EXHIBIT 2.1
AMENDED AND RESTATED
MERGER AGREEMENT
BETWEEN
RIVER HOLDING CORP.,
RIVER ACQUISITION CORP.,
HUDSON RESPIRATORY CARE INC.
AND
THE SHAREHOLDERS OF HUDSON RESPIRATORY CARE INC.
March 15, 1998
AMENDED AND RESTATED MERGER AGREEMENT
THIS AMENDED AND RESTATED MERGER AGREEMENT (the "Agreement") is made this
15 day of March, 1998, by and among River Holding Corp., a Delaware corporation
(the "Investor"), River Acquisition Corp., a California corporation and
wholly-owned subsidiary of the Investor ("Newco"), Hudson Respiratory Care Inc.,
a California corporation (the "Company") the Helen Lovaas Separate Property
Trust U/D/T dated 7/17/97 ("Lovaas") and the Helen Lovaas Trust No. 1 U/D/T
dated 11/10/97 (the "Trust"). Lovaas and the Trust are collectively referred to
herein as the "Shareholders."
RECITALS
A. The Shareholders own all of the outstanding shares of common stock of
the Company.
B. The Company manufactures disposable respiratory care and anesthesia
products and equipment.
C. The Boards of Directors of Newco, the Investor and the Company deem
advisable and in the best interests of their respective stockholders the merger
of Newco with and into the Company (the "Merger") upon the terms and conditions
set forth herein and in accordance with the Corporations Code of the State of
California (the "Corporations Code") (the Company and Newco being hereinafter
sometimes referred to as the "Constituent Corporations" and the Company,
following the effectiveness of the Merger, being hereinafter sometimes referred
to as the "Surviving Corporation");
D. The Boards of Directors of the Investor, Newco and the Company have
approved the Merger, upon the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants, and subject to the conditions, herein set forth, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
1.01 Defined Terms. The following words shall have the following meanings
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when used in this Agreement:
"Agreed Purchase Price" shall mean $233,600,000 plus any Contingent Payment
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payable pursuant to Section 2.13 hereof.
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"Arthur Anderson" shall mean the accounting firm Arthur Anderson LLP (or
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any successor thereto resulting from a merger or other business combination
involving Arthur Anderson LLP). If at any time Arthur Anderson LLP (or its
successor) shall cease to exist or shall otherwise refuse or be unable to
perform the services described in this Agreement as being provided by Arthur
Anderson, then the term Arthur Anderson shall be deemed to refer to any other
accounting firm as may be selected by Lovaas with Investor's reasonable consent.
"Balance Sheet Date" shall mean December 26, 1997.
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"Closing" shall have the meaning specified in Section 2.02.
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"Code" shall mean the Internal Revenue Code of 1986, as amended.
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"Company Transaction Expense Schedule" shall mean the schedule submitted to
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Investor by Lovaas five (5) business days prior to the Closing reflecting the
fees and expenses of the Company and the Shareholders in connection with the
transactions contemplated by this Agreement, including but not limited to the
Incentive Payments as described on Exhibit A attached hereto, the Ruiz
Consulting Fee, and legal, accounting and investment banking fees.
"Contingent Payment" shall have the meaning specified in Section 2.13.
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"Current Assets" shall consist of the current assets as shown on the
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December 26, 1997 Balance Sheet or the Final Balance Sheet, as the case may be,
excluding any deferred tax assets, and without giving effect to the transactions
contemplated by this Agreement, which balance sheets shall each be prepared in
accordance with GAAP (except as otherwise indicated in Schedule 3.05 hereto).
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"Current Liabilities" shall consist of the current liabilities as shown on
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the December 26, 1997 Balance Sheet or the Final Balance Sheet, as the case may
be, without giving effect to (i) the transactions contemplated by this
Agreement, (ii) the accruals related to the expenses associated with the
transactions contemplated by this Agreement (to the extent that such expenses
are included on the Company Transaction Expense Schedule) or (iii) tax
liabilities relating to obligations payable in connection with an election under
section 338(h)(10) of the Code), which balance sheets shall each be prepared in
accordance with GAAP (except as otherwise indicated in Schedule 3.05 hereto).
"Damages" shall have the meaning specified in Section 8.01.
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"Debt Schedule" shall mean the schedule submitted to Investor by Lovaas at
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least five (5) business days prior to the Closing, which schedule shall set
forth the principal amount of all of the Company's indebtedness for borrowed
money, plus accrued but unpaid interest and any prepayment penalties thereon
through to and including the Effective Date, which indebtedness, accrued
interest and any prepayment penalties to be paid by the Surviving Corporation
pursuant to Section 2.09(a) hereof as of the Effective Date.
"December 26, 1997 Balance Sheet" shall have the meaning specified in
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Section 3.05.
"Effective Date" shall have the meaning specified in Section 2.03.
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"Environmental Laws" shall have the meaning specified in Section 3.22.
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"EPP Liabilities" shall mean all liability of the Company to make payments
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to EPP Participants pursuant to the EPP Plan including all amounts payable to
retired or other former employees under the EPP Plan.
"EPP Participants" shall mean the individual participants under the EPP
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Plan.
"EPP Plan" shall mean the Hudson Respiratory Care Inc. Equity Participation
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Plan as established and maintained by the Company pursuant to the 1994 Amendment
and Restatement of the Hudson Respiratory Care Inc. Equity Participation Plan
(the "Plan Document") as such Plan Document has been amended prior to the date
hereof or may in the future be amended in the manner provided in Exhibit A
hereto.
"EPP Schedule" shall mean the schedule submitted to Investor by Lovaas at
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least five (5) business days prior to the Closing, which schedule shall set
forth the lump sum amount of the EPP Liability that will be payable to each EPP
Participant as of the completion of the Closing.
"Exchange Shares" shall mean the 3,739,435 shares of the Company's common
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stock held of record by the Trust and 9,229,285 shares of the Company's common
stock held of record by Lovaas, after giving effect to the stock split described
in section 2.06(a) hereof, which are each to be exchanged for the Price Per
Share in the Merger in accordance with the provisions of Article II hereof.
"Final Balance Sheet" shall mean a balance sheet of the Company as of the
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Effective Date prepared in accordance with GAAP (except as otherwise indicated
in Schedule 3.05 hereto).
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"Final Balance Sheet Date" shall mean the Effective Date.
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"Final Balance Sheet Tax Liabilities" shall mean all Pre-Acquisition Tax
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Liabilities set forth in the account for the accrued taxes payable or similar
account in the Final Balance Sheet and thus taken into account in determining
the Final Working Capital.
"Final Purchase Price" shall mean the Pro Forma Purchase Price as adjusted
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pursuant to Section 2.12(a).
"Final Working Capital" shall mean Current Assets, exclusive of Oxy Air,
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less Current Liabilities, exclusive of EPP Liabilities, Oxy Air Liabilities and
the current portion of Long-Term Debt or other debt reflected on the Debt
Schedule, in each case as reflected in the Final Balance Sheet.
"GAAP" shall mean United States generally accepted accounting principles as
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applied on a consistent basis throughout the three year period ended December
26, 1997.
"Hazardous Materials" shall have the meaning specified in Section 3.22.
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"Indebtedness" shall mean (i) obligations for borrowed money (including
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overdrafts), (ii) reimbursement obligations in respect of any letter of credit
or instruments serving a similar function (whether secured or unsecured), (iii)
obligations representing the deferred purchase price of property other than
accounts payable arising in connection with purchases in the ordinary course of
business, (iv) interest rate swaps, currency swaps, reverse repurchase
agreements and similar instruments, (v) any guarantee in respect of any
obligations of another person, and (vi) capital lease and sale leaseback
arrangements.
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"Independent Accounting Firm" shall mean Ernst & Young or another
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nationally recognized independent accounting firm jointly selected by Lovaas and
Investor. If such parties cannot agree on such accounting firm, the accounting
firm will be selected as follows: Lovaas and Investor shall each submit the
name of a nationally recognized independent accounting firm and the "Independent
Accounting Firm" shall mean the firm selected by lot from these two firms.
"Intangible Personal Property" shall have the meaning specified in Section
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3.10.
