tax.
(ii) The Company has not failed to withhold, or withheld but
failed to pay, any Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third party.
(iii) No Seller 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.
There is no dispute or claim concerning any Tax Liability of the
Company either (A) claimed or raised by any authority in writing or
(B) as to which any of the Sellers and the directors and officers (and
employees responsible for Tax matters) of the Company have Knowledge
based upon personal contact with any agent of such authority. Section
4(j) of the Disclosure Schedule lists all federal, state, local, and
foreign income Tax Returns filed with respect to the Company for
taxable periods ended on or after December 31, 1998, indicates whether
to the Seller's Knowledge those Tax Returns have been audited by a
taxing authority, and indicates whether those Tax Returns are the
subject of audit by a taxing authority. The Sellers have delivered to
the Buyer 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, 1998.
11
<PAGE>
(iv) The Company has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(v) The Company has not filed a consent under Codess.341(f)
concerning collapsible corporations. The Company has not made any payments,
is obligated to make any payments, or is a party to any agreement that
under certain circumstances could obligate it to make any payments that
will not be deductible under Codess.280G. The Company has not been a United
States real property holding corporation within the meaning of
Codess.897(c)(2) during the applicable period specified in
Codess.897(c)(1)(A)(ii). 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
Codess.6662. The Company is not a party to any Tax allocation or sharing
agreement. The Company (A) has not been a member of an Affiliated Group
filing a consolidated federal income Tax Return (other than a group the
common parent of which was the Company) or (B) does not have any Liability
for the Taxes of any Person (other than the Company) under Reg.ss.1.1502-6
(or any similar provision of state, local, or foreign law), as a transferee
or successor, by contract, or otherwise.
(vi) Section 4(j) of the Disclosure Schedule sets forth the
following information with respect to the Company as of the most recent
practicable date the amount of any net operating loss, net capital loss,
unused investment or other credit, unused foreign tax, or excess charitable
contribution allocable to the Company.
(vii) Other than the accounts receivable which are recorded on the
books of the Company under the accrual method, there is no material
difference between the book basis and the tax basis of the Company in its
assets.
(k) Intellectual Property.
---------------------
(i) The Company owns or has the right to use pursuant to license,
sublicense, agreement, or permission all Intellectual Property necessary
for the operation of the businesses of the Company as presently conducted
and as presently proposed to be conducted. Each item of Intellectual
Property owned or used by the Company immediately prior to the Closing
hereunder will be owned or available for use by the Company on identical
terms and conditions immediately subsequent to the Closing hereunder. The
Company has taken all necessary actions to maintain and protect each item
of Intellectual Property that they own or use.
(ii) The Company has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of third parties, and none of the Sellers and the directors
and officers (and employees with responsibility for Intellectual Property
matters) of the Company
12
<PAGE>
has ever received any charge, complaint, claim, demand, or notice alleging
any such interference, infringement, misappropriation, or violation
(including any claim that the Company must license or refrain from using
any Intellectual Property rights of any third party). To the Knowledge of
any of the Sellers and the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Company, no third
party has interfered with, infringed upon, misappropriated, or otherwise
come into conflict with any Intellectual Property rights of any of the
Company.
(iii) Section 4(k)(iii) of the Disclosure Schedule identifies each
patent or registration which has been issued to the Company with respect to
any of its Intellectual Property, identifies each pending patent
application or application for registration which the Company has made with
respect to any of its Intellectual Property, and identifies each license,
agreement, or other permission which the Company has granted to any third
party with respect to any of its Intellectual Property (together with any
exceptions). The Sellers have delivered to the Buyer correct and complete
copies of all such patents, registrations, applications, licenses,
agreements, and permissions (as amended to date). Section 4(k)(iii) of the
Disclosure Schedule also identifies each trade name or unregistered
trademark used by the Company in connection with any of its businesses.
With respect to each item of Intellectual Property required to be
identified in Section 4(k)(iii) of the Disclosure Schedule:
(A) the Company possesses all right, title, and interest in and
to the item, free and clear of any Security Interest, license, or
other restriction;
(B) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(C) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to the Knowledge of
any of the Sellers and the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Company, is
threatened which challenges the legality, validity, enforceability,
use, or ownership of the item; and
(D) the Company has never agreed to indemnify any Person for or
against any interference, infringement, misappropriation, or other
conflict with respect to the item.
(iv) Section 4(k)(iv) of the Disclosure Schedule identifies each
item of Intellectual Property that any third party owns and that the
Company uses pursuant to license, sublicense, agreement, or permission. The
Sellers have delivered to the Buyer correct and complete copies of all such
licenses, sublicenses, agreements, and permissions (as amended to date).
With respect to each item of Intellectual Property required to be
identified in Section 4(k)(iv) of the Disclosure Schedule:
13
<PAGE>
(A) the license, sublicense, agreement, or permission covering
the item is legal, valid, binding, enforceable, and in full force and
effect;
(B) the license, sublicense, agreement, or permission will
continue to be legal, valid, binding, enforceable, and in full force
and effect on identical terms following the consummation of the
transactions contemplated hereby;
(C) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default or
permit termination, modification, or acceleration thereunder;
(D) no party to the license, sublicense, agreement, or
permission has given notice of repudiation of any provision thereof;
(E) with respect to each sublicense, the representations and
warranties set forth in subsections (A) through (D) above are true and
correct with respect to the underlying license;
(F) the underlying item of Intellectual Property is not subject
to any outstanding injunction, judgment, order, decree, ruling, or
charge;
(G) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to the Knowledge of
any of the Sellers and the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Company, is
threatened which challenges the legality, validity, or enforceability
of the underlying item of Intellectual Property; and
(H) the Company has not granted any sublicense or similar right
with respect to the license, sublicense, agreement, or permission.
(v) To the Knowledge of any of the Sellers and the directors and
officers (and employees with responsibility for Intellectual Property
matters) of the Company, the Company will not interfere with, infringe
upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of its businesses as presently conducted and as presently
proposed to be conducted.
