UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 1, 2006
ESCO TECHNOLOGIES INC.
(Exact Name of Registrant as Specified in Charter)
Missouri 1-10596 43-1554045
(State or Other (Commission (I.R.S. Employer
Jurisdiction of Incorporation) File Number) Identification No.)
9900A Clayton Road, St. Louis, Missouri 63124-1186
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 314-213-7200
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2 (b) under the
Exchange Act (17 CFR 240.14d-2 (b) )
[ ] Pre-commencement communications pursuant to Rule 13e-4 (c) under the
Exchange Act (17 CFR 240.13e-4 (c))
ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On February 1, 2006, ESCO Technologies Holding Inc. ("ESCO Holding"), a
wholly-owned subsidiary of the Registrant, entered into a Stock Purchase
Agreement (the "Agreement") with Lawrence Sears, Gary L. Moore, Richard C.
Riccardi, Martin Zucker, Bridge Associates, LLC, as Trustee of the ADLT Class 7
Liquidating Trust, successor in interest to Advanced Lighting Technologies,
Inc., and Strength Capital Partners, L.P. (collectively "Sellers"), being all of
the shareholders of Hexagram, Inc., an Ohio corporation ("Hexagram"), pursuant
to which ESCO Holding purchased all of the outstanding shares of Hexagram.
Hexagram is now a wholly-owned subsidiary of ESCO Holding. The closing of the
transaction contemplated under the Agreement occurred on February 1, 2006,
immediately following the execution of the Agreement.
The total consideration paid and to be paid by ESCO Holding pursuant to the
Agreement is $67,500,000, subject to a working capital adjustment, plus
contingent payments based upon the achievement by Hexagram of annual net sales
targets over a five (5) year period commencing February 1, 2006. The maximum
aggregate amount of such contingent payments is $6,250,000. The potential
working capital adjustment is based upon the working capital of Hexagram on
February 1, 2006. $6,500,000 of the cash purchase price was placed in escrow as
security for any claims of ESCO Holding under the Agreement, including indemnity
obligations of Sellers. Twelve months after closing, the amount remaining in
escrow in excess of $3,250,000 will be distributed to the four individual
Sellers. Twenty-four months after closing, the balance remaining in escrow will
be so distributed.
Included in the $67,500,000 consideration are commitments by ESCO Holding in the
total amount of $2,500,000 to: (i) make a contribution to a university endowment
fund for engineering studies; (ii) make contributions to establish a charitable
foundation for scholarship awards for eligible dependents of persons employed by
Hexagram at closing (subject to Internal Revenue Service regulations); and (iii)
cause Hexagram to create a cash retention plan for incentive awards to key
non-executive employees.
In connection with the acquisition, the Registrant guaranteed the performance by
Hexagram of its contract to provide equipment, software and services to Pacific
Gas and Electric Company ("PG&E") in support of the gas utility portion of
PG&E's Advanced Metering Infrastructure project. The total anticipated contract
value from commencement through the five-year full deployment is expected to be
approximately $225,000,000, subject to various PG&E and regulatory approvals,
conditions and contingencies.
Also in connection with the acquisition, Lawrence Sears has entered into a
consulting agreement with Hexagram. The other individual Sellers have entered
into employment agreements with Hexagram whereby such individuals are prohibited
from competing with Hexagram or soliciting its employees during their employment
and for a period of one to two years following termination of their respective
agreements. Additionally, all of the individual Sellers are prohibited from
competing with Hexagram for a period of four years following the closing.
The foregoing description of the Agreement does not purport to be a complete
description of the Agreement and is qualified in its entirety by reference to
the text of the Agreement, which is filed as Exhibit 2.1 to this Form 8-K.
A copy of Registrant's press release, dated February 2, 2006, which announced
the Agreement and acquisition of Hexagram is attached hereto as Exhibit 99.1.
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
The information required by this Item is contained in Item 1.01 herein, which is
incorporated herein by reference.
ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Today, February 2, 2006, the Registrant is issuing a press release (Exhibit 99.2
to this report) announcing its fiscal 2006 first quarter financial and operating
results. See Item 7.01, Regulation FD Disclosure below.
ITEM 2.03. CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN
OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT
On February 1, 2006, in connection with the acquisition of all of the shares of
Hexagram, as described in Item 1.01 herein, Registrant partially funded the
acquisition by borrowing $47,000,000 under Registrant's Credit Agreement dated
as of October 6, 2004 among Registrant, Wells Fargo Bank, N.A., as agent, and
the lenders listed therein. The Credit Agreement is a $100 million revolving
credit facility having a final maturity and expiration of October 6, 2009. The
acquisition borrowing is a revolving credit loan subject to a LIBOR-based
interest rate, payable quarterly in arrears. There is no security for the loan
other than the corporate guarantees of Registrant's subsidiaries. Registrant has
certain rights of pre-payment, and payment is subject to acceleration in the
event of default under the Credit Agreement. In connection with the acquisition
borrowing, the parties to the Credit Agreement entered into a Consent And Waiver
To Credit Agreement (Exhibit 4.1 to this Form 8-K) wherein the lenders consented
to the Hexagram acquisition and waived certain limitations on acquisitions which
otherwise may have applied to the Hexagram acquisition and/or its combination
with ESCO Holding's previous acquisition of Nexus Energy Software, Inc.
ITEM 7.01. REGULATION FD DISCLOSURE
NON-GAAP FINANCIAL MEASURES
The press release furnished herewith as Exhibit 99.2 contains financial measures
and financial terms not calculated in accordance with generally accepted
accounting principles in the United States of America ("GAAP") in order to
provide investors and management with an alternative method for assessing the
Registrant's operating results in a manner that is focused on the performance of
the Registrant's ongoing operations. The Registrant has provided definitions
below for the non-GAAP financial measures utilized in the press release,
together with an explanation of why management uses these measures, and why
management believes that these non-GAAP financial measures are useful to
investors. The press release uses the non-GAAP financial measures of "EBIT" and
"EBIT margin".
The Registrant defines "EBIT" as earnings before interest and taxes. The
Registrant defines "EBIT margin" as EBIT as a percent of net sales. The
Registrant's management evaluates the performance of its operating segments
based on EBIT and EBIT margin, and believes that EBIT and EBIT margin are useful
to investors to demonstrate the operational profitability of the Registrant's
business segments by excluding interest and taxes, which are generally accounted
for across the entire Registrant on a consolidated basis. EBIT is also one of
the measures used by management in determining resource allocations within the
Registrant and incentive compensation.
The presentation of the information described above is intended to supplement
investors' understanding of the Registrant's operating performance. The
Registrant's non-GAAP financial measures may not be comparable to other
companies' non-GAAP financial performance measures. Furthermore, these measures
are not intended to replace net earnings, cash flows, financial position,
comprehensive income (loss), or any other measure as determined in accordance
with GAAP.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
The financial statements required by this Item, with respect to the acquisition
described in Item 1.01 herein, will be filed by amendment as soon as
practicable, and in any event not later than 71 days after the date on which
this Form 8-K is required to be filed.
(c) Exhibits
Exhibit No. Description of Exhibit
2.1 Stock Purchase Agreement dated February 1, 2006*
4.1 Consent and Waiver to Credit Agreement dated as of
January 20, 2006
99.1 Acquisition press release dated February 2, 2006
99.2 First Quarter results press release dated February 2, 2006
*The Registrant agrees to furnish supplementally a copy of any omitted schedule
to the Commission upon request.
OTHER MATTERS
The information contained in Item 2.02 of this report, including Exhibit 99.2,
shall not be deemed to be "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934 as amended ("Exchange Act") or otherwise subject to the
liabilities of that section, unless the Registrant incorporates it by reference
into a filing under the Securities Act of 1933 as amended or the Exchange Act.
SIGNATURE
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 hereunto duly authorized.
ESCO TECHNOLOGIES INC.
Dated: February 2, 2006 By: /s/ G.E. Muenster
G.E. Muenster
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
2.1 Stock Purchase Agreement dated February 1, 2006
4.1 Consent and Waiver to Credit Agreement dated as of
January 20, 2006
99.1 Acquisition press release dated February 2, 2006
99.2 First Quarter results press release dated February 2, 2006
Exhibit 2.1
STOCK PURCHASE AGREEMENT
by and among
ESCO TECHNOLOGIES HOLDING INC.
and
THE SHAREHOLDERS OF
HEXAGRAM, INC.
Dated: February 1, 2006
Table of Contents
Page
ARTICLE I. DEFINITIONS 1
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1.1 "Affiliate" 1
1.2 "Business" 1
1.3 "Business Day" 1
1.4 "Company Common Stock" 1
1.5 "Company Options and Warrants" 1
1.6 "Company Preferred Stock" 2
1.7 "Effective Time" 2
1.8 "Employee Sellers" 2
1.9 "GAAP" 2
1.10 "HSR Act" 2
1.11 "Knowledge of the Employee Sellers" 2
1.12 "Liens" 2
1.13 "Non-Employee Sellers" 2
1.14 "Permitted Liens" 2
1.15 "Person" 2
1.16 "Related Agreements" 3
1.17 Other Terms 3
ARTICLE II. PURCHASE AND SALE 5
-----------------
2.1 The Company Shares 5
2.2 Consideration 5
2.3 Closing 6
2.4 Deliveries of Sellers at Closing 6
2.5 Deliveries of Buyer at Closing 8
2.6 Escrow 8
2.7 Contingent Payments 9
2.8 Working Capital Adjustment 11
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE SELLERS 13
--------------------------------------------------
3.1 Organization and Authority 13
3.2 Capitalization of the Company 13
3.3 Title to Shares; Enforceability; No Violation of Existing
Agreements 13
3.4 Financial Statements 15
3.5 Corporate Records 15
3.6 No Undisclosed Liabilities 15
3.7 Taxes 16
3.8 Title to and Condition of Assets; Real Property 19
3.9 Necessary Property and Transfer of Assets 20
3.10 Accounts Receivable 21
3.11 Material Contracts 21
3.12 Validity of Contracts 22
3.13 Intellectual Property 22
3.14 Litigation 27
3.15 Insurance 28
3.16 Absence of Material Events 28
3.17 Permits; Compliance with Law 30
3.18 Related Party Transactions 30
3.19 Bank Accounts of the Company 31
3.20 Environmental, Health and Safety Matters 31
3.21 Officer, Director, Employee, Consultant and Agent;
Compensation. 33
3.22 Labor Matters 34
3.23 ERISA and Employee Benefit Matters 34
3.24 Overtime, Back Wages, Vacation and Minimum Wage 37
3.25 Discrimination 37
3.26 Workers' Compensation 38
3.27 Customers and Suppliers 38
3.28 Foreign Operations and Export Control 38
3.29 Brokers 39
3.30 Disclosure of all Material Matters 39
3.31 Product and Service Warranties 39
3.32 Product Liability Claims 39
3.33 Product Safety Authorities 40
3.34 Product Standards 40
3.35 Backlog 40
3.36 PG&E Contract Requirements 40
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF NON-EMPLOYEE SELLERS 41
------------------------------------------------------
4.1 Power and Authority of ADLT Trustee 41
4.2 Title to Shares; Enforceability; No Violation of
Existing Agreements 41
4.3 Related Party Transactions 42
4.4 Brokers 42
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER 42
---------------------------------------
5.1 Authorization 42
5.2 Consents 43
5.3 Brokers, Finders 43
ARTICLE VI. COVENANTS NOT TO COMPETE 43
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6.1 Non-Compete; Non-Solicit 43
6.2 Enforceability 44
6.3 Time Period 44
ARTICLE VII. ADDITIONAL COVENANTS OF THE PARTIES 44
-----------------------------------
7.1 Confidentiality 44
7.2 Further Assurances 44
7.3 Taxes 44
7.4 Employee Sellers' Representative; Actions 46
7.5 Regulatory and Other Authorizations; Consents 47
7.6 Buyers Post-Closing Covenants 48
7.7 Sellers Releases; Additional Information 49
7.8 Notification of Certain Matters 49
7.9 Insurance Policies 50
7.10 FCC Licenses 50
ARTICLE VIII. CONDITIONS TO CLOSING 50
---------------------
8.1 Conditions Precedent to Obligations of Buyer 50
8.2 Conditions Precedent to Obligations of Sellers 51
ARTICLE IX. INDEMNIFICATION 52
----------------
9.1 Survival of Representations and Warranties 52
9.2 Indemnification 52
9.3 Set-off Rights 54
9.4 Participation in Litigation 54
9.5 Claims Procedure 55
9.6 Tax Indemnification 55
9.7 Purchase Price Adjustment 55
9.8 Limitations 55
9.9 Exclusive Remedies 56
ARTICLE X. MISCELLANEOUS PROVISIONS 57
------------------------
10.1 Notices 57
10.2 Entire Agreement 58
10.3 Assignment; Binding Agreement 58
10.4 Counterparts 59
10.5 Headings; Interpretation 59
10.6 Expenses 59
10.7 Remedies Cumulative 59
10.8 Governing Law 60
10.9 No Third Party Beneficiaries or Other Rights 60
10.10 Disclosure Schedule 60
10.11 Venue 60
10.12 Frustration of Closing 60
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of
February 1, 2006, by and among ESCO TECHNOLOGIES HOLDING INC., a Delaware
corporation ("Buyer"), and each of the shareholders listed on Exhibit A
(each a "Seller" and collectively, the "Sellers"), who are all of the
shareholders of HEXAGRAM, INC., an Ohio corporation (the "Company"). Buyer
and each of the Sellers are referred to herein as a "Party" and together as
the "Parties."
RECITALS
A. Buyer desires to purchase from the Sellers, on the following terms and
conditions, all of the issued and outstanding shares of capital stock
of the Company.
B. The Sellers desire to sell all of the issued and outstanding shares of
capital stock of the Company to Buyer, on the following terms and
conditions.
NOW, THEREFORE, in consideration of the recitals and the mutual
covenants, representations, warranties, conditions, and agreements
hereinafter contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to
be legally bound, the Parties agree as follows:
ARTICLE I
DEFINITIONS
-----------
The following words shall have the meaning given them in this Article
I:
1.1 "Affiliate" means with respect to any Person, any other Person which
is controlling, controlled by, or under common control with, directly
or indirectly through any Person, the Person referred to, and, if the
Person referred to is a natural person, any member of such Person's
immediate family. The term "control" (including, with correlative
meaning, the terms "controlled by" and "under common control with") as
used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership
of voting securities, by contract or otherwise.
1.2 "Business"(a) means the business of the company as conducted on the
Closing Date, including the development, manufacture, marketing,
promotion and sale of automated meter reading systems to gas, water
and electric utilities and providing related services.
1.3 "Business Day" means any day which is not a Saturday, Sunday or a
legal holiday in the States of Missouri or Ohio, United States of
America.
1.4 "Company Common Stock" shall mean each of the issued and outstanding
shares of common stock of the Company, no par value.
1.5 "Company Options and Warrants" shall mean all outstanding options and
warrants exercisable for shares of Company Common Stock or Company
Preferred Stock.
1.6 "Company Preferred Stock" shall mean each share of the issued and
outstanding shares of preferred stock of the Company.
1.7 "Effective Time" means the time the Closing actually occurs on the
Closing Date as evidenced by the delivery and release of this
Agreement and the documents, instruments and other items identified in
Sections 2.4 and 2.5 by the Parties, including the transfer of the
Initial Purchase Price.
1.8 "Employee Sellers" means Lawrence Sears, Gary L. Moore, Richard C.
Riccardi and Martin Zucker.
1.9 "GAAP" means accounting standards generally accepted in the United
States of America. For purposes of this Agreement, the accounting
treatment accorded an item will be deemed to comply with GAAP if the
auditor of the Company's Financial Statements has expressed an
unqualified opinion with respect to the Company's Financial Statement
which included such item and, with respect to interim financial
statements, the Company has followed a practice consistent with the
treatment accorded any such item in prior audited statements with
respect to which the Company's Auditor has expressed an unqualified
opinion.
1.10 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and other related merger control Laws of the U.S. or
any other state, local or foreign jurisdiction.
1.11 "Knowledge of the Employee Sellers" means (i) the actual awareness of
a particular fact or other matter by any Employee Seller, or (ii)
knowledge that would have been acquired by any Employee Seller or Gina
Petrella upon inquiry and investigation that is reasonable under the
circumstances.
1.12 "Liens" means any lien, security interest, deed of trust, mortgage,
option, lease, tenancy, occupancy, covenant, condition, easement,
written or otherwise binding unwritten agreement, pledge,
hypothecation, charge, claim, restriction, or other encumbrance of
every kind and nature.
1.13 "Non-Employee Sellers" means the ADLT Trust and Strength Capital
Partners, L.P., a Delaware limited partnership.
1.14 "Permitted Liens" means, collectively, (a) liens for Taxes, fees,
levies, duties or other governmental charges of any kind which are not
yet delinquent or are being contested in good faith by appropriate
proceedings, (b) liens for mechanics, materialmen, laborers,
employees, suppliers or similar liens arising by operation of law for
amounts which are owed, but not yet delinquent, and (c) in the case of
real property, any matters, restrictions, covenants, conditions,
limitations, rights, rights of way, encumbrances, encroachments,
reservations, easements, agreements and other matters of record, such
state of facts of which an accurate survey of the property would
reveal.
1.15 "Person" means any individual, partnership, domestic or foreign
limited partnership, domestic or foreign limited liability company,
domestic or foreign corporation, trust, business trust, employee stock
ownership trust, real estate investment trust, estate, association and
other business or not for profit entity.
1.16 "Related Agreements" means the Escrow Agreement, the Employment
Agreements and the Consulting Agreement.
1.17 Other Terms. The following terms shall have the meanings set forth in
the below-referenced sections of this Agreement:
Term: Defined in:
"Accountant" Section 2.7(f)
"Accounts Receivable" Section 3.10
"Action" Section 3.14
"ADLT Trust" Section 4.1
"Affiliates' Products" Section 2.7(c)
"Agreement" Preamble
"AMT Committee" Section 7.6(e)
"Assets" Section 3.8(a)
"Assignment Agreements" Section 3.13(g)
"Awards" Section 7.6(d)
"Balance Sheet" Section 3.4(a)
"Basket" Section 9.8(a)
"Business Intellectual Property Section 3.13(i)
"Buyer" Preamble
"Buyer Indemnified Parties" Section 9.2(a)
"Cash Purchase Price" Section 2.2
"Cash Retention Plan" Section 7.6(d)
"Closing" Section 2.3
"Closing Balance Sheet" Section 2.8(c)
"Closing Date" Section 2.3
"COBRA" Section 3.23(f)
"Code" Section 3.7(e)
"Commercial Software" Section 3.13(b)
"Company" Preamble
"Company Intellectual Property" Section 3.13(a)
"Company Intellectual Property License" Section 3.13(c)
"Company Material Adverse Change" Section 7.8
"Company Material Adverse Effect" Section 7.8
"Company Products" Section 2.7(c)
"Company Shares" Section 2.1
"Confidentiality Agreement" Section 7.5(b)
"Consulting Agreement" Section 2.4(d)
"Contingent Payments" Section 2.7(a)
"Contract" Section 3.12
"Contracts" Section 3.12
"Customer Licenses" Section 3.13(c)
"ERISA" Section 3.23(b)
"Employment Agreements" Section 2.4(c)
"Employment Cases" Section 9.2(a)(vi)
"Environmental Law" Section 3.20(a)
"Environmental Permits" Section 3.20(b)
"Environmental Property" Section 3.20(a)
"Escrow Agent" Section 2.6(a)
"Escrow Agreement" Section 2.6(a)
"Escrow Deposit" Section 2.6(a)
"Escrow Fund" Section 2.6(a)
"Event" Section 7.8
"FCC Licenses" Section 3.17(b)
"Financial Statements" Section 3.4(a)
"First Escrow Return" Section 2.6(b)
"Formal Meeting" Section 3.5
"Fulfilled PG&E Requirements" Section 3.36(b)
"General Indemnification Limit" Section 9.8(a)
"Government" Section 3.7(y)
"Hazardous Materials" Section 3.20(c)
"Income Tax Returns" Section 7.3(b)
"Indemnification Agreements" Section 7.7(a)
"Indemnified Losses" Section 9.2(a)
"Indemnified Parties" Section 9.4
"Indemnified Party" Section 9.4
"Indemnifying Party" Section 9.4
"Initial Purchase Price" Section 2.2
"Intellectual Property" Section 3.13(a)
"IP Contracts" Section 3.13(c)
"Law" Section 3.17(a)
"Lease Agreements" Section 2.4(f)
"Losses" Section 9.2(a)
"Lower Working Capital Benchmark" Section 2.8(a)(i)
"Net Sales" Section 2.7(c)
"Net Sales Target" Section 2.7(a)
"Order" Section 3.14
"Ordinary Course of Business" Section 3.6(d)
"PBGC" Section 3.23(j)
"Party" or "Parties" Preamble
"PG&E" Section 8.1(d)
"PG&E Contract" Section 8.1(d)
"PG&E Requirements" Section 3.36(a)
"Plan" Section 3.23(a)
"Plans" Section 3.23(a)
"Pre-Closing Periods" Section 7.3(b)
"Prior Employment Agreements" Section 7.7
"Property" Section 3.8(a)
"Remaining Amount" Section 2.6(b)
"Representative" Section 7.4(a)
"Resolution Period" Section 2.7(e)
"Restrictive Period" Section 6.3
"Sales Period" Section 2.7(a)
"Sales Statement" Section 2.7(d)
"Seller" or "Sellers" Preamble
"Seller Indemnified Parties" Section 9.2(b)
"Seller Period" Section 7.3(c)
"Shareholder Agreements" Section 7.7(a)
"Shareholder Notes" Section 2.5(f)
"SRMZBCo." Section 3.16(b)
"Straddle Period" Section 7.3(c)
"Strength Capital Warrant" Section 7.7(a)
"Tax" Section 3.7(y)
"Tax Returns" Section 3.7(a)
"Taxes" Section 3.7(y)
"Terminating Agreements" Section 3.3(c)
"Third Party Intellectual Property License" Section 3.13(c)
"Trustee" Section 4.1
"Upper Working Capital Benchmark" Section 2.8(a)(v)
"Working Capital" Section 2.8(a)(ii)
"Working Capital Adjustment" Section 2.8(a)(iii)
"Working Capital Value" Section 2.8(a)(iv)
"23456 Lease Agreement" Section 2.4(e)
"23905 Lease Agreement" Section 2.4(f)
ARTICLE II.
PURCHASE AND SALE
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2.1 The Company Shares. Upon the terms and subject to the conditions of
this Agreement, at the Closing on the Closing Date and as of the
Effective Time, the Sellers shall sell, assign, transfer, convey and
deliver to Buyer, and Buyer shall purchase, acquire and accept from
the Sellers, all of the Sellers' right, title and interest to and in
the Company Common Stock and the Company Preferred Stock, if any
(collectively, the "Company Shares"), free and clear of all Liens.
2.2 Consideration. The consideration that Buyer shall pay the Sellers for
the Company Shares, the obligations of Sellers under Article VI, and
the other rights of Buyer hereunder shall be Sixty Five Million
Dollars (US$65,000,000) (the "Initial Purchase Price") subject to
adjustment for the Working Capital Adjustment, plus certain Contingent
Payments (the sum of the Initial Purchase Price, subject to the
Working Capital Adjustment, plus the Contingent Payments, the "Cash
Purchase Price"). In addition to the Cash Purchase Price, the Buyer
shall provide additional consideration to the Sellers, for the Company
Shares and other obligations of the Sellers contained herein, in the
form of the post-closing covenants set forth in Section 7.6.
2.3 Closing. The consummation of the transactions contemplated by this
Agreement (the "Closing") shall occur at 9:00 a.m. on February 1,
2006, or such other date and time as may be agreed to by the parties
(the "Closing Date"), effective as of the Effective Time . The Closing
shall take place at 9:00 a.m. on the Closing Date at the offices of
Bryan Cave LLP, 211 N. Broadway, Suite 3600, St. Louis, MO, 63102.
2.4 Deliveries of Sellers at Closing. At the Closing, the Sellers shall
deliver or cause to be delivered to Buyer:
(a) this Agreement, duly executed by each Seller;
(b) the Escrow Agreement, duly executed by the Representative;
(c) the Employment Agreements between the Company and each of Gary L.
Moore, Richard C. Riccardi and Martin Zucker (the "Employment
Agreements"), duly executed by such individuals;
(d) a Consulting Agreement between the Company and Lawrence Sears
(the "Consulting Agreement"), duly executed by such individual;
(e) upon prior consent and approval of the respective lessor, a Lease
Agreement between the Company, as lessee, and SZR Properties,
LLC, an Ohio limited liability company, as lessor, for the
premises commonly known as 23456 Mercantile Road, Beachwood, Ohio
(the "23456 Lease Agreement"), duly executed by the lessor
thereto;
(f) upon prior consent and approval of the respective lessor, a Lease
Agreement between the Company, as lessee, and The Sears Family
Limited Partnership, an Ohio limited partnership, as lessor, for
the premises commonly known as 23905 Mercantile Road, Beachwood,
Ohio (the "23905 Lease Agreement"; together with the 23456 Lease
Agreement, the "Lease Agreements"), duly executed by the lessor
thereto;
(g) certificates representing the Company Shares, free and clear of
all Liens, duly endorsed to Buyer or accompanied by duly executed
stock powers in a form acceptable to Buyer;
(h) the written resignations, effective as of the Closing Date, of
certain directors and certain officers of the Company designated
by Buyer;
(i) all consents and approvals relating to the Company required to be
obtained from Governments or from third parties under Contracts
other than clearance under the Hart-Scott-Rodino Act, as set
forth on Schedule 2.4(i);
(j) the written release of all Liens, other than Permitted Liens,
relating to the assets of the Company or the Company Shares,
executed by the holder of or parties to each such Lien, in form
and substance satisfactory to Buyer and its counsel;
(k) a certificate of good standing, or equivalent certificate, for
the Company, dated within five (5) Business Days of the Closing
Date, issued by the appropriate Government;
(l) the certificate referred to in Section 8.1(a);
(m) all share transfer books, minute books and other corporate
records of the Company;
(n) a receipt from each Seller for the "Amount of Initial Purchase
Price Paid at Closing" set forth next to each Seller's name on
Exhibit A; and
(o) a copy, certified by the Secretary of the Company to be true,
complete and correct as of the Closing Date, of the constituent
documents of the Company;
(p) an Assignment Agreement executed by Lawrence Sears transferring
certain patents identified on the attached Schedule 2.4(p) to the
Company;
(q) an Assignment Agreement executed by the Company and SRMZBCo.
transferring the FCC Licenses from the Company to SRMZBCo.
immediately prior to the Effective Time and approval of the
Federal Communications Commission of such proforma license
assignments;
(r) a Membership Interests Pledge and Security Agreement executed by
Sellers in their respective capacity as members of the SRMZBCo.
and the Company, pursuant to which the Sellers grant to the
Company a security interest in all their right title and
interests in their respective ownership interests in SRMZBCo.;
(s) the original certificates representing each Seller's financial
units of SRMZBCo.;
(t) an Irrevocable Proxy executed by each of the Sellers relating to
such Seller's rights as a member of SRMZBCo.;
(u) an Irrevocable Assignment Separate From Certificate executed by
each Seller relating to such Seller's financial units of
SRMZBCo.;
(v) a Conditional Spectrum Operating Agreement executed by the
Company and SRMZBCo.;
(w) a Spectrum Operating Agreement executed by the Company, as
licensee, and SRMZBCo., as licensor, pursuant to which SRMZBCo.
agrees to operate the licensed stations in furtherance of the
Company's business and in accordance with the Company's
instructions until the licensed stations are effectively assigned
to the Company;
(x) evidence satisfactory to the Buyer that the Form R relating to
lead contamination has been filed with the appropriate
Government; and
(y) proper application for approval of the Federal Communications
Commission of the transactions contemplated by this Agreements,
including conditional authority of the Company to continue use of
the FCC Licenses.