"Investor Tax Liabilities" shall mean, without duplication, each and all of
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(i) the Final Balance Sheet Tax Liabilities, (ii) Tax Liabilities attributable
to that portion of a Straddle Period following the Effective Date, (iii) Tax
Liabilities attributable to Post-Acquisition Taxable Periods, and (iv) Tax
Liabilities for which the Shareholders are not liable under Section 8.06 (ii)
hereof.
"Investor Transaction Expenses" shall mean the fees and expenses of the
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Investor and Newco in connection with the transactions contemplated by this
Agreement.
"Investor Transaction Expense Schedule" shall mean the schedule submitted
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to the Shareholders five (5) business days prior to the Closing reflecting the
Investor Transaction Expenses.
"Licenses" shall have the meaning specified in Section 3.14.
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"Long-Term Debt" shall mean the consolidated long-term debt of the Company,
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determined in accordance with GAAP less current installments of such long-term
debt.
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"Material Adverse Effect" shall mean changes, developments or occurrences
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which, individually or in the aggregate, have or reasonably can be expected to
have a material adverse effect on the assets, earnings, liabilities, prospects,
business, operations or financial condition or operating results of the Company
and the Subsidiary, taken as a whole.
"Merger" shall have the meaning specified in Section 2.01.
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"New Debt" shall mean the indebtedness, consisting of short term and long
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term debt which as of the date of this Agreement is estimated as approximately
$167,500,000, that will be borrowed by the Company as of the Effective Date to
pay the Pro Forma Purchase Price and the Investor Transaction Expenses.
"New Debt Schedule" shall mean the written schedule of New Debt that will
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be furnished by Investor to Lovaas not less than five (5) business days prior to
the Closing and on which Investor shall specify each category of New Debt
(revolving, short term and long term), the amount thereof and the lender(s)
thereof.
"New Preferred Stock" shall mean the shares of preferred stock of the
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Company to be issued on the Effective Date in exchange for the shares of
preferred stock of Newco, which preferred stock will have the rights,
preferences and privileges agreed to by the parties hereto.
"Outstanding Shares" shall mean 59,056 shares of common stock of the
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Company before giving effect to the stock split described in Section 2.06(a)
hereof which represents the total number of shares outstanding as of the date of
this Agreement.
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"Oxy Air" shall mean Oxy Air LLC, a Delaware limited liability company that
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is wholly-owned by the Company as of the date of this Agreement.
"Oxy Air Liabilities" shall mean any Indebtedness of Oxy Air.
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"Post-Acquisition Taxable Period" shall mean a taxable period of the
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Company that begins after the Effective Date.
"Pre-Acquisition Tax Liability" shall mean a Tax Liability of the Company
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for or with respect to any Pre-Acquisition Taxable Period or any Straddle Period
to the extent allocable to the period ending on the Effective Date.
"Pre-Acquisition Taxable Period" shall mean a taxable period of the Company
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that ends on or before the Effective Date.
"Price Per Share" means an amount equal to:
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(A) the Pro Forma Purchase Price less
(i) the aggregate amount shown on the Debt Schedule,
(ii) the aggregate amount shown on the EPP Schedule; and
(iii) the aggregate amount shown on the Company Transaction
Expense Schedule
divided by
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(B) the number of Exchange Shares.
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"Pro Forma Purchase Price" shall mean the Agreed Purchase Price as adjusted
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pursuant to Section 2.12(b).
"Pro Forma Working Capital" shall mean Current Assets, exclusive of Oxy
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Air, less Current Liabilities, exclusive of EPP Liabilities, Oxy Air Liabilities
and the current portion of Long-Term Debt or other debt reflected on the Debt
Schedule, in each case as reflected in the Pre-Closing Balance Sheet prepared
pursuant to Section 2.12(b).
"Real Property" shall have the meaning specified in Section 3.12.
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"Retained Shares" shall mean 1,500,000 shares of the Company's common stock
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held of record by Lovaas, after giving effect to the stock split described in
Section 2.06(a) hereof.
"Ruiz Consulting Agreement" shall mean that certain Employment Termination
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and Consulting Agreement between Hudson Respiratory Care Inc. and Richard K.
Ruiz dated as of December 31, 1996, as it may be amended.
"Ruiz Consulting Fee" shall mean the Consulting Fee that shall become
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payable, upon completion of the Closing, to Richard K. Ruiz pursuant to the Ruiz
Consulting Agreement.
"Shareholder Tax Liabilities" shall mean the U.S. federal and state income
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tax liabilities imposed on or against the Shareholders with respect to the
Company's income pursuant to the provisions of Sections 1361 et seq. of the Code
and comparable provisions of state income tax laws.
"Straddle Period" shall mean a taxable period of the Company that includes
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but does not end on the Effective Date.
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"Subsidiary" means Industrias Hudson, S.A. de C.V., a Mexican corporation
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in which the Company owns a 79% equity interest on the date hereof and will own
a 100% equity interest prior to the Effective Date.
"Surviving Corporation" shall have the meaning specified in Recital C
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hereof.
"Tax" or "Taxes" shall mean all taxes, including, without limitation, all
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net income, gross receipts, sales, use, withholding, payroll, employment, social
security, unemployment, excise and property taxes, plus applicable penalties and
interest thereon.
"Tax Liabilities" shall mean all liabilities for Taxes.
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"Tax Proceeding" shall mean any audit or other examination, or any judicial
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or administrative proceeding, relating to liability for or refunds or
adjustments with respect to Taxes.
"Tax Return" shall mean all reports and returns required to be filed with
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respect to Taxes.
1.02 Additional Terms. In addition to the foregoing, other capitalized
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terms used in this Agreement shall have the meanings given to such terms where
they first appear herein.
ARTICLE II
TRANSFER OF SHARES
2.01 The Merger. Upon the terms and conditions hereinafter set forth and
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in accordance with the California Corporations Code (the "Corporations Code"),
at the Effective Date (as defined in Section 2.03), Newco shall be merged with
and into the Company (the
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"Merger") and thereupon the separate existence of Newco shall cease, and the
Company, as the Surviving Corporation, shall continue to exist under and be
governed by the Corporations Code.
2.02 Closing; Filing. A closing shall be held at the offices of Gibson,
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Dunn & Crutcher LLP, 4 Park Plaza, Irvine, CA 92614 or such other place as the
parties shall agree, for the purpose of confirming the satisfaction or waiver,
as the case may be, of the conditions set forth in Articles VI and VII of this
Agreement (the "Closing") on the later of April 14, 1998 or the second business
day after satisfaction or waiver of the conditions set forth in Articles VI and
VII; provided, however, that if all of the conditions set forth in Articles VI
and VII have been satisfied or waived prior to April 14, 1998, Investor may
select an earlier date for the Closing, upon five (5) business days notice to
Lovaas. Immediately thereafter, Newco and the Company will cause an agreement
of merger, in substantially the form of Exhibit D attached hereto (the
"Agreement of Merger"), to be executed and filed with the Secretary of State of
the State of California.
2.03 Effective Date of the Merger. The Merger shall become effective
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immediately upon the filing of the Agreement of Merger with the Secretary of
State of the State of California in accordance therewith. The date and time of
such filing is herein sometimes referred to as the "Effective Date."
2.04 Articles of Incorporation and Bylaws. Upon the effectiveness of the
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Merger, the Articles of Incorporation of the Company shall be the Articles of
Incorporation of the Surviving Corporation, (amended to increase the number of
authorized shares of capital stock,
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create and authorize the New Preferred Stock and effect a stock split), and the
Bylaws of the Company as in effect on the Effective Date shall be the Bylaws of
the Surviving Corporation.
2.05 Directors and Officers. The persons who are directors of Newco
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immediately prior to the Effective Date (plus any directors of the Company
designated by Newco) and the officers of the Company (plus any officers of Newco
designated by Newco) shall, after the Effective Date and in accordance with the
Agreement of Merger, serve as the directors and officers, respectively, of the
Surviving Corporation, in each case such directors and officers to serve until
their successors have been duly elected and qualified in accordance with the
Articles of Incorporation and Bylaws of the Surviving Corporation.