(l) Tangible Assets. The Company owns or leases all buildings, machinery,
---------------
equipment, vehicles and other tangible assets necessary for the conduct of its
businesses as presently conducted and as presently proposed to be conducted.
Each such tangible asset is free from defects (patent and latent), has been
maintained in accordance with normal industry practice, is in good operating
condition and repair (subject to normal wear and tear), and is suitable for the
purposes for which it presently is used and presently is proposed to be used.
14
<PAGE>
(m) Inventory. The inventory of the Company consists of raw materials and
---------
supplies, manufactured and purchased parts, goods in process, and finished
goods, all of which is merchantable and fit for the purpose for which it was
procured or manufactured, and none of which is slow-moving, obsolete, damaged,
or defective, subject only to the reserve for inventory writedown set forth on
the face of the Most Recent Balance Sheet (rather than in any notes thereto) as
adjusted for the passage of time through the Closing Date in accordance with the
past custom and practice of the Company.
(n) Contracts. Section 4(n) of the Disclosure Schedule lists the following
---------
contracts and other agreements to which the Company is a party:
(i) any agreement (or group of related agreements) for the lease
of personal property to or from any Person providing for lease
payments in excess of Twenty Five Thousand Dollars ($25,000) per
annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services,
which is not in the ordinary course of business;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which
it has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, in excess of
Twenty Five Thousand Dollars ($25,000) or under which it has imposed a
Security Interest on any of its assets, tangible or intangible;
(v) any agreement concerning confidentiality or noncompetition;
(vi) any agreement with any of the Sellers and their Affiliates
(other than the Company);
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan
or arrangement for the benefit of its current or former directors,
officers, and employees;
(viii) any collective bargaining agreement;
(ix) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis or providing
severance benefits;
(x) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees;
(xi) any agreement under which the consequences of a default or
termination could have a material adverse effect on the business,
financial
15
<PAGE>
condition, operations, results of operations, or future prospects of
the Company; or
(xii) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of One Hundred
Thousand Dollars ($100,000).
The Sellers have delivered to the Buyer a correct and complete
copy of each written agreement listed in Section 4(n) of the Disclosure Schedule
(as amended to date) and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 4(n) of the Disclosure
Schedule. With respect to each such agreement: (A) the agreement is legal,
valid, binding, enforceable, and in full force and effect; (B) the agreement
will continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby; (C) no party is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
(o) Notes and Accounts Receivable. All notes receivable and accounts
-----------------------------
receivable of the Company are reflected properly on its books and records, are
valid receivables subject to no setoffs or counterclaims, are current and
collectible, and will be collected in accordance with their terms at their
recorded amounts, subject only to the historical rate for bad debts, which is
three percent (3%). The Company's accounts receivable register dated as of April
7, 2000, is attached to the Disclosure Schedule.
(p) Powers of Attorney. There are no outstanding powers of attorney
------------------
executed on behalf of the Company.
(q) Insurance. Section 4(q) of the Disclosure Schedule sets forth the
---------
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Company has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
four (4) years:
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder,
and the name of each covered insured; and
(iii) the policy number and the period of coverage.
With respect to each such insurance policy: (A) the policy is legal,
valid, binding, enforceable, and in full force and effect; (B) the policy will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (C) neither the Company nor any other party to the policy is in breach
or default (including with respect to the payment of premiums or the giving of
notices), and no event has occurred which, with notice or the lapse of time,
would constitute such a breach or default, or permit termination, modification,
or acceleration, under the policy; and (D) no
16
<PAGE>
party to the policy has repudiated any provision thereof. The Company has been
covered during the past four (4) years by insurance in scope and amount
customary and reasonable for the businesses in which it has engaged during the
aforementioned period. Section 4(q) of the Disclosure Schedule describes any
self-insurance arrangements affecting the Company.
(r) Litigation. Section 4(r) of the Disclosure Schedule sets forth
----------
each instance in which the Company (i) is subject to any outstanding injunction,
judgment, order, decree, ruling, or charge or (ii) is a party or, to the
Knowledge of any of the Sellers and the directors and officers (and employees
with responsibility for litigation matters) of the Company, is threatened to be
made a party to any action, suit, proceeding, hearing, or investigation of, in,
or before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
4(r) of the Disclosure Schedule could result in any material adverse change in
the business, financial condition, operations, results of operations, or future
prospects of the Company. None of the Sellers and the directors and officers
(and employees with responsibility for litigation matters) of the Company has
any reason to believe that any such action, suit, proceeding, hearing, or
investigation may be brought or threatened against the Company.
(s) Product Warranty. Each product manufactured, sold, leased, or
----------------
delivered by the Company has been in conformity with all applicable contractual
commitments and all express and implied warranties, and the Company does not
have any Liability (and, to Sellers' Knowledge, there is no Basis for any
present or future action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand against any of them giving rise to any Liability)
for replacement or repair thereof or other damages in connection therewith,
subject only to the reserve for product warranty claims set forth on the face of
the Most Recent Balance Sheet as adjusted for the passage of time through the
Closing Date in accordance with the past custom and practice of the Company. No
product manufactured, sold, leased, or delivered by the Company is subject to
any guaranty, warranty, or other indemnity beyond the applicable standard terms
and conditions of sale or lease. Section 4(s) of the Disclosure Schedule
includes copies of the standard terms and conditions of sale or lease for the
Company (containing applicable guaranty, warranty, and indemnity provisions).
(t) Product Liability. The Company does not have any Liability (and
-----------------
there is no Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against any of them giving
rise to any Liability) arising out of any injury to individuals or property as a
result of the ownership, possession, or use of any product manufactured, sold,
leased, or delivered by the Company.
(u) Employees. To the Knowledge of any of the Sellers and the
---------
directors and officers (and employees with responsibility for employment
matters) of the Company, no executive, key employee, or group of employees (with
the exception of Beverly DiGregorio) has any plans to terminate employment with
the Company. The Company is not a party to or bound by any collective bargaining
agreement, nor has it experienced any strikes, grievances, claims of unfair
labor practices, or other collective bargaining disputes. The Company has not
committed any unfair labor practice. None of the Sellers and the directors and
officers (and employees with responsibility for employment matters) of the
Company has any Knowledge of any
17
<PAGE>
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to employees of the Company.