2.5 Deliveries of Buyer at Closing. At the Closing, Buyer shall deliver or
cause to be delivered to the Sellers:
(a) this Agreement, duly executed by Buyer;
(b) the Escrow Agreement, duly executed by the Buyer;
(c) the certificate referred to in Section 8.2(a);
(d) by wire transfer of immediately available funds, the Initial
Purchase Price, less (i) the Escrow Deposit, (ii) any amounts
owed to the Company pursuant to all Shareholder Notes or any
other indebtedness of the Sellers to the Company, (iii) payment
of transaction costs as directed by Sellers, and (iv) payments to
Wells Fargo Business Credit, Inc. as directed by Sellers, to an
account or accounts designated by the Sellers not less than two
Business Days prior to the Closing Date, which amount shall be
disbursed to the Sellers in the respective amounts set forth in
Exhibit A under the column "Amount of Initial Purchase Price Paid
at Closing" set forth opposite each Seller's name;
(e) by wire transfer of immediately available funds, the Escrow
Deposit, to an account designated by the Escrow Agent; and
(f) notation by the Company on the Shareholder Notes releasing the
Employee Sellers from all obligations and liabilities arising
from or related to the Shareholder Notes and reflecting payment
in full of the respective amounts due to the Company pursuant to
the Shareholder Notes. "Shareholder Notes" shall mean (i) that
certain Promissory Note dated September 13, 2004 made by Lawrence
M. Sears to the Company in the principal sum of $450,000; (ii)
that certain Non-Negotiable Cognovit Promissory Note dated
November 20, 2004 made by Gary Moore, as Maker, to the Company,
as Payee, with a principal sum of $324,987; (iii) that certain
Non-Negotiable Cognovit Promissory Note dated December 19, 2002,
made by Richard C. Riccardi, as Maker, to the Company, as Payee,
with a principal sum of $137,502.75; and (iv) that certain
Non-Negotiable Cognovit Promissory Note dated December 19, 2002,
made by Martin Zucker, as Maker, to the Company, as Payee, with a
principal sum of $137,502.75.
The payments in (d), (e) and (f) will be made once all other Closing
obligations of Sellers have been fulfilled. The Sellers hereby release
the Buyer, the Company and their respective Affiliates from any and
all liability relating to the allocation of the Cash Purchase Price
among the Sellers.
2.6 Escrow.
(a) At the Closing, Buyer shall deliver a portion of the Initial
Purchase Price in the amount of Six Million Five Hundred Thousand
Dollars ($6,500,000) (the "Escrow Deposit") to Commerce Bank,
N.A. (the "Escrow Agent"), to be held in escrow pursuant to an
Escrow Agreement substantially in the form of Exhibit B hereto
(the "Escrow Agreement"). Subject to the terms of the Escrow
Agreement, the Escrow Deposit, together with all income earned
thereon (collectively, the "Escrow Fund"), shall be available to
satisfy any claims of Buyer under this Agreement, including the
indemnity obligations of Sellers pursuant to Article IX, to the
extent that such claims are not otherwise satisfied by Sellers by
payment of cash to Buyer.
(b) As soon as practicable following (i) the date which is 12 months
from Closing, if the aggregate amount of the Escrow Funds
remaining in escrow exceeds $3,250,000, such excess amount, less
any outstanding claims of Buyer under this Agreement which claims
have not yet been rejected pursuant to final, binding
determination, shall be distributed to the Employee Sellers in
the percentages set for in Exhibit A under the column "Amount of
Escrow Deposit Allocated to Employee Sellers" (the "First Escrow
Return"); and (ii) the date which is 24 months from Closing, the
Escrow Funds then remaining in escrow, less any outstanding
claims of Buyer under this Agreement which claims have not yet
been rejected pursuant to final, binding determination (the
"Remaining Amount"), shall be distributed to the Employee Sellers
in the percentages set for in Exhibit A under the column "Amount
of Escrow Deposit Allocated to Employee Sellers". As provided in
the foregoing sentence, if at any time a distribution is to be
made from the Escrow Funds and there are any outstanding claims
under this Agreement which claims have not yet been rejected
pursuant to final, binding determination, the amount to be paid
to the Employee Sellers shall be reduced by the amount necessary
to satisfy such outstanding claims, pending final determination
of the claims. For purposes of this Agreement, a claim shall be
"rejected pursuant to final, binding determination" only if a
court of competent jurisdiction has finally adjudicated the claim
or if the Buyer has executed a settlement agreement or other
writing expressly releasing the Employee Sellers from such claim.
2.7 Contingent Payments.
(a) The Employee Sellers shall be entitled to additional
consideration (the "Contingent Payments") if the Net Sales
----------------------
exceed the respective sales target ("Net Sales Target") for
-------------------
the applicable sales period (each a "Sales Period") noted in
--------------
the table below:
---------------------------------- ------------------
Sales Period Net Sales Target
---------------------------------- ------------------
---------------------------------- ------------------
February 1, 2006-January 31, 2007 $30,000,000
---------------------------------- ------------------
---------------------------------- ------------------
February 1, 2007-January 31, 2008 $70,000,000
---------------------------------- ------------------
---------------------------------- ------------------
February 1, 2008-January 31, 2009 $70,000,000
---------------------------------- ------------------
---------------------------------- ------------------
February 1, 2009-January 31, 2010 $70,000,000
----------------------------------- ------------------
----------------------------------- ------------------
February 1, 2010-January 31, 2011 $70,000,000
----------------------------------- ------------------
(b) If the Company's Net Sales for a Sales Period exceed the Net
Sales Target for such Sales Period, then the Buyer shall pay
Contingent Payments to the Employee Sellers in the following
amounts: Five Hundred Thousand Dollars ($500,000.00) per
Sales Period to Lawrence Sears; Two Hundred Fifty Thousand
Dollars ($250,000.00) per Sales Period to each of Gary L.
Moore, Richard C. Riccardi, and Martin Zucker. If Contingent
Payments are payable for any given Sales Period, the
Contingent Payments shall be paid by the later of: (i)
ninety (90) Business Days following the end of such Sales
Period or (ii) if a dispute arises, then within ten (10)
Business Days after receipt by Buyer of the Accountant's
determination set forth in Section 2.7(f). Contingent
Payments shall not be subject to or conditioned upon any
Employee Seller's continued employment with the Company, and
shall be subject to applicable withholdings, if any.
(c) For purposes of this Agreement, "Net Sales" shall mean the
gross sales by the Company of products, licenses and
services derived from the continuation of the Business,
including products, licenses and services developed by the
Company following the Closing which are extensions of the
Business, (collectively, the "Company Products") to third
parties which have accrued in the respective period, less
returns and allowances for doubtful accounts, all as
determined in accordance with GAAP. The Parties recognize
that Buyer may acquire additional businesses or that Buyer
or Buyer's other Affiliates may develop new products,
services or other businesses apart from the Company Products
yet which could be used in the Business (collectively, the
"Affiliates' Products"). The sales of Affiliates' Products
by the Company shall be excluded from Net Sales, however,
the sales of Company Products by the Buyer or any of Buyer's
Affiliates shall be included in Net Sales. Buyer agrees to
set up reasonably adequate accounting procedures to allow
Net Sales to be calculated.
(d) As soon as practicable, but in no event later than sixty
(60) Business Days following the end of each Sales Period,
Buyer shall prepare and deliver to the Representative a
statement which sets forth the Net Sales for such period and
a determination as to whether the Contingent Payment is due
in respect of such Sales Period (each a "Sales Statement").
The Sales Statement shall be prepared in accordance with the
provisions of this Section 2.7.
(e) After receipt of the Sales Statement, the Employee Sellers
shall have thirty (30) Business Days to review the Sales
Statement, and upon request of the Representative, the
records and the workpapers used in the preparation thereof.
Unless the Representative delivers written notice to Buyer
within 30 Business Days of receipt of the applicable Sales
Statement specifying objections to any of the items
contained therein along with a detailed description of the
reason for such objections, the Employee Sellers shall be
deemed to have accepted and agreed to the items listed on
the Sales Statement and such acceptance shall be deemed
final and binding. If the Representative so notifies Buyer
of the Employee Sellers' objection to the Sales Statement
such that Contingent Payments would be payable for the Sales
Period, the Parties shall, within thirty (30) Business Days
(or such longer period as to which the Parties may agree)
following such notice (the "Resolution Period"), attempt to
resolve their differences and any resolution by them as to
any disputed amounts shall be final, binding and conclusive.
(f) If, at the conclusion of the Resolution Period, sufficient
amounts remain in dispute that would trigger payment of the
Contingent Payments, then such amounts shall be submitted to
the Accountant for arbitration within ten (10) Business Days
after the expiration of the Resolution Period. For purposes
of this Agreement, the accountant shall be
PricewaterhouseCoopers, LLP, or if PricewaterhouseCoopers,
LLP shall be engaged by Buyer to perform audit work, then an
accounting firm of comparable size and experience selected
by Buyer but which in all events shall not have performed
audit services for Buyer or Employee Sellers within the 24
month period prior to submission of the dispute to such
accountant (the "Accountant"), unless otherwise agreed to by
the Parties. Each Party agrees to execute, if requested by
the Accountant, a reasonable engagement letter, including
customary indemnities. The costs and expenses of the
arbitration, including the Accountant's fees and expenses
and fees and expenses of experts shall be paid for by the
Employee Sellers unless the Accountant determines that
Contingent Payments are owed to the respective Employee
Sellers for the Sales Period, in which event they shall be
paid for by Buyer. The Accountant shall act as an arbitrator
to determine only those issues still in dispute and only as
to whether such amounts were arrived at in conformity with
this Section 2.7. The Accountant's determination shall be
made within thirty (30) Business Days of their engagement,
shall be set forth in a written statement delivered to the
Representative and Buyer and shall be final, binding and
conclusive.
2.8 Working Capital Adjustment
(a) Definitions.
(i) "Lower Working Capital Benchmark" means $6,800,000.
(ii) "Working Capital" shall mean current assets less
current liabilities, all as determined in accordance with
GAAP, except the Working Capital calculation shall take into
account any consideration (whether positive or negative) of
those items set forth on Schedule 2.8(a) in the manner
described on such schedule.
(iii) "Working Capital Adjustment" shall mean the
adjustment to the Initial Purchase Price, if any, resulting
from the calculations under Section 2.8(b).
(iv) "Working Capital Value" shall mean the Working
Capital of the Company as of the Effective Time, including
all accounting entries required to be made as a result of
the Closing.
(v) "Upper Working Capital Benchmark" means $7,500,000.
(b) The Initial Purchase Price shall be reduced,
dollar-for-dollar, to the extent the Working Capital
Value is less than the Lower Working Capital Benchmark.
The Initial Purchase Price shall be increased,
dollar-for-dollar, to the extent the Working Capital
Value is greater than the Upper Working Capital
Benchmark. No adjustment to Initial Purchase Price
shall be made if the Working Capital Value falls in the
range of the Lower Working Capital Benchmark to the
Upper Working Capital Benchmark, inclusive of such
amounts.
(c) As soon as reasonably practicable following the Closing
Date, and in any event no later than 100 days
thereafter, the Buyer shall cause to be prepared and
delivered to the Sellers a balance sheet of the
Company, as of close of business on the Closing Date,
prepared in accordance with GAAP as in effect at the
applicable time (the "Closing Balance Sheet") and a
statement which sets forth the Working Capital Value
and the Working Capital Adjustment. Buyer shall permit
the Sellers to review upon request the records and work
papers as are necessary to allow them to review such
calculations.
(d) If the Sellers dispute the Working Capital Adjustment
as proposed by Buyer, not more than 30 days after the
date the Sellers receive Buyer's proposal thereof, the
Sellers shall deliver to Buyer a Notice of Dispute
setting forth the Sellers' specific objections to the
Working Capital Adjustment and the detailed basis for
the same. Upon receipt of the Notice of Dispute, the
Sellers and Buyer shall promptly consult with each
other with respect to the specified points of
disagreement in an effort to resolve the dispute. If
any such dispute cannot be resolved by the Sellers and
Buyer within 10 Business days after Buyer receives the
Notice of Dispute, the Sellers and Buyer shall jointly
refer the dispute to the Accountant, as an arbitrator
to finally resolve, as soon as practicable, and in any
event within 45 days after such reference, all points
of disagreement with respect to the amount of the
Working Capital Adjustment. For purposes of such
arbitration, the Sellers and Buyer shall each submit a
proposed value for the items in dispute. The Accountant
shall apply the terms of this Section 2.8, and shall
otherwise conduct the arbitration under such procedures
as the Parties may agree or, failing such agreement,
under the then prevailing Commercial Rules of the
American Arbitration Association (but excluding any
filing or administrative fees payable as provided in
such rules). Each Party agrees to execute, if requested
by the Accountant, a reasonable engagement letter,
including customary indemnities. Each of the Parties
shall bear its own expenses in connection with the
arbitration. The fees and expenses of the Accountant
shall be allocated between the Sellers and Buyer by the
Accountant in proportion to the extent either of such
Parties did not prevail on items in dispute; provided,
that such fees and expenses shall not include, the
other Party's outside counsel or accounting fees. All
determinations by the Accountant shall be final,
conclusive and binding on Buyer and the Sellers with
respect to the Working Capital Adjustment and the
allocation of arbitration fees and expenses, in the
absence of fraud or manifest error.
(e) If the Working Capital Value, as finally determined is
less than the Lower Working Capital Benchmark, as
determined pursuant to Section 2.8(b), the Sellers each
shall pay their respective portion of such amount to
Buyer not more than seven days after the final
determination thereof, allocated in accordance with the
percentages set forth on Exhibit A opposite each
Seller's name in the column titled "Allocated Portion
of Working Capital Adjustment." If the Working Capital
Value, as finally determined is greater than the Upper
Working Capital Benchmark, then Buyer shall pay the
Sellers their respective portion of such amount
allocated in accordance with the same percentages set
forth on Exhibit A by check payable and delivered to
Sellers within 30 days following such final
determination.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF EMPLOYEE SELLERS
Each Employee Seller, jointly and severally with the other Employee
Sellers except as otherwise specifically and expressly provided herein,
hereby makes the following representations and warranties to Buyer, each of
which is true and correct on the date hereof, shall be true and correct on
the Closing Date, and shall survive the Closing as provided in Section 9.1.
3.1 Organization and Authority. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of
the state of Ohio. The Company has all requisite corporate power and
authority to own, lease and use its assets and properties and to
conduct the Business. The Company is duly licensed and qualified to do
business as a foreign corporation and is in good standing in the
jurisdictions listed on Schedule 3.1. The Company is not required to
be registered, licensed or qualified as a foreign corporation to do
business in any other jurisdiction. The Company does not have any
subsidiaries or otherwise own any capital stock or other equity
interests in any other entities.
3.2 Capitalization of the Company.
(a) The authorized capital of the Company consists of 233,000 shares
of the Company Common Stock and no shares of the Company
Preferred Stock. Of such authorized shares, there are issued and
outstanding 166,667 shares of Company Common Stock and no shares
of Company Preferred Stock. All of the Company Shares were when
issued and are currently duly authorized and validly issued and
are fully paid and non-assessable and were not, when issued,
subject to any unwaived preemptive rights. All of the Company
Shares and all other securities of the Company have been issued
in accordance with applicable federal and state securities laws
including exemptions under such laws. The transactions
contemplated by this Agreement are not subject to any preemptive
rights.
(b) Schedule 3.2(b) sets forth a list of each outstanding and
unexercised warrant and option exercisable for shares of Company
Common Stock or Company Preferred Stock and the exercise price of
each such outstanding and unexercised warrant and option. Except
as set forth on Schedule 3.2(b), there are no rights, warrants or
options to acquire securities of the Company, and the Company is
not subject to any obligation to issue, deliver, redeem, or
otherwise acquire or retire the Company Common Stock or the
Company Preferred Stock.
(c) Except as set forth on Schedule 3.2(c), no shareholder of the
Company is entitled to the payment of any dividends or other
distributions from the Company after the date hereof on account
of such shareholder's ownership of the Company Common Stock or
Company Preferred Stock on or before the date hereof.
3.3 Title to Shares; Enforceability; No Violation of Existing Agreements.
(a) Schedule 3.3(a) lists each holder of the Company Common Stock and
the Company Preferred Stock and the number of Company Shares
owned by such holder. Each Employee Seller severally represents
and warrants that he, she or it is the sole holder of record and
beneficial owner of all the Company Shares attributed to such
Employee Seller on Schedule 3.3(a), with all rights to vote such
Company Shares without restriction and that such Employee Seller
owns such Company Shares free and clear of any Liens, except for
the Liens contained in the agreements listed on Schedule 3.3(e).
(b) Each Employee Seller severally represents and warrants that he,
she or it has the power and authority to execute and deliver this
Agreement and the Related Agreements to which he, she or it is a
party, to perform his, her or its obligations hereunder and
thereunder, and to consummate the transactions contemplated
hereby and thereby.
(c) Other than the approvals required by the HSR Act, and except for
the Liens which will terminate in connection with the termination
and release of the Terminating Agreements, and except as
otherwise set forth on Schedule 3.3(c), no permit, consent,
waiver, approval or authorization of, or declaration to or filing
or registration with, any Government authority or third party is
required in connection with the execution, delivery or
performance of this Agreement and the Related Agreements by any
Seller or the consummation by any Seller of the transactions
contemplated hereby. "Terminating Agreements" means: (i) that
certain Credit and Security Agreement between the Company and
Wells Fargo Business Credit, Inc. dated April 27, 2001 as
amended, (ii) the Shareholder Notes and (iii) the Shareholder
Agreements.
(d) This Agreement has been duly executed and delivered by each
Employee Seller and constitutes a legal, valid and binding
obligation of each Employee Seller, enforceable against each
Employee Seller in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally, and (ii)
general principles of public policy and equity (regardless of
whether considered in a proceeding in equity or law). Each
Related Agreement has been duly executed and delivered by each
Employee Seller who is a party thereto and constitutes a legal,
valid and binding obligation of each such Employee Seller,
enforceable against each such Employee Seller in accordance with
its terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to enforcement of creditors'
rights generally, and (ii) general principles of public policy or
equity.
(e) None of the Company, any Employee Seller or the Representative is
a party to, subject to or bound by any note, bond, mortgage,
indenture, deed of trust, agreement, lien, contract or other
instrument or obligation or any statute, law, rule, regulation,
judgment, order, writ, injunction, or decree of any court,
administrative or regulatory body, governmental agency,
arbitrator, mediator or similar body, franchise or license, which
would (i) except for Liens which will terminate on Closing
through the discharge of liabilities as set forth on Schedule
3.3(e), and except as otherwise set forth on Schedule 3.3(e),
conflict with or be breached or violated or the obligations
thereunder accelerated or increased (whether or not with notice
or lapse of time or both) by the execution, delivery or
performance by them of this Agreement or by the Representative of
the Escrow Agreement or (ii) prevent the carrying out of the
transactions contemplated hereby or by the Escrow Agreement.
Except for Liens which will terminate on Closing through the
discharge of liabilities as set forth on Schedule 3.3(e), and
except as otherwise set forth on Schedule 3.3(e), no waiver or
consent of any third person or governmental authority is required
for the execution by any Employee Seller of this Agreement or by
the Representative of this Agreement or the Escrow Agreement, or
the consummation by any Employee Seller of the transactions
contemplated by this Agreement or any Related Agreement. The
execution of this Agreement by Employee Sellers and the
consummation of the transactions contemplated hereby will not
result in the creation of any Liens against the Company Shares,
the Company, Employee Sellers or any of the respective properties
or assets of the Company.
3.4 Financial Statements.
(a) Set forth on Schedule 3.4(a) are the (i) audited balance
sheet of the Company as of December 31, 2002, 2003 and 2004
and the related audited statements of income, retained
earnings and cash flows for the fiscal years then ended; and
(ii) the unaudited balance sheet of the Company as of
September 30, 2005 and the related unaudited statements of
income, retained earnings and cash flows for the 9-month
period then ended; in each case together with notes and
schedules thereto, if any (collectively, the "Financial
Statements"). For purposes of this Agreement, the unaudited
balance sheet of the Company dated September 30, 2005 shall
be referred to as the "Balance Sheet."
(b) The Financial Statements were derived from the books and
records of the Company and (i) are true, complete, and
correct in all material respects, (ii) present fairly, in
all material respects, the financial position, results of
operations, and cash flows of the Business at the dates and
for the periods indicated in accordance with GAAP, applied
on a consistent basis throughout all the periods involved,
and (iii) do not include any untrue statement of a material
fact required to be stated or reflected therein or omit to
state or reflect any material fact necessary to make any
statements therein not misleading in light of the
circumstances under which they were made; provided, however,
the unaudited interim Financial Statements do not include
customary year-end adjustments or notes to such Financial
Statements.
3.5 Corporate Records. The books of account and other financial
records of the Company, all of which have been made available to
Buyer, are complete and correct and represent actual, bona fide
transactions and have been maintained in accordance with sound
business practices. The minute books of the Company, all of which
have been made available to Buyer, contain accurate and complete
records of each Formal Meeting held of, and corporate action
taken by, the shareholders, the board of directors and committees
of the board of directors of the Company, and no Formal Meeting
of any such shareholders, board of directors or committee has
been held for which minutes have not been prepared or are not
contained in such minute books. "Formal Meeting" means any
meeting of the directors or shareholders in which the directors
or shareholders of the Company meet in their respective capacity
as such to conduct or manage the Business, or to otherwise take
any action or make any decision binding on the Company.
3.6 No Undisclosed Liabilities. The Company does not have any
liabilities or obligations whatsoever, whether known or unknown,
accrued, absolute, contingent, unliquidated or otherwise, and
there is no basis for any such liability or obligation or any
claim in respect thereof, other than:
(a) to the extent and for the amount reflected as a liability on
the Balance Sheet;
(b) liabilities or obligations incurred in the Ordinary Course
of Business (as hereinafter defined) since the date of the
Balance Sheet (none of which will or may reasonably be
expected to have an adverse effect upon the Company) that
are not required to be set forth in a Schedule hereto;
(c) obligations for performance (but not for breach) under
Contracts (as hereinafter defined); and
(d) the other obligations and liabilities specifically disclosed
on Schedule 3.6(d).
----------------
"Ordinary Course of Business" means, with respect to the Company,
----------------------------- only the ordinary course of
commercial operations customarily engaged in by the Company, as
applicable, consistent with past practices, and specifically does
not include (i) the purchase or sale of the Company, or of any
product line or business unit thereof; (ii) the assumption,
adoption, or modification of any Plan (as hereinafter defined);
(iii) activity that requires approval by the board of directors
or shareholders of the Company, other than (A) the act of making
the disclosure of information to the Buyer regarding the Company
and its Business in connection with the transactions contemplated
herein or (B) the assignment of the FCC Licenses to SRMZBCo.;
(iv) the incurrence of any liability for any tort or any breach
or violation of or default under any Contract or Law to the
extent in excess of the coverage derived from the net proceeds
(including deduction of self-pay or increased premiums) received
by the Company under its policies of insurance; (v) any material
increase in the compensation of any employee, or grant of any
unusual or extraordinary bonuses, benefits or other forms of
direct or indirect compensation to any employee other than the
special bonuses to Gary Moore, Richard Riccardi and Martin Zucker
in an amount not greater than $50,000 in the aggregate and a
success sharing bonus paid to non-management employees not
exceeding $150,000 in the aggregate; (vi) the declaration or
distribution of any dividends; (vii) any increase, termination,
amendment or modification to, or creation of, any Plan; (viii)
any material changes in the Company's employee force count except
those necessary for the fulfillment of its contract with PG&E
(ix) substantial changes in the materials used or the methods
employed by the Company in its manufacturing processes or
operations; or (x) the payment in advance of any debt of the
Company, excluding the payment in full of the Credit and Security
Agreement between the Company and Wells Fargo Business Credit,
Inc. dated April 27, 2001 as may have been amended from time to
time.
3.7 Taxes.
(a) The Company has timely filed with the appropriate Government
entity all returns, reports, estimates, declarations, claims for
refund, information returns or statements relating to, or
required to be filed in connection with any Taxes, including any
schedule or attachment thereto, and including any amendment or
supplement thereof ("Tax Returns") due on or before the Closing
Date. All such Tax Returns are true, correct, and complete.
(b) All Taxes (whether or not reflected on any Tax Return) due and
owing by the Company on or before the Closing Date have been
timely and fully paid. There are no reasonable grounds for the
assertion or assessment of any additional Taxes against the
Company or the assets of the Company. Schedule 3.7(b) hereto
lists all jurisdictions where the Company files Tax Returns.
(c) The unpaid Taxes of the Company through the Closing Date do not
exceed the accruals and reserves for Taxes (excluding any reserve
for deferred Taxes established to reflect timing differences
between book and Tax income) reflected on the Closing Balance
Sheet.
(d) There are no Liens for Taxes upon the assets of the Company,
other than Liens for current Taxes not yet due and payable for
which an adequate reserve has been accrued as a current liability
on the Closing Balance Sheet and such liability has been taken
into account for purposes of computing the Working Capital
Adjustment.
