On July 15, 2011, the Company, Homeland Security Capital Corporation (“Homeland”), and Safety and Ecology Holdings Corporation (“Safety”) entered into a definitive Stock Purchase Agreement (“Purchase Agreement”), whereby the Company is to purchase at closing of the Purchase Agreement all of the issued and outstanding shares of capital stock of Safety and its subsidiaries (the “Acquisition”). Homeland is the owner of all of the issued and outstanding capital stock of Safety. The consummation of the Acquisition is subject to numerous conditions precedent, including, but not limited to, the Company entering into a definitive agreement with its lender, whereby the lender increases the amount of the Company's credit facilities and provides the financing to the Company to fund the cash portion of the purchase price, Homeland's stockholders approve the transaction and Homeland has complied with the Information Statement requirements under the Securities Exchange Act of 1934, as amended. If the Acquisition is consummated, the Company agrees to pay Homeland the following, subject to the terms of the Purchase Agreement and adjustments of the purchase price as set forth in the Agreement:
Cash Consideration. At the closing, the Company will pay:
$20,000,000 of the cash consideration, as may be adjusted by the estimated net working capital adjustment at the closing, less the aggregate amount of the purchase price due and owing the Company for the Company's Common Stock to be purchased by the Management Investors as described below, to Homeland, and
$2,000,000 of the cash consideration to SunTrust Bank, as escrow agent (the “Escrow Agent”), to be held and administered pursuant to the terms of the escrow agreement, to satisfy claims of the Company for indemnity pursuant to the terms of the Purchase Agreement and for any other purpose specifically set forth in the Escrow Agreement.
Promissory Note (the “Note”). The Note in the principal amount of $2,500,000 shall be issued by the Company to the order of Homeland. The Note:
shall bear an annual interest rate equal to 6%;
shall be non-negotiable;
may not be sold, transferred or assigned by Homeland without the prior written consent of the Company;
shall be subject to offset under certain conditions; and
shall be payable over a three (3) year period in thirty-six (36) monthly installments of principal and interest, with each monthly installment to be as follows: the sum of $76,054.84 principal and interest, with the final installment to be in the sum of the remaining unpaid principal balance due under the Note plus accrued interest, due thereon.
The Note further provides that on the failure of the Company to pay any monthly installment of principal and interest within 30 days when due or in the event of bankruptcy of the Company or upon a change in control of the Company:
the annual interest rate will automatically increase (without any action on the part of Homeland) as of such default date to 12% during the period of such default, and
Homeland will have the option to declare the Note in default and to be immediately due and payable, and Homeland will thereafter during the period of such event of default, at its option and in its sole discretion, have the right to elect by written election delivered to the Company to receive in full and complete satisfaction of all of the Company's obligations under the Note either:
The cash amount equal to the sum of the unpaid principal balance owing under the Note and all accrued and unpaid interest thereon, plus the Expenses (as defined in the Note) (the “Payoff Amount”);
Subject to certain conditions set forth in the Purchase Agreement, the number of fully paid and non-assessable shares of the Company's restricted Common Stock (the “Payoff Shares”), equal to the quotient determined by dividing the Payoff Amount by the average of the closing prices per share of the Company's Common Stock as reported by the primary national securities exchange or automatic quotation system on which the Company's Common Stock is traded during the 30 consecutive trading day period ending on the trading day immediately prior to receipt by the Company of the written demand notice and Homeland's written election to receive Payoff Shares in full and complete satisfaction of the Company's obligations under the Note; provided, however, that the number of Payoff Shares plus the number of shares of the Company's Common Stock to be issued to the Management Investors, as described below, shall not exceed 19.9% of the voting power of all of the Company's voting securities issued and outstanding as of the date of this Agreement. If issued, the Payoff Shares will be issued in a private placement and not be registered and Homeland will not be entitled to registration rights with respect to the Payoff Shares, except for certain piggyback rights.
Subject to the terms of the Purchase Agreement, any combination of the Payoff Amount and the Payoff Shares, provided, however, that the aggregate amount of the Payoff Amount and the Payoff Shares shall not exceed the unpaid principal balance and accrued interest due under the Note as of receipt by PESI of the written demand notice, with the number of Payoff Shares to be determined by dividing the amount of the Payoff Amount which is to be paid in Payoff Shares by the average of the closing prices per share of the Company's Common Stock as reported by the primary national securities exchange or automatic quotation system on which the Company's Common Stock is traded during the thirty (30) consecutive trading day period ending on the trading day immediately prior to receipt by the Company of the written demand notice and Homeland's written election to receive a portion of the Payoff Amount in Payoff Shares, with such notice to specify the amount of the Payoff Amount to be paid in Payoff Shares.