(v) Employee Benefits.
-----------------
(i) Section 4(v) of the Disclosure Schedule lists each
employee benefit plan ("Employee Benefit Plan") that the Company
maintains or to which the Company contributes.
(A) Each such Employee Benefit Plan (and each related
trust, insurance contract, or fund) complies in form and in
operation in all respects with the applicable requirements
of ERISA, the Code, and other applicable laws.
(B) All required reports and descriptions (including
Form 5500 Annual Reports, Summary Annual Reports, PBGC-1's,
and Summary Plan Descriptions) have been filed or
distributed appropriately with respect to each such Employee
Benefit Plan. The requirements of Part 6 of Subtitle B of
Title I of ERISA and of Code ss.4980B have been met with
respect to each such Employee Benefit Plan which is an
Employee Welfare Benefit Plan.
(C) All contributions (including all employer
contributions and employee salary reduction contributions)
which are due have been paid to each such Employee Benefit
Plan which is an Employee Pension Benefit Plan and all
contributions for any period ending on or before the Closing
Date which are not yet due have been paid to each such
Employee Pension Benefit Plan or accrued in accordance with
the past custom and practice of the Company. All premiums or
other payments for all periods ending on or before the
Closing Date have been paid with respect to each such
Employee Benefit Plan which is an Employee Welfare Benefit
Plan.
(D) Each such Employee Benefit Plan which is an
Employee Pension Benefit Plan meets the requirements of a
"qualified plan" under Code ss.401(a) and has received,
within the last two years, a favorable determination letter
from the Internal Revenue Service.
(E) The Sellers have delivered to the Buyer correct
and complete copies of the plan documents and summary plan
descriptions, the most recent determination letter received
from the Internal Revenue Service, the most recent Form 5500
Annual Report, and all related trust agreements, insurance
contracts, and other funding agreements which implement each
such Employee Benefit Plan.
(ii) With respect to each Employee Benefit Plan that the
Company and the Controlled Group of Corporations which includes the
Company maintains or ever has maintained or to which it contributes,
ever has contributed, or ever has been required to contribute:
18
<PAGE>
(A) No such Employee Benefit Plan which is an Employee
Pension Benefit Plan (other than any Multiemployer Plan) has
been completely or partially terminated or been the subject
of a Reportable Event as to which notices would be required
to be filed with the PBGC. No proceeding by the PBGC to
terminate any such Employee Pension Benefit Plan (other than
any Multiemployer Plan) has been instituted or threatened.
(B) There have been no Prohibited Transactions with
respect to any such Employee Benefit Plan. No Fiduciary has
any Liability for breach of fiduciary duty or any other
failure to act or comply in connection with the
administration or investment of the assets of any such
Employee Benefit Plan. No action, suit, proceeding, hearing,
or investigation with respect to the administration or the
investment of the assets of any such Employee Benefit Plan
(other than routine claims for benefits) is pending or
threatened. None of the Sellers and the directors and
officers (and employees with responsibility for employee
benefits matters) of the Company has any Knowledge of any
Basis for any such action, suit, proceeding, hearing, or
investigation.
(C) The Company has not incurred, and none of the
Sellers and the directors and officers (and employees with
responsibility for employee benefits matters) of the Company
has any reason to expect that the Company will incur, any
Liability to the PBGC (other than PBGC premium payments) or
otherwise under Title IV of ERISA (including any withdrawal
Liability) or under the Code with respect to any such
Employee Benefit Plan which is an Employee Pension Benefit
Plan.
(iii) None of the Company and the other members of the
Controlled Group of Corporations that includes the Company contribute to,
ever has contributed to, or ever has been required to contribute to any
Multiemployer Plan or has any Liability (including withdrawal Liability)
under any Multiemployer Plan.
(iv) The Company does not maintain nor has it ever
maintained or contributed, or ever has been required to contribute to any
Employee Welfare Benefit Plan providing medical, health, or life insurance
or other welfare-type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than in accordance
with Code ss.4980B).
(w) Guaranties. The Company is not a guarantor nor is it otherwise
----------
liable for any Liability or obligation (including indebtedness) of any other
Person.
(x) Certain Transactions. Except as set forth in Section 4(x) of the
--------------------
Disclosure Schedule, there is no agreement or transaction, and no agreement or
transaction has been proposed, to which the Company was or is to be a party and
in which any director or officer of the Company or any person owning of record
or beneficially more than 10% of the outstanding
19
<PAGE>
capital stock of the Company or any Affiliate of any such Person had or has a
direct or indirect material interest.
(y) Disclosure. The representations and warranties contained in
----------
this Section 4 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 4 not misleading.
5. Pre-Closing Covenants. The Parties agree as follows with respect to
---------------------
the period between the execution of this Agreement and the Closing.
(a) General. Each of the Parties will use his or its reasonable
-------
efforts to take all action and to do all things necessary in order to consummate
and make effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set forth in Section 7
below).
(b) Notices and Consents. The Sellers will cause the Company to
--------------------
give any notices to third parties, and will cause the Company to use its
reasonable efforts to obtain any third party consents, that the Buyer may
reasonably request in connection with the matters referred to in Section 4(c)
above. Each of the Parties will (and the Sellers will cause the Company to) give
any notices to, make any filings with, and use its reasonable efforts to obtain
any authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Section 3(a)(i), Section
3(b)(ii), and Section 4(c) above.
(c) Operation of Business. The Sellers will not cause or permit the
---------------------
Company to engage in any practice, take any action, or enter into any
transaction outside the Ordinary Course of Business, with the exception of
causing the Company to distribute Sellers' Vehicles to the shareholders. Without
limiting the generality of the foregoing, the Sellers will not cause or permit
the Company to (i) declare, set aside, or pay any dividend or make any
distribution with respect to its capital stock or redeem, purchase, or otherwise
acquire any of its capital stock, or (ii) otherwise engage in any practice, take
any action, or enter into any transaction of the sort described in Section 4(g)
above.
