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AGREEMENT
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THIS AGREEMENT, made as of the 16th day of March, 1994
between Valley Welding Supply Co, Inc., a Corporation ("VALLEY")
and Xxxxxxx X. Xxxxxxxxxx ("XXXXXXXXXX").
WHEREAS, Xxxxxxxxxx, individually and by and through
his consulting corporation ADE Vantage, Inc. ("CORPORATION") have
entered into an arrangement with Valley Welding Supply Co. for
the development of an acquisition program as well as promulgation
and execution of a Strategic Business Plan, 1994-1998
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("PLAN") for the expansion of Valley's industrial gas and welding
supply business, through acquisition and expansion of industrial
gas and welding supply distributors ("ACQUISITION PROGRAM"); a
copy of the Plan is attached hereto and incorporation herein by
reference as Exhibit A; and
WHEREAS, Valley and Xxxxxxxxxx desire to enter into
this Agreement setting forth Xxxxxxxxxx'x relationship with
Valley in the execution of the Acquisition Program and Plan
including compensation therefore.
WITNESSETH in consideration of the mutual promises
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hereinafter contained Valley and Xxxxxxxxxx agree as follows:
1. Duties. Xxxxxxxxxx will identify, investigate and
develop industrial gas and welding supply business distributors
as prospective acquisition candidates. Xxxxxxxxxx together with
Valley will qualify all potential distributors for acquisition
and jointly target distributors for acquisition solicitation
("TARGET DISTRIBUTORS"). Xxxxxxxxxx will assist Valley in the
solicitation, preparation of offering memoranda, contract
negotiation, due diligence and/or any
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other matters necessary to assist Valley to consummate Target
Target Distributor acquisitions in accordance with the Plan.
2. Term. The term of this Agreement shall be give
(5) years from the execution and delivery of this Agreement
unless sooner terminated pursuant to Paragraph 14 hereinafter.
3. Independent Contractor Status. It is understood
that Xxxxxxxxxx is an independent contractor, representing Valley
pursuant to this Agreement, and he shall not otherwise hold
himself out to the public as employee, agent, or partner of
Valley. As such Xxxxxxxxxx is responsible, where necessary, to
secure at his sole cost, worker's compensation, insurance,
disability, benefits and any other insurance as may be required
by law. Valley will not provide, nor will it be responsible to
pay for benefits for Xxxxxxxxxx. Any benefits, if provided by
Indelicato for himself and/or his staff, including but not
limited to, health insurance, paid vacation, paid holidays, sick
leave or disability insurance coverage of whatever nature, shall
be secured and paid for by Xxxxxxxxxx.
4. Tax Duties and Responsibilities. Xxxxxxxxxx is
responsible for the payment of all required payroll taxes,
whether federal, state or local in nature, including, but not
limited to, income taxes, social security taxes, federal
unemployment compensation taxes, and any other fees, charges,
licenses or other payments required by law.
5. Employee's of Independent Contractor. Xxxxxxxxxx
may employ as many employees as he requires, such matter resting
entirely with his own discretion. Valley need not be advised to
the employment of such individuals. Such persons are employees
of Xxxxxxxxxx, and he shall be deemed employer of such persons.
As such, Xxxxxxxxxx shall be responsible for compensation as well
as all necessary insurance and payroll deductions for such persons,
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including but not limited to, federal, state and local income taxes,
social security taxes, unemployment compensation taxes, workers
compensation coverage, etc.
6. ADE Vantage, Inc. Xxxxxxxxxx may at his sole cost
and expense (except for reimbursable support service costs as
provided in Paragraph 11 hereinafter), in his execution of the
Plan, engage Corporation, ADE Vantage, Inc., his consulting firm,
as his agent and contractor to provide support services and any
other services executed pursuant to the Plan or otherwise
required of Xxxxxxxxxx hereunder. At all times, Corporation
shall solely be the contractual agent of Xxxxxxxxxx and not
Valley.