(e) Except to the extent such amounts are not in excess of $5,000 in
the aggregate for all occurrences, the Company has complied with
all Laws (as hereinafter defined) relating to the withholding of
Taxes and the payment thereof (including, without limitation,
withholding of Taxes under Section 1441 and 1442 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any similar
provision under state, local, or foreign Law), and has timely and
properly withheld from the appropriate party and paid over to the
proper Government all amounts required to be withheld and paid
over under applicable Law, including any amounts paid or owing to
any employee, independent contractor, creditor, shareholder or
other third party.
(f) The Company is not a party to or bound by any Tax indemnity, Tax
sharing or Tax allocation agreement or arrangement.
(g) The Company has (i) never been a member of an affiliated group of
corporations, within the meaning of Section 1504 of the Code, and
(ii) no liability for the Taxes of any Person under Treasury
regulation Section 1.1502-6 (or any similar provision of state,
local or foreign Law), as a transferee or successor, by contract
or otherwise.
(h) Except as set forth on Schedule 3.7(h), there are no federal,
state, local, or foreign audits, examinations or investigations
or administrative or judicial proceedings being conducted with
respect to the Company related to Taxes. The Company has not
received for any open period from any federal, state, local or
foreign Tax authority (including jurisdictions where the Company
has not filed a Tax Return) any (i) notice indicating an intent
to open an audit or other review; (ii) request for information
related to Tax matters; or (iii) notice of deficiency or proposed
adjustment for any amount of Tax proposed, asserted, or assessed
by any Tax authority against the Company.
(i) There is no waiver or tolling of any statute of limitations in
effect with respect to any Tax Returns nor has the Company agreed
to an extension of time with respect to a Tax assessment or
deficiency.
(j) The Company is not a real property holding company within the
meaning of Section 897(c) of the Code.
(k) Schedule 3.7(k) sets forth a list of all Tax Returns, Tax
examination reports and statements of deficiencies assessed
against, or agreed to with respect to the Company with the
Internal Revenue Service or any Taxing authority for the last six
years, other than with respect to the Income Tax Return for the
year ending December 31, 2005, true, correct and complete copies
of which have been provided to Buyer. The Company has retained,
directly or through its accountants, all records or other
information (including any Tax work papers) used in the
preparation of any Tax Returns, audits or other examinations
relating to liability for Taxes for the past six years.
(l) All elections with respect to Taxes affecting the Company as of
the date hereof that are not reflected on any Tax Return are set
forth in Schedule 3.7(l). No new elections with respect to Taxes,
or any changes in current elections with respect to Taxes of the
Company or affecting the Company have been made since January 1,
2005.
(m) Schedule 3.7(m) hereto lists all material Tax holidays,
abatements, incentives and similar grants made or awarded to the
Company by any Government.
(n) The Company is not a party to any agreement, contract,
arrangement or plan that has resulted or would result, separately
or in the aggregate, in a payment that would not be fully
deductible as a result of Section 280G of the Code or an excise
Tax to the recipient of such payment pursuant to Section 4999 of
the Code, determined without regard to the reasonableness of any
such compensation.
(o) The Company has not made any payment to any person or to any
entity described in Section 162(c) of the Code or any similar
provision under foreign Law. Neither the Internal Revenue Service
nor, to the Knowledge of the Employee Sellers, any other federal,
state, local or foreign government agency or entity has initiated
or threatened any investigation of any payments made by the
Company alleged to have been of the type covered by this Section
3.7(o).
(p) No asset of the Company is property that is required to be
treated as being a "safe harbor lease" within the meaning of
Section 168(f)(8) of the Code, as in effect prior to amendment by
the Tax Equity and Fiscal Responsibility Act of 1982.
(q) None of the assets of the Company directly or indirectly secures
any debt the interest on which is Tax exempt under Section 103(a)
of the Code. The Company is not the borrower or the guarantor of
any outstanding industrial revenue bonds, and the Company is not
a tenant, principal user or related person to any principal user
within the meaning of Section 144(a) of the Code of any property
that has been financed or improved with the proceeds of
industrial revenue bonds.
(r) None of the assets of the Company are "tax-exempt use property"
within the meaning of Section 168(h) of the Code.
(s) The Company has not agreed to, and is not required to make, any
adjustment under Section 481(a) of the Code by reason of a change
in accounting method and the Internal Revenue Service has not
proposed any such adjustment or change in accounting method. The
Company does not have any pending private letter ruling request
with the Internal Revenue Service.
(t) The Company has never had a permanent establishment in any
foreign country, as defined in any applicable Tax treaty or
convention between such country and the United States.
(u) The Company has consistently classified for state and federal Tax
purposes each and every worker as either an employee or
independent contractor in accordance with the criteria set forth
in Rev. Rul. 87-41.
(v) The Company has not distributed stock of another Person or has
had its stock distributed by another Person in a transaction that
was purported or intended to be governed in whole or in part by
Section 355 or Section 361 of the Code.
(w) No property of the Company, including but not limited to
un-cashed checks to vendors, customers or employees, non-refunded
overpayments or unclaimed subscription balances, is escheatable
to any state or municipality under any applicable escheatment
laws as of the date hereof or may at any time after the date
hereof become escheatable to any state or municipality under any
applicable escheatment law.
(x) None of the assets of the Company is an equity ownership in an
entity, including any partnership, joint venture, or other
arrangement or contract that could be treated as a partnership
for federal income tax purposes.
(y) As used in this Agreement, "Taxes" means all taxes, charges,
fees, levies, or other like assessments, including without
limitation income, gross receipts, ad valorem, value added,
premium, excise, commercial activity, real property, personal
property, windfall profit, sales, use, transfer, license,
withholding, employment, payroll, social security (or similar),
unemployment, disability, PBGC premium, franchise, severance,
stamp, occupation, environmental (including taxes under Section
59A of the Code), customs, duties, capital stock, profits,
registration, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, imposed by: the United States or any
other nation, state, or bilateral or multilateral governmental
authority, any local governmental unit or subdivision thereof, or
any branch, agency, or judicial body thereof ("Government"); and
shall include any interest, fines, penalties, assessments, or
additions to tax resulting from, attributable to, or incurred in
connection with any such Taxes, whether disputed or not, and
including any obligations to indemnify or otherwise assume or
succeed to the Tax liability of any other Person. Any one of the
foregoing shall be referred to sometimes as a "Tax".
3.8 Title to and Condition of Assets; Real Property.
(a) The Company does not own, nor has it or any of its predecessors
owned, any real property. Except as set forth on Schedule 3.8(a)
or except for any tangible personal property disposed of by the
Company in the Ordinary Course of Business since the date of the
Balance Sheet, the Company is the sole owner of all right, title,
and interest in and to (i) all assets reflected on the Balance
Sheet, or acquired after the date of the Balance Sheet and (ii)
all other assets and property, real and personal, tangible and
intangible (including, without limitation, all Intellectual
Property), owned, used or operated by the Company or located on
premises owned, leased or operated by the Company (items (i) and
(ii) collectively, the "Assets", and together with all property
leased by or licensed to the Company, the "Property").
(b) Except as set forth on Schedule 3.8(b) and the documents
specifically identified therein, there exists no restriction on
the use or transfer of the Property.
(c) Except as set forth on Schedule 3.8(c), no Property is in the
possession of others and the Company does not hold any Property
on consignment.
(d) Except as set forth on Schedule 3.8(d), and except for Liens
which will terminate at Closing through the discharge of
liabilities as set forth on Schedule 3.8(d), the Company has good
and indefeasible title to, or a valid leasehold interest in, all
of its Property, free and clear of all Liens, other than (i)
Liens for current Taxes not yet due and payable for which an
adequate reserve has been accrued as a current liability on the
Closing Balance Sheet and such liability has been taken into
account for purposes of computing the Working Capital Adjustment,
and (ii) easements for public utilities, none of which materially
interfere with or materially adversely affect the operation, use
and/or enjoyment of the Property affected thereby. Immediately
following the Closing, the Company shall continue to be vested
with good and indefeasible title to, or a valid leasehold
interest in, its Property.
(e) Except to the extent disposed of in the Ordinary Course of
Business prior to Closing, all of the tangible Property has been
maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and
tear and obsolescence), and is adequate for the purposes for
which it is presently used.
(f) The Company is lessee under the Lease Agreements. The Lease
Agreements respectively represent the entire agreement between
the Company and the respective lessor thereto concerning the
lease of the respective premises and each is in full force and
effect, and, except for the amendment extending the term of the
23905 Lease Agreement effective December 1, 1977, has not been
amended, rescinded or modified.
(g) The Company is not in arrears for any rent or other charges
payable by the Company under the Lease Agreements or any prior
lease agreements with respect to the premises leased under the
Lease Agreements, there is no existing default on the part of the
Company or the respective lessors to the Lease Agreements, and
there are no events currently existing or which with the passage
of time, giving of notice or both would be deemed a default of
the Company or either of the respective lessors or which would
give the Company or either lessor the right to cancel or
terminate either of the Lease Agreements.
3.9 Necessary Property and Transfer of Assets.
(a) The Property constitutes all property and property rights now
used in or necessary for the conduct of the Business. Except as
provided in Schedule 3.9(a), there exists no condition,
restriction or reservation affecting the title to or utility of
the Property
(b) Except as provided in Schedule 3.9(b), there exists no condition,
---------------
restriction or reservation that would prevent the Company from
enforcing its rights with respect to the Property after the
Closing to the same full extent that they might continue to do so
if the sale and transfer contemplated hereby did not take place.
3.10 Accounts Receivable.
(a) Set forth on Schedule 3.10(a), are a list of all the accounts
-----------------
receivable of the Company and aging schedules relating thereto as
of December 31, 2005. Such accounts receivable and any accounts
receivable arising between such date and the Closing Date
(collectively, the "Accounts Receivable") are valid and existing.
(b) Except as set forth on Schedule 3.10(b), all such Accounts
-----------------
Receivable arose in the Ordinary Course of Business. Except to
the extent of the allowance for doubtful accounts on the Balance
Sheet, no Account Receivable is subject to any counterclaim,
set-off, defense, security interest, claim, or other encumbrance.
(c) Except as set forth on Schedule 3.10(c), no agreement for
-----------------
deduction, free goods, discount or other deferred price or
quantity adjustment has been made with respect to any Account
Receivable.
(d) Except to the extent of contractual holdbacks which will be paid
in accordance with contract terms and reserves for uncollectible
accounts on the Closing Balance Sheet, all Accounts Receivable,
other than those paid prior to the Closing Date, will be paid in
full to the Company within 180 days of the Closing Date.
3.11 Material Contracts. Except as set forth on Schedule 3.11(a)-(n) and
---------------------
Schedule 3.13(c) the Company is not a party to or otherwise obligated
----------------
under or has made (and under which any party thereto still has
remaining rights or obligations) any of the following, whether written
or oral:
(a) promissory notes, loans, agreements, indentures, evidences of
indebtedness or other instruments relating to the lending of
money, whether as borrower, lender or guarantor, in excess of
$25,000;
(b) license agreements, consulting services agreements with
customers, software support agreements that either provide for
payments in excess of $10,000 or cannot be terminated in one year
or less at no cost;
(c) lease and leasing agreements which provide for annual payments in
excess of $5,000;
(d) agreements with suppliers and customers (excluding purchase
orders and sales orders in the Ordinary Course for amounts less
than $100,000) either with a remaining term of more than one year
or a contract value of more than $20,000;
(e) agreements with labor unions or other employee organizations;
(f) consignment, distributorship and agency agreements;
(g) guarantees and sureties granted with respect to any obligation of
third parties (including the Sellers and any parties related to
them);
(h) joint venture and cooperation agreements;
(i) agreements concerning confidentiality or non-competition;
(j) employment and consulting agreements;
(k) agreements or commitments (other than those types covered above
by subsection (a) through (j)) in excess of $20,000 or which
cannot be terminated on three months' notice or less without
payment of compensation;
(l) any and all outstanding bids, proposals or other offers to
customers which (i) individually have values in excess of
$500,000, (ii) are not bid at standard Company profit margins or
(iii) include warranties for a period of time longer than the
standard Company warranties (copies of which have been provided
to Buyer, or, if not evidenced by a written document, summaries
of the material terms thereof have been provided to Buyer);
(m) any contract or agreement that is expected to result in a
material loss to the Company in any given calendar year; and
(n) any contract or commitment not made in the Ordinary Course of
Business.
3.12 Validity of Contracts. Each written or oral contract, agreement,
commitment, license, lease, indenture, or evidence of indebtedness to
which the Company is a party or is otherwise obligated (individually,
a "Contract" and collectively, the "Contracts") is a valid, binding
---------- -----------
and enforceable obligation of the Company, and, to the Knowledge of
the Employee Sellers, the other parties thereto in accordance with its
terms and conditions. Except as set forth on Schedule 3.12, (a) no
--------------
party to any of the Contracts is in breach or violation thereof or
default thereunder, and (b) no event has occurred which, through the
passage of time or the giving of notice, or both, would constitute,
and neither the execution of this Agreement nor the Closing do or will
constitute or result in, a breach or violation of or default under any
Contract, or would cause the acceleration of any obligation of any
party thereto or the creation of a Lien upon any Property, provided,
however, to the extent the representation in (a) or (b) applies to a
violation or breach by a third party it shall be limited to the
Knowledge of the Employee Sellers. The Company has delivered to Buyer
a true, complete and accurate copy of each written Contract required
to be disclosed on Schedule 3.12 and a true, complete and accurate
-------------
description of each oral Contract required to be disclosed on
Schedule 3.12, and none of such Contracts has been modified or amended
-------------
in any respect, except as reflected in such disclosure to Buyer.
3.13 Intellectual Property.
(a) For purposes of this Agreement, "Intellectual Property" means all
of the following to the extent any exist in any jurisdiction
throughout the world: (i) all inventions and discoveries (whether
patentable or unpatentable and whether or not reduced to
practice), all improvements thereto, and all patents and patent
applications, together with all continuations,
continuations-in-part, provisional, non-provisional, revisions,
extensions, reexaminations, reissues and foreign counterparts
thereof, (ii) all trademarks (registered or unregistered),
service marks (registered or unregistered), trade dress, logos,
slogans, trade names, brand names, corporate names, Internet
domain names, and rights in telephone numbers, together with all
translations, adaptations, derivations, and combinations thereof
and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection
therewith, (iii) all works of authorship, including derivative
works, all copyrightable works, all copyrights, and all
applications, registrations, and renewals in connection therewith
(registered or unregistered), (iv) all mask works and all
applications, registrations, and renewals in connection
therewith, (v) 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),
(vi) all computer software, computer programs and firmware
(including source code, executable code, data, databases, and
related documentation), (vii) rights of publicity and privacy,
(viii) shop rights, (ix) all advertising and promotional
materials, (x) all copies and tangible embodiments thereof (in
whatever form or medium), (xi) any other intellectual property
rights anywhere in the world; and (xii) all common law,
statutory, treaty and convention rights with respect to any
thereof; all property rights, moral rights, ownership and other
proprietary rights in any thereof; and all worldwide forms of
protection and rights in, to and under all of the foregoing; and
the right and power to assert, defend and recover title thereto
and the right to sue for and recover damages for past, present
and future infringement, misuse, misappropriation or other
violation thereof. "Company Intellectual Property" shall mean all
-------------------------------
Intellectual Property that is owned, in whole or in part, by the
Company, including any intellectual property included in the
Fulfilled PG&E Requirements.
(b) The Company owns, or is licensed, or otherwise possesses legally
enforceable rights to use all Intellectual Property used in
connection with the Business. Schedule 3.13(b) contains a true,
-----------------
complete and accurate list of each of the following items of
Company Intellectual Property: each patent or registration that
has been issued, each pending patent application or application
for registration, each material unregistered trademark, service
mark, trade name, corporate name, each registered top level
Internet domain name, material computer software item (other than
commercially available off-the-shelf software purchased or
licensed for less than a total cost of $25,000 in the aggregate
("Commercial Software")) and each material unregistered
-----------------------
copyright. Schedule 3.13(b) accurately summarizes, where
----------------
applicable, the following for each item of Company Intellectual
Property: patent number, registration number, date of issuance,
applicant, mark or name, owner(s), country of origin, and the
next maintenance fee and other administrative obligations
required to maintain or prosecute such Intellectual Property.
With respect to each item of Company Intellectual Property, other
than Commercial Software:
(i) except for Liens which will terminate at Closing through the
discharge of liabilities set forth on Schedule 3.13(b)(i),
-------------------
and except as otherwise described on Schedule 3.13(b)(i),
-------------------
the Company is the sole and exclusive owner of all right,
title, and interest in and to the item, free and clear of
any Lien, license, or other restriction or limitation
regarding use or disclosure;
(ii) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or is
threatened that challenges the legality, validity,
enforceability, use, or ownership of the item, and to the
Knowledge of the Employee Sellers, there are no grounds for
the same;
(iv) except for express provisions set forth in the Company's
customer and vendor Contracts pursuant to which the Company
agrees to indemnify such customer or vendor from claims of
intellectual property infringement by a third party arising
out of such customer's use of the Company Products, or such
vendor's use of the Company Intellectual Property, as
intended under such Contract, and except as described in
Schedule 3.13(b)(iv), the Company has not, in any Contract
---------------------
in effect as of the Effective Date, agreed to indemnify any
Person for, or against, any third party claims relating to
interference, infringement, misappropriation, or to the
Knowledge of the Employee Sellers, other conflict with
respect to the item; and
(v) the Company has taken actions reasonably necessary to
maintain and protect the Company Intellectual Property. The
Company has (A) paid all application, examination,
registration, issue, renewal and maintenance fees that have
become due, (B) filed all necessary documents and
certificates including statements of use with the relevant
patent, copyright, trademark or other authorities, (C)
recorded documents of title and releases of security
interests required to perfect rights in the Company
Intellectual Property, and (D) exercised reasonable care to
protect the Company's rights in confidential information and
trade secrets of others who have provided such confidential
information and trade secrets to the Company in confidence.
(c) Schedule 3.13(c)(i) contains a true, complete and accurate list
------------------- of all Contracts with respect to Intellectual
Property, including agreements with current or former employees,
consultants, or contractors regarding the assignment or the
non-disclosure of any such Intellectual Property and all
Contracts with respect to the development of Intellectual
Property, including software. Schedule 3.13(c)(ii) also contains
a list of each license, -------------------- sublicense,
agreement, or other permission that the Company has granted to
any third party with respect to any Company Intellectual Property
(such agreement, a "Company Intellectual Property License") and
----------------------------------------
each license, sublicense, agreement or other permission to which
the Company is a party (excluding off-the-shelf software programs
licensed, directly or indirectly, by the Company pursuant to
"shrink wrap," "click wrap," or other standardized form licenses)
with respect to any Intellectual Property, other than Company
Intellectual Property Licenses (such agreement, a "Third Party
------------
Intellectual Property License"), provided, however, with respect
------------------------------
to Schedule 3.13(c)(ii), it shall not be necessary to separately
list those Company Intellectual Property Licenses which are
nonexclusive licenses contained in or required by the Company's
customer Contracts which permit such customers themselves to use,
or for purposes of such customer's own use to make or have made,
the respective Company Intellectual Property (the "Customer
Licenses") .
(d) Schedule 3.13(d) contains a list of each item of Intellectual
----------------
Property that any third party owns that the Company uses pursuant
to license, sublicense, agreement, or permission (excluding
off-the-shelf software programs licensed, directly or indirectly,
by the Company pursuant to "shrink wrap," "click wrap," or other
standardized form licenses, but including all software licensed
by the Company pursuant to the GNU general public license or
limited general public license or any other open source
licenses).
(e) With respect to each Contract, license, sublicense, agreement,
permission or item of Intellectual Property required to be listed
in Schedule 3.13(c)-(d) (collectively, "IP Contracts"):
------------------- --------------
(i) to the Knowledge of the Employee Sellers, the IP Contracts
will continue to be legal, valid, binding, enforceable, and
in full force and effect on identical terms following
consummation of the transactions contemplated hereby and the
Company's use of such Intellectual Property will not be
subject to restrictions or limitations other than those to
which the Company's use thereof would be subject if the
transactions contemplated hereby did not occur;
(ii) the Company, to the Knowledge of the Employee Sellers, has
complied with all performance standards required to be met
by the Company under such IP Contract;
(iii) to the Knowledge of the Employee Sellers, no party to the
IP Contracts is in breach or default, and no event has
occurred that with notice or lapse of time would constitute
a breach or default or permit termination, modification, or
acceleration thereunder;
(iv) to the Knowledge of the Employee Sellers, no party to the IP
Contracts has repudiated any provision thereof;
(v) with respect to each sublicense contained in an IP Contract,
the representations and warranties set forth in subsections
(i) through (iii) above are true and correct with respect to
the underlying license;
(vi) the item of Intellectual Property underlying an IP Contract
is not subject to any outstanding injunction, judgment,
order, decree, ruling, or charge;
(vii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to the
Knowledge of the Employee Sellers, is threatened that
challenges the legality, validity, or enforceability of the
underlying item of Intellectual Property, and to the
Knowledge of the Employee Sellers, there are no grounds for
the same; and
(viii) except for Customer Licenses, the Company has not granted
any sublicense or similar right with respect to any IP
Contract.
(f) There have been delivered to Buyer correct and complete copies of
(1) all Company Intellectual Property (other than source code and
trade secrets of the Company) for which copies can reasonably be
made or for which written documentation evidencing ownership and
prosecution (if applicable) can reasonably be provided and (2)
all IP Contracts.
(g) The Company has valid, binding and enforceable written Contracts
with all employees and independent contractors employed or
engaged by it at any time for the creation or development of its
Intellectual Property, assigning to, and vesting in, the Company
all right, title and interest in and to such Intellectual
Property (the "Assignment Agreements"). All Assignment Agreements
-----------------------
are listed on Schedule 3.13(g).
(h) The Company has imposed written non-disclosure obligations on
employees, independent contractors, customers, suppliers and
other third parties that have received any of the Company's
confidential information or trade secrets, and to the Knowledge
of the Employee Sellers, each has exercised reasonable care,
including taking all reasonable steps, to protect the Company's
rights in its confidential information and trade secrets.
(i) The Company Intellectual Property together with the Third
Party Intellectual Property Licenses includes all rights in
Intellectual Property used in the operations or conduct of
the Business, other than Commercial Software (collectively,
"Business Intellectual Property"). To the Knowledge of the
---------------------------------
Employee Sellers, each item of Business Intellectual
Property prior to the Closing will be owned or available for
use by the Company on identical terms and conditions
immediately following the Closing. To the Knowledge of the
Employee Sellers, the Company has taken all reasonable
actions to maintain and protect each item of Company
Intellectual Property and no loss of any item of Company
Intellectual Property is threatened, pending or reasonably
foreseeable.
(j) Except as described in Schedule 3.13(j), to the Knowledge of
----------------
Employee Sellers, the Company and the manufacture, use and sale
of its products have not infringed upon or otherwise come into
conflict with any Intellectual Property rights of third parties,
and neither the Company nor any of its directors or officers has
ever received any charge, complaint, claim, demand, or notice
alleging any such infringement or violation (including with
respect to a claim of infringement any demand or offer to license
any Intellectual Property from any third party or any claim that
the Company must license or refrain from using any Intellectual
Property rights of any third party). Immediately following the
Closing, the Company will not interfere with, infringe upon,
misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties which are now
existing as a result of the continued operation of the Business
as presently conducted No notices regarding any of the items in
the immediately foregoing sentence have been received.
(k) Except as described in Schedule 3.13(k), to the Knowledge of the
---------------
Employee Sellers, no third party has interfered with, infringed
upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of the Company and there are no
facts raising a likelihood of any such interference,
infringement, misappropriation or conflict.
(l) There is no Knowledge of the Employee Sellers, nor is there any
actual awareness of any other employee with responsibility for
Intellectual Property matters, of any new products, inventions,
procedures, or methods of manufacturing or processing that any
competitors or other third parties have developed that reasonably
could be expected to supersede or make obsolete any product or
process of the Company or to limit the operations or conduct of
the Business of the Company.
(m) To the Knowledge of the Employee Sellers, other than Commercial
Software, the owners of any of the Intellectual Property licensed
to the Company have taken all necessary and desirable actions to
maintain and protect the Intellectual Property covered by such
license.
(n) The Company has complied with and is presently in compliance with
all foreign, federal, state, local, governmental (including, but
not limited to, the Federal Trade Commission and State Attorneys
General), administrative or regulatory laws, regulations,
guidelines and rules applicable to any Intellectual Property in
jurisdictions where the Company is doing business.
(o) The Company has licenses for all Commercial Software used or
which will be used in its Business, the use of such Commercial
Software has been in accordance with such licenses and the
Company does not have any obligation to pay any further fees,
royalties, or other amounts for the Company's current usage
thereof.
(p) The automatic meter reading products now manufactured and sold by
the Company were first offered for sale on or before January 1,
1996, and the operational use of such products by the Company and
by other third parties, as well as the services rendered by the
Company, have not materially changed since January 1, 1996.
(q) No Seller has any rights in or to any item of Intellectual
Property owned or used by the Company. To the extent any Seller
is deemed to have any rights in or to any such Intellectual
Property, such Seller hereby transfers and assigns to the Company
all of such Seller's right, title and interest in and to such
Intellectual Property (including without limitation the goodwill
associated therewith).
3.14 Litigation. Except as set forth on Schedule 3.14 and except for
--------------
administrative proceedings pursuant to the prosecution or registration
of Intellectual Property undertaken in the Ordinary Course of Business
(other than reexamination, opposition and interference proceedings
that may affect the Company's rights in Intellectual Property),
(a) there is no, and since January 1, 2001, there has not been any
suit, claim, litigation, proceeding (administrative, judicial, or in
arbitration, mediation or alternative dispute resolution), Government
or grand jury investigation, or other action (any of the foregoing,
"Action") pending or, to the Knowledge of the Employee Sellers,
--------
threatened against the Company or involving its Business, any
Property, or, in connection with its Business, any of its
shareholders, directors, officers, agents, or other personnel,
including without limitation any Action challenging, enjoining, or
preventing this Agreement or the consummation of the transactions
contemplated hereby; and (b) the Company is not and, has not since
January 1, 2001 been subject to any judgment, order, writ, injunction,
or decree of any court or other Government entity ("Order") other than
-------
Orders of general applicability.
3.15 Insurance.
(a) Set forth on Schedule 3.15(a) is a list of all insurance policies
---------------
and bonds currently in force covering or relating to the
properties, operations or personnel of the Company and, with
respect to insurance policies covering product liability and
similar occurrence based risks, in force at any time since
January 1, 2001. Such schedule clearly indicates which of such
policies are claims made and which of such policies are
occurrence based. All of such insurance policies are in full
force and effect (with respect to the applicable coverage
periods), and the Company is not in default with respect to any
of its obligations under any of such insurance policies.