(d) Preservation of Business. The Sellers will cause the Company to
------------------------
keep its business and properties substantially intact, including its present
operations, physical facilities, working conditions, and relationships with
lessors, licensors, suppliers, customers, and employees.
(e) Full Access. Each of the Sellers will permit, and the Sellers
-----------
will cause the Company to permit, representatives of the Buyer to have full
access at all reasonable times, and in a manner so as not to interfere with the
normal business operations of the Company, to all premises, properties,
personnel, books, records (including Tax records), contracts, and documents of
or pertaining to the Company.
(f) Notice of Developments. The Sellers will give prompt written
----------------------
notice to the Buyer of any material adverse development causing a breach of any
of the representations and warranties in Section 4 above. Each Party will give
prompt written notice to the others of any
20
<PAGE>
material adverse development causing a breach of any of his or its own
representations and warranties in Section 3 above.
(g) Exclusivity. None of the Sellers will (and the Sellers will not
-----------
cause or permit the Company to) (i) solicit, initiate, or encourage the
submission of any proposal or offer from any Person relating to the acquisition
of any capital stock or other voting securities, or any substantial portion of
the assets of, the Company (including any acquisition structured as a merger,
consolidation, or share exchange) or (ii) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing. None of the Sellers will vote their
Company Shares in favor of any such acquisition structured as a merger,
consolidation, or share exchange. The Sellers will notify the Buyer immediately
if any Person makes any proposal, offer, inquiry, or contact with respect to any
of the foregoing.
6. Post-Closing Covenants. The Parties agree as follows with respect to
----------------------
the period following the Closing.
(a) General. In case at any time after the Closing any further action
-------
is necessary to carry out the purposes of this Agreement, each of the Parties
will take such further action (including the execution and delivery of such
further instruments and documents) as any other Party reasonably may request,
all at the sole cost and expense of the requesting Party (unless the requesting
Party is entitled to indemnification therefor under Section 8 below). The
Sellers acknowledge and agree that from and after the Closing the Buyer will be
entitled to possession of all documents, books, records (including Tax records),
agreements, and financial data of any sort relating to the Company.
(b) Transition. None of the Sellers will take any action that is
----------
designed or intended to have the effect of discouraging any lessor, licensor,
customer, supplier, or other business associate of the Company from maintaining
the same business relationships with the Company after the Closing as it
maintained with the Company prior to the Closing. Each of the Sellers will refer
all customer inquiries relating to the businesses of the Company to the Buyer
from and after the Closing. Should Milton DiGregorio voluntarily terminate his
employment with the Company, the event of his termination shall not by itself be
deemed to be a breach of this Section 6(b).
(c) Confidentiality. Each of the Sellers will treat and hold as such
---------------
all of the Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
the Buyer or destroy, at the request and option of the Buyer, all tangible
embodiments (and all copies) of the Confidential Information which are in his or
its possession. In the event that any of the Sellers is requested or required
(by oral question or request for information or documents in any legal
proceeding, interrogatory, subpoena, civil investigative demand, or similar
process) to disclose any Confidential Information, that Seller will notify the
Buyer promptly of the request or requirement so that the Buyer may seek an
appropriate protective order or waive compliance with the provisions of this
Section 6(c). If, in the absence of a protective order or the receipt of a
waiver hereunder, any of the Sellers is, on the advice of counsel, compelled to
disclose any Confidential Information to any tribunal or else stand liable for
contempt, that Seller may disclose the Confidential
21
<PAGE>
Information to the tribunal; provided, however, that the disclosing Seller shall
use his or its reasonable efforts to obtain, at the request of the Buyer, an
order or other assurance that confidential treatment will be accorded to such
portion of the Confidential Information required to be disclosed as the Buyer
shall designate. The foregoing provisions shall not apply to any Confidential
Information which is generally available to the public immediately prior to the
time of disclosure.
(d) Covenant Not to Compete. As set forth in and subject to the
-----------------------
provisions of that certain Non-Competition Agreement, the DiGregorios shall not,
for a period of ten (10) years from and after the Closing Date, engage directly
or indirectly in any business that the Company conducts as of the termination of
Employee's employment pursuant to the Employment Agreement. The Parties
acknowledge that the Non-Competition Agreement is a material inducement to the
purchase and sale of the Company Shares pursuant to this Agreement.
(e) Continued Employment. Buyer shall not, for a period of up to six
--------------------
(6) months following the Closing Date, terminate any employee of the Company
without cause (other than Milton DiGregorio under the terms of his Employment
Agreement executed in conjunction herewith) without the approval of Milton
DiGregorio, which approval shall not be unreasonably withheld. (f) Sellers'
Vehicles. The DiGregorios accept the Sellers' Vehicles "as is, where is." The
DiGregorios shall pay all taxes, transfer fees, title fees, license fees and the
like with respect to the transfer of title to and ownership of the Sellers'
Vehicles.