2.06 Conversion.
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(a) Prior to the Effective Date, the Company and the Shareholders
shall take all action necessary to amend the Company's Articles of Incorporation
to (i) increase its authorized common stock to 15 million shares, (ii) create a
class of preferred stock with two million authorized shares, (iii) authorize
600,000 shares of New Preferred Stock and (iv) effect a 245 to 1 stock split
with respect to the 59,056 Outstanding Shares.
(b) Investor covenants that (i) it will contribute to Newco $10.00
for each share of the common stock of Newco issued to Investor and $100.00 (less
any underwriting fees paid by Investor to a non-affiliate of Investor in
connection with the sale and placement of such preferred stock) for each share
of the preferred stock of Newco issued to Investor, (ii) at least 5,500,000
shares of Newco's common stock shall be issued to Investor and remain
outstanding immediately prior to the Effective Date and (iii) at least 650,000
shares of common stock of the Surviving Corporation shall be purchased by
Investor immediately following the Effective Date at a purchase price of $10.00
per share.
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(c) At the Effective Date, by virtue of the Merger and without any
action on the part of the holders thereof:
(i) Each issued and outstanding Exchange Share shall be
automatically converted into the right to receive the Price Per Share in cash,
to be paid as set forth in Section 2.08 below.
(ii) Each issued and outstanding share of the common stock of
Newco shall be converted into one (1) validly issued, fully-paid and
nonassessable share of common stock of the Surviving Corporation, and each
issued and outstanding share of preferred stock of Newco shall be converted into
one (1) validly issued, fully-paid and nonassessable share of New Preferred
Stock of the Surviving Corporation.
(iii) The Retained Shares shall remain outstanding.
2.07 Closing of the Transfer Books. At the Effective Date, the stock
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transfer books of the Company shall be closed, and no transfer of shares of
common stock of the Company shall thereafter be made.
2.08 Surrender of Certificates.
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(a) The Company. Each of the Shareholders shall deliver at the
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Closing certificates evidencing all of the Exchange Shares to be canceled
pursuant to Section 2.06. Upon the surrender for exchange of such certificates,
together with such documents of transfer, duly completed and properly executed,
as reasonably requested by Investor, each Shareholder shall be paid at the
Closing, by wire transfer of immediately available funds, the
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amount of cash to which such Shareholder is entitled hereunder, and such
certificates shall forthwith be canceled.
(b) Newco. The Investor, as the sole stockholder of Newco, shall,
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upon surrender to the Surviving Corporation of certificates representing the
common stock, $.01 par value, of Newco and the preferred stock, $.01 par value,
of Newco, receive certificates representing the number of shares of common stock
of the Surviving Corporation into which the common stock of Newco shall have
been converted and the number of shares of New Preferred Stock into which the
preferred stock of Newco shall have been converted, each pursuant to Section
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2.06(c)(ii) hereof.
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2.09 Additional Payments on the Effective Date. On the Effective Date,
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the Surviving Corporation shall pay:
(a) by wire transfer of immediately available funds, the
aggregate amount of indebtedness, inclusive of principal and interest accrued
through the Effective Date, as set forth in the Debt Schedule to the parties and
in accordance with the instructions as specified in the Debt Schedule;
(b) to the EPP Participants the EPP Liability payable to such EPP
Participants as set forth in the EPP Schedule, with the Surviving Corporation to
make payment of the EPP Liabilities by wire transfer of immediately available
funds to the EPP Participants in accordance with instructions as specified in
the EPP Schedule; and
(c) to the parties specified in the Company Transaction Expense
Schedule the fees and expenses reflected in the Company Transaction Expense
Schedule, with the Surviving Corporation to make payment of such fees and
expenses by wire transfer of
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immediately available funds or by check delivered at the Effective Date,
whichever may be applicable as specified in the Company Transaction Expense
Schedule, provided, however, Incentive Payments may be made following the
Effective Date solely to the extent provided for under Section 5.01(b).
2.10 Effect of Merger. On and after the Effective Date, the Surviving
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Corporation shall possess all the rights, privileges, powers and franchises of a
public as well as of a private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; and all
singular rights, privileges, powers and franchises of each of the Constituent
Corporations, and all property, real, personal and mixed, and all debts due to
either of the Constituent Corporations on whatever account, as well for stock
subscriptions and all other things in action or belonging to each of the
Constituent Corporations, shall be vested in the Surviving Corporation; and all
property, rights, privileges, powers and franchises, and all and every other
interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of the Constituent Corporations, and the title to any
real estate vested, by deed or otherwise, in either of the Constituent
Corporations shall not revert or be in any way impaired; but all rights of
creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Constituent Corporations shall thenceforth attach to the Surviving
Corporation and may be enforced against it to the same extent as if said debts,
liabilities and duties had been incurred or contracted by it.
2.11 Further Assurances. If at any time after the Effective Date the
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Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in
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law or any other acts are necessary, desirable or proper (a) to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation, the title to any
property or right of the Constituent Corporations acquired or to be acquired by
reason of, or as a result of, the Merger, or (b) otherwise to carry out the
purposes of this Agreement, the Constituent Corporations agree that the
Surviving Corporation and its proper officers and directors shall and will
execute and deliver all such deeds, assignments and assurances in law and do all
acts necessary, desirable or proper to vest, perfect or confirm title to such
property or right in the Surviving Corporation and otherwise to carry out the
purposes of this Agreement, and that the proper officers and directors of the
Constituent Corporations and the proper officers and directors of the Surviving
Corporation are fully authorized in the name of the Constituent Corporations or
otherwise to take any and all such action.
2.12 Working Capital Adjustment.
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(a) The Agreed Purchase Price will be adjusted, by increasing or
decreasing the amount thereof pursuant to the following provisions of this
Section 2.12 (the "Working Capital Adjustment"). If the Final Working Capital
is less than $26,750,000 (the "Minimum Working Capital"), the Pro Forma Purchase
Price shall be reduced by, and the Shareholders shall pay to the Surviving
Corporation, an amount equal to the difference between the Minimum Working
Capital and the Final Working Capital. In the event that the Final Working
Capital is greater than $29,500,000 (the "Maximum Working Capital"), the Pro
Forma Purchase Price shall be increased by, and the Surviving Corporation shall
pay to the Shareholders, an amount equal to the difference between the Final
Working Capital and the Maximum Working Capital. Amounts equal to or greater
than the Minimum Working Capital
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and equal to or less than the Maximum Working Capital shall be referred to as
the "Working Capital Range." The Working Capital Adjustment shall be payable as
set forth below.
(b) In an effort to reduce the amount of the Working Capital
Adjustment after the Effective Date, a pro forma Working Capital Adjustment
shall initially be calculated 5 days prior to the Closing (the "Pro Forma
Working Capital Adjustment") based on the most recently available balance sheet
(the "Pre-Closing Balance Sheet"), which shall be subject to Investor's review
and approval, which approval shall not be unreasonably withheld. The Pro Forma
Working Capital Adjustment shall be determined as follows: the Agreed Purchase
Price shall be increased or decreased, as applicable, to the extent that the Pro
Forma Working Capital as reflected in the Pre-Closing Balance Sheet is greater
than or less than, as the case may be, the Working Capital Range.
(c) No later than 60 days following the Effective Date, the Company
shall prepare and deliver to Lovaas and Investor a draft Final Balance Sheet
that has been audited by Arthur Anderson. During the 15 days after delivery of
the draft Final Balance Sheet, Lovaas and Investor and their respective
representatives and accountants shall have the right to review, audit and
approve the draft Final Balance Sheet and the calculation of the Final Working
Capital. Lovaas and Investor and their respective representatives and
accountants shall have the right to review all workpapers of Arthur Anderson
used in auditing the draft Final Balance Sheet and Lovaas and her
representatives and accountants shall have full access to the books and records
of the Company for the purpose of verifying the accuracy and fairness of the
draft Final Balance Sheet. If neither party objects to the draft Final Balance
Sheet within
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such 15-day period, it shall be deemed acceptable to and binding upon the
parties and Arthur Anderson shall issue an audited Final Balance Sheet with an
unqualified opinion.