(b) Since January 1, 2001, the Company has at all times maintained
insurance as required by law or under any agreement to which the
Company is or has been a party, including, without limitation,
unemployment and workers' compensation coverage.
3.16 Absence of Material Events. Since September 30, 2005, except as set
forth on Schedule 3.16(a) - (r) hereto, there has not been with
------------------------
respect to the Company or the Property:
(a) Any adverse change in the Business, condition, financial or
otherwise, operations, or prospects of the Company or the
condition of the Property, and, to the Knowledge of the Employee
Sellers, no such change will arise from the consummation of the
transactions contemplated hereby;
(b) Any declaration, setting aside, or payment of any dividend or any
distribution (in cash or in kind) to any Person or entity with
respect to any securities of the Company, or any direct or
indirect redemption, purchase, or other acquisition by the
Company of any of its securities except the transfer of the FCC
Licenses to SRMZBCo., LLC, an Ohio limited liability company
("SRMZBCo.");
----------
(c) Any increase in compensation or other remuneration payable to or
for the benefit of or committed to be paid to or for the benefit
of any shareholder, director, officer, agent, or employee of the
Company, or in any benefits granted under any Plan with or for
the benefit of any such shareholder, director, officer, agent, or
employee (other than increases in wages or salaries required
under existing Contracts listed on Schedules 3.11(a)-(n) or
----------------------
otherwise not unusual in timing, character or amount made in the
Ordinary Course of Business to employees);
(d) Any transaction entered into or carried out by the Company other
than in the Ordinary Course of Business;
(e) Any borrowing or incurrence of any other indebtedness (other than
accounts payable in the Ordinary Course of Business) contingent
or other, by or on behalf of the Company (it being understood
that the foregoing is not intended to describe obligations of the
Company under Contracts to sell products or provide services to
others);
(f) Any modification or termination of any Contract disclosed on
Schedules 3.11(a)-(n) or 3.13(c) or any material term thereof or
--------------------------------
any Government license, permit or other authorization;
(g) Any purchase by the Company of capital assets or any interests in
real property or any lease arrangement (whether as a lessor or
lessee or sublessor or sublessee) entered into by the Company
with respect to real property;
(h) Any lapse or infringement of any Intellectual Property owned or
used by or licensed to the Company, or to the Knowledge of the
Employee Sellers, any abandonment thereof;
(i) Any acquisition of or investment in (by merger, exchange,
consolidation, purchase or otherwise) any corporation or
partnership or interest in any business organization or entity;
(j) Any acquisition of any assets (whether through capital spending
or otherwise) outside of the Ordinary Course of Business or which
are material, individually or in the aggregate, to the Company;
(k) Any waiver of any claims or rights that are material or otherwise
involve amounts in the aggregate in excess of $10,000;
(l) Any disclosure of any confidential or proprietary information to
any person or entity other than to Buyer and Buyer's
representatives, agents, attorneys and accountants, or the
employees, consultants, customers or vendors of the Company in
the Ordinary Course of Business;
(m) Any charitable contributions or commitments therefore in excess
of $10,000 in the aggregate;
(n) Any material change in the Company's methods of purchase, sale,
lease, management, marketing or promotion, or any delay or
postponement of the payment of accounts payable or other
liabilities;
(o) Any change in any method of accounting or accounting policies of
the Company, other than those required by GAAP, or any write-down
in the accounts receivable of the Company other than in the
Ordinary Course of Business;
(p) Any change, election or revocation of a Tax election, accounting
period, or method of accounting;
(q) Any sale, license or transfer of any Intellectual Property other
than in the Ordinary Course of Business; or
(r) Any binding commitment or agreement by the Company, or a
shareholder of the Company, to do any of the foregoing items (b)
through (q).
3.17 Permits; Compliance with Law.
(a) Except as explicitly disclosed as a breach of Law on
Schedule 3.17(a) to this Agreement, the Company is current and
----------------
has been at all times in compliance with all applicable statutes,
laws, treaties, conventions, ordinances, decrees, orders,
injunctions, rules, directives, or regulations of any Government
("Law") or the provisions of any Government permit, franchise, or
-----
license.
(b) Set forth on Schedule 3.17(b) is a complete and accurate list of
----------------
all authorizations, licenses and permits issued to and continued
to be held by the Company from the Federal Communications
Commission (the "FCC Licenses"). Each FCC License will be validly
-------------
assigned to SRMZBCo. and such assignment shall not cause any
lapse in enforceability or any restriction on use by the Company,
greater than the restrictions imposed upon the Company prior to
assignment. Each FCC License is and will remain valid, in full
force and effect. The FCC Licenses include all licenses required
to be obtained from the Federal Communications Commission as
required to conduct the Business. Neither the execution of this
Agreement nor the consummation of the transactions contemplated
herein do or will constitute or result in a default under or
violation of any FCC License.
(c) The Company holds all authorizations, licenses and permits
(issued by any Government other than the Federal Communications
Commission) required to conduct its Business, and each such
authorization, license or permit is valid, in full force and
effect, and listed on Schedule 3.17(c). Neither the execution of
----------------
this Agreement nor the Closing do or will constitute or result in
a default under or violation of any such authorization, permit or
license.
(d) The entire ownership interests of SRMZBCo. are owned by the
Sellers in the same percentage ownership as the Company Shares
were owned by the Sellers immediately prior to transfer of the
FCC Licenses to SRMZBCo.
3.18 Related Party Transactions.
(a) No director, officer or affiliate of the Company or any
individual related by blood, marriage or adoption to any such
individual or any entity in which any such individual or entity
owns any beneficial interest and, to the Knowledge of the
Employee Sellers, no shareholder or employee of the Company, or
any individual related by blood, marriage or adoption to any such
individual, in any such case, is a party to any agreement,
contract, commitment or other form of transaction or arrangement
with the Company, written or oral, or has any interest in any of
the Property, except as specifically disclosed on Schedule
--------
3.18(a) and which represent transactions conducted on arms-length
------
terms.
(b) Except as specifically disclosed on Schedule 3.18(b), no
-----------------
director, officer or affiliate of the Company and, to the
Knowledge of the Employee Sellers, no shareholder or employee of
the Company has any direct or indirect financial interest in any
competitor with or supplier or customer of the Company; provided,
however, that for this purpose ownership of corporate securities
having no more than 2% of the outstanding voting power of any
competitor, supplier or customer, which securities are listed on
any national securities exchange or authorized for quotation on
the Nasdaq National Market, shall not be deemed to be such a
financial interest, provided that such person has no other
connection or relationship with such competitor, supplier or
customer.
3.19 Bank Accounts of the Company. Set forth on Schedule 3.19 is a list of
-------------
the locations and numbers of all bank accounts, investment accounts
and safe deposit boxes maintained by the Company, together with the
names of all persons who are authorized signatories or have access
thereto or control thereunder.
3.20 Environmental, Health and Safety Matters.
(a) Except as set forth on Schedule 3.20(a), all assets and property
---------------
currently or previously owned, leased, operated, or used by the
Company, or any of its predecessors in interest, or in connection
with the Business ("Environmental Property"), all current and
-------------------------
previous conditions on and uses of the Environmental Property,
and all current and previous ownership and operations of the
Environmental Property and of the Company (including without
limitation transportation and disposal of Hazardous Materials (as
hereinafter defined) by or for the Company) comply and have at
all times complied, and do not cause, have not caused, and will
not cause liability to be incurred by the Company under any
current or past Law relating to the protection of health, safety
or the environment, including without limitation: the
Occupational Safety and Health Act, the Clean Air Act, the
Federal Water Pollution Control Act, the Resource Conservation
and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Toxic Substance Control Act,
as all may be amended from time to time, any comparable state or
foreign law, and the common law, including the law of nuisance
and strict liability (collectively, "Environmental Law"). Except
-------------------
as set forth on Schedule 3.20(a), the Company is not in violation
of and has never violated any Environmental Law.
(b) Except as set forth on Schedule 3.20(b), the Company has properly
---------------
obtained and is in compliance with all necessary permits,
registrations, approvals, and licenses ("Environmental Permits"),
-----------------------
and has properly made all filings with and submissions to any
Government or other authority required by any Environmental Law.
Except as set forth on Schedule 3.20(b), no deficiencies have
-----------------
been asserted by any such Government or authority with respect to
such items.
(c) Except as set forth on the respective subsection of Schedule
--------
3.20(c), there has been no spill, discharge, leak, leaching,
-------
emission, migration, injection, disposal, escape, dumping, or
release of any kind on, under or from the Environmental Property
or by or on behalf of the Company of any (i) pollutants or
contaminants, (ii) hazardous, toxic, infectious or radioactive
substances, chemicals, materials or wastes (including without
limitation those defined as hazardous under any Environmental
Law), (iii) petroleum including crude oil or any derivative or
fraction thereof, (iv) asbestos fibers, (v) solid wastes, (vi)
silicia or (vii) mold ((i)-(vii), collectively, "Hazardous
---------
Materials").
-----------
(d) Except as set forth on Schedule 3.20(d), there are and have been
----------------
no (i) Hazardous Materials present, stored, disposed of,
generated, manufactured, refined, transported, produced, or
treated at, upon, or from the Environmental Property;
(ii) ceramic or asbestos fibers or materials or polychlorinated
biphenyls on, in or beneath the Environmental Property, or (iii)
underground storage tanks on or beneath the Environmental
Property.
(e) The Company has delivered to Buyer, prior to the execution and
delivery of this Agreement, complete copies of any and all
(i) documents received by the Company from, or submitted by any
of the shareholders, or the Company to the Environmental
Protection Agency and/or any foreign, state, county or municipal
environmental or health agency concerning the environmental
condition of the Environmental Property or the effect of the
operations of the Company on the environmental condition of the
Environmental Property or any adjoining, adjacent or neighboring
property and (ii) reviews, audits, reports, or other analyses
concerning the Environmental Property, or any adjoining, adjacent
or neighboring property, in the possession of the Company, its
Affiliates, or their respective agents, consultants or attorneys.
(f) Except as set forth on Schedule 3.20(f), there never has been
----------------
pending or, to the Knowledge of the Employee Sellers, threatened
against the Company, any civil, criminal or administrative
action, suit, summons, citation, complaint, claim, notice,
demand, request, judgment, order, lien, proceeding, hearing,
study, inquiry or investigation based on or related to any
Environmental Permits or an Environmental Law.
(g) Except as set forth on Schedule 3.20(g), no facts, circumstances,
---------------
activities, incidents or conditions exist with respect to the
Environmental Property or any property at which the Company
arranged for the disposal, recycling or treatment of Hazardous
Materials, that could reasonably be expected to: (i) result in
the Company incurring any losses, liabilities or expenses under
any Environmental Law or Environmental Permit; (ii) interfere
with, prevent, or increase the costs of compliance or continued
compliance with any Environmental Permits or any renewal or
transfer thereof or any Environmental Law; (iii) make more
stringent any restriction, limitation, requirement or condition
under any Environmental Law or any Environmental Permit in
connection with the operations on the Environmental Property.
(h) Set forth on Schedule 3.20(h), is a list of all sites where
-----------------
Company's Hazardous Materials may have been sent in the past, or
are currently being sent for disposal, treatment, recycling or
storage, including the address of each such site, and a
description and estimate of the amount of the Hazardous Materials
disposed of, treated, recycled or stored at each such site.
(i) Except as set forth in Schedule 3.20(i), there is not nor has
-----------------
there been exposure or resulting consequences to any persons,
including, without limitation, employees of the Company, to any
Hazardous Materials stored, treated, generated or handled at the
Environmental Property or in a product sold, distributed or
disposed of by the Company.
(j) The Company has complied with all Laws relating to the disposal
of any batteries or related materials used its own operations,
including without limitation any batteries or related materials
acquired for incorporation into, delivery in connection with, or
actually incorporated into, any Company Products.
(k) The Company has never undertaken any responsibility for the
renewal or disposal of batteries in Company Products sold to its
customers and has provided all appropriate and necessary warnings
and advisements to such customers regarding the disposal of
batteries or related materials.
3.21 Officer, Director, Employee, Consultant and Agent; Compensation.
(a) Set forth on Schedule 3.21(a) is a complete list of: (i) all
---------------
current directors of the Company, (ii) all current officers (with
office held) of the Company, (iii) all current employees other
than temporary or so called "leased" employees (including each
employee on leave of absence, including under Family Medical
Leave Act, workers' compensation, disability, or other leave,
paid or unpaid, or layoff status) of the Company employed in the
United States, (iv) all current employees (including each
employee on leave of absence, including under Family Medical
Leave Act, workers' compensation, disability, or other leave,
paid or unpaid, or layoff status) of the Company employed outside
of the United States, if any, (v) all current paid independent
contractors, consultants and agents to the Company,(vi) all
temporary and leased employees, and (vii) each employee whose
employment with the Company was terminated or otherwise ended
during the last two years; together, in each case (i) through
(vi) with a complete and accurate list of the following
information: name, job title, employment location, birth date,
date of hiring, pay type (exempt or non-exempt), EEOC codes,
status (full-time, part-time, temporary or leased), whether on
leave or active status, basis of permission to work in the United
States (citizenship or otherwise), current compensation paid or
payable and any change in compensation since January 1, 2004,
vacation, sick or other leave that is accrued but unused, and
service credited for purposes of vesting and eligibility to
participate under any Plan. The temporary and "leased" employees
are leased by the Company from a Person that is not an Affiliate
or a related party of the Company or any Seller.
(b) Except as set forth on Schedule 3.21(b): (i) the Company is not
----------------
indebted to any of its officers, directors, employees or
consultants except for amounts due as normal salaries, wages,
employee benefits and bonuses and in reimbursement of ordinary
business expenses (including automobile usage, business travel
and entertainment and communication expenses) on a basis
consistent with past practices; and (ii) no officer, director,
employee, independent contractor, consultant or agent of the
Company is indebted to the Company except for advances for
ordinary business expenses on a basis consistent with past
practices.
(c) All payments to agents, independent contractors, consultants and
others made by the Company, or by a shareholder in connection
with the Company, have been in payment of bona fide fees and
commissions and not as bribes or as otherwise illegal or improper
payments. All such payments have been made directly to the
parties providing the services for which such payments were made,
and no such payment has been paid in a manner intended to avoid
currency controls or any party's Tax reporting or payment
obligations. The Company has properly and accurately reflected on
its books and records: (i) all compensation paid to and
perquisites provided to or on behalf of its agents and employees;
and (ii) all compensation and perquisites that are due and
payable to such persons, but which have not been paid or provided
at the Closing Date. Such compensation and perquisites have been
properly and accurately disclosed in the Financial Statements and
other public or private reports, records or filings of the
Company, to the extent required by Law.
(d) The Company is in compliance with the provisions of the Jobs
Creation Act of 2004, and no "Supplemental Payments" have been
made (or will be made by virtue of the transactions contemplated
hereby) to any employee of the Company.
3.22 Labor Matters. Set forth on Schedule 3.22 is each collective
--------------
bargaining, works council, union representation or similar agreement
or arrangement to which the Company is or has been a party or by which
it is or has been bound. Except as set forth on Schedule 3.22:
-------------
(a) There is no organized labor strike, dispute, slowdown, or
stoppage pending or, to the Knowledge of the Employee Sellers
threatened against the Company;
(b) No Person holds a right of representation respecting the
Company's employees;
(c) No collective bargaining agreement is currently being negotiated
and no organizing effort is currently being made with respect to
the employees of the Company; and
(d) None of the Company, or any of its respective agents,
representatives or employees has committed any unfair labor
practice, as defined in the National Labor Relations Act of 1947,
as amended. There is not now pending or, to the Knowledge of the
Employee Sellers, threatened any charge or complaint against the
Company by the National Labor Relations Board, any state or local
labor or employment agency or any representative thereof, and the
execution or consummation of this Agreement will not result in
any such charge or complaint.
3.23 ERISA and Employee Benefit Matters.
(a) Except as set forth on Schedule 3.23(a), the Company does not
----------------
have outstanding, or is it a party to, or subject to liability
under: (i) any agreement, arrangement, plan, or policy, whether
or not written and whether or not considered legally binding,
that involves (A) any pension, retirement, profit sharing,
deferred compensation, bonus, stock option, stock appreciation,
stock purchase, phantom stock, health, welfare, or incentive
plan; or (B) welfare or "fringe" benefits, including without
limitation vacation, severance, disability, medical,
hospitalization, dental, life and other insurance, tuition,
company car, club dues, sick leave, maternity, paternity or
family leave, or other benefits; or (ii) any employment,
consulting, engagement, or retainer agreement or arrangement ((i)
and (ii) together the "Plans" and each item thereunder a "Plan").
------ ----
True, correct, and complete copies of all documents creating or
evidencing any Plan listed on Schedule 3.23(a) have bee
----------------
delivered to Buyer, including, without limitation, all plan
documents, summary plan descriptions and related trust
agreements, annuity contracts and other funding instruments.
There are no negotiations, demands or proposals which are pending
or, to the Knowledge of the Employee Sellers, threatened or which
have been made since the Company's inception which concern
matters now covered, or that would be covered, by the foregoing
types of Plans. Except as set forth on Schedule 3.23(a), the
-----------------
Company does not have outstanding nor is it a party to or subject
to any liability under any agreement, arrangement, plan or policy
subject to or entitled to grandfathered treatment under Code
Section 409A and the regulations and other guidance issued
thereunder.
(b) Each Plan complies with, has been administered, operated and
maintained in compliance with its terms, including but not
limited to, distributing summary plan descriptions to employees,
COBRA beneficiaries and alternate payees, as applicable, timely
submission of employee and employer 401(k) contributions and
timely COBRA notifications, and the Company does not have any
direct or indirect liability for non-compliance under, the
Employee Retirement Income Security Act of 1974, as amended
("ERISA") or any other Law applicable to any Plan. To the extent
-------
applicable with respect to each Plan, true, correct and complete
copies of the three most recent Forms 5500 have been delivered to
Buyer. Each Plan that is intended to qualify under Section 401(a)
or Section 501(c)(9) of the Code has received or, if a prototype
plan, its sponsor has received or is seeking a favorable
determination letter from the Internal Revenue Service (a copy of
which has been provided to Buyer) and related trusts have been
determined to be exempt from taxation. Nothing has occurred that
would cause, and, except as set forth in Schedule 3.23(b), no
-----------------
Action is pending or threatened, which could result in the loss
of such exemption or qualification.
(c) The Company has not (i) made or had an obligation to make any
contributions to any multi-employer plan (as defined in ERISA) or
to any pension plan subject to the minimum funding standards of
ERISA or Title IV of ERISA, (ii) been a member of a controlled
group which contributed to or had an obligation to contribute to
any such plans or (iii) been under common control with an
employer which contributed to or had an obligation to contribute
to any such plans.
(d) Except as set forth on Schedule 3.23(d), the Company has not
----------------
terminated or taken any action to terminate any employee benefit
plan, and no "reportable event" (as defined in ERISA) or
"prohibited transaction" (as defined in the Code or ERISA) has
occurred or, to the Knowledge of the Employee Sellers, is
threatened to occur with respect to any Plan.
(e) The Company has received all required independent auditor
opinions on statements of assets and liabilities with respect to
the Plans and such opinions have been delivered to the Buyer.
(f) Except as set forth on Schedule 3.23(f), all of the Plans, to the
---------------
extent applicable, are in compliance with the continuation of
health benefit provisions contained in the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), and with
-------
Section 1862(b)(4)(A)(i) of the Social Security Act, and the
Company does not have any liability for any excise Tax imposed by
Code Section 5000. True, correct and complete copies of the most
recent notification to employees of their COBRA rights and form
of letter(s) distributed upon the occurrence of a qualifying
event have been delivered to Buyer. Other than as required by
COBRA, the Company does not have any liability or obligation to
provide life, medical or other welfare benefits to former or
retired employees.
(g) With respect to any Plan which is a welfare plan as defined in
Section 3(1) of ERISA: (i) each such welfare plan which is
intended to meet the requirements for tax-favored treatment under
Subchapter B of Chapter 1 of the Code meets such requirements;
and (ii) there is no disqualified benefit (as such term is
defined in Code Section 4976(b)) which would subject the Company
or Buyer to a Tax under Code Section 4976(a).
(h) Full payment has been made of all amounts due under each of the
Plans and to each person employed or formerly employed by the
Company that are required under the terms of the Plans, and full
payment will be made of all amounts that are required to be so
paid through the Closing Date.
(i) Except as set forth on Schedule 3.23(i), all contributions with
----------------
respect to the Plans for all periods ending prior to the Closing
Date (including periods from the first day of the current plan
year to the Closing Date) will be made prior to the Closing Date
by the Company and all members of the controlled group in
accordance with past practice and the recommended contribution in
the applicable actuarial report.
(j) All insurance premiums (including premiums to the Pension Benefit
Guaranty Corporation (the "PBGC")) have been paid in full,
------
subject only to normal retrospective adjustments in the ordinary
course, to the extent applicable to the Plans for policy years or
other applicable policy periods ending on or before the Closing
Date.
(k) There will be no incidence of (i) acceleration of vesting under,
or payment of benefits from, the Plans, (ii) severance payments,
(iii) change in control payments which would be characterized as
"excess parachute payments" under Section 280G of the Code, or
(iv) any other termination benefits for which Buyer or the
Company will be responsible as a consequence of the transactions
contemplated hereby.
(l) Except as described on Schedule 3.23(l), there is no pending or,
----------------
to the Knowledge of the Employee Sellers, threatened legal
action, proceeding or investigation against or involving any Plan
described in Schedule 3.23(l) hereof and there is no basis for
----------------
any such legal action, proceeding or investigation. None of the
Company, or any of its directors, officers, employees or any
other fiduciary has any liability for failure to comply with
ERISA, the Code or any other applicable Law for any action or
failure to act in connection with the administration or
investment of any Plan. The Company does not have any liability
by virtue of its being a member of a controlled group with a
person who has liability under the Code or ERISA. The Company has
no liability in connection with its reporting or withholding
obligations under the Code with respect to the payment of
benefits from the Plans.
(m) All expenses and liabilities relating to all of the Plans
described on Schedule 3.23(a) have been, and will be on the
----------------
Closing Date, fully and properly accrued on the Company's books
and records, as applicable, and the Financial Statements reflect
all of such liabilities in a manner satisfying the requirements
of Financial Accounting Standards 87 and 88. The statements of
assets and liabilities of the Plans as of the end of the most
recent three fiscal years for which information is available, and
the statements of changes in fund balances, financial position
and net assets available for benefits under such Plans for such
fiscal years, copies of which have been certified by the Company
and furnished to Buyer, fairly present the financial condition of
such Plans as of such date and the results of operations thereof
for the year ended on such date, all in accordance with GAAP
applied on a consistent basis, and the actuarial assumptions used
for funding purposes have not been changed since the last written
report of actuaries on such Plans, which written reports have
been furnished to Buyer.
(n) Each Plan (including any funding instrument thereunder) is legal,
valid and binding and in full force and effect, and there are no
defaults thereunder. None of the rights of the Company thereunder
will be impaired by the consummation of the transactions
contemplated by this Agreement, and all of the rights of the
Company thereunder will be enforceable by Buyer at or after the
Closing without the consent or agreement of any other party. Each
Plan (including any Plan covering former employees of the
Company) may be unilaterally amended, varied, modified or
terminated in whole or in part by the Company or Buyer on or at
any time after the Closing Date, subject to the requirements of
applicable law.
(o) The Company does not maintain or contribute to any employee
welfare benefit plan that provides health, accident or life
insurance benefits to former employees, their spouses or
dependents, other than as required by Section 4980B of the Code.
(p) The disallowance of a deduction under Section 162(m) of the Code
for employee remuneration will not apply to any amount paid or
payable by the Company under any contractual arrangement
currently in effect, determined as if the Company were a publicly
held corporation within the meaning of Section 162(m)(2).
(q) The Company does not maintain any Plan or other benefit
arrangement covering any employee or former employee outside of
the United States and has never been obligated to contribute to
any such plan.
3.24 Overtime, Back Wages, Vacation and Minimum Wage. Except as set forth
in Schedule 3.24, no present or former employee of the Company has
--------------
given notice to the Company, as applicable, of, and there is no valid
basis for, any claim against the Company (whether under Law, any
employment agreement or otherwise) on account of or for (a) overtime
pay, other than overtime pay for the current payroll period, (b) wages
or salary (excluding current bonus, accruals and amounts accruing
under pension and profit sharing Plans) for any period other than the
current payroll period, (c) wages or salary for time necessary to don
protective clothing or equipment, (d) vacation, sick or other time
off, or pay in lieu of vacation, sick or other time off, other than
that earned in respect of the current fiscal year, or (e) any
violation of any Law relating to minimum wages, child labor or maximum
hours of work.
3.25 Discrimination.
(a) Except as set forth on Schedule 3.25(a), since its date of
-----------------
incorporation, the Company has not received any written notice
from any Government entity alleging discrimination in employment
or employment practices, and no such claim, notice of claim,
charge or lawsuit is pending or, to the Knowledge of the Employee
Sellers, threatened against the Company.
(b) Except for the Company's customer Contracts that obligate the
Company to indemnify its customers and except as otherwise set
forth on Schedule 3.25(b), the Company does not have any
-----------------
outstanding Contracts or obligations to indemnify any person for
violation of the Laws and standards set forth in this Section.
3.26 Workers' Compensation.
(a) Schedule 3.26(a) sets forth a true, correct and complete list of
---------------
all workers compensation claims against the Company made over the
three years preceding the date hereof, and all other older claims
currently pending, and there have never been any workers
compensation claims against the Company relating to the use or
existence of asbestos or lead in any of the Company's products.
(b) Except for the Company's customer Contracts that obligate the
Company to indemnify its customers and except as otherwise set
forth on Schedule 3.26(b), the Company does not have any
-----------------
outstanding Contracts or obligations to indemnify any person for
violation of the Laws and standards set forth in this Section.
3.27 Customers and Suppliers. Schedule 3.27 sets forth a true, complete and
-------------
correct list, by company, of the 10 largest customers of the Company
and the 10 largest suppliers (including subcontractors to the Company
under any Contracts) of the Company, by volume of sales and purchases,
respectively (by dollar volume) for each of the years ended
December 31, 2003, 2004 and 2005. Except as disclosed on Schedule
--------
3.27, the Company has not received any written notice from any
----
supplier of the Company (including those listed on Schedule 3.27) to
-------------
the effect that any such supplier will stop or decrease the rate of
supplying materials, products or services to the Company. Except as
disclosed on Schedule 3.27, the Company has not received any written
--------------
notice from any customer of the Company (including those listed on
Schedule 3.27) to the effect that such customer will stop or decrease
-------------
the rate of buying materials, services or products from the Company.
