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DCV Holdings3/24/2005
rebate to DuCoa (we are trying to get to the bottom of this, but Paul Halter commits that Du Pont will honor the rebate letter).
*
DuCoa has amortized $148,000 of these rebates and miscellaneous adjustments through June 30, 1997 with the balance of $416,00 to be amortized. If these rebates had not been booked in 1996, incentive compensation would have been reduced by $404,000 and earnings reduced by $160,000 in DuCoa. See attached schedule.
Thus, Halter clearly informed Winward that the rebate had been booked but not paid in 1996 and had been used by DuCoa to boost bonuses and earnings. On July 24, Stejskal sent a similar fax to Winward. At trial, Stejskal testified that he could not read the minds of DuCoa management regarding the nature of the rebate, but that he had related the facts as he understood them to Winward.
As Winward's chief negotiator, Sikorski testified at trial about his understanding of Halter's July 23 fax. Sikorski knew that the TMA rebate had been booked by DuCoa as a 1996 receivable because of Leddy's December 1996 letter to Fischer. He also knew that even though the rebate was not paid in 1996, DuCoa management had received an additional $404,000 in incentive compensation because of the rebate letter. He realized that DuCoa may have acted intentionally in order to increase bonus compensation. Finally, Sikorski knew that as of March 1997 DuCoa was aware that it would not receive the rebate from Du Pont.
After Sikorski received Halter's fax, a conference call was held among Halter, Sikorski and an executive from MetLife, Winward's primary investor. During that conversation, Sikorski told Halter that Winward wanted to reaudit the books of both DuCoa and DCV, Inc., and that the accounting issues could impact the value of the sale. Shortly after the phone call took place, Winward decided to forego a reaudit in favor of a $4 million reduction in the cash purchase price, from $58 to $54 million. This strategy was successful. It is clear from Sikorski's testimony that Winward executives, as sophisticated investment professionals, made a tactical decision to use the TMA rebate issue as leverage to obtain a lower purchase price.
At trial, Halter testified that on July 23 he paid the rebate from discretionary funds allotted for the DCV transaction because both he and James were concerned about impact of the unresolved accounting issues. Winward was well aware of DuCoa's accounting problems. For this reason, Sikorski and Porta planned to replace Hilling with Dan Rose, then-president of DCV's Canadian Harvest division, as president of DuCoa if the deal went through. Sikorski testified that the reason for the change was the newly discovered accounting irregularities in the systems and controls of the company.
The same information was incorporated into the Disclosure Schedule to the Purchase Agreement, which was signed by the parties on August 12, 1997. The wording is the same as that used in Halter's July 23 fax to Winward except for the omission of the phrase "we are trying to get to the bottom of this, but Paul Halter commits that Du Pont will honor the rebate letter." The information is included verbatim as an exception to Sellers' representation in ยง 3.8 of the contract that DCV, Inc.'s 1996 financial statements were prepared in accordance with GAAP and fairly represented the financial position of DCV, Inc. and its IOC's. Thus, the Buyers were again informed again that:
The following list, previously disclosed to the Buyers, represent certain items that are either not in accordance with GAAP or affect the identified subjects in the previously provided Financial Statements: TMA Rebate The December
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