(d) If either Lovaas or Investor has any objections to the draft
Final Balance Sheet, such party will deliver a detailed statement describing
their objections to the other party within 15 days after receiving the draft
Final Balance Sheet. Investor and Lovaas will use reasonable efforts to resolve
any such objections themselves. If the parties do not obtain a final resolution
within 30 days after a party has received the statement of objections, however,
the remaining objections will be resolved by the Independent Accounting Firm
within 15 days of the expiration of the 30 day period and Arthur Anderson shall
then issue an audited Final Balance Sheet with an unqualified opinion. The fees
and expenses incurred by the Independent Accounting Firm shall be paid half by
the Shareholders and half by the Surviving Corporation.
(e) Any excess or shortfall of the Final Working Capital with
respect to the Pro Forma Working Capital shall be paid by the Surviving
Corporation or Shareholders, as the case may be, within ten (10) days following
(i) the expiration of the 15-day comment period without objection as provided in
Section 2.12(c) hereof or (ii) the final resolution of any dispute over the
Final Balance Sheet as described in Section 2.12(d) hereof, whichever may be
appropriate.
2.13 Contingent Payments.
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(a) In the event that the Surviving Corporation's EBITDA before
EPP (as defined below) for fiscal 1998 is at least $31,600,000, then the
Surviving Corporation shall pay an additional aggregate amount equal to
$5,700,000 (the "Contingent Payment"), with such amount payable as follows:
$2,479,500 payable to Lovaas, $826,500 payable to the
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Trust and $2,394,000 payable to the individuals set forth on Schedule 2.13 (the
"Participating Employees") in the respective amounts set forth on Schedule 2.13.
At the Surviving Corporation's option, the Contingent Payment shall be paid in
cash in immediately available funds or pursuant to a three-year payment schedule
(with principal and interest payable in 36 equal monthly installments and
prepayable at any time without penalty), together with interest at the rate of
8% per annum. EBITDA before EPP shall mean the Surviving Corporation's earnings
before depreciation and amortization, interest expense and income tax expense
and before charges related to the EPP Plan and the payment of special 1997
bonuses, not giving effect to any acquisitions by the Surviving Corporation
during fiscal 1998.
(b) No later than 60 days following the end of fiscal 1998, the
Surviving Corporation shall prepare and deliver to the Shareholders and the
Participating Employees the Surviving Corporation's draft financial statements
for fiscal 1998 (the "1998 Financial Statements") as audited by the Surviving
Corporation's accountants, together with a calculation of EBITDA before EPP.
During the 15 days after delivery of the draft 1998 Financial Statements, the
Shareholders and the Participating Employees and their respective
representatives and accountants shall have the right to review the draft 1998
Financial Statements and the calculation of EBITDA before EPP solely for the
purpose of determining whether the Contingent Payment is payable. The Surviving
Corporation will use its best efforts to make available to the Shareholders and
the Participating Employees and their respective representatives and accountants
all workpapers of the Surviving Corporation's accountants used in auditing the
draft 1998 Financial Statements and the Shareholders and the Participating
Employees and their respective representatives and accountants shall have full
access to the books and records of the Surviving Corporation for the purpose of
verifying the
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accuracy of the draft 1998 Financial Statements and the calculation of EBITDA
before EPP. If the Shareholders and the Participating Employees do not object to
the draft 1998 Financial Statements or the calculation of EBITDA before EPP
within such 15-day period, it shall be deemed acceptable to and binding upon the
parties.
(c) If the Shareholders or the Participating Employees have any
objections to the draft 1998 Financial Statements or the calculation of EBITDA
before EPP, such parties will deliver a detailed statement describing their
objections to the Surviving Corporation within 15 days after receiving the draft
1998 Financial Statements and the calculation of EBITDA before EPP. The
Surviving Corporation and such parties will use reasonable efforts to resolve
any such objections themselves. If the parties do not obtain a final resolution
within 5 days after the Surviving Corporation has received the statement of
objections, however, the remaining objections will be resolved by the
Independent Accounting Firm within 10 days of the expiration of the 5-day
period. The fees and expenses incurred by the Independent Accounting Firm shall
be paid half by the Shareholders and Participating Employees and half by the
Surviving Corporation.
(d) The Contingent Payment shall be paid by the Surviving
Corporation in accordance with Section 2.13(a) beginning ten (10) days following
(i) the expiration of the 15-day comment period without objection as provided in
Section 2.13(b) hereof or (ii) the final resolution of any dispute over the 1998
Financial Statements or the calculation of EBITDA before EPP as described in
Section 2.13(c) hereof, whichever may be appropriate.
(e) For all Tax purposes, the Contingent Payments to the
Shareholders shall be treated as additional purchase price consideration and the
Contingent
20
Payments to the Participating Employees shall be treated as participation
payments under the EPP Plan.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders, jointly and severally, represent and warrant to
Investor that at as of the date of this Agreement:
3.01 Organization. Good Standing and Authority. The Company is a
-----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California. The Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the Country of Mexico.
Each of the Company and the Subsidiary has full power and authority to carry on
its business as it is now conducted, and is entitled to own, lease or operate
the properties and assets it now owns, leases or operates. Each of the Company
and the Subsidiary is qualified to do business and has all required and
appropriate licenses in each jurisdiction in which its failure to obtain or
maintain such qualification or licensing (i) would have a Material Adverse
Effect or (ii) would result in a material breach of any of the other
representations, warranties or covenants set forth in this Agreement. Each of
this Agreement and the Noncompetition Agreement has been duly executed and
delivered by the Shareholders and the Company, has been authorized by all
necessary corporate action of the Shareholders and the Company and constitutes a
legal, valid and binding obligation of the Shareholders and the Company,
enforceable against each of them in accordance with its terms, except as
enforcement may be limited by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to creditors rights
generally. Except as
21
described in Exhibit A or as set forth on Schedule 3.01, the Company does not
own, directly or indirectly, legally or beneficially, any shares of capital
stock or any equity interest in, or otherwise control, any corporation,
partnership, joint venture or other entity or business other than the
Subsidiary.
3.02 Ownership of Shares and Power to Transfer. All of the
-----------------------------------------
Outstanding Shares have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable. The number of Outstanding Shares
owned by each Shareholder is set forth on Schedule 3.02 hereto. Except as set
forth in Schedule 3.02, neither the Shareholders nor the Company have granted,
issued or agreed to grant or issue any other equity interests in the Company
(other than the Outstanding Shares), and there are no outstanding options,
warrants, preemptive rights, subscription rights, securities or similar rights
of any kind that are convertible into or exchangeable for or any other
commitments of any character relating to the Outstanding Shares or any other
equity interests of the Company. The Shareholders have good and valid title to,
and sole record and beneficial ownership of, the Outstanding Shares set forth
opposite such Shareholder's name on Schedule 3.02, free and clear of any claims,
liens, pledges, options, security interests, trusts, encumbrances or other
rights or interests of any person, and the Shareholders have the absolute and
unrestricted right, power, authority and capacity to transfer the Exchange
Shares at the Closing and this Agreement constitutes a legal, valid and binding
obligation of the Shareholders enforceable against each of them in accordance
with its terms, except as enforcement may be limited by equitable principles or
by bankruptcy, insolvency, reorganization, moratorium or similar laws relating
to creditors rights generally. The Outstanding Shares constitute all outstanding
shares of capital stock of the Company. All dividends, distributions and
redemptions made or to be made by the Company with respect to its equity
interests have complied or will comply with applicable law.
22
3.03 Consents and Approvals of Governmental Authorities. Except as set
--------------------------------------------------
forth in Schedule 3.03 hereto, no consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority by the Shareholders, the Company or the Subsidiary is required in
connection with the execution, delivery and performance of this Agreement and
the Noncompetition Agreement by the Shareholders or the Company and the
consummation by the Shareholders or the Company of the transactions contemplated
hereby.