3.28 Foreign Operations and Export Control. At all times, the Company has
acted:
(a) pursuant to valid qualifications to do business in all
jurisdictions outside the United States where such qualification
is required by local Law;
(b) in compliance with all applicable foreign Laws, including without
limitation Laws relating to foreign investment, foreign exchange
control, immigration, employment, import, export and taxation;
(c) without notice of violation of and in compliance with all
relevant anti-boycott laws, regulations and guidelines, including
without limitation Section 999 of the Code and regulations and
guidelines issued pursuant thereto and the Export Administration
Regulations administered by the U.S. Department of Commerce, as
amended from time to time, including all reporting requirements;
(d) without violation of any import or export control or sanctions
laws, orders or regulations, including without limitation the
Export Administration Regulation administrated by the U.S.
Department of Commerce and sanctions and embargo executive orders
and regulations administered by the Office of Foreign Assets
Control of the U.S. Treasury Department, as amended from time to
time, and without violation and in compliance with any required
export or reexport licenses or authorizations granted under such
laws, regulations or orders, which licenses or authorizations are
described in Schedule 3.28; and
-------------
(e) without violation of the Foreign Corrupt Practices Act of 1977,
as amended or other anti-corruption laws of any Government.
3.29 Brokers. Except as set forth in Schedule 3.29, no finder, broker,
--------------
agent, or other intermediary, acting on behalf of the Company or the
Employee Sellers, is entitled to a commission, fee, or other
compensation or obligation in connection with the negotiation or
consummation of this Agreement or any of the transactions contemplated
hereby. Neither the Company, nor any of the Employee Sellers is
subject to any letter of intent, agreement, understanding or
commitment with any third party (other than Buyer) or its agents
representatives, written or unwritten, regarding any offer, proposal,
or indication of interest involving the purchase, sale or transfer
(including but not limited to, by means of a merger, recapitalization,
joint venture or the like) of all or a controlling portion of the
capital stock of the Company or all or a material portion of the
Business or assets of the Company, and the Company and the Employee
Sellers have discontinued any negotiations with and furnishing of
information to any such third party or its agents or representatives.
3.30 Disclosure of all Material Matters. Neither this Agreement nor any of
the schedules, attachments or the Exhibits hereto or any agreements
contemplated hereby contain any untrue statement of material fact or
omit a material fact necessary to make each statement contained herein
or therein, in light of the circumstances under which they were made,
not misleading. To the Knowledge of the Employee Sellers, there is no
fact which has not been disclosed to Buyer which has had or could
reasonably be anticipated to have a Company Material Adverse Effect or
Company Material Adverse Change.
3.31 Product and Service Warranties.
(a) Set forth in Schedule 3.31(a) are the standard forms of product
----------------
and service warranties and guarantees used by the Company and
copies of all other outstanding product and service warranties
and guarantees. No product or service warranties or guaranties
have been orally authorized or made containing terms less
favorable to the Company than the terms of the forms of product
and service warranties and guarantees set forth in Schedule
--------
3.31(a). No oral warranties or guaranties have been authorized or
-------
made by the Company relating to the life of batteries in the
Company Products or the replacement, renewal or disposal of such
batteries.
(b) Except as set forth in Schedule 3.31(b), since September 30,
-----------------
2005, no product or service warranty or similar claims have been
made against the Company except routine claims as to which, in
the aggregate, losses and expenses in respect of service costs
and repair or replacement of merchandise do not and will not
exceed the amount of the reserve for warranties on the Balance
Sheet. The aggregate loss and expense attributable to all product
or service warranty and similar claims now pending or hereafter
asserted with respect to services performed and products
manufactured on or prior to the Closing Date will not exceed
$500,000.
3.32 Product Liability Claims. Except as set forth in Schedule 3.32,
-------------
none of the Employee Sellers and/or the Company has received
notice or information as to any claim or allegation of personal
injury, death, or property or economic damages, any claim for
punitive or exemplary damages, any claim for contribution or
indemnification, or any claim for injunctive relief in connection
with any services provided or products manufactured, sold,
distributed or otherwise put in commerce by or in connection with
any service provided by the Company or its employees. Schedule
--------
3.32 accurately and completely describes all such claims,
----
together in each case with the date such claim was made, the
amount claimed, the disposition or status of such claim
(including settlement or judgment amount), and the amount of
attorney's fees incurred in connection with such claim. The
aggregate loss and expense attributable to any and all such
claims and allegations with respect to products manufactured,
sold, distributed or put in commerce or services provided on or
prior to the Closing Date which are asserted after the date of
this Agreement will not exceed the amount of the reserve for such
claims on the Balance Sheet, exclusive of any recovery under any
insurance policy as provided in Section 9.2(d). The Company has
maintained "occurrence based" product liability insurance in
effect for the entire five year period prior to the Closing Date
in amounts reasonably appropriate for the Company.
3.33 Product Safety Authorities. Neither the Company nor any Seller
has been required to file any notification or other report with
or provide information to any Government or product safety
standards group concerning actual or potential defects or hazards
with respect to any services performed or products manufactured,
sold, distributed or put in commerce by the Company, and to the
Knowledge of the Employee Sellers there exist no grounds for the
recall of any such products.
3.34 Product Standards. The Company has not manufactured for
commercial supply, marketed, sold or supplied any product which
was at the time not compliant with its standard terms and
conditions of sale and the Company at all times has complied with
any applicable Customer requirements regarding standards
applicable to the manufacture, marketing, sale or supply of any
such product.
3.35 Backlog. Set forth in Schedule 3.35 is a list of the Company's
--------------
backlog of unfilled customer orders as of January 31, 2006. Such
backlog is valid and bona fide and represents customer orders
received by the Company in the Ordinary Course of Business which
the Company reasonably expects to fulfill within 12 months.
3.36 PG&E Contract Requirements.
(a) Set forth on Schedule 3.36(a) is a complete and accurate
-----------------
list of (i) all substantial changes required in the
materials used or methods to be employed by the Company in
its business and/or manufacturing processes and methods, and
(ii) all new, enhanced or other property or property rights,
including Intellectual Property or other assets of the
Company, and (iii) all authorizations, licenses and permits
(including licenses to be issued by the Federal
Communications Commission), all as required by the Company
to fulfill its obligations under the PG&E Contract
(collectively, "PG&E Requirements").
-------------------
(b) Except as set for on Schedule 3.36(b), the Company (i)
-----------------
currently possesses and owns or otherwise has the right to
use all the PG&E Requirements and (ii) has completed
development, acquisition and installation of the PG&E
Requirements and all necessary testing related to the PG&E
Requirements. The PG&E Requirements other than those set
forth on Schedule 3.36(b) shall be referred to as "Fulfilled
------ ----------
PG&E Requirements."
-------------------
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF NON-EMPLOYEE SELLERS
------------------------------------------------------
Each Non-Employee Seller severally (and not jointly and severally with
any other Sellers) hereby makes the following representations and
warranties to Buyer (except for the Representation set forth in Section 4.1
which is made solely by the Trustee on behalf of the ADLT Trust), each of
which is true and correct on the date hereof, shall be true and correct on
the Closing Date, and shall survive the Closing as provided in Section 9.1.
4.1 Power and Authority of ADLT Trustee. The ADLT Class 7 Liquidating
Trust (the "ADLT Trust") was duly formed under the laws of the State
-------------
of Illinois. Bridge Associates, LLC, a Delaware limited liability
company (the "Trustee") is the duly appointed and acting trustee of
---------
the ADLT Trust. The ADLT Trust was created under a Trust Agreement
dated December 10, 2003 pursuant to Section 3.12 of the Fourth Amended
Chapter 11 Plan of Reorganization of Venture Lighting International,
Inc. et al., as confirmed by the Order of the United States Bankruptcy
Court, Northern District, Eastern Division of Illinois in Case No.
03-5255.
4.2 Title to Shares; Enforceability; No Violation of Existing Agreements.
(a) Schedule 3.3(a) lists the Company Common Stock and the Company
---------------
Preferred Stock and the number of Company Shares owned by such
Non-Employee Seller, and such Non-Employee Seller is the owner of
no other Company Shares other than those so listed. Each
Non-Employee Seller severally represents and warrants that he,
she or it is the sole holder of record and beneficial owner of
all the Company Shares attributed to such Non-Employee Seller on
Schedule 3.3(a), with all rights to vote such Company Shares
----------------
without restriction and that such Non-Employee Seller owns such
Company Shares free and clear of any Liens, except for the Liens
contained in the agreements listed on Schedule 3.3(a).
---------------
(b) Such Non-Employee Seller severally represents and warrants that
he, she or it has the power and authority to execute and deliver
this Agreement, to perform his, her or its obligations hereunder,
and to consummate the transactions contemplated hereby.
(c) Other than the approvals required by the HSR Act, and the Liens
which will terminate in connection with the termination and
release of the Terminating Agreements, and except as otherwise
set forth on Schedule 3.3(c), no permit, consent, waiver,
----------------
approval or authorization of, or declaration to or filing or
registration with, any Government authority or third party is
required in connection with the execution, delivery or
performance of this Agreement by such Non-Employee Seller or the
consummation by such Non-Employee Seller of the transactions
contemplated hereby.
(d) This Agreement has been duly executed and delivered by such
Non-Employee Seller and constitutes a legal, valid and binding
obligation of such Non-Employee Seller, enforceable against such
Non-Employee Seller in accordance with its terms, except that
such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally, and (ii)
general principles of public policy and equity (regardless of
whether considered in a proceeding in equity or law).
(e) Such Non-Employee Seller is not a party to, subject to or bound
by any note, bond, mortgage, indenture, deed of trust, agreement,
lien, contract or other instrument or obligation or any statute,
law, rule, regulation, judgment, order, writ, injunction, or
decree of any court, administrative or regulatory body,
governmental agency, arbitrator, mediator or similar body,
franchise or license, which would (i) except for Liens which will
terminate on Closing through debt discharge or otherwise as set
forth on Schedule 3.3(e) and except as otherwise set forth on
---------------
Schedule 3.3(e), conflict with or be breached or violated or the
---------------
obligations thereunder accelerated or increased (whether or not
with notice or lapse of time or both) by the execution, delivery
or performance by them of this Agreement. Except for Liens which
will terminate on Closing through debt discharge or otherwise as
set forth on Schedule 3.3(e) and except as otherwise set forth on
--------------
Schedule 3.3(e), no waiver or consent of any third person or
----------------
governmental authority is required for the execution by such
Non-Employee Seller of this Agreement, or the consummation by
such Non-Employee Seller of the transactions contemplated by this
Agreement. The execution of this Agreement by Non-Employee
Sellers and the consummation of the transactions contemplated
hereby will not result in the creation of any Liens against the
Company Shares, the Company, Non-Employee Sellers or any of the
respective properties or assets of the Company.
4.3 Related Party Transactions(a) . Except for the Amended and
Restated Shareholders Agreement dated July 9, 2002 among the
Company, Advanced Lighting Technologies, Inc., Strength Capital
Partners, LP and Lawrence M. Sears and assumed by the Trustee,
neither of the Non-Employee Sellers are parties to any agreement,
contract, commitment or other form of transaction or arrangement
with the Company, written or oral, or has any interest in any of
the Property. Neither of the Non-Employee Sellers own any direct
or indirect financial interest in any competitor with or supplier
or customer of the Company.
4.4 Brokers. No finder, broker, agent, or other intermediary, acting
on behalf of any Non-Employee Seller, is entitled to a
commission, fee or other compensation or obligation in connection
with the negotiation or consummation of this Agreement or any
other of the transactions contemplated hereby other than that
Algon Capital which will be paid by the ADLT Trust.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby makes the following representations and warranties to
Sellers, each of which is true and correct on the date hereof, shall be
true and correct on the Closing Date, and shall survive the Closing as
provided in Section 9.1.
5.1 Authorization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer
has all requisite power and authority to execute and deliver this
Agreement and the Related Agreement, to perform its obligations
hereunder and thereunder, and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement and any applicable Related Agreements by Buyer has been duly
authorized by all requisite corporate action on the part of Buyer.
This Agreement constitutes a valid and binding obligation of Buyer,
enforceable against it in accordance with its terms.
5.2 Consents. Other than the approvals required under the HSR Act, no
waiver or consent of any third person or Government is required for
the execution by Buyer of this Agreement or any applicable Related
Agreement or the consummation by Buyer of the transactions
contemplated hereby.
5.3 Brokers, Finders. No finder, broker, agent, or other intermediary
acting on behalf of Buyer, directly or indirectly, is entitled to a
commission, fee, or other compensation or obligation in connection
with the negotiation or consummation of this Agreement or any
applicable Related Agreement or any of the transactions contemplated
hereby.
ARTICLE VI.
COVENANTS NOT TO COMPETE
------------------------
In consideration of the Cash Purchase Price and the consummation of
the transactions contemplated hereby:
6.1 Non-Compete; Non-Solicit. Each Employee Seller agrees that he or she
shall not:
(a) Directly or indirectly through any entity other than the Company,
as a principal, employee, partner, shareholder, member, officer,
director, agent or otherwise, compete, assist in or provide
financial resources to any activity which competes with the
Business anywhere in the world during the Restrictive Period;
provided, however, that the running of such time period shall be
tolled during any period of time during which such Employee
Seller violates the provisions of this paragraph; provided, that
the foregoing shall not prohibit such Employee Seller from owning
2% or less of the outstanding equity securities of a publicly
traded entity;
(b) Use or disclose to anyone except authorized personnel of the
Company any trade secrets or confidential matters concerning the
Company, including, without limitation, secrets, customer lists
and credit records, employee data, sales representatives and
their territories, mailing lists, consultant arrangements,
pricing policies, operational methods, marketing plans or
strategies, product development and techniques or plans, research
and development programs and plans, business acquisition plans,
new personnel acquisition plans, designs and design projects, any
Intellectual Property (unless previously publicly disclosed in a
manner which would not and does not constitute a breach of this
Agreement or any other relevant agreement) and any other research
or business information concerning the Company which the Company
currently treats as confidential (whether or not a trade secret
under applicable law); or
(c) Directly or indirectly, for the Restrictive Period, solicit,
encourage to leave employment, or hire any officer or employee of
the Company or any person who at the time of proposed hire by
such Seller had been an officer or employee of the Company within
the previous 12 months, or induce or attempt to induce, or assist
anyone else to induce or attempt to induce, any customer of the
Company to reduce or discontinue its business with the Company or
disclose to anyone else the name and/or requirements of any such
customer.
6.2 Enforceability. Each Employee Seller acknowledges that the foregoing
restrictions are reasonable and agrees that in the event of any breach
thereof the harm to Buyer and the Company will be irreparable and
without adequate remedy at law and therefore that injunctive relief
with respect thereto will be appropriate. In the event that a court of
competent jurisdiction determines, in an Action brought by or on
behalf of Buyer or the Company, that any of the foregoing provisions
are unenforceable as stated, the Parties intend that such restrictions
be modified to permit the maximum enforceable restriction on each
Seller's competition with the Company.
6.3 Time Period. For purposes of this Agreement, "Restrictive Period"
---------------------
shall mean a period of 4 consecutive years from and after the Closing
Date.
ARTICLE VII.
ADDITIONAL COVENANTS OF THE PARTIES
-----------------------------------
7.1 Confidentiality. The Sellers will not make any public disclosure of
the terms hereof or issue any press release with respect to the
transactions contemplated by this Agreement or otherwise issue any
written public statements with respect to such transactions without
the prior written consent of Buyer, not to be unreasonably withheld,
delayed or conditioned, except as may be required by applicable
requirements of Laws or by obligations pursuant to any listing
agreement with any national securities exchange or quotation system.
Each Seller agrees that he, she or it shall not use or disclose to
anyone except authorized personnel of the Company, Buyer or its
Affiliates, and only as reasonably necessary in the performance of his
or her duties on behalf of the Company, Buyer or its Affiliates,
whether or not for his, her or its own benefit or otherwise, any trade
secrets or confidential matters concerning the Company, including,
without limitation, secrets, customer lists and credit records,
employee data, sales representatives and their territories, mailing
lists, consultant arrangements, pricing policies, marketing plans or
strategies, product development and techniques or plans, research and
development programs and plans, business acquisition plans, new
personnel acquisition plans, designs and design projects, and any
Intellectual Property (unless previously publicly disclosed in a
manner which would not and does not constitute a breach of this
Agreement or any other relevant agreement) which the Company currently
treats (or after the Closing treats) as confidential (whether or not a
trade secret under applicable law).
7.2 Further Assurances. From and after the Closing, the Parties shall do
such acts and execute such documents and instruments as may be
reasonably required to make effective the transactions contemplated
hereby provided that no Party shall be required to incur any
additional economic burden in complying with this Section.
7.3 Taxes.
(a) All transfer, documentary, sales, use, stamp, registration and
other such Taxes and all conveyance fees, recording charges and
other fees and charges (including any penalties and interest)
incurred in connection with consummation of the transactions
contemplated by this Agreement shall be paid by Employee Sellers
when due, and Employee Sellers will, at their own expense, file
all necessary Tax Returns and other documentation with respect to
all such Taxes, fees and charges, 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.
(b) Employee Sellers shall prepare or cause to be prepared, and file
or cause to be filed, all Tax Returns relating to Taxes imposed
upon or related to income or gross income (but not gross
receipts) ("Income Tax Returns") of the Company for any Taxable
---------------------
period ending on or before the Closing Date ("Pre-Closing
------------
Periods"). Such Income Tax Returns will be prepared in a manner
--------
consistent with prior Tax Returns of the Company to the extent
permitted by applicable law. Employee Sellers shall permit Buyer
to review and comment on such Tax Returns prior to filing. All
other Tax Returns of the Company due after the Closing Date shall
be prepared by Buyer. Notwithstanding anything in this Agreement
to the contrary, all Taxes payable with respect to all Tax
Returns for Pre-Closing Periods shall be borne by the Employee
Sellers and promptly remitted to Buyer to the extent such Taxes
exceed the liabilities for such Taxes accrued on the Closing
Balance Sheet and taken into account in computing the Working
Capital Adjustment.
(c) Buyer shall prepare or cause to be prepared, and file or cause to
be filed, all Tax Returns of the Company for Taxable periods
commencing on or prior to the Closing Date and ending after the
Closing Date (a "Straddle Period"). The portion of any Straddle
------------------
Period Tax that is allocable to Employee Sellers (a "Seller
-------
Period") shall be (i) in the case of Taxes that are (x) based
-------
upon or related to income or receipts, (y) imposed in connection
with the sale or other transfer or assignment of property (real
or personal, tangible or intangible), (z) employment, social
security or other similar Taxes, deemed equal to the amount which
would be payable if the taxable year ended at the end of the
Closing Date; and (ii) in the case of Taxes imposed on a periodic
basis with respect to any assets or otherwise measured by the
level of any item, deemed to be the amount of such Taxes for the
entire period (or, in the case of such Taxes determined on an
arrears basis, the amount of such Taxes for the immediately
preceding period) multiplied by a fraction the numerator of which
is the number of calendar days in the period ending at the end of
the Closing Date and the denominator of which is the number of
calendar days in the entire taxable period. Any amounts payable
by Employee Sellers, reduced by any liability for such Tax to the
extent such Taxes exceed the liabilities for such Taxes accrued
on the Closing Balance Sheet and taken into account in computing
the Working Capital Adjustment, shall be paid to Buyer within
fifteen (15) days after the date on which such Taxes are paid
with respect to such periods. Each Party shall be responsible for
their own cost with respect to the preparation of Tax Returns for
which such Party is responsible for preparing.
(d) Buyer or the Company may file such change of address notices with
respect to Tax Returns, filed or unfiled, as may be deemed
appropriate. Buyer and Employee Sellers agree to give each other
prompt written notice in the event either party receives any
written notification from the IRS relating to any audit of the
any Tax Returns for any period ending on or before the Closing,
provided however, a party shall be deemed to have violated this
covenant only to the extent such failure impairs or otherwise
prejudices the other party's rights granted herein or its ability
to respond to such audit notification. Buyer and Sellers agree to
furnish or cause to be furnished to each other, upon request, as
promptly as practical, such information (including reasonable
access to books and records, Tax Returns and Tax filings) and
assistance as is reasonably necessary for the filing of any Tax
Return, the conduct of any Tax audit, and for the prosecution or
defense of any claim, suit or proceeding relating to any Tax
matter. Buyer and Employee Sellers shall cooperate with each
other in the conduct of any Tax audit or other Tax proceedings
and each shall execute and deliver such powers of attorney and
other documents as are necessary to carry out the intent of this
Section 7.3. Any Tax audit or other Tax proceeding shall be
deemed to be a Third Person claim subject to the procedures set
forth in Article VIII of this Agreement. For purposes of
indemnification claims relating to Taxes, a taxing authority
shall be deemed a third party.
(e) Within 120 days after Closing, the Employee Sellers shall deliver
to Buyer a Tax balance sheet for the Company as of December 31,
2005. Such Schedule shall be true, correct and complete in all
material respects.
7.4 Employee Sellers' Representative; Actions.
(a) Employee Sellers hereby appoint Martin Zucker as the
representative of Employee Sellers (the "Representative"), to be
----------------
their true and lawful attorney-in-fact for all matters in
connection with this Agreement, including without limitation the
acceptance of any claim by Buyer, and the compromise of any
disputes between Buyer and Employee Sellers relating to this
Agreement. The Representative will act on behalf of Employee
Sellers with respect to all matters requiring action by the
Employee Sellers under this Agreement. The Representative hereby
accepts such appointment. In the event of the incapacity of
Martin Zucker, a successor Representative will be appointed by
Buyer and such Employee Sellers which are former holders of a
majority of the Company Shares.
(b) The Representative shall take all actions required to be taken by
Employee Sellers or the Representative under this Agreement and
may take any action contemplated by this Agreement. By giving
notice to the Representative in the manner provided by
Section 10.1, Buyer shall be deemed to have given notice to all
Employee Sellers. Any action taken by the Representative may be
considered by Buyer to be the action of Employee Sellers for whom
such action was taken for all purposes of this Agreement.
Further, to the extent the terms of this Agreement allow Buyer to
satisfy any obligation owed by Buyer to the Employee Sellers by
provision of notice, payment or other obligation to the
Representative, Buyer shall be entitled to consider such
obligation discharged in full upon such provision of notice,
payment or other obligation.
(c) In the event that Buyer gives notice to the Representative of a
claim for which indemnification may be sought, the Representative
shall have the authority to determine, in his or her sole
judgment, whether to retain counsel (and to select that counsel)
to protect Employee Sellers' interests, whether to assume the
defense of or otherwise to control the handling of the claim,
whether to consent to indemnification and to make all other
decisions required to be made by Employee Sellers pursuant to
this Agreement, including without limitation whether to consent
or withhold his or her consent to any settlement or compromise of
a claim.
(d) The Representative shall not be liable to any Seller for any act
or omission taken pursuant to or in conjunction with this
Agreement, except for his or her own gross negligence or willful
misconduct. Employee Sellers shall indemnify and hold the
Representative, and each successor thereof, harmless from any and
all liability and expenses (including, without limitation,
counsel fees) which may arise out of any action taken or omitted
by him or her as Representative in accordance with this
Agreement, as the same may be amended, modified or supplemented,
except such liability and expense as may result from the gross
negligence or willful misconduct of the Representative.
(e) The Representative agrees that within a reasonable time after
receipt of notice of a claim, he or she shall give each Seller
notice of same and shall from time to time keep Employee Sellers
apprised as to developments with respect to such claim. Such
notices shall be sent to Employee Sellers at their respective
addresses as may be communicated to the Representative in writing
by Employee Sellers.
7.5 Regulatory and Other Authorizations; Consents.
(a) The Parties have each filed a notification and report form
pursuant to the HSR Act with respect to the transactions
contemplated by this Agreement. The Parties agree to supply
promptly any additional information and documentary material that
may be requested pursuant to the HSR Act. Buyer shall be
responsible for all of the filing fees associated with such
filings under the HSR Act.
(b) Each Party shall promptly notify the other Parties of any
communication it receives from any Government relating to the
matters that are the subject of this Agreement. Sellers will
permit counsel for Buyer to review in advance any proposed
communication by Sellers with any Government. Each Party shall
provide each other with copies of all correspondence, filings or
communications between them or any of their representatives, on
the one hand, and any Government or members of its staff, on the
other hand, subject to Section 7.1. Sellers shall not agree to
participate in any meeting with any Government in respect of any
such filings, investigation or other inquiry unless it consults
with Buyer in advance and, to the extent permitted by such
Government, gives Buyer the opportunity to attend and participate
at such meeting. Subject to the Letter of Intent by and among
Buyer and Sellers dated December 2, 2005 (the "Confidentiality
----------------
Agreement") and to Section 7.1, the Parties will coordinate and
----------
cooperate fully with each other in exchanging such information
and providing such assistance as the other Parties may reasonably
request in connection with the foregoing..
(c) Each Party agrees to cooperate in obtaining any other consents
and approvals that may be required in connection with the
transactions contemplated by this Agreement and the other
agreements executed in connection herewith; provided, however,
that neither Party shall be required to compensate any third
party, commence or participate in litigation or offer or grant
any accommodation (financial or otherwise) to any third party to
obtain any such consent or approval.
7.6 Buyers Post-Closing Covenants.
(a) Buyer agrees that, for a period of 5 years following the Closing
Date, Buyer will use commercially reasonable efforts to fund or
otherwise obtain funding for the automatic meter reading research
and development expenses of the Company at levels equal to or
greater than $2,000,000.
(b) Within six months following the Closing Date, Buyer agrees to, or
cause the Company to, establish in the name of the Company and
Lawrence Sears, to an Endowment Fund for Case Western Reserve
University's Case School of Engineering in the aggregate amount
of $500,000 for engineering studies. Buyer agrees to permit
Lawrence Sears to serve as the donor representative in all
dealings with the University. Lawrence Sears agrees that the name
of the Company will be publicly associated with this endowment.
(c) As soon as practicable, but not later than one year following the
Closing Date, Buyer or one or more of its Affiliates shall
establish a charitable foundation (or cause a separate fund at
the ESCO Technologies Foundation to be established) with
aggregate contributions of One Million Dollars ($1,000,000) to be
utilized to make scholarship awards for post-secondary education
for the benefit of eligible dependents of persons employed by the
Company on the Closing Date. The criteria for granting
scholarship awards and establishing the terms of the charitable
foundation shall comply with the requirements set forth in
Sections 117, 170 and 501 of the Code.