7. Indemnification. Xxxxxxxxxx shall not be liable
for the acts, negligence or defaults of any employee, agent or
representative of Valley, nor shall he be liable for anything
done or not done in good faith, including errors of judgment,
acts done or committed on the advice of counsel, or mistakes of
fact or law. Xxxxxxxxxx shall, without prejudice to any other
rights which he may have, be indemnified by Valley against all
liability and expense reasonably incurred by him in connection
with any claim, action, suit or proceeding of whatever nature in
which he may be involved as a party or otherwise by reason of
having entered into this Agreement and the execution of the
duties assumed hereunder relative to his execution of the
Acquisition Program and Plan. Indemnification hereunder, shall
not, however, extend to any liability, loss, damage claim or
expense to the extent occasioned by or arising out of
Xxxxxxxxxx'x default hereunder or any willful misconduct or
grossly negligent act by Xxxxxxxxxx, his agents and employees in
his capacity as an Independent Contractor in the execution of his
duties hereunder. Further, Valley agrees that ADE Vantage, Inc.
shall not be liable and shall be held harmless for any damage or
injury caused by its negligent mistakes, errors and omissions in
and about providing financial services under this Agreement.
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8. Business of Independent Contractor. During the
term of this Agreement, Xxxxxxxxxx may engage in any other
business which does not conflict with his duties hereunder,
conflict with Valley's business, or otherwise impair the
successful execution and implementation of the Acquisition
Program and Plan. Notwithstanding, Valley and Xxxxxxxxxx agree
that approximately thirty percent (30%) of Xxxxxxxxxx'x time will
be spent on the Acquisition Program and Plan.
9. Supervision. Xxxxxxxxxx shall not be subject to
the provisions of any personnel handbook or the rules and
regulations of applicable employees to Valley since Xxxxxxxxxx
shall fulfill his responsibilities independent of and without
supervision or control by Valley.
10. Compensation. Xxxxxxxxxx'x compensation hereunder
shall be set forth as follows:
a. Prior to Acquisition Program and Plan.
Xxxxxxxxxx shall be compensated for his efforts in
structuring of the Acquisition Program, aid and effort in
the solicitation and procurement of acquisition financing
and as well the preparation and promulgation of the Plan
based upon a redeemable credit arrangement as set forth in
subparagraph (c) hereinafter at the base credit rate of One
Hundred Fifteen Dollars ($115.00) per hour ("APPLICABLE BASE
CREDIT RATE") for all hours reasonably incurred for such
services, and which shall have been invoiced by Xxxxxxxxxx
to Valley monthly during the development phase of the
Acquisition Program and Plan, which shall terminate as of
the execution and delivery of this Agreement. Also, during
this period Valley shall reimburse Xxxxxxxxxx by cash
payment for out of pocket expenses reasonably
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incurred in and about his efforts in structuring the Acquisition
Program, aid in the solicitation and procurement acquisition
financing and preparing the plan.
b. After Commencement of Acquisition Program and
Plan. Xxxxxxxxxx'x compensation during the term of this
Agreement shall also be based upon a redeemable credit
arrangement. For all compensable hours pursuant to
compensation provisions in subparagraphs d, (ii) through
(iv) hereinafter, Xxxxxxxxxx shall accrue credits for
services performed at applicable base credit rates of either
One Hundred Fifteen Dollars ($115.00) per hour or Fifty
Dollars ($50.00) per hour (both also "APPLICABLE BASE CREDIT
RATE") as specified and adjusted hereinafter.
c. Redeemable Credit Arrangement.
Notwithstanding, the term of this Agreement such credits are
redeemable by Xxxxxxxxxx within a seven (7) year period from
the date of accrual ("REDEMPTION PERIOD"). The value of
said credits during the seven (7) year redemption period
shall increase proportionately with the increase in Valley's
net worth as compared to the present Valley net worth on an
annual basis. After each fiscal year (July 1 through
June 30 "FISCAL YEAR") during the term of this Agreement,
Valley shall provide Xxxxxxxxxx with a financial statement
reflecting the net worth of Valley as of the end of the
previous fiscal year. During the redemption period,
Xxxxxxxxxx shall be entitled to his original accrued credits
plus an increase in value based on the net worth of Valley
at the date of each year end fiscal net worth as indicated
in the example hereinafter.