The purchase price is also subject to certain working capital adjustments to be determined within 75 days following the closing as set forth in the Purchase Agreement and could be further subject to certain offsets as described in the Purchase Agreement.
Contemporaneously with the closing of the Acquisition, Homeland is to cause certain individuals (each a “Management Investor” and collectively, “Management Investors”) to purchase in a private placement restricted shares of Common Stock of the Company, at a per share price determined by dividing $1,000,000 by the average of the closing prices of the Company's Common Stock as reported by the NASDAQ for the 30 consecutive trading day period ending on the trading day immediately prior to the earlier of (a) the Closing Date or (b) the public announcement of the Acquisition by the Company. The purchases by the Management Investors shall be unregistered, meeting the requirements of Rule 506 of Regulation D promulgated under the Securities Act. Homeland shall cause the Management Investors to purchase an aggregate number of restricted shares of the Company's Common Stock valued at not less than $900,000 nor more than $1,000,000. The Company shall reduce from the cash portion of the purchase price, and the Company shall retain, the amount owing by the Management Investors for the shares of the Company's Common Stock.
Safety, headquartered in Knoxville, Tennessee, specializes in the remediation of nuclear materials for the U.S. Department of Energy, U.S. Department of Defense, and other federal agencies. Safety employs more than 450 employees and, based on Homeland's 2010 Form 10-K, Safety generated approximately $86.0 million in revenue and $3.3 million in net income for the fiscal year ended June 30, 2010. We expect to complete the Acquisition during the third quarter of 2011.
In connection with the potential acquisition of Safety, we have entered into a commitment letter with our senior lender, PNC, to increase our revolving and term credit facilities with PNC to approximately $43,500,000, the proceeds of which would be used to:
refinance existing senior bank debt;
partially fund capital expenditures;
provide for our ongoing working capital needs; and
finance the cash portion of the acquisition of Safety.
Under the commitment, the following credit facilities would be made available to us;
up to $25,000,000 secured revolving credit facility, subject to a borrowing based on a certain percentage of eligible receivables and certain reserves;
term loan up to $16,000,000 limited to certain percentages of the liquidation value of eligible machinery and equipment, plus a certain percentage of the fair market value of eligible real estate; and
up to $2,500,000 equipment line, subject to certain limitations.
The new credit facilities would be secured by substantially all of our assets and stock of our subsidiaries, be for a term of five (5) years and completion of the new credit facilities being subject to numerous conditions precedent, including, but not limited to, execution of definitive loan documentation, certain minimum excess revolving credit availability, completion of the sale of PFFL, and completion of the acquisition of Safety.
Finite Risk Insurance Policy
As previously disclosed, our PFNWR facility has a finite risk insurance policy dated August 2007 with Chartis. The policy provides an initial $7,800,000 of financial assurance coverage with an annual growth rate of 1.5%, which at the end of the four year term policy, will provide maximum coverage of $8,200,000. We have the option to renew this policy at the end of the four year term. On July 31, 2011, the policy was renewed for an additional year which required a $46,000 fee. We have the option to renew this policy annually going forward with a similar fee which will be determined at the time of renewal. All other terms of the policy remain substantially unchanged (See “Note 7 – Commitment and Contingencies – Insurance” for terms and payments made on the original policy).
On July 25, 2011, our Compensation and Stock Option Committee approved the grant of 300,000 Incentive Stock Options (“ISOs”) from the 2010 Stock Option Plan to Mr. James Blankenhorn, our Chief Operating Officer, which allows for the purchase of up to 300,000 shares of the Company's Common Stock at $1.57 per share. Mr. Blankenhorn's employment with the Company was effective June 1, 2011. The options granted are for a term of six years from grant date with one-third yearly vesting over a three year period. The fair value of the options were determined to be approximately $266,000 in accordance with ASC 718, “Compensation – Stock Compensation”, using the Black-Scholes valuation model and will be expensed over the vesting period of three years.