(d) Within sixty days of the Closing Date, Buyer agrees to cause the
Company to create a $1 million cash retention plan (the "Cash
-----
Retention Plan") to be utilized for the retention and benefit of
---------------
certain key non-executive employees of the Company in the form of
incentive awards ("Awards"). Awards shall vest and be payable to
-------
the specified employees ratably on the first, second and third
anniversaries of the Closing Date, if such employee remains
employed by the Company on such anniversary dates. For
clarification, thirty-three percent (33.3%) of each Award shall
vest on each anniversary date. The allocation of the Awards among
the qualified employees will be determined by agreement between
the Buyer and the Employee Sellers. The Company shall pay the
vested amounts of the Awards to employees within ninety days
following each anniversary date.
(e) Within one year of the Closing Date, the Buyer agrees to
establish an Advanced Metering Technology Committee (the "AMT
----
Committee") within the organization of the Buyer or one of its
----------
Affiliates. The Buyer agrees to cause the Company to fund
activities of the AMT Committee at the rate of $200,000 per year
for each year of its initial three year charter and to conduct
any activities deemed appropriate by the AMT Committee to further
develop automated meter reading technologies. The Buyer will
designate all members of the AMT Committee, except that it shall
include Lawrence Sears on the AMT Committee.
(f) Buyer agrees to cause the Company and/or one of Buyer's
Affiliates to establish an internship program to develop and
train technology interns and employees and assist in
technological advances and staffing of Buyer's Affiliates that
operate in the advanced metering industry.
7.7 Sellers Releases; Additional Information.
(a) The Sellers hereby release the Company, the Buyer and each of
their respective Affiliates from any and all claims, obligations
or liabilities of any nature arising out of or related to the
Prior Employment Agreements, the Shareholder Agreements, the
Strength Capital Warrant, the indemnification obligations set
forth in Article IV of the Third Amended and Restated Regulations
of the Company, the Indemnification Agreements and any agreements
relating to the subject matter thereof, and all such agreements
are hereby deemed void and of no further force and effect. "Prior
------
Employment Agreements" shall mean (i) that certain Employment
-----------------------
Agreement (Amended and Restated) dated November 16, 2004 and
effective November 1, 2003 between the Company and Gary Moore,
(ii) that certain Employment Agreement effective January 1, 2004
between the Company and Richard Riccardi and (iii) that certain
Employment Agreement effective January 1, 2004 between the
Company and Martin Zucker. "Indemnification Agreements" shall
----------------------------
mean each of (i) any indemnification agreement between the
Company and Lawrence Sears, (ii) that certain Indemnification
Agreement dated November 1, 2004 between the Company and Gary
Moore, (iii) that certain Indemnification Agreement dated July 9,
2001 between the Company and Richard Riccardi and (iv) that
certain Indemnification Agreement dated August, 1998 between the
Company and Martin Zucker. "Shareholder Agreements" shall mean:
------------------------
(i) that certain Employee Shareholder Agreement dated November
15, 2004 between the Company and Gary Moore (ii) that certain
Employee Shareholder Agreement dated April 24, 2002 between the
Company and Richard Riccardi (iii) that certain Employee
Shareholder Agreement dated April 24, 2002 between the Company
and Martin Zucker (iv) that certain Amended and Restated
Shareholders Agreement dated July 9, 2002 among the Company,
Advanced Lighting Technologies, Inc., Strength Capital Partners,
L.P. and Lawrence M. Sears and (v) that certain Registration
Rights Agreement dated July 9, 2001 between the Company and
Strength Capital Partners, L.P. "Strength Capital Warrant" shall
--------------------------
mean the warrant issued to Strength Capital Partners, L.P. dated
July 9, 2001. The Buyer agrees to cause the Company to accept all
releases set forth in this Section 7.7.
(b) The Employee Sellers hereby release the Company, the Buyer and
each of their respective Affiliates from any and all claims,
obligations or liabilities of any nature arising out of or
related to the 2001 and 2004 Stock Option Plans, any awards
thereunder and any prior agreements relating to the subject
matter thereof and all such agreements are hereby deemed void and
of no further force and effect.
(c) The Sellers, each in their capacity as a shareholder of the
Company acting by unanimous written consent, hereby ratify all
prior acts of the shareholders and directors of the Company and
all other acts of the Company and its Affiliates, and each Seller
hereby releases the Company, the Buyer and each of their
respective Affiliates from any and all claims, obligations or
liabilities of any nature arising out of or related to such prior
acts of the shareholders and directors of the Company and all
other acts of the Company and its Affiliates.
7.8 Notification of Certain Matters. The Sellers shall give prompt notice
to Buyer if any of the following occur after the date of this
Agreement: (i) any notice of, or other communication relating to, a
default or event, occurrence, fact, condition, change, development or
effect ("Event") which, with notice or lapse of time or both, would
-------
become a default under any Contract listed on Schedules 3.11(a)-(n);
----------------------
(ii) receipt of any notice or other communication from any third party
alleging that the consent, approval, waiver or authorization of,
notice to or declaration or filing with, such third party is or may be
required in connection with the transactions contemplated by this
Agreement; (iii) receipt of any material notice or other communication
from any Government authority in connection with the transactions
contemplated by this Agreement; (iv) the occurrence of an event which
would have a Company Material Adverse Effect (as defined below) or
Company Material Adverse Change (as defined below); (v) the
commencement or threat of any Action involving or affecting the
Company, or any of its Property which, if pending on the date hereof,
would have been required to have been disclosed in or pursuant to this
Agreement or which relates to the consummation of the transactions
contemplated by this Agreement or any material development in
connection with any Action disclosed by the Company in or pursuant to
this Agreement; and (vi) the occurrence of any Event that would cause
a breach by the Sellers of any provision of this Agreement, including
such a breach that would occur if such Event had taken place on or
prior to the date of this Agreement. "Company Material Adverse Change"
---------------------------------
and "Company Material Adverse Effect" means any change or effect that
---------------------------------
is or could reasonably be expected to be materially adverse to the
Business, operations, assets, liabilities, employee relationships,
earnings or results of operations, or the business prospects or
condition (financial or otherwise), of the Company, but shall be
deemed to exclude any adverse change or effect to the extent resulting
from matters, which are of a general economic nature, that affect the
industry in which the Company operates.
7.9 Insurance Policies. Buyer will not, and will cause the Company not to,
cancel any fully paid Director and Officer, E&O or warranty and
representation insurance policy purchased by the Employee Sellers, if
any, in connection with this Agreement or the transactions
contemplated hereby.
7.10 FCC Licenses. The Sellers hereby agree to transfer all their right,
title and interests in the ownership interests in SRMZBCo. to the
Company or, at the sole election and discretion of the Company, to
cause SRMZBCo. to transfer all its right, title and interests in the
FCC Licenses to the Company within 5 Business Days of receipt by
SRMZBCo. of approval of such transfer from the Federal Communications
Commission, or otherwise within 10 Business Days or receipt of written
demand by the Company. All such transfers of equity interest in
SRMZBCo. or the FCC Licenses shall be at no additional costs to the
Company, the Buyer or any of their respective Affiliates (except for
any necessary filing fees, which shall be paid by the Company). Each
Seller hereby grants to the Company a security interest in their
respective equity interests of SRMZBCo. Sellers agree not to cause or
permit any Lien to be granted against the FCC Licenses or their
respective ownership interests of SRMZBCo., other than Liens granted
to the Company. Sellers shall take all reasonable actions as may be
requested by Buyer in order to perfect the security interests granted
to the Company.
ARTICLE VIII.
CONDITIONS TO CLOSING
---------------------
8.1 Conditions Precedent to Obligations of Buyer. The obligations of Buyer
to proceed with the Closing shall be subject to the satisfaction, on
or prior to the Closing Date, of each of the following conditions
precedent, any of which may be waived in whole or in part by Buyer:
(a) All representations and warranties made by Sellers in this
Agreement shall be true and correct in all material respects on
and as of the Closing Date with the same effect as if such
representations and warranties had been made on and as of the
Closing Date (unless qualified by materiality in which case such
representation shall be true and correct in all respects), except
to the extent that any such representation or warranty by its
terms relates to an earlier date, and except to the extent of any
change permitted by the terms of this Agreement or consented to
by Buyer, and Sellers shall have performed or complied in all
material respects with all covenants, agreements and conditions
contained in this Agreement on their part required to be
performed or complied with at or prior to the Closing. Sellers
shall deliver to Buyer at the Closing a certificate certifying
that the conditions stated in this Section 8.1 have been
fulfilled;
(b) On the Closing Date, there shall exist no valid judicial order
which would prohibit the consummation of the transactions
contemplated by this Agreement or the Related Agreements;
(c) No facts or circumstances shall have occurred or arisen since the
date hereof that have or would reasonably be expected to have had
a material adverse effect on the Business, affairs, assets,
liabilities, condition (financial or otherwise), operations,
prospects or the condition of the property of the Company;
(d) All material consents and approvals identified on Schedule 2.4(i)
---------------
relating to the Company shall have been obtained from (i)
Governments, including without limitation under the HSR Act, and
(ii) third parties under Contracts, including without limitation,
the waiver executed by Pacific Gas & Electric Company ("PG&E") of
------
the application of the Change of Control Provision contained in
the Supply Agreement entered into between the Company and PG&E
dated November 1, 2005 (the "PG&E Contract") upon terms
-----------------
acceptable to Buyer;
(e) The Sellers shall have delivered to Buyer all of the documents
required to be delivered by them under Section 2.4 of this
Agreement; and
(f) Employee Sellers and/or the Company shall have caused all amounts
due to Wells Fargo Business Credit, Inc. under the Company's
Credit Facility to have been paid in full and all related
guaranties, mortgages and security interests granted pursuant to
such credit facility to have been released.
8.2 Conditions Precedent to Obligations of Sellers. The obligations of
Sellers to proceed with the Closing shall be subject to the
satisfaction, on or prior to the Closing Date, of each of the
following conditions precedent, any of which may be waived in whole or
in part by the Sellers:
(a) All representations and warranties made by Buyer in this
Agreement shall be true and correct in all material respects on
and as of the Closing Date with the same effect as if such
representations and warranties had been made on and as of the
Closing Date, except to the extent that any such representation
or warranty by its terms relates to an earlier date, and except
to the extent of any change permitted by the terms of this
Agreement or consented to by Sellers, and Buyer shall have
performed or complied in all material respects with all
covenants, agreements and conditions contained in this Agreement
on its part required to be performed or complied with at or prior
to the Closing. Buyer shall deliver to Sellers at the Closing a
certificate of an officer of Buyer certifying that the conditions
stated in this Section 8.2 have been fulfilled;
(b) On the Closing Date, there shall exist no valid judicial order
which would prohibit the consummation of the transactions
contemplated by this Agreement or the Related Agreements;
(c) All material consents and approvals relating to the Company
required to be obtained from Governments, including without
limitation under the HSR Act, and from third parties under
Contracts shall have been obtained; and
(d) Buyer shall have delivered to Sellers the Initial Purchase Price,
required to be delivered by it under Section 2.5.
ARTICLE IX.
INDEMNIFICATION
---------------
9.1 Survival of Representations and Warranties.
All representations and warranties of the Sellers set forth in
Article III and Article IV, and the Buyer set forth in Article V, of
this Agreement shall survive the Closing and shall remain in effect
for a period of twenty-four (24) months after the Closing Date and
shall thereupon terminate and be of no further force and effect;
provided, however, that the foregoing shall not apply to
representations and warranties under Sections 3.1 through 3.3 and
Article IV which shall survive for the period of the statute of
limitations applicable to any third party's claim plus an additional
six months, Section 3.20 which shall survive for five years from the
Closing Date and Section 3.7 which shall survive past the Closing Date
for the applicable statutes of limitations plus an additional 60 days;
and provided, further, that this shall not prohibit any claim for
Indemnified Losses pursuant to Section 9.2 after such applicable
survival period with respect to Indemnified Losses as to which the
Sellers who are to be held liable for such claim have received notice
in accordance with this Article IX prior to the expiration of such
survival period. The expiration of any representation or warranty made
in this Agreement delivered pursuant hereto shall not impair or
restrict the rights that any Party could assert with respect to any
and all remedies at law or in equity in the absence of such
representation or warranty. All representations and warranties
hereunder shall be deemed to be material and, except as otherwise
specifically provided herein, relied upon by the Parties with or to
whom the same were made, notwithstanding any investigation or
inspection made by or on behalf of such Party or Parties.
9.2 Indemnification.
(a) The Employee Sellers, jointly and severally (except only
severally with respect to those Sections, or parts of Sections,
in Article III which by their terms expressly state that they
shall be several and not joint), hereby agree to indemnify and
hold Buyer, the Company, their respective shareholders,
directors, officers, employees, Affiliates, successors, assigns
and agents of each of them, other than Sellers themselves
(collectively, the "Buyer Indemnified Parties") harmless from,
-----------------------------
against and in respect of, and waive any claim for contribution
or indemnity with respect to, any and all claims, losses,
damages, liabilities, obligations, expenses or costs, except as
otherwise provided in Section 9.2(d) ("Losses"), plus reasonable
--------
attorneys' fees and expenses incurred in connection with Losses
and/or enforcement of this Agreement, plus interest from the date
a claim is made through the date of payment at the prime
commercial lending rate announced from time to time in The Wall
Street Journal plus one and one-half percent (in all,
"Indemnified Losses") incurred or to be incurred by any of them
---------------------
to the extent resulting from or arising out of:
(i) any breach of the representations and warranties contained
in Article III;
(ii) any breach of any of the covenants or obligations contained
in this Agreement;
(iii) as provided in Section 9.6;
(iv) related to the conversion or exchange of any Company
Preferred Stock held by Strength Capital Partners, L.P. or
the acquisition of ADLT's warrant and underlying Company
Shares by Lawrence Sears;
(v) any matters disclosed in Schedules 3.20(a) through 3.20(i);
(vi) the failure to provide COBRA notices; the failure to
properly document the cafeteria plan and the 401(k) Plan,
including any corrective actions taken with respect to such
failures; the failure to make timely contributions to the
401(k) plan, including any corrective actions taken with
respect to such failures; and the Employment Cases, where
"Employment Cases" means (A) any cases or claims relating to
-----------------
or arising out of the EEOC case filed by Wilma Caniglia, (B)
any cases or claims relating to or arising out of the EEOC
case filed by Jennifer Walker, (C) any cases or claims or
related to or arising out of the ADA case having EEOC charge
number 220-2006-00390, and (D) any cases or claims relating
to or arising out of any charges made by Angela Cogburn with
the Ohio Civil Rights Commission;
(vii) all matters disclosed on Schedule 3.8(c), provided however
that the Employee Sellers obligation to indemnify and hold
harmless the Buyer Indemnified Parties for Indemnified
Losses arising out of or relating to the possession of the
disclosed Property shall terminate upon execution and
delivery of a Bailment Agreement in the form attached hereto
as Exhibit B, but only for the Property specifically
----------
identified in each Bailment Agreement; and
(viii) any claims (A) relating to indemnification of past
directors or officers of the Company or (B) arising out of
or related to the Company's failure to hold meetings of
shareholders or directors or to document any meetings.
(b) The Non-Employee Sellers, severally, and not jointly, hereby
agree to indemnify and hold the Buyer Indemnified Parties
harmless from, against and in respect of, and waive any claim for
contribution or indemnity with respect to, any and all
Indemnified Losses, except as otherwise provided in Section
9.2(d), incurred or to be incurred by any of the Buyer
Indemnified Parties to the extent resulting from or arising out
of any breach of the representations and warranties contained in
Article IV and any breach of any of the covenants or obligations
contained in this Agreement which expressly by their terms apply
to such Non-Employee Sellers;
(c) Buyer hereby agrees to indemnify and hold the Sellers and their
respective shareholders, directors, officers, employees,
Affiliates, successors, assigns and agents of each of them
(collectively, the "Seller Indemnified Parties") harmless from,
-----------------------------
against and in respect of, and waive any claim for contribution
or indemnity with respect to, any and all Indemnified Losses,
except as otherwise provided in Section 9.2(d), incurred or to be
incurred by any of them to the extent resulting from or arising
out of:
(i) any breach of the representations and warranties contained
in Article V; and
(ii) any breach of any of the covenants or obligations contained
in this Agreement.
(d) Losses shall not include punitive or special damages in
connection with or arising out of this Agreement (except for
punitive or special damages awarded third parties), however such
arise, whether in breach of contract, breach of warranty, by
operation of law or in tort, including negligence, and even if
Sellers have previously been advised of the possibility of such
damages, whether or not foreseeable. All Losses shall be
exclusive of any recovery under any insurance policy derived from
the net proceeds thereof after deducting any self pay or
increased premiums.
9.3 Set-off Rights.
Buyer shall be entitled to set off any amounts owing by the
Sellers to any of the Buyer Indemnified Parties pursuant to this
Article IX or otherwise, against any amounts owed to any of the
Sellers by Buyer, including, without limitation, the Contingent
Payments provided, however, Buyer shall first satisfy its claims
against the funds held in Escrow and shall not withhold the Contingent
Payments in anticipation of a determination of an indemnity claim
unless the Escrow Fund has a zero balance or the amount of such
claim(s) exceeds the amount remaining in the Escrow Fund.
9.4 Participation in Litigation.
In the event any suit or other proceeding is initiated against a
Buyer Indemnified Party or a Seller Indemnified Party (each, an
"Indemnified Party" and collectively, the "Indemnified Parties") with
------------------ ---------------------
respect to which the Indemnified Party alleges that the other Party is
or may be obligated to indemnify such Indemnified Party hereunder (the
"Indemnifying Party"), the Indemnifying Party shall be entitled to
---------------------
participate in such suit or proceeding, at its expense and by counsel
of their choosing, provided that (a) such counsel is reasonably
satisfactory to the Indemnified Party, and (b) the Indemnified Party
shall retain primary control over such suit or proceeding. Each
Party's counsel shall be afforded access to all information pertinent
to the suit or proceeding in question. The Indemnified Party shall be
entitled to settle or otherwise compromise any such suit or proceeding
provided that the Indemnified Party shall have notified the
Indemnifying Party of such settlement or compromise, and the
Indemnifying Party shall not have provided notice of objection (acting
reasonably) thereto within 48 hours of receipt of the Indemnified
Party's notice. Provided further, that the Indemnified Party may
proceed with such settlement or compromise if the Indemnifying Party
fails to provide a timely objection and/or if consent thereto is
withheld unreasonably.
9.5 Claims Procedure. In the event from time to time a Party seeks
indemnification on behalf of an Indemnified Party, it shall promptly
notify the Indemnifying Party in writing of the matter, specifying the
facts constituting the basis for such claim and the amount, to the
extent known, of the claim asserted; provided, however, that the right
of an Indemnified Party to be indemnified hereunder shall not be
adversely affected by a failure to give such notice unless, and then
only to the extent that, the Indemnifying Party is prejudiced thereby.
Unless disputed in accordance with the terms of this Agreement, the
Indemnifying Party shall pay any amount to be indemnified hereunder
not more than five days after receipt of notice from the Indemnified
Party of the amount to be indemnified. If disputed, the Indemnifying
Party shall pay any amount indemnified not more than five days after
the defense has been rejected pursuant to final, binding
determination.
9.6 Tax Indemnification. In addition to any other indemnification granted
herein relating to the breach of any representation or covenant
contained herein, the Employee Sellers agree to indemnify and hold
harmless the Buyer Indemnified Parties from and against any Losses,
including Sellers' liability for their own Taxes or their liability,
if any, for Taxes of others, and all other Losses payable with respect
to Taxes claimed or assessed against Buyer or the Company (i) for any
Taxable period ending on or before the Closing Date or arising out of
or related to the transactions contemplated by this Agreement to the
extent such Taxes exceed the liabilities for such Taxes accrued on the
Closing Balance Sheet and taken into account in computing the Working
Capital Adjustment, or (ii) resulting from a breach of any of the
representations or warranties contained in Section 3.7 hereof or
covenants contained in Section 7.3 hereof. Employee Sellers also agree
to indemnify and hold harmless the Buyer Indemnified Parties from and
against any and all Loss sustained in a Tax period of Buyer ending
after the Closing Date arising out of the settlement or other
resolution of a proposed Tax adjustment which relates to a Tax period
ending on or before the Closing Date.
9.7 Purchase Price Adjustment. With respect to any indemnity payment under
this Article IX, the Parties agree to treat, to the extent permitted
by Law, all such payments as an adjustment to the Cash Purchase Price
paid hereunder.
9.8 Limitations.
(a) Subject to the provisions of Sections 9.8(b), (c) and (d), in the
event of any claim for indemnity under Section 9.2:
(i) a Buyer Indemnified Party shall not be entitled to
indemnification therefor unless the Buyer Indemnified
Parties have sustained Losses in excess of Nine Hundred
Thousand Dollars ($900,000) in the aggregate (the "Basket"),
---------
in which event the Indemnified Party shall be entitled to
indemnification for the amount of all Losses suffered or
incurred in excess of Four Hundred Fifty Thousand Dollars
($450,000);
(ii) the Buyer Indemnified Parties shall not be entitled to
indemnification to the extent Losses exceed twenty-five
percent (25%) of the Cash Purchase Price (the "General
--------
Indemnification Limit"); and
----------------------
(iii) with respect to those representations and warranties made
severally by the Sellers under Article III or Article IV,
each Seller shall be liable only for the amount of the
Indemnified Losses attributable to that Seller's breach.
(b) Notwithstanding the provisions of Section 9.8(a), the General
Indemnification Limit shall not apply to claims for
indemnification under this Article IX with respect to any of the
following:
(i) Sections 3.1 through 3.3, and Section 3.20, and Article IV
and claims for indemnification Sections 9.2(a)(iv) in which
case the Buyer Indemnified Parties shall be entitled to
receive indemnification for all Indemnified Losses up to a
maximum amount equal to the Cash Purchase Price; or
(ii) Section 3.7, Section 3.13 and claims for indemnification
under Sections 9.2(a)(iii) in which case the Buyer
Indemnified Parties shall be entitled to receive
indemnification for all Indemnified Losses up to a maximum
amount equal to fifty percent (50%) of the Cash Purchase
Price.
(c) No Seller shall be liable for Indemnified Losses or for any
liability arising under or relating to this Agreement or for
actions or failures to act in connection with this Agreement or
the transactions contemplated by this Agreement in excess of the
amount of the Cash Purchase Price allocable to such Seller
hereunder, except such limit shall not apply in the event of
fraud or with respect to the Employment Agreements, the Leases or
the Consulting Agreement.
(d) Notwithstanding the above provisions of this Section 9.8, the
Escrow Fund and, by way of set off, the Contingent Payments are
available for payment of all Indemnified Losses, regardless if
such amounts exceed the liability of the Employee Sellers under
this Agreement with respect to such Indemnified Losses and
regardless if mutuality of debtor and creditor or other formal
requirements of set off exist. The foregoing remains subject to
the priorities set forth in Section 9.3.
9.9 Exclusive Remedies. Anything contained in this Agreement to the
contrary notwithstanding, the indemnification rights set forth in this
Article IX, all of which are subject to the terms, limitations, and
restrictions of this Article IX, shall be the exclusive remedy after
Closing for monetary damages sustained as a result of a breach of a
representation, warranty, covenant, or agreement under this Agreement,
except that the foregoing shall not apply to any remedies for monetary
damages that an Indemnified Party may have for fraud. In connection
with the seeking of any non-monetary equitable relief, each of the
Parties acknowledges and agrees that the other Parties hereto would be
damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, in addition, such limitations set
forth in this Article IX shall not impair the rights of any of the
Parties: (a) to seek non-monetary equitable relief, including (without
limitation) specific performance or injunctive relief to redress any
default or breach of this Agreement, including for the provisions of
Article VI and Article VII hereof; or (b) to seek enforcement,
collection, damages, or such non-monetary equitable relief to redress
any default or breach of any employment agreement or other agreement
to be delivered at Closing hereunder.
ARTICLE X.
MISCELLANEOUS PROVISIONS
------------------------
10.1 Notices. All notices, requests, demands, and other communications
required or permitted under this Agreement shall be in writing and
shall be deemed to have been duly given and made upon being delivered
either by courier or fax delivery to the Party for whom it is
intended, provided that a copy thereof is deposited, postage prepaid,
certified or registered mail, return receipt requested, in the United
States mail, bearing the address shown in this Section 10.1 for, or
such other address as may be designated in writing hereafter by, such
Party:
If to Buyer:
ESCO Technologies Holding Inc.
9900A Clayton Road
St. Louis, Missouri 63124-1186
Attention: General Counsel
Facsimile No.: (314) 213-7215
With a copy to:
Bryan Cave LLP
One Metropolitan Square, Suite 3600
211 North Broadway
St. Louis, Missouri 63102
Attention: Frederick W. Bartelsmeyer
Facsimile: (314) 259-2020
If to Employee Sellers:
As "Representative"
Martin R. Zucker
23905 Mercantile Road
Beachwood, Ohio 44122
Facsimile: (216) 464-3426
With a copy to:
Persky, Shapiro & Arnoff Co. LPA
Beachwood, Ohio 44122-5687
Attention: Jerrold L. Goldstein
Facsimile: (216) 593-0921
If to Strength Capital Partners, L.P:
Strength Capital Partners, L.P.
555 S. Old Woodward Ave. No. 755
Birmingham, MI 48009
Facsimile: (248) 593-6875
And a copy to:
R. Jamison Williams, Jr.
Williams, Williams, Rattner & Plunkett, P.C.
380 North Old Woodward Ave, Suite 300
Birmingham, MI 48009
Facsimile: 248-642-0856
If to ADLT Class 7 Liquidating Trust:
Bridge Associates, LLC, Trustee
2701 N. Rocky Poinyt Dr., Suite 183
Tampa, Florida 33607
And a copy to:
Levenfeld Pearlstein LLP
211 North LaSalle, Suite 1300
Chicago, Illinois 60602
Attention: Aaron Kase and Philip E. Rubin
Facsimile: (312) 346-8434
10.2 Entire Agreement. This Agreement (which includes the Schedules and
Exhibits hereto) embodies the entire agreement and understanding of
the Parties with respect to the subject matter hereof, and supersedes
all prior and contemporaneous agreements and understandings relative
to such subject matter.
10.3 Assignment; Binding Agreement. This Agreement and the various rights
and obligations arising hereunder shall inure to the benefit of and be
binding upon the Parties and their respective successors, heirs,
devisees, legatees, legal representatives and permitted assigns.