In the event Valley is unsuccessful in its
operations and its net worth declines or becomes negative,
the earned Applicable Base Credit Rates shall not be
decreased and shall constitute the minimum credit redemption
value rates.
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Alternatively, in the event Valley offers its
corporate stock for public ownership and such shares of
stock become publicly traded, Xxxxxxxxxx may in his
discretion elect that the value of his credits be converted
into shares earned, based upon Valley's net worth share
value at the end of the year in which the credits were
earned. For such stock value calculation, Xxxxxxxxxx'x
credits shall be converted into shares determined as of and
with reference to the net worth value at the Fiscal Year end
in years that shares accrue.
For Example:
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$50 x 500 hrs
Starting Starting $115 x 200 hrs
Number of Year Net Ending Year Accumulated Shares Accumulated
Valley Shares Worth Net Worth Credits Earned Total Shares
10,000,000 $10,000,000 $12,000,000 $50,000 41,666 41,666
10,000,000 $12,000,000 $14,000,000 $50,000 35,710 77,376
10,000,000 $14,000,000 $17,000,000 $50,000 29,412 106,788
10,000,000 $17,000,000 $20,000,000 $50,000 25,000 131,788
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Net Worth Share Value $2.00 x 131,788 = 263,576
I.P.O. 131,780 shares x $12.00 = $1,581.456 Stock Value
In our example, we have assumed a base value per share of $1.00
and a hypothetical initial public offering price of $12.00 per
share.
d. Compensation During Term of Plan. Valley
shall compensate Xxxxxxxxxx for services hereunder during
the term of this Agreement as follows:
x. Xxxxxxxxxx shall receive no compensation
when a Target Distributor is solicited but no
acquisition offer is made.
ii. Xxxxxxxxxx shall be entitled to credit
at the rate of $50.00 per hour (with credit earned
during the fiscal year the time was actually spent) for
all time spent soliciting and preparing offering
memoranda for solicitation of a
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Target Distributor, when an acquisition is made but,
for whatever reason, the acquisition in unsuccessful.
iii. Xxxxxxxxxx shall be entitled to a credit
of $115.00 per hour (with credit earned during the
fiscal year the time was actually spent) for all time
spent soliciting, preparing offering memoranda,
negotiating purchase contract, due diligence and/or
other services required of Xxxxxxxxxx by Valley in the
solicitation of a Target Distributor when an
acquisition offer is made, and the Target Distributor
acquisition is successful culminating in closing.
iv. Xxxxxxxxxx will be paid a management
service fee of $1,000.00 per month by cash payment, and
not be credit. The management service fee shall be
reviewed from year to year to evaluate whether
adjustment might be made to adjust the fee for actual
management services provided.
v. Valley shall reimburse Xxxxxxxxxx by
cash payment for all out of pocket expenses reasonably
incurred by him, while rendering services under
subparagraphs d(i), d(ii), d(iii) and d(iv) next above.
e. Redemption. Xxxxxxxxxx shall give Valley at
least fifteen (15) days prior written notice of his intent
to redeem any or all of his accrued credits. Xxxxxxxxxx, as
available may elect such redemption either (1) on the
adjusted net worth percentage increase basis, or (2) in the
event public stock offering on the stock base redemption
basis, specifying the redemption date and number of credits
to be redeemed. Any and all credits not redeemed prior to
the seven (7) year redemption period shall be automatically
redeemed as of the expiration of the redemption period.
Valley shall have thirty (30) days after the redemption date
to make redemption payments to Xxxxxxxxxx.
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11. Reimbursable Support Service.
a. Financial. Xxxxxxxxxx shall be entitled to
reimbursement for financial support services for financial
projections, evaluations as well as other necessary and
required analyses prepared for Xxxxxxxxxx by Corporation or
by independent professional agents obtained for this
specific purpose, at the rate of Seventy-two Dollars
($72.00) per hour as such support service costs are incurred
during the term of this Agreement. Valley and Xxxxxxxxxx
agree that they intend to use ADE Vantage, Inc. for
financial services.
b. Legal. Xxxxxxxxxx shall be entitled to
reimbursement for legal support services for letters of
intent, offering memorandum, as well as other necessary and
required legal support services furnished for Xxxxxxxxxx by
Corporation by independent professional agents obtained for
such specific purposes at the rate of One Hundred Twenty-
eight Dollars ($128.00) per hour as such support service
costs are incurred during the term of this Agreement.
c. Approval of Valley. All such financial and
legal support services shall be incurred on a case by case
basis, only upon the notice to and agreement of Valley as to
the proposed nature and extent thereof.