7. Conditions to Obligation to Close.
---------------------------------
(a) Conditions to Obligation of the Buyer. The obligation of the
-------------------------------------
Buyer to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section
3(a) and Section 4 above shall be true and correct in all material
respects at and as of the Closing Date;
(ii) the Sellers shall have performed and complied with all
of their covenants hereunder in all material respects through the
Closing;
(iii) the Company shall have procured all of the third party
consents specified in Section 5(b) above;
(iv) no action, suit, or proceeding shall be pending before
any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge
would (A) prevent consummation of any of the transactions contemplated
by this Agreement, (B) cause any of the transactions contemplated by
this Agreement to be rescinded following consummation, (C) affect
adversely the right of the Buyer to own the Company Shares and to
control the Company, or (D) affect adversely the right of the Company
to own its
22
<PAGE>
assets and to operate its businesses (and no such injunction,
judgment, order, decree, ruling, or charge shall be in effect);
(v) the Sellers shall have delivered to the Buyer a
certificate to the effect that each of the conditions specified above
in Section 7(a)(i)-(iv) is satisfied in all respects;
(vi) the Buyer and the Sellers shall have entered into
that certain Continuing Guaranty;
(vii) the Buyer and the Sellers shall have entered into
that certain Collateral Agreement;
(viii) the Buyer, the Sellers and Norwest Bank Colorado,
N.A. shall have entered into that certain Stock Escrow Agreement;
(ix) the Buyer, the Company and the Sellers shall have
entered into that certain Master Tek Shareholder Agreement;
(x) the Buyer, the Company and Milton DiGregorio shall
have entered into that certain Employment Agreement;
(xi) the Buyer, the Company and the DiGregorios shall have
entered into that certain Noncompetition Agreement
(xii) the Sellers shall have executed releases of all
claims, rights and obligations with respect to the Company, other than
claims, rights and obligations arising under documents executed as of
the Closing Date;
(xiii) the Buyer shall have received the resignations,
effective as of the Closing, of each director and officer of the
Company;
(xiv) the Board of Directors of the Buyer shall have
approved this Agreement and the other documents referred to herein;
(xv) the Buyer shall have obtained on terms and conditions
reasonably satisfactory to it all of the financing it needs in order
to consummate the transactions contemplated hereby;
(xvi) the Buyer and the Sellers shall have executed cross-
receipts for the number of Company Shares sold by, and the amount of
Purchase Price paid to, each Seller; and
(xvii) all actions to be taken by the Sellers in connection
with consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Buyer.
23
<PAGE>
The Buyer may waive any condition specified in this Section 7(a) if it executes
a writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the Sellers. The obligation of the
---------------------------------------
Sellers to consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in
Section 3(b) above shall be true and correct in all material respects
at and as of the Closing Date;
(ii) the Buyer shall have performed and complied with all
of its covenants hereunder in all material respects through the
Closing;
(iii) no action, suit, or proceeding shall be pending
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement or (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
(iv) the Buyer shall have delivered to the Sellers a
certificate to the effect that each of the conditions specified above
in Section 7(b)(i)-(iii) is satisfied in all respects;
(v) the relevant parties shall have entered into the
agreements referred to in 7(a)(vi)-(xi);
(vi) the Buyer shall have executed the Promissory Note and
delivered the Purchase Price to the Sellers;
(vii) the Buyer and the Sellers shall have executed cross-
receipts for the number of Company Shares sold by, and the amount of
Purchase Price paid to, each Seller; and
(viii) all actions to be taken by the Buyer in connection
with consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Sellers.
The Sellers may waive any condition specified in this Section 7(b) if they
execute a writing so stating at or prior to the Closing.
24
<PAGE>
8. Remedies for Breaches of This Agreement.
---------------------------------------
(a) Survival of Representations, Warranties and Covenants. All of
-----------------------------------------------------
the representations and warranties of the Parties shall survive the Closing
hereunder and continue in full force and effect for a period equal to the
applicable statute of limitations on any actions with respect to such matters.
(b) Indemnification Provisions for Benefit of the Buyer. In the event
---------------------------------------------------
any of the Sellers breaches (or in the event any third party alleges facts that,
if true, would mean any of the Sellers has breached) any of their
representations, warranties or covenants contained herein, provided that the
Buyer makes a written claim for indemnification against any of the Sellers
pursuant to Section 8(d) below within the applicable survival period set forth
in Section 8(a), then each of the Sellers agrees jointly and severally to
indemnify the Buyer from and against the entirety of any Adverse Consequences
the Buyer may suffer through and after the date of the claim for indemnification
(including any Adverse Consequences the Buyer may suffer after the end of any
applicable survival period) resulting from, arising out of, relating to, in the
nature of, or caused by the breach (or the alleged breach).
(c) Indemnification Provisions for Benefit of the Sellers. In the
-----------------------------------------------------
event the Buyer breaches (or in the event any third party alleges facts that, if
true, would mean the Buyer has breached) any of its representations, warranties,
and covenants contained herein, provided that any of the Sellers makes a written
claim for indemnification against the Buyer pursuant to Section 8(d) below
within the applicable survival period set forth in Section 8(a), then the Buyer
agrees to indemnify each of the Sellers from and against the entirety of any
Adverse Consequences the Seller may suffer through and after the date of the
claim for indemnification (including any Adverse Consequences the Seller may
suffer after the end of any applicable survival period) resulting from, arising
out of, relating to, in the nature of, or caused by the breach (or the alleged
breach).
(d) Indemnification Procedures.
--------------------------
(i) If any third party shall notify any Party (the "Indemnified
-----------
Party") with respect to any matter (a "Third Party Claim") which may
----- -----------------
give rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party
------------------
shall promptly notify each Indemnifying Party thereof in writing;
provided, however, that no delay on the part of the Indemnified Party
-------- -------
in notifying any Indemnifying Party shall relieve the Indemnifying
Party from any obligation hereunder unless (and then solely to the
extent) the Indemnifying Party thereby is prejudiced.
(ii) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party so long as (A)
the Indemnifying Party notifies the Indemnified Party in writing
within fourteen (14) days after the Indemnified Party has given notice
of the Third Party Claim that the Indemnifying Party will indemnify
the Indemnified Party from and against the entirety of any Adverse
Consequences the Indemnified Party may suffer resulting from, arising
25
<PAGE>
out of, relating to, in the nature of, or caused by the Third Party
Claim, (B) the Indemnifying Party provides the Indemnified Party with
evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against
the Third Party Claim and fulfill its indemnification obligations
hereunder, (C) the Third Party Claim involves only money damages and
does not seek an injunction or other equitable relief, (D) settlement
of, or an adverse judgment with respect to, the Third Party Claim is
not, in the good faith judgment of the Indemnified Party, likely to
establish a precedential custom or practice materially adverse to the
continuing business interests of the Indemnified Party, and (E) the
Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(iii) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 8(d)(ii)
above, (A) the Indemnified Party may retain separate co-counsel at its
sole cost and expense and participate in the defense of the Third
Party Claim, (B) the Indemnified Party will not consent to the entry
of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior written consent of the Indemnifying
Party (not to be withheld unreasonably), and (C) the Indemnifying
Party will not consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim without the prior
written consent of the Indemnified Party (not to be withheld
unreasonably).