Neither this Agreement nor any of the rights, interests, or
obligations hereunder shall be transferred, delegated, or assigned (by
operation of Law or otherwise) by Buyer without the prior written
consent of the Sellers or by any of the Sellers without the prior
written consent of Buyer; provided, however, that Buyer shall have the
right to transfer and assign its rights hereunder to purchase the
Company Shares and any other rights or benefits afforded to it by this
Agreement to any entity which is controlled by ESCO Technologies Inc.,
the parent of Buyer.
10.4 Counterparts. This Agreement may be executed simultaneously in
multiple counterparts and delivered by facsimile or other electronic
transmission, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
10.5 Headings; Interpretation. The Article and Section headings contained
in this Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of the Agreement. Each
reference in this Agreement to an Article, Section, Schedule or
Exhibit, unless otherwise indicated, shall mean an Article or a
Section of this Agreement or a Schedule or Exhibit attached to this
Agreement, respectively. References herein to "days," unless otherwise
indicated by reference to "Business Days," are to consecutive calendar
days. Words in the singular shall be held to include the plural and
vice versa. Words of one gender shall be held to include both genders.
The word "including" and words of similar import shall mean "including
without limitation" unless otherwise specified. The word "or" shall
not be exclusive unless otherwise specified. Provisions shall apply,
when appropriate, to successive events and transactions. Each Party
hereto has participated substantially in the negotiation and drafting
of this Agreement and each Party agrees that any ambiguity herein
should not be construed against the draftsman. The words "herein",
"hereof" and "hereunder", and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to any
particular provision hereof. The word "will" shall be construed to
have the same meaning and effect as the word "shall". Unless otherwise
stated in this Agreement, any definition of or reference to any
agreement, contract, document, instrument or other record herein shall
be construed as referring to such agreement, contract, document,
instrument or other record as from time to time amended, supplemented,
restated or otherwise modified (i) prior to the date of this
Agreement, and (ii) if expressly permitted by this Agreement after the
date of this Agreement (subject to any applicable restrictions on such
amendments, supplements or modifications).
10.6 Expenses. The Company shall pay all cost and expenses of the Employee
Sellers and the Company associated with the negotiation, preparation
and execution of this Agreement and consummation of the transactions
contemplated hereby, including the fees and expenses of attorneys and
accountants, provided however, the Company shall not pay any fees due
to brokers or investment bankers relating to the transactions
contemplated by this Agreement other than that the Company shall pay
certain fees of England Securities under the letter agreement dated
November 9, 2005, to the extent these are not therein designated
"success fees." Buyer shall pay all costs and expenses incurred on its
behalf in connection with the negotiation, preparation and execution
of this Agreement and the consummation of the transactions
contemplated hereby, including, without limitation, the fees and
expenses of its attorneys and accountants. Fees connected with the HSR
Act are allocated among the Parties as provided in Section 7.5(a).
10.7 Remedies Cumulative. Except as otherwise provided herein, all rights
and remedies of the Parties under this Agreement are cumulative and
without prejudice to any other rights or remedies under Law.
10.8 Governing Law. This Agreement shall in all respects be construed in
accordance with and governed by the substantive laws of the State of
Missouri, without reference to its choice of law rules.
10.9 No Third Party Beneficiaries or Other Rights. Subject to the rights
granted the Indemnified Parties in Article IX, nothing herein shall
grant to or create in any person not a party hereto, or any such
person's dependents or heirs, any right to any benefits hereunder, and
no such party shall be entitled to sue any party to this Agreement
with respect thereto. The representations and warranties contained in
this Agreement are made for purposes of this Agreement only and shall
not be construed to confer any additional rights on the Parties under
applicable state and federal securities laws. For purposes of clarity,
this Agreement, including this Section 10.9, does not grant any rights
to any third parties to sue the Buyer for breach of any covenants set
forth in Section 7.6 or, unless such a third party action clearly is
intended by the express terms of this Agreement, for breach of any
other covenants or obligations set forth elsewhere in this Agreement.
10.10 Disclosure Schedule. Any disclosure with respect to a Section or
Schedule of this Agreement shall not be deemed to be disclosed for any
other Sections or Schedules of this Agreement but shall be deemed to
be disclosed only for the specific Section or Schedule expressly and
explicitly referenced.
10.11 Venue. Any proceeding arising out of or relating to this Agreement
shall be brought in the courts of the State of Missouri, County of St.
Louis, or, if it has or can acquire jurisdiction, in the United States
District Courts of the State of Missouri, Eastern District, and each
of the Parties irrevocably submits to the exclusive jurisdiction of
each such court in any such proceeding, waives any objection it may
now or hereafter have to venue or to convenience of forum, agrees that
all claims in respect of the proceeding shall be heard and determined
only in any such court and agrees not to bring any proceeding arising
out of or relating to this Agreement in any other court. The Parties
agree that any of them may file a copy of this paragraph with any
court as written evidence of the knowing, voluntary and bargained
agreement between the Parties irrevocably to waive any objections to
venue or to convenience of forum. Process in any proceeding referred
to in the first sentence of this section may be served on any party
anywhere in the world. The Parties hereby waive their right to a jury
trial.
10.12 Frustration of Closing. No party to this Agreement may rely upon the
failure of any condition precedent to the Closing, as set forth
herein, if such failure was caused by such party's failure to comply
with its obligation and/or other transactions contemplated in this
Agreement.
[Remainder of this page intentionally left blank, signature page follows.]
IN WITNESS WHEREOF, each of the Parties hereto has caused this
Agreement to be executed as of the date first above written.
BUYER:
ESCO TECHNOLOGIES HOLDING INC.
By: s/Charles J. Kretschmer
Name: Charles J. Kretschmer
Title: Vice President and
Chief Operating Officer
EMPLOYEE SELLERS:
s/Lawrence Sears
Lawrence Sears
s/Gary L. Moore
Gary L. Moore
s/Richard C. Riccardi
Richard C. Riccardi
s/Martin Zucker
Martin Zucker
NON-EMPLOYEE SELLERS:
BRIDGE ASSOCIATES, LLC,
TRUSTEE OF THE ADLT CLASS 7
LIQUIDATING TRUST,
successor in interest to
Advanced Lighting Technologies, Inc.
By: s/Mark Stickel
Name: Mark Stickel
Title:
STATE OF NEVADA)
) SS
COUNTY OF CLARK)
I, ________________________, a notary public, do hereby certify that on
this _____ day of January, 2006, personally appeared before me Mark Stickel who,
being by me first duly sworn, declared that he is an Authorized Signatory of
Bridge Associates, LLC, that he signed the foregoing document as Authorized
Signatory of Bridge Associates, LLC, and that the statements therein contained
are true.
STRENGTH CAPITAL PARTNERS, L.P.,
By: s/Mark R. McCammon
Name: Mark R. McCammon
Title: Managing Partner
STATE OF MICHIGAN)
) SS
COUNTY OF OAKLAND)
I, ________________________, a notary public, do hereby certify that on
this _____ day of January, 2006, personally appeared before me Mark R. McCammon
who, being by me first duly sworn, declared that he is a Managing Partner of
Strength Capital Partners, L.P., that he signed the foregoing document as
Managing Partner of Strength Capital Partners, L.P., and that the statements
therein contained are true.
TABLE OF EXHIBITS AND SCHEDULES
-------------------------------
EXHIBITS
- --------
Exhibit A Shareholder List
Exhibit B Bailment Agreement
SCHEDULES
- ---------
Schedule 2.4(p) Patents To Be Assigned By Larry Sears
Schedule 2.4(i) Consents and Approvals Relating to the Company
Schedule 2.8(a) Working Capital
Schedule 3.1 Hexagram's Qualification to do Business
Schedule 3.2(b) Convertible Securities and Obligations to Issue
Securities
Schedule 3.2(c) Dividends and Distributions
Schedule 3.3(a) Title to Shares
Schedule 3.3(c) Required Consents, Permits, Waivers, Filings and
Registrations
Schedule 3.3(e) No Violation of Existing Agreements; Consents
Schedule 3.4(a) Financial Statements
Schedule 3.6(d) Off Balance Sheet Liabilities
Schedule 3.7(b) Tax Jurisdictions
Schedule 3.7(h) Tax Audits/Investigations
Schedule 3.7(k) Tax Returns/Reports
Schedule 3.7(l) Tax Elections
Schedule 3.7(m) Tax Incentives
Schedule 3.8(a) Ownership of Assets
Schedule 3.8(b) Restrictions on Use
Schedule 3.8(c) Possession of Assets
Schedule 3.8(d) Title to Assets
Schedule 3.9(a) and (b) Necessary Property and Transfer of Assets
Schedule 3.10(a) Accounts Receivable Validity
Schedule 3.10(b) Accounts Receivable - Ordinary Course
Schedule 3.10(c) No Deduction to Accounts Receivable
Schedule 3.11(a)-(m) Material Contracts
Schedule 3.12 Validity of Contracts
Schedule 3.13(b) Company Intellectual Property
Schedule 3.13(b)(i) Ownership of Company Intellectual Property
Schedule 3.13(b)(iv) Third Party Indemnification for Infringement
Schedule 3.13(c)(i)and(ii) IP Development and Assignment Contracts and
IP Licenses
Schedule 3.13(d) Third Party Owned IP
Schedule 3.13(g) IP Assignment Agreements
Schedule 3.13(j) Infringement by the Company
Schedule 3.13(k) Infringement by Others
Schedule 3.14 Litigation
Schedule 3.15(a) Insurance
Schedule 3.16(a)-(r) Absence of Material Events
Schedule 3.17(a) Compliance with Law
Section 3.17(b) FCC Licenses
Section 3.17(c) Other Licenses
Schedule 3.18(a) and (b) Related Party Transactions
Schedule 3.19 Bank Accounts of the Company
Schedule 3.20(a)-(i) Environmental Matters
Schedule 3.21(a) and (b) Officers, Directors, Employees, Consultants and
Agents; Compensation
Schedule 3.22 Labor Matters
Schedule 3.23(a)-(o) ERISA and Employee Benefit Matters
Schedule 3.24 Overtime, Back Wages, Vacation and Minimum Wage
Schedule 3.25 (a) and (b) Discrimination Claims
Schedule 3.26 (a) and (b) Workers' Compensation Claims
Schedule 3.27 Customers and Suppliers
Schedule 3.28 Foreign Operations and Export Control
Schedule 3.29 Brokers
Schedule 3.31(a) Product and Service Warranties
Schedule 3.31(b) Warranty Claims Since Balance Sheet
Schedule 3.32 Product Liability Claims
Schedule 3.35 Backlog of Unfilled Customer Orders
Schedule 3.36(a) PG&E Requirements
Schedule 3.36(b) Fulfilled PG&E Requirements
Exhibit 4.1
CONSENT AND WAIVER TO CREDIT AGREEMENT
--------------------------------------
This CONSENT AND WAIVER TO CREDIT AGREEMENT (this "Agreement") is entered
into and effective as of January 20, 2006, by and among ESCO TECHNOLOGIES INC.,
a Missouri corporation ("Borrower"), WELLS FARGO BANK, NATIONAL ASSOCIATION
("Wells Fargo"), as Administrative Agent ("Administrative Agent"), and Wells
Fargo and the other lenders listed on the signature pages hereto (the
"Lenders").
Recitals:
---------
A. Borrower, Administrative Agent and Lenders have heretofore entered into
that certain Credit Agreement dated as of October 6, 2004, as amended from
time to time (as amended, the "Credit Agreement;" all capitalized terms
used and not otherwise defined in this Agreement shall have the respective
meanings ascribed to them in the Credit Agreement as amended by this
Agreement).
B. Administrative Agent, Lenders and Borrower have agreed to the provisions
set forth herein on the terms and conditions contained herein.
Agreement
---------
Therefore, in consideration of the mutual agreements herein and other
sufficient consideration, the receipt of which is hereby acknowledged, Borrower,
Administrative Agent and Lenders hereby agree as follows:
1. Consent. Borrower has notified Administrative Agent and Lenders regarding the
-------
possible acquisition of Hexagram, Inc., an Ohio corporation, by ESCO
Technologies Holding Inc. (the "Hexagram Acquisition") for an initial purchase
price not to exceed $70,000,000.00 plus contingent payments not to exceed
$7,500,000.00 payable over five (5) years (collectively, the "Purchase Price").
Section 5.14 of the Credit Agreement provides that Borrower will not, and it
will not cause or permit any Subsidiary to, consummate any Acquisitions other
than Permitted Acquisitions. The Purchase Price may exceed the limitation set
forth in subsection (e) of the definition of Permitted Acquisition. Furthermore,
the Purchase Price, when aggregated with the purchase price paid in connection
with the acquisition by ESCO Technologies Holding Inc. of Nexus Energy Software,
Inc., a Massachusetts corporation, on November 29, 2005 (the "Nexus
Acquisition"), exceeds the limitation set forth in subsection (f) of the
definition of Permitted Acquisition. At the request of Borrower, Administrative
Agent and Lenders hereby (a) waive the application of subsections (e) and (f) of
the definition of Permitted Acquisition to the Hexagram Acquisition, (b) consent
to the consummation of the Hexagram Acquisition for consideration not exceeding
the Purchase Price, subject to the fulfillment of the remaining conditions of
the definition of Permitted Acquisition, and (c) agree to exclude the Hexagram
Acquisition and Nexus Acquisition from the annual Acquisition limitation set
forth in subsection (f) of the definition of Permitted Acquisition; provided,
however, that (1) contemporaneously with the execution of this Agreement,
Borrower delivers, or causes to be delivered, to Administrative Agent, a Joinder
Agreement executed by Nexus Energy Software, Inc. in the form attached hereto as
Exhibit A (the "Nexus Joinder") and (2) within ten (10) Business Days following
the closing date of the Hexagram Acquisition, Borrower agrees to deliver, or
cause to be delivered, to Administrative Agent, a Joinder Agreement executed by
Hexagram, Inc. in the form attached hereto as Exhibit B (the "Hexagram
Joinder"). Borrower further agrees to deliver, or cause to be delivered, any and
all other documentation, including, without limitation, certified corporate
documents, resolutions and legal opinions, as Administrative Agent may
reasonably require in connection with the Nexus Joinder and the Hexagram
Joinder, all of which must be in form and substance reasonably satisfactory to
Administrative Agent. Borrower further acknowledges and agrees that Hexagram,
Inc. and Nexus Energy Software, Inc. will each become a "Domestic Subsidiary"
and "Material Subsidiary" as such terms are defined in the Credit Agreement, and
it will cause such Subsidiaries to execute any and all such documents
(including, without limitation, the Joinder Agreements described above), as are
required pursuant to Section 5.17 of the Credit Agreement. The consent and
waiver granted herein constitute the consent and waiver of Administrative Agent
and Lenders only for the specific purposes herein described and upon the terms
and conditions set forth herein and shall not be deemed a consent to or waiver
of Section 5.14 or any other provisions of the Credit Agreement for any other
Acquisition, transaction or purpose prohibited by the terms of the Credit
Agreement or any other Loan Document.
2. Representations and Warranties of Borrower. Borrower hereby represents and
-------------------------------------------
warrants to Administrative Agent and Lenders that (i) Borrower's execution,
delivery and performance of this Agreement has been duly authorized by all
requisite action of Borrower, (ii) no consents are necessary from any third
parties for Borrower's execution, delivery or performance of this Agreement,
(iii) this Agreement, the Credit Agreement, and each of the other Loan
Documents, constitute the legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their terms, except to the
extent that the enforceability thereof against Borrower may be limited by
bankruptcy, insolvency or other laws affecting the enforceability of creditors
rights generally or by equity principles of general application, (iv) all of the
representations and warranties contained in Article IV of the Credit Agreement
are true and correct with the same force and effect as if made on and as of the
date of this Agreement, (v) after giving effect to this Agreement, there is no
Event of Default, (vi) since the Effective Date, there has been no change or
modification to the organizational documents of Borrower, any Borrowing
Subsidiary or any Guarantor Subsidiary, (vii) since the Effective Date, there
has been no change in the financial condition or business operations of
Borrower, any Borrowing Subsidiary or any Guarantor Subsidiary which could
reasonably be expected to result in a Material Adverse Effect, (viii) there are
no proceedings of any kind, pending or threatened against Borrower, any
Borrowing Subsidiary or any Guarantor Subsidiary, which could reasonably be
expected to result in a Material Adverse Effect, and( ix) there are no Liens
with respect to Borrower or its Subsidiaries or any of their respective assets,
except for those Liens permitted by Section 5.11 of the Credit Agreement.
3. Reaffirmation. Borrower hereby represents, warrants, acknowledges and
-------------
confirms that (i) the Credit Agreement and the other Loan Documents remain in
full force and effect, (ii) Borrower has no defenses to its obligations under
the Credit Agreement and the other Loan Documents, and (iii) Borrower has no
claim against Administrative Agent or any Lender arising from or in connection
with the Credit Agreement or the other Loan Documents and any such claim is
hereby irrevocably waived and released and discharged forever.
4. Definitions. All references in the Credit Agreement to "this Agreement" and
-----------
any other references of similar import shall henceforth mean the Credit
Agreement as amended by this Agreement.
5. Effectiveness of Agreement. This Agreement shall become effective, unless
--------------------------
otherwise stated herein, as of the date first written above, but only if this
Agreement has been executed by Borrower, Administrative Agent and Lenders and
acknowledged by each Guarantor.
6. Governing Law. This Agreement shall be governed by and construed under the
-------------
laws of the State of Missouri without giving effect to choice or conflicts of
law principles thereunder.
7. Section Titles. The section titles in this Agreement are for convenience of
--------------
reference only and shall not be construed so as to modify any provisions of this
Agreement.
8. Counterparts; Facsimile Transmissions. This Agreement may be executed in one
--------------------------------------
or more counterparts and on separate counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same
instrument. Signatures to this Agreement may be given by facsimile or other
electronic transmission, and such signatures shall be fully binding on the party
sending the same.
9. Incorporation By Reference. Administrative Agent, Lenders and Borrower hereby
--------------------------
agree that all of the terms of the Loan Documents are incorporated in and made a
part of this Agreement by this reference.
10. Fees and Expenses. Borrower shall promptly pay to Administrative Agent all
-----------------
fees, expenses and other amounts owing to Administrative Agent under the Credit
Agreement and the other Loan Documents, including, without limitation, all fees,
costs and expenses incurred by Administrative Agent in connection with the
preparation, negotiation, execution, and delivery of this Agreement.
11. No Oral Agreements; Entire Agreement. This notice is provided pursuant to
-------------------------------------
Section 432.047 R.S.Mo. As used herein, "creditor" means Administrative Agent
and Lenders and "this writing" means this Agreement, the Credit Agreement, and
the other Loan Documents. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND
CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO
EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE, REGARDLESS OF THE LEGAL THEORY
UPON WHICH IT IS BASED THAT IS IN ANY WAY RELATED TO THIS AGREEMENT. TO PROTECT
YOU (BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY
AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH
IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS
WE MAY LATER AGREE IN WRITING TO MODIFY IT.
12. Patriot Act Notice. Administrative Agent and each Lender hereby notifies the
------------------
Borrower and each Guarantor that, pursuant to the requirements of the USA
Patriot Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the
"Act"), it is required to obtain, verify and record information that identifies
the Borrower and each Guarantor, which information includes the name and address
of the Borrower and each Guarantor and other information that will allow
Administrative Agent or such Lender, as applicable, to identify the Borrower and
each Guarantor in accordance with the Act.
[remainder of page intentionally left blank]
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first
above written.
ESCO TECHNOLOGIES, INC., a Missouri corporation, as Borrower
By: /s/ V.L. Richey, Jr.
Name:
Title:
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Administrative Agent and a Lender
By: /s/ Kevin L. Handley
Name: Kevin L. Handley
Title: Vice President
BANK OF AMERICA, N.A., Lender
By: /s/ Jason R. Hickey
Name: Jason R. Hickey
Title: Senior Vice President
LASALLE BANK NATIONAL ASSOCIATION, Lender
By: /s/ Michelle Dacey
Name: Michelle Dacey
Title: Commercial Banking Officer
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, Lender
By: /s/ Christopher C. Cavaiani
Name: Christopher Cavaiani
Title: Vice President
COMMERCE BANK, N.A., Lender
By: /s/ Mark Winker
Name: Mark Winker
Title: Vice President
THE NORTHERN TRUST COMPANY, Lender
By: /s/ David Sullivan
Name: David Sullivan
Title: Vice President
Acknowledged and Agreed to as of __________________, 2006.
COMTRAK TECHNOLOGIES, L.L.C., a Missouri limited liability company
By: /s/ V.L. Richey, Jr.
Name:
Title:
DISTRIBUTION CONTROL SYSTEMS, INC., a Missouri corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
ETS-LINDGREN L.P., a Texas limited partnership
By: RANTEC COMMERCIAL, INC.
By: /s/ V.L. Richey, Jr.
Name:
Title:
ESCO TECHNOLOGIES HOLDING INC., a Delaware corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
FILTERTEK INC., a Delaware corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
LINDGREN, INC., a Delaware corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
LINDGREN R.F. ENCLOSURES, INC., an Illinois corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
PTI TECHNOLOGIES INC., a Delaware corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
RANTEC HOLDINGS, INC., a Missouri corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
RANTEC COMMERCIAL, INC., a California corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
VACCO INDUSTRIES, a California corporation
By: /s/ V.L. Richey, Jr.
Name:
Title:
Exhibit A
JOINDER AGREEMENT
-----------------
THIS JOINDER AGREEMENT (the "Agreement"), dated as of January 20, 2006, is
by and between NEXUS ENERGY SOFTWARE, INC., a Massachusetts corporation (the
"Subsidiary"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, in its capacity as
Administrative Agent under that certain Credit Agreement dated as of October 6,
2004, among ESCO Technologies, Inc., a Missouri corporation (the "Borrower"),
the Lenders identified therein and Wells Fargo Bank, National Association, as
Administrative Agent (as the same may from time to time be amended, modified,
extended, renewed or restated, the "Credit Agreement"). All of the defined terms
in the Credit Agreement are incorporated herein by reference.
Reference is further made to that certain Continuing Guaranty dated as of
October 6, 2004 by and among Comtrak Technologies, L.L.C., Distribution Control
Systems, Inc., ETS-Lindgren L.P., ESCO Technologies Holding Inc., Filtertek
Inc., Lindgren, Inc., Lindgren R.F. Enclosures, Inc., PTI Technologies Inc.,
Rantec Holdings, Inc., Rantec Commercial, Inc., and Vacco Industries, as
Guarantors, in favor of Administrative Agent and Lenders (as the same may from
time to time be amended, modified, extended, renewed or restated, the
"Guaranty").
The Borrower is required by Section 5.17 of the Credit Agreement to cause
the Subsidiary to guaranty the payment and performance of all of the
Obligations.
Accordingly, the Subsidiary hereby agrees with the Administrative Agent,
for the benefit of the Lenders as follows:
1. The Subsidiary hereby acknowledges, agrees and confirms that, by its
execution of this Agreement, the Subsidiary will be deemed to be a party to the
Guaranty and a "Guarantor" for all purposes of the Guaranty, and shall have all
of the obligations of a Guarantor thereunder as if it had executed the Guaranty.
The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound
by, all of the terms, provisions and conditions applicable to the Guarantors
contained in the Guaranty. Without limiting the generality of the foregoing
terms, the Subsidiary hereby absolutely and unconditionally jointly and
severally guarantees to each Lender, the Swing Line Lender, the Offshore
Currency Fronting Lender, the Letter of Credit Issuer and the Administrative
Agent the prompt and complete payment when due in accordance with their
respective terms (whether by reason of demand, maturity, acceleration or
otherwise) of any and all of the Obligations (whether heretofore, now or
hereafter made, incurred or created, whether voluntary or involuntary and
however arising, absolute or contingent, liquidated or unliquidated, determined
or undetermined, whether the Borrower or any Borrowing Subsidiary may be liable
individually or jointly with others and whether recovery upon such Obligations
may be or hereafter becomes unenforceable) in accordance with the terms and
conditions hereof. In addition, the Subsidiary shall and agrees to be jointly
and severally liable to each Lender, the Swing Line Lender, the Offshore
Currency Fronting Lender, the Letter of Credit Issuer and the Administrative
Agent for all costs and expenses incurred by such Person in attempting or
effecting collection under the Guaranty (whether or not litigation shall be
commenced in aid thereof) and in connection with representation of such Person
in connection with bankruptcy or insolvency proceedings relating to or affecting
the Guaranty, including, without limitation, reasonable attorneys' fees and
expenses.
2. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original but all of which when taken together shall
constitute one contract.
3. This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the Subsidiary has caused this Joinder Agreement to be
duly executed by its authorized officers, and the Administrative Agent, for the
benefit of the Lenders, has caused the same to be accepted by its authorized
officer, as of the day and year first above written.
NEXUS ENERGY SOFTWARE, INC.
By: s/ V. L. Richey
Name: V. L. Richey
Title: Chairman and CEO
Acknowledged and accepted:
WELLS FARGO BANK,
NATIONAL ASSOCIATION
as Administrative Agent
By: s/Kevin L. Handley
Name: Kevin L. Handley
Title: Vice President
Exhibit B
SECRETARY'S CERTIFICATE
OF
NEXUS ENERGY SOFTWARE, INC.
I am Secretary of Nexus Energy Software, Inc., a Massachusetts corporation
(the "Company"), and do hereby certify further that:
1. Attached hereto as Exhibit A is a true and complete copy of the Articles
of Organization of the Company certified by the Secretary of the Commonwealth of
Massachusetts and in effect on this date.
2. Attached hereto as Exhibit B is a true and complete copy of the By-Laws
of the Company as in effect on this date.
3. Each persons named in Exhibit C hereto is a duly elected, qualified and
acting officer or authorized signatory of the Company, holding the office in the
Company set forth opposite his or her name on such Exhibit, and set forth
opposite his or her name on such Exhibit is the genuine signature of such person
or a true facsimile of such genuine signature.
4. No further amendment to the Articles of Incorporation of the Company has
been approved by its Board of Directors or stockholders or has been filed with
the Secretary of the Commonwealth of Massachusetts.
5. The Company is in good standing as a corporation under the laws of the
Commonwealth of Massachusetts, no proceeding has been commenced or to the best
of my knowledge is contemplated for the dissolution or liquidation of the
Company.
6. Attached hereto as Exhibit D is a true and complete copy of resolutions
duly adopted by unanimous written consent of the Board of Directors of the
Company authorizing the transactions contemplated therein, which resolutions
have not been amended and are in full force and effect on this date.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Secretary to be executed on January 20, 2006.