12. Assignment. Xxxxxxxxxx shall not sell, assign or
transfer this Agreement, however, he shall have the limited right
to assign the Agreement to the Corporation.
13. Governing Law. This Agreement shall be subject to
and governed by the laws of the State of West Virginia.
14. Termination of Agreement. This Agreement may be
terminated at will by either party, at any time, by written
notice to the other party as provided hereinafter in
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Paragraph "15. Notices." The posting of such certified mail
notification shall be the effective termination date, unless
otherwise expressly set forth in the notice of termination. If
Valley Welding terminates the agreement other than for just
cause, the value of Xxxxxxxxxx'x credits would be valued at the
increased net book value amount. If Xxxxxxxxxx terminates the
Agreement or if Valley terminates the Agreement for just cause,
then his credits will be valued at the $50.00 and $115.00
Applicable Base Credit Rates without benefit of the increase in
Valley's net book value. In the event Xxxxxxxxxx dies, then in
such event his estate would be entitled to the value of
Xxxxxxxxxx'x credits valued at the increased net book value
amount, the same as if Valley Welding terminated the Agreement
other than for just cause. Termination of this Agreement will in
no event cause forfeiture of Xxxxxxxxxx'x right to payment
hereunder, which shall survive any and all such termination.
15. Notices. All notices required to be given
hereunder shall be in writing and shall be sent by certified
mail, postage prepaid, to Valley and/or to Xxxxxxxxxx at the
addresses indicated below, unless written notice of change of
address is provided to other party at the address indicated.
To Valley: Valley Welding Supply Co., Inc., 67 -
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00xx Xxxxxx, Xxxxxxxx, Xxxx Xxxxxxxx 00000; Attention
Xxxx X. Xxxx.
To Xxxxxxxxxx: Xxxxxxx X. Xxxxxxxxxx, 0000 X. Xxxx
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Xxxxxx, Xxxxx 000, Xxxxxxxx, Xxxxxxxxxxx 00000.
16. Waiver. The waiver by either party of a breach of
any provision in the Agreement shall not operate or be construed
to operate as a waiver of any subsequent breach.
17. Modification. No change, modification or waiver
of any term of this Agreement shall be valid unless it is in
writing and signed by both parties.
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18. Entire Agreement. This Agreement constitutes the
entire Agreement between the parties and supersedes all prior
Agreements or understandings between Valley and Xxxxxxxxxx.
19. Captions. The captions are inserted for
convenience only and shall not be considered when interpreting
any provision or terms hereof.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of this 15th day of January, 1994.
VALLEY WELDING SUPPLY COMPANY,
a West Virginia corporation
By
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Its
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Xxxxxxx X. Xxxxxxxxxx
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January 23, 1995
Mr. Xxxx Xxxx, Chairman
Valley Welding Supply, Inc.
00 00xx Xxxxxx
X.X. Xxx 0000
Wheeling, West Virginia 26003 - 7061
Dear Xxxx:
This letter will confirm the modifications to the consulting
agreement between Valley National Gases (Valley Welding Supply)
and Xxxxxxx X. Xxxxxxxxxx, dated March 16, 1994, which we agreed
to make during our meeting of January 19, 1995. The
modifications involve a change in the hourly compensation rate
paid to me for completed acquisitions from a fixed rate of $115
per hour, as stipulated as d.(iii) on page 7 of the agreement, to
one which varies as a function of price paid relative to a range
of value.
The purpose of these modifications is: (1) to have my hourly
rate compensation more accurately reflect the potential value
each acquisition could create for Valley National Gases and (2)
to provide me the opportunity to be compensated for the zero
hourly rate consulting which I provide, primarily in meetings
with acquisition candidates, and attending NWSA zone meetings.