(iv) In the event any of the conditions in Section 8(d)(ii)
above is or becomes unsatisfied, however, (A) the Indemnified Party
may defend against, and consent to the entry of any judgment or enter
into any settlement with respect to, the Third Party Claim in any
manner it reasonably may deem appropriate (and the Indemnified Party
need not consult with, or obtain any consent from, any Indemnifying
Party in connection therewith), (B) the Indemnifying Parties will
reimburse the Indemnified Party promptly and periodically for the
costs of defending against the Third Party Claim (including reasonable
attorneys' fees and expenses), and (C) the Indemnifying Parties will
remain responsible for any Adverse Consequences the Indemnified Party
may suffer resulting from, arising out of, relating to, in the nature
of, or caused by the Third Party Claim to the fullest extent provided
in this Section 8.
(v) In the event that the claim for indemnification does not
involve a claim by a third party, but instead is a claim by Buyer
against Seller or Seller against Buyer, the Indemnified Party shall
give the Indemnifying Parties notice of the alleged breach. The
Indemnifying Parties shall have thirty (30) days to cure such breach,
if the breach is of the type that can be cured. If the breach cannot
be cured, or has not been cured after the expiration of the cure
period, then the Indemnifying Parties shall promptly pay the
Indemnified Party the amount of the claim to the fullest extent
provided in this Section 8.
26
<PAGE>
(vi) Notwithstanding anything to the contrary in this Agreement,
the Buyer shall not have any right to receive any indemnification
payment from the Sellers for any claims until:
(A) The Sellers have exhausted all coverage available from
insurance carried by Buyer or the Company with respect to such
claims; and
(B) The Buyer has accrued an aggregate of $25,000 of
claims in excess of the claims covered by insurance.
(vii) Notwithstanding anything to the contrary in this Agreement:
(A) The Buyer shall not have any right to receive any
indemnification payment from the Sellers in an amount in excess
of the aggregate of the (x) principal amount then outstanding
under the Promissory Note, (y) the then remaining payments under
the Noncompetition Agreement and (z) the maximum amount then
payable to Sellers in the event of a full exercise of Sellers'
remaining Put Rights under the Master Tek Shareholders Agreement;
such maximum amount shall be determined as of the date of the
notice to Sellers that Buyer is seeking indemnification; and
(B) The Buyer shall have no right to proceed against any
assets of the Sellers other than their interest in the Promissory
Note, Noncompetition Agreement and Master Tek Shareholder
Agreement. This provision shall survive Closing and shall control
in the event of a conflict with any provision of any document
executed at Closing of the transactions contemplated by this
Agreement.
(e) Rights of Offset. In the event the Sellers have denied the
----------------
Buyer's request for indemnification, in whole or in part, the Buyer shall have
the option of recouping all or any part of any Adverse Consequences it may
suffer by filing suit against the Sellers pursuant to Section 11(h) below and
notifying the Sellers in writing that the Buyer is exercising its rights of
offset under this Section 8(e).
(i) While Buyer's action against the Sellers is pending, Buyer
shall have the right to withhold or to direct the Company to withhold,
as applicable, (1) the principal payments due under the Promissory
Note (but must continue to pay the interest to Sellers), (2) the
Noncompetition Payments (as defined in the Noncompetition Agreement)
and (3) any amounts due under a "Put Right" as defined in the Master
Tek Shareholder Agreement (collectively, the "Withholds").
(ii) Buyer or the Company, as applicable, must pay the Withholds
as they become due to a court registry or the escrow established
pursuant to the Collateral Agreement, will be considered as payments
made in a timely manner under each of the Promissory Note,
Noncompetition Agreement and Master Tek
27
<PAGE>
Shareholder Agreement, and shall not constitute a default under any of
such agreements.
(iii) The Withholds shall not exceed (1) the amount Buyer
reasonably believes the indemnification claim is worth, net of the
amounts set forth in Section 8(d)(vi), or (2) the maximum limit on
indemnification established by Section 8(d)(vii).
(iv) In the event that Buyer prevails on its claim for
indemnification against Sellers, Buyer and Sellers shall direct the
registry or escrow agent to release the Withholds deposited therein in
accordance with this Section to Buyer. The recoupment by Buyer of any
principal amounts under the Promissory Note shall affect the timing
and amount of payments required under the Promissory Note in the same
manner as if the Maker (as defined in the Promissory Note) had made a
permitted prepayment (without premium or penalty) thereunder and
recoupment of payments under the Noncompetition Agreement and Master
Tek Shareholder Agreement shall constitute regular payments under each
of those Agreements.
(v) In the event that Buyer does not prevail on its claim for
indemnification against Sellers, (1) Buyer and Seller shall direct the
registry or escrow agent to release the Withholds deposited therein in
accordance with this Section to the Sellers, and (2) Buyer shall make
to the Sellers an accelerated payment of principal under the
Promissory Note in an amount equal to twice the principal amount of
the Promissory Note actually withheld as part of the Withholds (the
aggregate payment not to exceed the maximum amount of principal then
remaining under the Promissory Note). The accelerated payment of
principal under the Promissory Note to Sellers shall affect the timing
and amount of payments required under the Promissory Note in the same
manner as if the Maker had made a permitted prepayment (without
premium or penalty) thereunder.