3.04 Agreement not a Breach. Except as set forth on Schedule 3.04, the
----------------------
execution of this Agreement and the Noncompetition Agreement by the Shareholders
or the Company and the fulfillment, performance and compliance with the terms
and provisions of this Agreement and the Noncompetition Agreement by the
Shareholders or the Company will not (i) conflict with or result in a breach of
any provision of the Company's Articles of Incorporation or Bylaws or any
organizational document of a Shareholder or the Subsidiary, (ii) conflict with,
violate or result in a breach of the terms, conditions or provisions of, or
constitute a default (or event which upon provision of notice or lapse of time
or both would become such a default) or result in the acceleration of any
obligation under, or result in the cancellation or modification of, or permit
termination of, any agreement, lease, license, note, contract or instrument to
which the Shareholders, the Company or the Subsidiary is a party or by which any
of them is bound; (iii) accelerate, or constitute an event entitling the holder
of any Indebtedness of the Company or the Subsidiary to accelerate the maturity
of any such Indebtedness, permit subordination of any such Indebtedness of the
Company or the Subsidiary to any other Indebtedness of the Company or the
Subsidiary to which the Company or the Subsidiary was not already subordinated;
(iv) conflict with or violate the provisions of any law or any
23
judgment, decree, order, arbitration award, regulation or rule of any court or
governmental authority or any covenant or restriction binding upon the Company
or the Subsidiary; (v) violate or result in the modification, termination or
loss of any permit, license or other authorization applicable to the Company or
the Subsidiary; or (vi) result in the creation of any lien, charge or
encumbrance upon any equity interest in or assets of the Company or the
Subsidiary under any agreement or instrument to which the Shareholders, the
Company or the Subsidiary are a party or by which the Shareholders, the Company
or the Subsidiary are bound, unless any such matter set forth in items (ii) -
(v) above would not result in a Material Adverse Effect.
3.05 Financial Statements. Attached hereto as Schedule 3.05 is the
--------------------
unaudited consolidated balance sheet of the Company as of December 26, 1997 (the
"December 26, 1997 Balance Sheet") and related statements of income and cash
flow for the twelve month period then ended (the "Unaudited 1997 Financial
Statements"). The audited consolidated balance sheet of the Company as of
December 26, 1997 and related statements of income and cash flow for the twelve
month period then ended (the "Audited 1997 Financial Statements") to be
delivered to Investor prior to the Effective Date will not differ in any
material respect from the Unaudited 1997 Financial Statements. The Shareholders
have also delivered to Investor the audited consolidated balance sheets of the
Company as of December 27, 1996 and December 29, 1995, and related statements of
income and cash flow for the respective twelve month periods then ended
(collectively, with the Unaudited 1997 Financial Statements and, when delivered,
the Audited 1997 Financial Statements, the "Financial Statements"). Except as
set forth in Schedule 3.05 hereto, the Financial Statements (i) were prepared in
accordance with the books and records of the Company; (ii) were prepared in
accordance with the Company's accounting policies and principles and are in
accordance with GAAP in a manner consistent
24
with the Company's historic accounting practices applied on a consistent basis
except as set forth on Schedule 3.05 (except that the 1997 Financial Statements
are unaudited and therefore do not have certain notes otherwise required by GAAP
and may be subject to certain immaterial audit adjustments); and (iii) present
fairly the financial position and results of operations of the Company at the
dates and for the periods covered thereby. Schedule 3.05 sets forth a true and
complete list of all of the Indebtedness of the Company and the Subsidiary
(excluding capital lease obligations) as of the Balance Sheet Date.
3.06 Absence of Certain Changes. Except as set forth in Exhibit A and
--------------------------
Schedule 3.06, since January 1, 1997, there has not been:
(a) Any Material Adverse Effect;
(b) Any increase in the compensation paid or payable by the
Company or the Subsidiary, other than in the ordinary course of business and
consistent with past practices, to any of its consultants who were paid in
excess of $100,000 in the calendar year ended December 31, 1997 or officers;
(c) Any recapitalization in respect of the equity interests in
the Company or any direct or indirect redemption, purchase or other acquisition
of any such equity interest or any agreement to do any of the foregoing;
(d) Any issuance, transfer, sale or pledge by the Company or the
Subsidiary of its capital stock or any other equity interest or of any
commitments, options, warrants, rights or privileges under which the Company or
the Subsidiary is or may become obligated to issue any shares of its capital
stock or any other equity interest;
25
(e) Any liability, commitment or obligation incurred by the
Company or the Subsidiary (excluding intercompany transactions), except such as
may have been incurred or entered into in the ordinary course of business and
consistent with past practices;
(f) Any loan, capital contribution, or advance made or agreed to
be made by the Company or the Subsidiary (excluding intercompany transactions),
nor has the Company or the Subsidiary become liable or agreed to become liable
as a guarantor with respect to any obligation of a third party;
(g) Any waiver by the Company or the Subsidiary of any right or
rights of material value or any payment, direct or indirect, of any material
debt, liability or other obligation before the same became due in accordance
with its terms other than in the ordinary course of business and consistent with
past practice;
(h) Any adoption, amendment or entering into by the Company or
the Subsidiary of any bonus, profit sharing, stock option, pension, retirement,
severance, deferred compensation or other employee benefit plan or agreement
other than in the ordinary course of business and consistent with past practice;
(i) Any amendment to the Company's or the Subsidiary's Articles
of Incorporation or Bylaws;
(j) Any amendment, cancellation or termination of any contract,
license or other instrument or arrangement material to the Company or the
Subsidiary other than in the ordinary course of business and consistent with
past practice;
26
(k) Any failure to repay any material obligation of the Company
or the Subsidiary when due;
(1) Any transaction entered into or committed to be entered into
between the Company or the Subsidiary, on one hand, and any Related Party (as
defined in Section 3.26) on the other hand;
(m) Any material change in the accounting methods, practices or
policies followed by the Company (other than as required by GAAP), any material
increase in reserves or any material revaluation of any of the Company's or the
Subsidiary's assets from those in effect during the past three fiscal years;
(n) Except for the purchase, replacement or disposition of
assets in the ordinary course of business, any purchase or other acquisition of,
or any sale, lease, disposition of, mortgage, pledge or subjection to any lien
or encumbrance on, any material property or assets, whether tangible or
intangible, of the Company or any agreement to do any of the foregoing;
(o) Payment or declaration of any dividend or other distribution
in respect of any shares of the Company's capital stock, or any incurrence of
any obligation to make any such dividend or distribution; or
(p) Any agreement or commitment to do any of the foregoing.
3.07 Taxes.
-----
(a) S Corporation Status.
--------------------
27
(i) S Corporation Defined. As used herein the term "S
---------------------
corporation" means, with respect to any specified period, a corporation that has
in effect throughout such period a valid election under Section 1362(a) of the
Code to be an S corporation which is, and whose shareholders are, subject to the
tax treatment provided for under the provisions of Sections 1361 et seq. of the
Code.
(ii) S Corporation Status. The taxable year of the Company
--------------------
for federal and state income tax purposes is the 52-53 week year ending on the
Friday that is on or immediately before December 31 of each year. The Company
made a valid election to be taxed as an S Corporation on or before December 31,
1986, and for all periods of the Company commencing on and after November 1,
1987, for federal tax purposes the Company was and is an S corporation. For all
periods with respect to which the Company has been an S corporation, for federal
tax purposes the Company's Tax Returns have been prepared and filed on a basis
consistent with its status as an S corporation.
(iii) State S Corporation Treatment. In Schedule 3.07(a)
-----------------------------
hereto there is a true and complete list of each state in which the Company and
the Shareholders are treated, for such state's income and/or franchise tax
purposes, in a manner comparable to the federal tax treatment of a S corporation
and its shareholders. For purposes of this representation, the state tax
treatment shall be deemed comparable to that of a S corporation if the state's
income or franchise tax on the corporation's net income is eliminated or
materially reduced and such net income (net of state corporate taxes, if any) is
treated as taxable to the shareholders whether or not distributed thereto.
Schedule 3.07(a) also specifies, for each such state listed therein, the period
during which the Company has been subject to such comparable S corporation state
tax treatment.