Definitions:
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A. Stand Alone Value - Determined by financial projections of
ten years and a terminal value, as a non-consolidated business
reflecting historical or low (1%-2% per year) growth rates and
historical profit margins, calculated on a basis that the
business being valued has no interest bearing debt. The
projections may be adjusted for all income or expense producing
assets held outside the business by related parties and may be
further adjusted for all non recurring costs or income items
which would not exist in a stand alone configuration under
management of a similar business. (See Nations Bank Loan
Agreement Section 4.06(a)(i)(A))
B. Strategic Value - Using the Stand Alone Case projections as a
starting point, this value is derived by assuming certain cost
savings and rationalizations recognized by Valley management to
be achieved over a reasonable period of time. (See Nations Bank
Loan Agreement Section 4.06(a)(i)(B))
C. Adjusted Net Worth - The book net worth of the acquisition
candidate adjusted upward to reflect cylinders, vessels, real
estate and other significant assets from book value to market
value. (See Nations Bank Loan Agreement Section 4.06(a)(i)(C))
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Concept: The acquisition hourly rate will be determined
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uniquely for each acquisition, from a scale or range of value.
The scale will be devised with Strategic Value at the lower end,
and the lesser of either Stand Alone Value or Adjusted Net Worth
at the upper end. The Strategic Value at the lower end will be
assigned a rate of $100/hour and the lesser of either Stand Alone
Value or Adjusted Net Worth at the upper end will be assigned a
rate of $225/hour. (See Exhibit I)
On this scale is the price paid for each acquisition, on a net
present value basis. The price paid will include all components
of the purchase, such as the stock or the assets, covenants not
to compete, consulting agreements, brokers commissions, and
extraordinary capital expenditures.
Where the price paid for each acquisition is on this scale of
value will determine the hourly rate for each completed
acquisition, up to the first one hundred (100) hours, spent on
each completed acquisition. All hours in excess of 100 hours,
for each completed acquisition, will be credited at a flat rate
of $100/hour. In no case will the first 100 hours be at a rate
greater than $225 per hour or less than $100 per hour.
The revised hourly rate for the first 100 hours spent on each
completed acquisition is then calculated as follows:
A - PP
Hourly Rate = ------- X $125 + $100
A - B
A = Strategic Value for each acquisition
where B = Stand Alone Value or Adjusted Net Worth, whichever
is less for each acquisition
PP = Price Paid for each acquisition
Hourly rates so determined will be based upon information
available to us immediately after closing and A,B, and PP will be
recalculated to use all information known to us at that time.
An example will illustrate how the rate is determined. Xxxxx
Welders Supply in Jonesboro, Arkansas will be the first
acquisition which would use this approach. Assuming we buy the
business for our offering price, the rate is determined as
follows:
A = Strategic Value = $6.152 million
B = Stand Alone Value = $5.202 million
or B = Adjusted Net Worth = $3.751 million
PP = Offered Price = $5.021 million
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We will use Adjusted Net Worth because it is the smaller number.
Putting these numbers into the above formula gives an hourly rate
of:
6.152 - 5.021
------------- X 125 + 100 = $158.88 / hr (See Exhibit I)
6.152 = 3.751
Effective Date of Change: This rate change will become
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effective as of the date of this memorandum. The change in rate
will not affect any acquisition for which an offer has already
been made. This includes Xxxxxx, Quest, Service Welders, A-L
Compressed Gases/Westco, Xxxxx, or Xxxxx. It will commence with
our offer to Xxxxx Welders Supply in Jonesboro, Arkansas.
All other provisions of the consulting agreement between Valley
and me will remain unchanged.
Please indicate your acceptance of these changes by signing both
copies of this letter and returning one copy to me.
Very truly yours,
/s/ Xxxxxxx X. Xxxxxxxxxx
Xxxxxxx X. Xxxxxxxxxx
AGREED TO and ACCEPTED by:
/s/ Xxxx X. Xxxx
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Xxxx X. Xxxx, Chairman
3/16/95
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date
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SCALE OF VALUE
EXHIBIT I
ADJ NET PRICE BASE CASE VALLEY
WORTH PAID VALUE STRAT VALUE
$3.571 $5.021 $5.202 $6.152
B PP A
225 158 hr rate 100
[FN]
In some acquisitions these may be reversed
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4.06 CONDITIONS AND METHODS OF DISBURSEMENT.