(f) Other Indemnification Provisions. Subject to the provisions of
--------------------------------
Section 8(d)(vii), the foregoing indemnification provisions are in addition to,
and not in derogation of, any statutory, equitable, or common law remedy any
Party may have for breach of representation, warranty, or covenant. Each of the
Sellers hereby agrees that he, she or it will not make any claim for
indemnification against the Company by reason of the fact that he, she or it was
a director, officer, employee, or agent of any such entity or was serving at the
request of any such entity as a partner, trustee, director, officer, employee,
or agent of another entity (whether such claim is for judgments, damages,
penalties, fines, costs, amounts paid in settlement, losses, expenses, or
otherwise and whether such claim is pursuant to any statute, charter document,
bylaw, agreement, or otherwise) with respect to any action, suit, proceeding,
complaint, claim, or demand brought by the Buyer against such Seller (whether
such action, suit, proceeding, complaint, claim, or demand is pursuant to this
Agreement, applicable law, or otherwise).
(g) Limitation of Seller's Liability to the Company. The Parties
-----------------------------------------------
hereby agree that any and all claims, counterclaims, demands, actions and causes
of action, suits, rights, liabilities,
28
<PAGE>
debts, contracts, duties and obligations, of any kind and nature whatsoever,
whether known or unknown, whether arising under common law, in equity or any
statute, which the Company ever had, now has, or in the future may claim to have
against Sellers and which have arisen at any time on or prior to the date of
that certain Release and Limitation of Liability between Sellers and the Company
("Company Claims"), shall be included within the limitations and requirements
established by Section 8(d)(vi) and (vii) and Section 8(e) as though they were
claims for indemnification under this Agreement. In no event shall the total of
Buyer's claims for indemnification and the Company Claims ever exceed the
limitations established by Section 8(d)(vi) and (vii) and Section 8(e).
9. Tax Matters. The following provisions shall govern the allocation of
-----------
responsibility as between Buyer and Sellers for certain tax matters following
the Closing Date:
(a) Section 338(h)(10) Election. The Sellers and Buyer agree that no
---------------------------
Party shall make an election under Section 338(h)(10) of the Code with respect
to the purchase and sale of the stock of the Company hereunder.
(b) Tax Periods Ending on or Before the Closing Date. Buyer 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. Buyer shall permit Sellers to review and comment
on each such Tax Return described in the preceding sentence prior to filing and
shall permit Sellers to contest on reasonable grounds any taxes, penalties or
interest imposed by the taxing authorities. Sellers shall reimburse Buyer for
Taxes of the Company with respect to such periods within fifteen (15) days after
payment by Buyer or the Company of such Taxes.
(c) Tax Periods Beginning Before and Ending After the Closing Date.
--------------------------------------------------------------
Buyer 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. Sellers shall pay to Buyer 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. 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 that 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 (x) 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 (y)
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 ended
on the Closing Date. Any credits relating to a Taxable period that 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 allocations shall be made in a manner consistent
with prior practice of the Company.
29
<PAGE>
(d) Cooperation on Tax Matters.
--------------------------
(i) Buyer, the Company and Sellers shall cooperate fully, as
and to the extent reasonably requested by another 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 agrees (A) 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 Buyer or Sellers, any
extensions thereof) of the respective taxable periods, and to abide by
all record retention agreements entered into with any taxing
authority, and (B) to give the other Parties reasonable written notice
prior to transferring, destroying or discarding any such books and
records and, if another Party so requests, the Company shall allow
such Party to take possession of such books and records.
(ii) Buyer and Sellers further agree, upon request, to use their
commercially reasonable efforts to obtain any certificate or other
document from any governmental authority or any 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).
(iii) Buyer and Sellers further agree, upon request, to provide
the other Parties with all information that any Party may be required
to report pursuant to Section 6043 of the Code and all Treasury
Department Regulations promulgated 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 Sellers
when due, and Sellers 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, Buyer will, and will cause its affiliates to, join in the
execution of any such Tax Returns and other documentation.
(f) Changes in Accounting Methods. Notwithstanding any other
-----------------------------
provision of this Agreement, Sellers shall not be liable for any taxes, or any
interest and penalties on taxes, that arise solely as a result of a change in
accounting methods of the Company after the Closing.
10. Termination.
-----------
(a) Termination of Agreement. The Parties may terminate this
------------------------
Agreement as provided below:
30
<PAGE>
(i) The Buyer and the Sellers may terminate this Agreement by
mutual written consent at any time prior to the Closing.
(ii) the Buyer may terminate this Agreement by giving written
notice to the Sellers at any time prior to the Closing (A) in the
event any of the Sellers has breached any material representation,
warranty, or covenant contained in this Agreement in any material
respect and the breach has continued without cure for a period of five
(5) days after the notice of breach or (B) if the Closing shall not
have occurred on or before April 30, 2000, by reason of the failure of
any condition precedent under Section 7(a) hereof (unless the failure
results primarily from the Buyer itself breaching any representation,
warranty, or covenant contained in this Agreement); and
(iii) the Sellers may terminate this Agreement by giving written
notice to the Buyer at any time prior to the Closing (A) in the event
the Buyer has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, the
Sellers have notified the Buyer of the breach, and the breach has
continued without cure for a period of five (5) days after the notice
of breach or (B) if the Closing shall not have occurred on or before
April 30, 2000, by reason of the failure of any condition precedent
under Section 7(b) hereof (unless the failure results primarily from
any of the Sellers themselves breaching any representation, warranty,
or covenant contained in this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement
---------------------
pursuant to Section 10(a) above, all rights and obligations of the Parties
hereunder shall terminate without any Liability of any Party to any other Party
(except for any Liability of any Party then in breach).
11. Miscellaneous.
-------------
(a) Press Releases and Public Announcements. No Party shall issue any
---------------------------------------
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the Buyer and the Sellers;
provided, however, that any Party may make any public disclosure it believes in
good faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the disclosing Party
will use its reasonable best efforts to advise the other Parties prior to making
the disclosure).
(b) No Third-Party Beneficiaries. This Agreement shall not confer any
----------------------------
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) Entire Agreement. This Agreement, together with the Promissory
----------------
Note and the Agreements referred to in 7(a)(vi)-(xi), inclusive, constitutes the
entire agreement among the Parties and supersedes any prior understandings,
agreements, or representations by or among the Parties, written or oral, to the
extent they related in any way to the subject matter hereof.