28
(b) Tax Returns. Tax Payments and Tax Audits. Except as set
----------------------------------------
forth in Schedule 3.07(b) hereto, the Company has (i) timely filed or caused to
be timely filed all Tax Returns of the Company required to be filed as of the
date hereof (after giving effect to any extension of time to file such Tax
Returns) and (ii) paid, when due, all taxes as shown to be due and payable on
said Tax Returns. Except as set forth in Schedule 3.07(b) hereto, all such
previously-filed Tax Returns were complete and accurate in all material respects
when filed, and as of the date hereof no additional Tax Liabilities for periods
covered by such previously-filed Tax Returns have been assessed on or proposed
to the Company. With respect to each such Tax Return, Schedule 3.07(b) hereto
also specifies (A) each such Tax Return that (1) is currently being audited by a
Tax authority, or (2) as to which the Company has received a written and/or oral
notice from a Tax authority that such Tax authority intends to commence an audit
or examination of such Tax Return, and (B) each such Tax Return as to which the
Company has given its consent to waive or extend the applicable statute of
limitations for such Tax Return or the assessment of Taxes required to be
reported thereon. The Company has either delivered to Investor or made available
for inspection by Investor or its representatives or agents complete and correct
copies of all Tax audit reports and statements of Tax deficiencies with respect
to any delinquent Tax assessed against or agreed to by the Company for all
taxable periods commencing on or after January 1, 1993, for which audit reports
or statements of deficiencies have been received by the Company. As used herein
the term "Company" shall be deemed in each place to refer also to the
Subsidiary.
(c) Unpaid Taxes. The Pre-Acquisition Tax Liabilities of the
------------
Company and the Subsidiary (whether imposed before or after Closing and whether
imposed
29
upon filing of a Tax return or as a result of an audit or examination) which are
unpaid as of the close of business on the Effective Date will not exceed the
reserves for Tax Liabilities as set forth in the account for accrued taxes
payable or similar account included in the Final Balance Sheet Tax Liabilities
and taken into account in the Working Capital Adjustment under Section 2.12
hereof. Attached hereto as Schedule 3.07(c) is a schedule of the accruals for
taxes included in the Company's Unaudited 1997 Financial Statements.
(d) Tax Sharing Agreements. Neither the Company nor the
----------------------
Subsidiary is a party to any tax-sharing or tax-indemnity agreement and has not
otherwise assumed the Tax Liability of any other person under contract.
(e) Section 481 Adjustments. The Company has not agreed, nor is
-----------------------
it required to make, any adjustment under Code Section 481(a) by reason of a
change in accounting method or otherwise.
(f) U.S. Real Property Holding Corporation. The Company is not
--------------------------------------
and has never been a United States real property holding corporation as defined
in Section 897(c)(2) of the Code.
(g) No Liens. None of the assets of the Company or the
--------
Subsidiary are subject to any liens in respect of Taxes (other than for current
Taxes not yet due and payable).
(h) No Closing Agreements. The Company has not executed or
---------------------
entered into any closing agreement pursuant to Section 7121 of the Code, or any
predecessor provisions thereof or any similar provision of state Tax law.
30
(i) No Section 1374 Liability. The Company will not be subject
-------------------------
to any Tax liability with respect to any net recognized built-in gain under
Section 1374 of the Code.
3.08 Collective Bargaining Agreements and Employee Benefits. Except as
------------------------------------------------------
described in Schedule 3.08, the Company is not involved in any labor discussion
with any unit or group seeking to become the bargaining unit for any of its
employees, nor has any such unit or group notified the Shareholders or the
Company of an intention to commence any organizational activities among the
employees of the Company. Schedule 3.08 contains a listing of (i) each
collective bargaining agreement and other labor agreement to which the Company
is a party or by which it is bound, (ii) each employment, consulting, severance,
deferred compensation, bonus and any other employee benefit plan or agreement
providing for compensation or other benefits to employees (including officers),
or independent contractors, individually or as a group, to which the Company is
a party or by which it is bound; (iii) each "employee pension benefit plan" as
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974
("ERISA") and not exempted under Section 4(b) or 201 of ERISA maintained by the
Company or to which the Company is required to contribute, including any
multiemployer pension plan; and (iv) each "employee welfare benefit plan" as
defined in Section 3(1) of ERISA maintained by the Company or to which the
Company contributes or is required to contribute, including any multiemployer
welfare plan, and each other plan under which "fringe benefits" (including,
without limitation, profit-sharing, bonus, stock option, stock purchase, stock
bonus, dependent care assistance, excess benefit, incentive, salary
continuation, and other compensation arrangements, vacation plans or programs,
severance benefits, sick leave plans or
31
programs, dental or medical plans or programs, and related or similar benefits)
are afforded to employees of, or otherwise required to be provided by, the
Company. All plans, programs and arrangements described in clauses (ii), (iii),
and (iv) of the previous sentence shall be referred to as "Benefit Plans." The
Company has either delivered to Investor or made available for inspection by
Investor or its representatives or agents a true and complete copy of each
Benefit Plan and any related funding agreements (e.g., trust agreements or
insurance contracts), including all amendments (and Schedule 3.08 includes a
description of any such amendment that is not in writing), the current draft of
the Summary Plan Description and Summary of Material Modifications (if
applicable) of each Benefit Plan, the most recent Internal Revenue Service
determination letter (if applicable) for each Benefit Plan, which determination
letter reflects all amendments that have been made to the plan, and the two (2)
most recent Form 5500s that were filed on behalf of the Benefit Plan, including
the actuarial report (if applicable). The Company has complied in all material
respects with all applicable laws, rules and regulations relating to employment,
including those relating to wages, hours, collective bargaining and the payment
and withholding of taxes and other sums as required by appropriate governmental
authorities. Except as set forth in Schedule 3.08, all Benefit Plans in effect
at any time since inception of the Company are now, and have always been,
established, maintained and operated in accordance, in all material respects,
with all applicable laws (including, but not limited to, ERISA and the Code) and
all regulations and interpretations thereunder and in accordance with their plan
documents. The Internal Revenue Service has issued a favorable determination
letter with respect to each Benefit Plan that is intended to qualify under
Section 401(a) of the Code, and no event has occurred (either before or after
the date of the letter) that would disqualify the plan. Except as set forth in
Schedule 3.08, there is no unfunded liability for vested or non-vested benefits
under any funded Benefit Plan, and all
32
contributions required to be made to or with respect to each Benefit Plan and
all costs of administering each Benefit Plan have been completely and timely
paid, and all such costs are fully deductible. With respect to each Benefit Plan
that is subject to Title IV of ERISA, no liability or obligation to the PBGC has
been incurred or is expected except for insurance premiums under Section 4007 of
ERISA, and all insurance premiums incurred or accrued up to and including the
Effective Date have been or will be timely paid by the Company; and no amount
is, and as of the Effective Date no amount will be, due or owing from the
Company to any "multiemployer plan" (as defined in Section 3(37) of ERISA) on
account of any withdrawal therefrom, and the value, determined on a termination
basis using the actuarial assumptions stated in the plan, of all accrued and
ancillary benefits (whether or not vested) under each such plan did not exceed,
as of the most recent valuation date, and will not exceed as of the Effective
Date, the then current fair market value assets of the plan, arid there is no
accumulated funding deficiency (within the meaning of Code Section 4971),
whether or not such deficiency has been waived. The Company does not have any
liability to any Multiemployer Plans in the event of a complete withdrawal
therefrom, as of the close of the most recent plan year of the Multiemployer
Plan ended prior to the date hereof. There has been no prohibited transaction as
described in Section 406 of ERISA and Section 4975 of the Code with respect to
any employee benefit plan. No Benefit Plan provides medical or death benefits to
any former employees (including retirees) of the Company, other than benefits
required to be provided under Section 490B of the Code. For purposes of this
Section 3.08 and only with respect to this Section, the term "Company" shall
include any entity that is aggregated with the Company under Code Section 414.