(Seal) s/Alyson S. Barclay
Alyson S. Barclay, Secretary
I am Vice President of the Company. I hereby certify that on the date of
the Certificate set forth above Alyson S. Barclay is the duly elected, qualified
and acting Secretary of the Company and that the signature set forth above is
his genuine signature.
s/V. L. Richey
V. L. Richey, ____________
ESCO TECHNOLOGIES
Exhibit 99.1
For more information contact: For media inquiries:
Patricia K. Moore David P. Garino
Director, Investor Relations (314) 982-0551
ESCO Technologies Inc.
(314) 213-7277
ESCO ANNOUNCES ACQUISITION OF HEXAGRAM, INC.
St. Louis, MO, February 2, 2006 - ESCO Technologies Inc. (NYSE: ESE) today
announced the acquisition of Hexagram, Inc. (Hexagram). The capital stock of
Hexagram was acquired for cash consideration of $67.5 million and a potential
working capital adjustment. The acquisition agreement also provides for
contingent consideration of up to $6.3 million during the five year period
following the acquisition if Hexagram exceeds certain sales targets.
Hexagram is a well established RF fixed network Automatic Meter Reading
(AMR) company headquartered in Cleveland, Ohio. Hexagram's fixed network
technology was first deployed in 1996, and currently provides AMR data from over
one million endpoints. Hexagram's system is in service at over seventy-five
utilities including installations at the water utility in the District of
Columbia and at Wisconsin Public Service where it provides gas reads and
operates alongside ESCO's Distribution Control Systems, Inc. (DCSI) electric AMR
system. In addition, Hexagram has a contract with Pacific Gas and Electric
Company (PG&E) covering 4.1 million gas meters with total anticipated revenues
over the five year full deployment period of approximately $225 million.
Hexagram's contract with PG&E, like DCSI's, is subject to a successful
demonstration phase, Public Utility Commission approval and PG&E's full-scale
deployment decision. Annual purchase order releases are anticipated on the PG&E
program.
Over the past three years Hexagram's annual revenue has been in the range
of $20 to $35 million. Excluding amortization of identifiable intangible assets,
the acquisition is not expected to have a material impact on earnings in fiscal
2006. Including amortization, the acquisition may be modestly dilutive to 2006
earnings.
Hexagram will continue to be led by the existing management team, and
Hexagram's founder, Larry Sears, will remain as a consultant to the company
focused on helping Hexagram and ESCO shape their long-
- more -
Add One
term AMR technology roadmaps. Hexagram will operate as a stand-alone subsidiary
of ESCO and will collaborate with DCSI and Nexus Energy Software, Inc., ESCO's
other utility communications businesses, where there are opportunities to better
support its customers by working together.
In making the announcement, Vic Richey, Chairman and CEO, commented: "The
addition of Hexagram not only more than doubles our served market in AMR but
also allows us to offer a broader portfolio of products and technologies to
satisfy the AMR needs of any utility. I have great confidence in the team at
Hexagram and I am extremely excited about the opportunities created by this
combination."
Larry Sears, Hexagram's founder, stated: "By joining ESCO, Hexagram will
gain valuable additional resources. These will allow us to expand our marketing,
customer support, and product development activities, as well as maintain a
creative and innovative environment for our employees."
Statements in this press release regarding the Hexagram acquisition's
impact on fiscal 2006 earnings, the impact of the acquisition on the Company's
success in the AMR market, the total anticipated value and scope of the PG&E
contract and any other statements which are not strictly historical are
"forward-looking" statements within the meaning of the safe harbor provisions of
the Federal Securities Laws. Investors are cautioned that such statements are
only predictions, speak only as of the date of this release and the Company
undertakes no duty to update. The Company's actual results in the future may
differ materially from those projected in the forward-looking statements due to
risks and uncertainties that exist in the Company's operations and business
environment, including but not limited to: actions by the California Public
Utility Commission, PG&E's Board of Directors or PG&E's management impacting
PG&E's AMI projects, the content of purchase order releases by PG&E, Hexagram's
successful performance under the PG&E contract, technical difficulties,
competition, changes in customers demands, intellectual property rights,
termination for convenience of the PG&E contract, and the Company's successful
execution of internal operating plans.
ESCO, headquartered in St. Louis, is a leading supplier of engineered
filtration products to the process, health care and transportation markets
worldwide. In addition, the Company markets proprietary, special purpose
communications systems and is the industry leader in RF shielding and EMC test
products. Further information regarding ESCO and its subsidiaries is available
on the Company's web site, www.escotechnologies.com.
# # #
ESCO TECHNOLOGIES
Exhibit 99.2
For more information contact: For media inquiries:
Patricia K. Moore David P. Garino
Director, Investor Relations (314) 982-0551
ESCO Technologies Inc.
(314) 213-7277
ESCO ANNOUNCES FIRST QUARTER RESULTS AND
REAFFIRMS FIRST HALF AND FULL YEAR EPS GUIDANCE
St. Louis, MO, February 2, 2006 - ESCO Technologies Inc. (NYSE: ESE) today
announced its results for the fiscal 2006 first quarter ended December 31, 2005,
and reaffirmed first half earnings per share (EPS) guidance of $0.35 to $0.40
per share, and narrowed its full year EPS guidance to $1.20 to $1.30 per share
from $1.15 to $1.30 per share, excluding the impact of the Hexagram, Inc.
acquisition. The expected results of operations for Nexus Energy Software, Inc.
(Nexus) which was acquired on November 29, 2005 are included in the 2006
guidance.
Within this release, references to "quarters" relate to the fiscal quarters
ended December 31 for the respective fiscal years noted.
Net earnings for the 2006 first quarter were $2.2 million, or $0.08 per
share compared to net earnings of $10.5 million, or $0.40 per share in the first
quarter of 2005. The primary drivers of the lower earnings in the 2006 first
quarter include:
o A significant decrease in deliveries to electric utility cooperative (COOP)
customers at DCSI resulting from the low level of orders received in the
second half of fiscal 2005.
o A $3.8 million increase in consolidated SG&A expenses relating to
additional engineering, marketing, new product development, stock option
expensing ($0.5 million, or $0.02 per share), and the addition of Nexus
($0.7 million, for the one month since acquisition).
o Lower sales of Comtrak's SecurVision video security products in the
current quarter compared to the prior year.
o Lower sales of higher margin defense spares and T-700 shipments at VACCO in
the current period versus prior year.
o Additionally at DCSI, the current period operating results were negatively
impacted by pretax charges totaling $1.0 million, or $0.02 per share,
resulting from a $0.4 million write-off of assets
- more -
Add One
related to a terminated subcontract manufacturer, and $0.6 million of
warranty costs related to a commercial transponder.
Sales
- -----
First quarter 2006 sales were $90.6 million, or 13.2 percent lower than
first quarter 2005 sales of $104.4 million. Unfavorable foreign currency values
in 2006 resulted in a $1.0 million negative sales comparison.
Communications sales of $19.1 million decreased $14.5 million, or 43
percent in the 2006 first quarter compared to the first quarter of 2005 as a
result of the following items: sales to COOP customers decreased $9.9 million in
the first quarter due to the weakness in orders entered during the latter half
of fiscal 2005; sales to legacy customers such as Wisconsin Public Service
(WPS), Bangor Hydro, Puerto Rico Electric Power Authority (PREPA), and PPL
Electric Utilities Corporation (PPL) were $2.2 million lower in the current
period compared to the prior year; and lower shipments of Comtrak's SecurVision
video security products, which generated $2.5 million in sales during the first
quarter of 2006 versus $7.1 million of sales in the 2005 first quarter. These
first quarter decreases were partially offset by $1.5 million in deliveries to
TXU Electric Delivery (TXU) and $1.2 million of sales from Nexus. During the
first quarter of 2006, DCSI's sales to COOP and public power (Municipal)
customers were $11.5 million compared to $21.4 million in the first quarter of
2005.
Filtration segment sales of $41.5 million decreased $2.5 million, or 5.8
percent during the first quarter of 2006 compared to the prior year due to the
following items: $0.5 million of additional sales at PTI due to the continued
strengthening of the commercial aerospace market; $2.5 million lower sales at
VACCO resulting from lower deliveries of defense spares; and $0.5 million lower
sales at Filtertek primarily due to lower automotive shipments and lower volumes
at its French operation.
Test segment sales of $30.0 million increased $3.2 million, or 11.9 percent
during the first quarter of 2006 due to significantly higher component sales and
additional test chamber installations. These increases were partially offset by
a $1.5 million decrease in sales in the first quarter of 2006 at the Company's
European operations resulting from the prior year completion of two large test
chamber installations.
Earnings Before Interest and Taxes (EBIT)
- -----------------------------------------
On a segment basis, items that impacted EBIT dollars and EBIT as a percent
of sales ("EBIT margin") during the first quarter of fiscal 2006 included the
following.
In the Communications segment, EBIT for the 2006 first quarter was a loss
of $1.0 million, compared to a profit of $9.6 million in the prior year first
quarter. The primary causes of this profit swing include: the significant
decrease in sales volume of AMR and SecurVision products noted above; a $1.0
million increase in SG&A expenses relating to additional engineering, marketing
and new product development; the $1.0 million in charges at DCSI related to the
subcontractor and warranty issues noted above; partially offset by the Nexus
EBIT contribution of $0.2 million for its one month of operations since the date
of acquisition.
- more -
Add Two
In the Filtration segment, the 2006 first quarter EBIT was $4.1 million, or
42.1 percent lower than prior year and was impacted by the following items: a
$1.7 million reduction in EBIT at VACCO resulting from the decreased sales of
defense spares; a $1.4 million decrease at Filtertek resulting from the slowdown
in the automotive market and a year-over-year increase in raw material costs
(ie., petroleum based resins). Additionally, the 2005 first quarter included a
$0.6 million gain realized at Filtertek related to a supply agreement with a
medical device customer which was terminated in fiscal 2005.
In the Test segment, EBIT of $2.9 million increased 40.1 percent in the
first quarter of 2006 due to additional sales volume and favorable changes in
sales mix. In addition, EBIT was negatively impacted in the first quarter of
2005 as a result of higher installation costs incurred on certain government
shielding projects in foreign locations.
The Corporate office operating expenses were $0.7 million higher in the
first quarter of 2006 and included $0.5 million of pretax expenses related to
stock options.
Effective Tax Rate
- ------------------
For the first quarter of 2006, the Company's effective tax rate was 40.4
percent versus the 2005 first quarter of rate of 38 percent. The increased rate
was primarily driven by lower than expected foreign-sourced pretax income,
primarily in Puerto Rico.
New Orders
- ----------
New orders received were $126.1 million (including $2.0 million of new
orders and $9.0 million of acquired backlog from Nexus) and $101.7 million in
the first quarters of 2006 and 2005, respectively, resulting in a backlog of
$268.7 million at December 31, 2005.
New orders received in the first quarter of 2006 compared to the first
quarter of 2005, respectively, were: in Filtration, $41.1 million and $39.2
million; in Communications, $59.2 million and $35.3 million; and in Test were
$25.8 million and $27.1 million.
New orders received by DCSI in the first quarter totaled $45.6 million and
included $33.7 million in COOP and Municipal orders, and $11.9 million in
investor-owned utility (IOU) orders including the $9.4 million from TXU for the
100,000 unit expansion as discussed in the November 15, 2005 release.
Cash
- ----
At December 31, 2005, the Company had $70.4 million in cash and no debt
outstanding. During the first quarter of 2006, the Company used $5.3 million of
cash for general operating purposes and spent $28.8 million of cash related to
the acquisition of Nexus. The 2006 first quarter cash use was the result of the
lower earnings, higher working capital requirements, and the additional
expenditures related to the TNG software project.
- more -
Add Three
Chairman's Commentary
- ---------------------
Vic Richey, Chairman and Chief Executive Officer, commented, "While I am
disappointed in our sales and earnings in the first quarter, given the strength
of our orders, we have not reduced our first half or full year guidance.
"Since our last communication we have made great progress on our highest
priority items. We reestablished our position in the COOP market and acquired
the resources and capabilities which support our commitment to becoming the
premier provider of Advanced Metering functionality at scale.
"Our confidence in the near-term financial progress we are anticipating in
Communications is well supported by the strength of our first quarter orders at
DCSI. We have also substantially enhanced our opportunity to meet our stated
long-term objectives through the acquisition of the software resources and
energy data management products we added with Nexus, and the addition of the RF
capabilities and direct access to the gas and water markets that we gained
through the acquisition of Hexagram.
"In Filtration, while our first quarter performance was in line with our
expectations, it was down from the prior year. Our commercial aerospace business
at PTI is continuing to make progress. At Filtertek, we are taking a number of
steps to improve performance, including reducing our headcount and continuing to
move work to our lower cost plants. We expect to see the benefits of these
actions in the second half of this year.
"In the Test business, we had year-over-year improvement in the first
quarter and we expect increased volumes and improved margins for the balance of
this year.
"Overall, we made great strides toward satisfying our primary strategic
objective. Our focus going forward will be to cultivate the opportunities we
have created through our recent acquisitions, complete the internal development
work at DCSI, and continue to drive for an improved contribution from our
Filtration and Test businesses.
"We remain committed to delivering significant increases in shareholder
value. The opportunities and resources we have to support that commitment have
never been better."
Business Outlook
- ----------------
Statements contained in the preceding and following paragraphs are based on
current expectations. Statements that are not strictly historical are considered
forward-looking, and actual results may differ materially.
The Business Outlook described below includes the expected results of
Nexus, but does not include the impact of the Hexagram acquisition, or any
future acquisitions or divestitures. In addition, refer to the Business Outlook
section of the November 15, 2005 release for a detailed discussion of the PG&E
contract and the related accounting.
- more -
Add Four
Earnings Per Share - 2006
- -------------------------
Management has narrowed the range of EPS guidance for the full year and now
estimates 2006 EPS to be in the range of $1.20 to $1.30 per share, with the
first half of the fiscal year EPS remaining between $0.35 and $0.40 per share on
sales now estimated to be between $200 and $205 million. The second half of the
fiscal year EPS is now expected to be between $0.85 and $0.90 per share, on
sales now estimated to be between $230 and $235 million. As noted above, in
fiscal 2006 the Company began expensing stock options. This expense, included in
the EPS numbers above, is expected to be in the range of $0.08 to $0.11 per
share annually, or $0.02 to $0.03 per quarter.
The effective tax rate for the second quarter of fiscal 2006 is expected to
be approximately 38 percent, and for the full year, the annual rate is expected
to be approximately 39 percent.
Revenues and EBIT Margins
- -------------------------
Management expects 2006 consolidated revenues to be in the range of $430 to
$440 million and consolidated EBIT margins should be in the range of 12 to 13
percent.
On a segment and operating unit basis for 2006, Management now expects the
following:
o PTI sales are expected to be between $43 and $45 million and EBIT margins
should be in the range of 12 to 13 percent (up from 9.2 percent in 2005).
o VACCO sales are expected to be between $31 and $32 million and EBIT margins
should be in the range of 20 to 22 percent (down from 26.9 percent in 2005)
as a result of the significantly lower deliveries of defense spares and a
production break in T-700 shipments.
o Filtertek sales are expected to be in the range of $93 to $95 million and
EBIT margins should be in the range of 7 to 8 percent (down from 8.9
percent in 2005). The 2005 results included approximately $2 million in
sales and EBIT realized from the settlement of a contract termination with
a medical device customer.
o Test segment sales are expected to be in the range of $125 and $127 million
and EBIT margins should be in the range of 10.5 to 11.5 percent (up from
10.2 percent in 2005) as a result of the continued strength of the wireless
and electronics markets, and solid growth in Asia.
o Communications segment sales, including Nexus, are expected to be between
$138 and $141 million and EBIT margins should be in the range of 21 to 23
percent (down from 28.1 percent in 2005) with the margin decrease driven
primarily by an expected $8 million decrease in sales of SecurVision
products at Comtrak. The 2005 sales of SecurVision products included a
catch up in deliveries previously delayed by the customer from the prior
year. Nexus sales are expected to be in the range of $10 to $12 million and
EBIT margins should be in the range of 4 to 5 percent after
- more -
Add Five
deducting the $0.9 million of non-cash amortization expenses related to
identifiable intangible assets allocated as part of the purchase accounting
valuation. Sales of AMR products at DCSI are expected to be relatively flat
and do not include any revenues associated with the PG&E contract as
software acceptance is not expected until the latter part of fiscal 2007.
DCSI's EBIT margin is expected to be 25 to 27 percent. Cost of sales will
also include approximately $2.2 million of additional costs as a result of
DCSI beginning to amortize the capitalized software development costs
related to the TNG software. TNG has been in development with a third party
software contractor for the past two years. TNG is being designed and
deployed to efficiently handle the additional levels of communications
dictated by the size of the service territories and the frequency of reads
that are required under time-of-use or critical peak pricing scenarios
needed to meet the requirements of large IOUs. The Company has incurred
approximately $23 million in external TNG development costs through
December 31, 2005, which are included on the balance sheet in other assets,
and is expected to incur another $10 to $15 million in costs over the next
two years. Additional non-TNG related engineering and development costs are
being incurred to ramp up the PG&E contract as well as support other IOU
pilots which are in process.
o Corporate operating costs are expected to increase slightly in 2006,
excluding the costs related to the initiation of stock option expensing
which began in the first quarter of 2006. Management expects quarterly
stock option pretax expenses to be approximately $0.5 to $0.6 million.
Conference Call
- ---------------
The Company will host a conference call today, February 2, at 5:00 p.m.,
Central Time, to discuss the Company's first quarter operating results. A live
audio webcast will be available on the Company's Web site at
www.escotechnologies.com. Please access the Web site at least 15 minutes prior
to the call to register, download and install any necessary audio software.
A replay of the conference call will be available for seven days on the
Company's website noted above or by phone (dial 1-888-203-1112 and enter the
pass code 8437777).
Forward-Looking Statements
- --------------------------
Statements in this press release regarding fiscal 2006 revenues, results,
earnings, sales, EBIT, EBIT margins, EPS, sales and EBIT margins from each
segment and operating unit and the timing of these contributions, expected
results from the Hexagram and Nexus acquisitions, achievement of strategic
objectives, the success of product development efforts, fiscal 2006 corporate
operating expenses, fiscal 2006 effective tax rate, long term success of the
Company, stock option expensing, amortization of capitalized software
development costs in fiscal 2006, successful development of the TNG software,
and costs to be incurred over the next two years, the timing of software
acceptance by PG&E, the Company's ability to capture future AM opportunities,
the Company's ability
- more -
Add Six
to increase shareholder value and any other written or oral statements which are
not strictly historical are "forward-looking" statements within the meaning of
the safe harbor provisions of the federal securities laws. Investors are
cautioned that such statements are only predictions and speak only as of the
date of this release, and the Company undertakes no duty to update. The
Company's actual results in the future may differ materially from those
projected in the forward-looking statements due to risks and uncertainties that
exist in the Company's operations and business environment including, but not
limited to: actions by the California Public Utility Commission, PG&E's Board of
Directors or PG&E's Management impacting PG&E's AMI projects; the success of the
Company's competitors; changes in or the effect of the Federal Energy Bill; the
timing and success of DCSI's software development efforts; the timing and
content of purchase order releases under the PG&E contracts; DCSI's and
Hexagram's successful performance of the PG&E contracts; weakening of economic
conditions in served markets; changes in customer demands or customer
insolvencies; competition; intellectual property rights; technical difficulties;
unforeseen charges impacting corporate operating expenses; the performance of
the Company's international operations; successful execution of the planned sale
of the Company's Puerto Rico facility; material changes in the costs of certain
raw materials including steel, copper and petroleum-based resins; delivery
delays or defaults by customers; termination for convenience of customer
contracts; timing and magnitude of future contract awards; containment of
engineering and development costs; performance issues with key customers,
suppliers and subcontractors; labor disputes; changes in laws and regulations
including but not limited to changes in accounting standards and taxation
requirements; changes in foreign or U.S. business conditions affecting the
distribution of foreign earnings; costs relating to environmental matters;
litigation uncertainty; successful integration of newly acquired businesses; and
the Company's successful execution of internal operating plans.
ESCO, headquartered in St. Louis, is a leading supplier of engineered
filtration products to the process, health care and transportation markets
worldwide. In addition, the Company markets proprietary, special purpose
communications systems and is the industry leader in RF shielding and EMC test
products. Further information regarding ESCO and its subsidiaries is available
on the Company's website at www.escotechnologies.com
- tables attached - -
Add Seven
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
December 31, 2005
-----------------
Net Sales $ 90,586
Cost and Expenses:
Cost of sales 64,027
SG&A 23,619
Interest (income) expense (717)
Other (income) expenses, net (38)
---
Total costs and expenses 86,891
------
Earnings before income taxes 3,695
Income taxes 1,491
-----
Net earnings $ 2,204
=========
Earnings per share:
Basic
Net earnings $ 0.09
=========
Diluted
Net earnings $ 0.08
=========
Average common shares O/S:
Basic 25,575
======
Diluted 26,334
======
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Add Eight
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
December 31, 2004
-----------------
Net Sales $ 104,375
Cost and Expenses:
Cost of sales 68,509
SG&A 19,813
Interest (income) expense (481)
Other (income) expenses, net (453)
----
Total costs and expenses 87,388
------
Earnings before income taxes 16,987
Income taxes 6,464
-----
Net earnings $ 10,523
=========
Earnings per share:
Basic
Net earnings $ 0.41
=========
Diluted
Net earnings $ 0.40
=========
Average common shares O/S:
Basic 25,586
======
Diluted 26,408
======
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Add Nine
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Condensed Business Segment Information
(Unaudited)
(Dollars in millions)
Three Months Ended
December 31,
2005 2004
---- ----
Net Sales - GAAP
----------------
PTI $ 10.7 10.2
VACCO 8.1 10.6
Filtertek 22.7 23.2
---- ----
Filtration subtotal 41.5 44.0
Communications 19.1 33.6
Test 30.0 26.8
---- ----
Totals $ 90.6 104.4
====== =====
EBIT - GAAP basis
PTI $ 1.2 1.1
VACCO 1.9 3.6
Filtertek 1.0 2.4
--- ---
Filtration subtotal 4.1 7.1
Communications (1.0) 9.6
Test 2.9 2.1
Corporate (3.0) (2.3)
---- ----
Totals $ 3.0 16.5
====== ====
Note: Depreciation and amortization expense was $3.1 million for the
quarters ended December 31, 2005 and 2004, respectively.
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Add Ten
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Reconciliation of Non-GAAP Financial Measures
(Unaudited)
(Dollars in millions)
EBIT (1) - As Reported
Three Months Ended
December 31,
2005 2004
---- ----
EBIT $ 3.0 16.5
Interest income 0.7 0.5
Less: Income taxes 1.5 6.5
--- ---
Net earnings from
continuing operations $ 2.2 10.5
===== ====
(1) EBIT is defined as earnings from continuing operations before
interest and taxes.
EBIT Margin Outlook - FY 2006
- -----------------------------
Consolidated EBIT margin in the range of 12 percent to 13 percent,
PTI EBIT margin in the range of 12 percent to 13 percent, VACCO EBIT
margin in the range of 20 percent to 22 percent, Filtertek EBIT
margin in the range of 7 percent to 8 percent, Test segment EBIT
margin in the range of 10.5 percent to 11.5 percent, Communications
segment EBIT margin in the range of 21 percent to 23 percent, Nexus
EBIT margin in the range of 4 percent to 5 percent, and DCSI's EBIT
margin in the range of 25 percent to 27 percent under "Business
Outlook" cannot be reconciled with a GAAP measure as this represents
a forward-looking measure with no comparable GAAP measurement
quantifiable at this time.
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Add Eleven
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
December 31, September 30,
2005 2005
---- ----
Assets
Cash and cash equivalents $ 70,359 $104,484
Accounts receivable, net 68,928 68,819
Costs and estimated earnings
on long-term contracts 3,679 4,392
Inventories 52,774 48,645
Current portion of deferred
tax assets 29,965 30,219
Other current assets 8,369 8,394
----- -----
Total current assets 234,074 264,953
Property, plant and equipment, net 66,962 67,190
Goodwill 92,606 68,880
Deferred tax assets -- --
Other assets 40,084 27,697
------ ------
$433,726 $428,720
======== ========
Liabilities and Shareholders' Equity
Accounts payable $ 31,858 29,299
Other current liabilities 36,088 33,458
------ ------
Total current liabilities 67,946 62,757
Deferred income 2,979 3,134
Other liabilities 28,905 31,805
Long-term debt -- --
Shareholders' equity 333,896 331,024
------- -------
$433,726 $428,720
======== ========
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Add Twelve
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
December 31, 2005
-----------------
Cash flows from operating activities:
Net earnings $ 2,204
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation and amortization 3,078
Stock compensation expense 1,273
Changes in operating working capital (532)
Effect of deferred taxes (3,090)
Other (1,001)
------
Net cash provided by operating activities 1,932
Cash flows from investing activities:
Acquisition of business (28,833)
Capital expenditures (2,320)
Additions to capitalized software (5,724)
------
Net cash used by investing activities (36,877)
-------
Cash flows from financing activities:
Proceeds from/payments of long-term debt --
Purchases of common stock into treasury --
Other, including exercise of stock options 820
---
Net cash provided by financing activities 820
---
Net decrease in cash and cash equivalents (34,125)
Cash and cash equivalents, beginning of period 104,484
-------
Cash and cash equivalents, end of period $ 70,359
========
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Add Thirteen
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Other Selected Financial Data
(Unaudited)
(Dollars in thousands)
Backlog And Entered
- -------------------
Orders-Q1 FY 2006 Filtration Comm. Test Total
- ----------------- ---------- ----- ---- -----
Beginning Backlog
9/30/05 $ 80,497 87,781 64,836 233,114
Entered Orders 41,145 59,166 * 25,834 126,145
Sales (41,446) (19,133)* (30,007) (90,586)
------- ------- ------- -------
Ending Backlog-
12/31/05 $ 80,196 127,814 60,663 268,673
== == == ========= ======= ====== =======
*Communications Recap Q1 FY 2006 Q1 FY 2006
Entered Orders Sales
-------------- -----
AMR Products (DCSI) $ 45,640 15,418
SecurVision Video Security
(Comtrak) 2,510 2,510
Nexus Energy 11,016 (1) 1,205 (2)
------ -----
Total 59,166 19,133
====== ======
(1) Includes $2.0 million of new orders and $9.0 million of acquired
backlog
(2) Represents one month of sales.
# # #