31
<PAGE>
(d) Succession and Assignment. This Agreement shall be binding upon
-------------------------
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of his or its rights, interests, or obligations hereunder without the prior
written approval of the Buyer and the Sellers; provided, however, that the Buyer
may (i) assign any or all of its rights and interests hereunder to one or more
of its Affiliates and (ii) designate one or more of its Affiliates to pay and
perform its obligations hereunder (in any or all of which cases the Buyer
nonetheless shall remain jointly and severally liable for the payment and
performance of all of the obligations of Buyer hereunder).
(e) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) Notices. All notices, requests, demands, claims, and other
-------
communications hereunder will only be in writing. Any notice, request, demand,
claim, or other communication hereunder shall only be deemed duly given on the
second business day ("business day" means Mondays through Fridays other than
days on which the United States Postal Service does not make regularly scheduled
deliveries of first class mail) after it is deposited with the United States
Postal Service for delivery by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to Sellers: Milton R. DiGregorio
Beverly A. DiGregorio
Milton R. DiGregorio and Beverly A. DiGregorio 2000
Irrevocable Family Trust
273 Vaquero Drive
Boulder, Colorado 80303
Telecopier: (303) 499-0125
Copy to: Douglas B. Koff
Waldbaum, Corn, Koff & Berger, P.C.
303 East 17/th/ Avenue, Suite 940
Denver, Colorado 80203
Telecopier: (303) 861-0601
If to Southwest: Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
Attention: Vice President of Finance
Telecopier: (626) 915-1558
32
<PAGE>
If to the Company: Master Tek International, Inc.
9168 Marshall Place
Westminster, Colorado 80031-2922
Telecopier: (303) 650-1094
Copy to: Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
Attention: Vice President of Finance
Telecopier: (626) 915-1558
Copy to: Latham & Watkins
650 Town Center Drive, 20/th/ Floor
Costa Mesa, California 92626
Attention: James Daniels, Esq.
Telecopier: (714) 755-8290
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient as
proven by the sender. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
(h) Governing Law; Jurisdiction; Venue. This Agreement shall be
----------------------------------
governed and construed in accordance with the laws of the State of Colorado
excluding any conflicts or choice of law rule or principle that might otherwise
refer construction or interpretation of this Agreement to the substantive law of
another jurisdiction. Each of the Parties submits to the jurisdiction of any
state or federal court sitting in Denver, Colorado, in any action or proceeding
arising out of or relating to this Agreement and agrees that all claims in
respect of the action or proceeding may only be heard and determined in any such
court. These courts shall be the exclusive forum for the determination of any
claim or right arising out of or relating to this Agreement. Each of the Parties
waives any defense of inconvenient forum to the maintenance of any action or
proceeding so brought and waives any bond, surety, or other security that might
be required of any other Party with respect thereto. No Party will request the
court in any such action or proceeding to enter relief (whether for damages or
injunctive relief) until the opposing Party has had not less than seven (7) days
to respond to the request or motion for relief. Any Party may make service on
any other Party by sending or delivering a copy of the process to the Party to
be served at the address and in the manner provided for the giving of notices in
Section 11(g) of this Agreement. Each Party hereby waives any and all rights it
may have to a trial by jury. The parties acknowledge that by executing THIS
AGREEMENT, they are giving up all rights, if any, to a trial by jury.
(i) Attorneys Fees. The fees and costs, including reasonable
--------------
attorneys' fees, incurred by any Party to this Agreement as a result of any
dispute arising under or related to this
33
<PAGE>
Agreement shall be awarded to the prevailing party. If there is no prevailing
party, fees and costs may be awarded in the discretion of the court which, in
making such award, shall assess the relative good or bad faith of the Parties
throughout the dispute.
(j) Amendments and Waivers. No amendment of any provision of this
----------------------
Agreement shall be valid unless the same shall be in writing and signed by the
Buyer and the Sellers. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence. (k) Severability. Any term
or provision of this Agreement that is invalid or unenforceable in any situation
in any jurisdiction shall not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or enforceability of the
offending term or provision in any other situation or in any other jurisdiction.
(l) Expenses. Each of the Parties and the Company will bear his or
--------
its own costs and expenses (including legal fees and expenses) incurred in
connection with this Agreement and the transactions contemplated hereby.
(m) Construction. Any reference to any federal, state, local, or
------------
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
(n) Incorporation of Exhibits and Schedules. The Exhibits and
---------------------------------------
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
*****
34
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the date first above written.
SOUTHWEST WATER COMPANY,
a Delaware corporation
By: /s/ PETER J. MOERBEEK
---------------------
Title: CFO
------------------
MILTON R. DIGREGORIO, an individual
By: /s/ MILTON R. DIGREGORIO
------------------------
BEVERLY A. DIGREGORIO, an individual
By: /s/ BEVERLY A. DIGREGORIO
-------------------------
MILTON R. DIGREGORIO AND BEVERLY A.
DIGREGORIO 2000 IRREVOCABLE FAMILY TRUST
By: /s/ BEVERLY A. DIGREGORIO
-------------------------
Title: Trustee
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 248,000
<SECURITIES> 0
<RECEIVABLES> 12,561,000
<ALLOWANCES> (1,240,000)
<INVENTORY> 0
<CURRENT-ASSETS> 16,074,000
<PP&E> 168,353,000
<DEPRECIATION> 45,864,000
<TOTAL-ASSETS> 149,803,000
<CURRENT-LIABILITIES> 17,374,000
<BONDS> 28,000,000
<COMMON> 65,000
0
517,000
<OTHER-SE> 40,134,000
<TOTAL-LIABILITY-AND-EQUITY> 149,803,000
<SALES> 20,557,000
<TOTAL-REVENUES> 2,557,000
<CGS> 16,073,000
<TOTAL-COSTS> 19,183,000
<OTHER-EXPENSES> 49,000
<LOSS-PROVISION> 34,000
<INTEREST-EXPENSE> 788,000
<INCOME-PRETAX> 717,000
<INCOME-TAX> 287,000
<INCOME-CONTINUING> 430,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 430,000
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
</TABLE>