To the Shareholders' knowledge, there is no liability of the Company under any
insurance policy or similar arrangement procured in connection with any
33
Benefit Plan in the nature of a retroactive rate adjustment or loss sharing
arrangement. There are no investigations, proceedings, or lawsuits or other
claims (other than routine claims for benefits under the plan and qualified
domestic relations orders) pending against or involving any Benefit Plan, or any
Fiduciary of such plan (within the meaning of Section 3(21)(A) of ERISA) brought
on behalf of any participant, beneficiary, or Fiduciary thereunder, nor, to the
Shareholders' knowledge, is there any reasonable basis for any such claim. The
Company has no intention or commitment, whether legally binding or not, to
create any additional Benefit Plan, or to modify or change any existing Benefit
Plan so as to increase benefits to participants or the cost of maintaining the
plan. Other than as required by law, the benefits under all Benefit Plans have
not been, and will not be increased subsequent to the date documents are
provided to Investor. Except as provided in Schedule 3.08, none of the Benefit
Plans or employment contracts with the Company provide any benefits that become
payable solely as a result of the consummation of this transaction. None of the
persons performing services for the Company have been improperly classified as
independent contractors, leased employees, or as being exempt from the payment
of wages for overtime. The EPP Liabilities constitute all liabilities and
obligations of the Company under the EPP Plan.
3.09 Litigation. Except as set forth on Schedule 3.09, there is no
----------
pending, or to the knowledge of the Shareholders, threatened, claim, suit,
arbitration proceeding, governmental (including, without limitation, foreign)
proceeding or investigation or other proceeding of any character against any
Shareholder, the Company or the Subsidiary that could reasonably be expected to
have a Material Adverse Effect or prevent, hinder or delay consummation of the
transactions contemplated by this Agreement, declare the same unlawful, or cause
the rescission thereof. There are no judgments, decrees, injunctions or orders
of any court or governmental authority against the Company, the Subsidiary or
any Shareholder (which affect
34
the Company) which could reasonably be expected to have a Material Adverse
Effect. There is no pending claim against the Company or the Subsidiary which
could reasonably be expected to have a Material Adverse Effect (i) on account of
product warranties, (ii) with respect to the sale by the Company or the
Subsidiary of allegedly defective or inferior products or (iii) with respect to
any Trademark, Copyright or Patent and, to the knowledge of the Shareholders,
there is no such threatened claim or event which may give rise to any such
claim.
3.10 Licenses of Intangible Personal Property. There is listed in
----------------------------------------
Schedule 3.10 all material licenses or similar agreements or arrangements to
which the Company or the Subsidiary is a party either as licensee or licensor
for any item of intangible personal property ("Intangible Personal Property")
and except as set forth on Schedule 3.10:
(a) No proceedings have been instituted or are pending or, to the
knowledge of the Shareholders, threatened which challenge the rights of the
Company or the Subsidiary in any material respect in and to any of such
Intangible Personal Property or any license thereof; and
(b) There are no pending or, to the knowledge of the
Shareholders, threatened claims, demands or proceedings, restricting the right
of the Company or the Subsidiary to use, charging the Company or the Subsidiary
with infringement of, or making any other claim with respect to, any of such
Intangible Personal Property or any license thereof which, if adversely
determined, could reasonably have a Material Adverse Effect.
3.11 Insurance. Schedule 3.11 sets forth a true and correct list of all
---------
insurance policies of any nature whatsoever maintained by the Company or the
Subsidiary pertaining to
35
the business of the Company or the Subsidiary. The Company or the Subsidiary
maintains, with responsible insurance carriers, fire, worker's compensation,
property and general liability insurance. Such policies and binders are in full
force and effect through the Effective Date and, except as otherwise set forth
on Schedule 3.11, such policies, or other policies covering the same risks, have
been in full force and effect, without gaps, continuously for the past five (5)
years. Copies of all such policies have been made available to Investor for its
inspection. Neither the Company nor the Subsidiary is in default under any of
such policies or binders, and, to the knowledge of the Shareholders, neither has
failed to give any notice or to present any claim under any such policy or
binder in a due and timely fashion.
3.12 Real Property. There is listed in Schedule 3.12: (i) a description
-------------
of each parcel of real property owned by the Company or the Subsidiary (the "Fee
Real Property"), (ii) a listing of each lease of real property under which the
Company or the Subsidiary is a lessee, lessor, sublessee or sublessor, as so
designated therein (the "Leased Real Property" and together with the Fee Real
Property, the "Real Property"), and (iii) all options to acquire, sell or lease
any real property interests to which the Company or the Subsidiary is a party.
The Real Property constitutes all of the real property interests owned, leased
or occupied in whole or in part by the Company or the Subsidiary. Except as
indicated in Schedule 3.12:
(a) The Company has beneficial ownership of and good and
marketable title in fee simple to the Fee Real Property free and clear of all
mortgages, liens, encumbrances, leases, equities, security interests, pledges
conditional sale agreements, title retention agreements, claims, charges,
easements, licenses, rights-of-way, covenants, conditions, restrictions, options
and adverse or equitable claims or rights whatsoever (collectively, "Liens"),
except for liens, if any, for property taxes not yet due and other items
36
which do not and will not impair, in any material respect, the usefulness to the
Company, or the value or the marketability, of any such Fee Real Properties
("Permitted Liens"), individually, or in the aggregate;
(b) All material leases, easements and other real property
interests held by the Company or the Subsidiary are valid and subsisting free
and clear of all Liens other than Permitted Liens and neither the Company nor
the Subsidiary, and to the Shareholders' knowledge, each other party thereto, is
in material default thereunder. The Company has either delivered to Investor or
made available for inspection by Investor or its representatives or agents true,
correct and complete copies of each of the foregoing documents;
(c) Neither the Shareholders, the Company nor the Subsidiary has
received any notice, or is aware, that any of the buildings, structures or other
material improvements erected on the Real Property owned or leased by the
Company or the Subsidiary, or the present use thereof, (i) does not conform in
all material respects with all applicable laws (or does not constitute a legal
nonconforming use), ordinances, regulations or other laws and applicable deed
restrictions, or (ii) materially encroaches on property of others;
(d) Neither the Shareholders, the Company nor the Subsidiary have
received notice from any municipal body or other public authority requiring work
to be done or improvements to be made upon any of the Real Property and have no
knowledge of the enactment or adoption of any ordinance or resolution by any
such body or authority authorizing work or improvements for which any of the
Real Property may be assessed; and
37
(e) All of the improvements situated on any of the Real Property
are in good operating condition and are adequate and suitable for the purposes
for which they are presently being used.
3.13 Material Contracts. Schedule 3.13 sets forth, as of the date hereof,
------------------
whether written or oral, a true and correct list of:
(a) Each contract between the Company or the Subsidiary and any
party to whom the Company or the Subsidiary provides products or services which
involves more than $150,000 in consideration for any twelve month period; and
(b) Each contract (except for real property leases, insurance
contracts and employment or personnel-related agreements) between the Company or
the Subsidiary and any party to whom the Company or the Subsidiary is obligated
to pay more than $150,000 in consideration for any twelve month period.
(c) Each contract, agreement and commitment, whether or not fully
performed, pursuant to which the Company or the Subsidiary has acquired or
disposed of a material portion of its business or assets at any time since
December 31, 1995;
(d) Each agreement containing covenants not to compete on the
part of the Company or the Subsidiary or otherwise restricting the ability of
the Company or the Subsidiary in any material way to engage in its business and
each confidentiality agreement to which the Company or the Subsidiary is a
party;
(e) Each note, mortgage, indenture, letter of credit, guarantee,
performance bond, sale-leaseback agreement and any other agreement or instrument
for or
38
relating to any lending or borrowing (including assumed debt) entered into by
the Company or the Subsidiary or pursuant to which any properties or assets of
the Company or the Subsidiary are pledged or mortgaged as collateral; and
(f) Any other executory contracts and agreements which are
material to the Company and the Subsidiary considered as a whole (except for
real property leases, insurance contracts and employment or personnel-related
agreements). The contracts and agreements which are required to be identified in
Schedule 3.13 pursuant to subsections (a) and (b) above are hereinafter referred
to as the "Material Contracts." True and complete copies of each Material
Contract have either been delivered to Investor by the Company or made available
by Company for inspection by Investor or its representatives or agents. Except
as set forth in Schedule 3.13:
(i) Each of the Material Contracts is a valid, binding and
enforceable agreement of the Company or the Subsidiary, as the case may be, and,
to the knowledge of the Shareholders, the other parties thereto and will,
subject to the receipt of consents set forth on Schedules 3.03 and 3.18,
continue to be valid, binding and enforceable immediately after the Effective
Date, subject to equitable defenses to specific performance and injunctive
relief;
(ii) As of the date hereof, the Shareholders have no reason
to believe that the Company or the Subsidiary, as the case may be, will not be
able to fulfill in all material respects all of their respective obligations
under the Material Contracts which remain to be performed after the date hereof;
39
(iii) There has not occurred any material breach or default
(or event which upon provision of notice or lapse of time or both would become
such a breach or default) under any of the Material Contracts on the part of the
Company or the Subsidiary, as the case may be; and
(iv) To the knowledge of the Shareholders, there does not
exist any event that, with the giving of notice or the lapse of time or both,
would constitute a material breach of or a material default under such Material
Contract by any party other than the Company or the Subsidiary, as the case may
be, and neither the Company nor the Subsidiary has received or given notice of
any such breach, default or event.