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(A) INFORMATION. At least ninety (90) days prior to the
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making of any AOF Loan or the issuance of any Letter of Credit
with respect to the Acquisition of any Related Business (or one
hundred twenty (120) days in the case of AOF Loan or Letter or
Credit equal to or in excess of $5,000,000.00), the Borrower
shall furnish to the Bank the following information and materials
(each of which shall be in form and substance reasonably
satisfactory to the Bank and shall be presented in a consistent
format all at the Borrower's expense):
(i) a three-step evaluation of the Related Business which
justifies the purchase price intended to be offered by the
Borrower to the seller of the Related Business. Each evaluation
method, described below, is to be thoroughly documented and
explained to the reasonable satisfaction of the Bank with
detailed supporting information, schedules and lists. The three-
step evaluation is as follows:
(A) BASE CASE - A base case evaluation based upon a
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financial projection for not less than five nor more than ten
years of the Related Business as a standalone (non-consolidated)
business based on the actual historical growth rates and profit
margins of the Related Business calculated on a basis that the
Related Business has no debt or to the extent that the Related
Business has debt, such debt is non-interest bearing. The base
case evaluation may be adjusted for all income or expense
producing assets held outside the Related Business by related
parties and may be further adjusted for all excessive or non-
recurring costs or income items which would not exist in a
standalone configuration under management of similar businesses.
Free cash flows as set forth in such projection shall be
discounted to arrive at the estimated net present value of the
Related Business using commercially feasible, market based
assumptions. The discount rate in such net present value
calculation is to be based on objective, supportable market
criteria including current rates of return on thirty year U.S.
Treasury obligations plus an equity risk premium component plus a
small company risk premium component. Terminal value is to be
determined using a capitalization rate of not less than the
discount rate less the real industry growth rate (adjusted
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for inflation).
(B) MOST LIKELY CASES. Using the base case projections
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as a starting point, the Borrower shall then make a most likely
case evaluation by assuming certain cost savings and expense
rationalizations to be achieved over a reasonable period of time.
Each such saving or rationalization form the past actual costs of
the Related Business must be thoroughly documented, defensible,
explainable, line-by-line. Resulting net free cash flows shall
be projected and discounted as in the base case evaluation to
arrive at the most likely case evaluation.
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(C) NET ASSET BUILD-UP OR ADJUSTED NET WORTH. A net
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asset evaluation of the tangible assets of the Related Business
based upon the net book values of such assets less the
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liabilities of the Related business. Such asset evaluation shall
be made (1) on a category-by-category basis for the major assets
of the Related Business as follows: net accounts receivable;
inventory; machinery and equipment; rental cylinders (excluding
cylinders under lifetime leases to customers) with appropriate
deep discounts on cylinders and under long-term leases; and bulk
storage tanks and (2) using supportable, documented advance rates
on the nest book values of such assets to estimate the reasonable
fair market value of such assets (or replacement cost in the case
of rental cylinders and tanks). Such values applied to rental
cylinders and bulk storage tanks shall be detailed by type.
(ii) a written summary statement as to how the final purchase
price is determined based on a reconciliation of the foregoing
three methods of evaluation, including a discussion of how such
purchase price relates to (i) total revenues of Related Business
for its immediately past fiscal year and (ii) the operating
profit margins of the Related Business. Such summary shall also
include a comparative analysis, in reasonable detail, of how each
intended purchase price relates to other acquisitions recently
made or analyzed by Borrower and justification of why such
intended purchase price deviates materially from comparison if
such is the case.
(iii) supporting information for the evaluation and determination
set forth in subsections (ii) and (iii) above which shall consist
of the following:
(A) financial statements (including notes, schedules and all
other available information) of the Related Business for the
three completed fiscal years of the Related Business immediately
prior to the date of the proposed Acquisition,
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