3.14 Governmental Permits and Licenses. Schedule 3.14 contains a true and
---------------------------------
complete list of the governmental permits, licenses, franchises and other
certificates and authorizations (the "Licenses") that are required for and are
material to the operation of the business conducted by the Company and the
Subsidiary as such business is now conducted. Except as set forth on Schedule
3.14, all of such Licenses are, and as of the Effective Date will be, valid and
in full force and effect and the continuing validity and effectiveness of such
Licenses will not be affected by the Merger. The Company has provided, or prior
to the Effective Date will provide, Investor with true, correct and complete
copies of each License listed in Schedule 3.14. Except as set forth on Schedule
3.14, the Company and the Subsidiary are and have been in compliance in all
material respects with all material conditions or requirements of such Licenses,
and neither the Company, the Subsidiary nor the Shareholders have been notified
by any governmental (including any foreign governmental) or licensing authority
that any governmental or licensing authority intends to cancel, terminate or
modify any of such Licenses.
40
3.15 Management Personnel. Schedule 3.15 contains a true and complete
--------------------
list of the names of and current salaries, bonuses and other monetary benefits
paid to or accrued by all management employees of the Company and the Subsidiary
who earned in excess of $100,000 in the calendar year ended December 31, 1997.
3.16 Banking Facilities. Schedule 3.16 contains a true and complete list
------------------
of:
(a) Each bank, savings and loan or other institution in which the
Company has a deposit, custodial, trust or similar account or safety deposit or
lock box account and the numbers and types of the accounts or safety deposit
boxes maintained by the Company at such institutions; and
(b) The names of all persons authorized to draw on each such
account or to have access to any such safety deposit or lock box facility,
together with a description of any limitations on such authority of each such
person with respect thereto.
3.17 Compliance with Law. Except as set forth on Schedule 3.17 hereto,
-------------------
the conduct of business by each of the Company or the Subsidiary has not
violated and does not violate in any material respect any federal, state, local
or foreign laws, statutes, ordinances, rules, regulations, decrees, orders,
permits or other similar items in force on the date hereof including, without
limitation, federal, state, municipal and foreign (a) laws and regulations
affecting the protection of the health and safety of employees, (b) laws and
regulations affecting equal employment opportunity and (c) laws and regulations
affecting the manufacture, sale and distribution of medical devices, equipment
and supplies. There are no unresolved notices of deficiency or charges of
violation brought or, to the knowledge of the
41
Shareholders, threatened against the Company or the Subsidiary, including under
any federal, state, local or foreign regulation or otherwise, which individually
or in the aggregate will have a Material Adverse Effect, or interfere with the
maintenance or reissuance of any of the Licenses held by the Company or the
Subsidiary, and there are no facts or circumstances known to the Shareholders
that would constitute a reasonable basis on which any such proceedings, notices
or actions may be instituted, issued or brought hereafter.
3.18 Consents of Non-Governmental Third Parties. Except as set forth in
------------------------------------------
Schedule 3.18 hereto, no consent, waiver or approval of any party to a Material
Contract is necessary for the execution and delivery of this Agreement and the
Noncompetition Agreement or the consummation by the Shareholders or the Company
of the transactions contemplated hereby.
3.19 Brokers Commission or Finder's Fee. Neither the Company nor the
----------------------------------
Shareholders have retained any broker or finder (other than Salomon Smith
Barney) or agreed to become obligated to pay any fee or commission to any broker
or finder (other than fees and commissions payable to Salomon Smith Barney
pursuant to that certain agreement (the "Salomon Engagement Letter") dated as of
September 3, 1997, between the Company and Salomon Smith Barney) for or on
account of the transactions contemplated by this Agreement. The payment of fees
and commissions to Salomon Smith Barney will be paid by the Surviving
Corporation pursuant to Section 2.09(c) above.
3.20 No Undisclosed Liabilities. The Company and the Subsidiary do not
--------------------------
have, and as of the Effective Date will not have, any liabilities, obligations
or commitments (whether absolute, accrued, known or unknown, contingent or
otherwise) matured or unmatured (herein "Liabilities") except (i) Liabilities
which are adequately reflected or fully reserved against in the December 26,
1997 Balance Sheet, (ii) Liabilities which have been incurred in the ordinary
42
course of business and consistent with past practice since the Balance Sheet
Date, (iii) Liabilities disclosed in Exhibit A or in the Schedules hereto and
(iv) Liabilities arising under contracts or other agreements which because of
the dollar amount involved are not required to be listed in the Schedules hereto
(collectively, the "Known Liabilities").
3.21 Title to Assets. The Company and the Subsidiary have good and
---------------
marketable title to all of their respective assets (real, personal or mixed,
tangible and intangible). Except as set forth on Schedule 3.21, none of the
Company's or the Subsidiary's assets is subject to any mortgage, deed of trust,
pledge, lien, security interest, encumbrance, claim or charge of any kind or
character except (i) liens for taxes or other amounts not yet due and payable,
and (ii) liens and encumbrances which in the aggregate do not materially impair
the usefulness or value of such assets.
3.22 Environmental Matters.
---------------------
(a) For the purposes of this Agreement, the term "Environmental
Laws" shall mean all federal, state, local and foreign environmental protection,
occupational, health and safety or similar laws, ordinances, restrictions,
licenses, rules, regulations and permit conditions, including, but not limited
to, the Federal Water Pollution Control Act, Resource Conservation & Recovery
Act, Clean Air Act, Comprehensive Environmental Response, Compensation and
Liability Act, Emergency Planning and Community Right to Know, Occupational
Safety and Health Act and other federal, state, local or foreign laws of similar
effect, each as amended, and the term "Hazardous Materials" shall mean any
hazardous or toxic substances, wastes or materials, defined as such or governed
by any applicable Environmental Law.
43
(b) Except as disclosed on Schedule 3.22, (i) the Company has not
received any notices, directives, violation reports, actions or claims from or
by (1) any federal, state, local or foreign governmental agency concerning the
Company or the Subsidiary and any Environmental Laws or (2) any person alleging
that, in connection with Hazardous Materials, conditions at the Real Properties
of the Company or the Subsidiary or any real property interest previously owned,
leased, occupied or operated by the Company or the Subsidiary (the "Sites") have
resulted in or caused or threatened to result in or cause injury or death to any
person or damage to any property, including without limitation, damage to
natural resources, and to the Shareholders' knowledge, no such notices,
directives, violation reports, actions, claims, assessments or allegations
exist; (ii) neither the Company nor the Subsidiary does currently or did
previously lease, operate or own any Sites that are listed or, to the knowledge
of the Shareholders, are threatened to be listed on a "Superfund" List or with
respect to which, there is any pending or, to the knowledge of the Shareholders,
threatened proceeding or investigation under any Environmental Law; (iii)
throughout the period of ownership and/or operation of any of the Sites by the
Company or the Subsidiary, the Company or the Subsidiary has operated and
continues to operate the Sites in material compliance with all Environmental
Laws; (iv) no underground storage tanks either are or, to the Shareholders'
knowledge, have been located at any of the Sites; (v) to the knowledge of the
Shareholders, there has been no spill, discharge, release, contamination or
cleanup of or by any Hazardous Materials used, generated, treated, stored,
disposed of or handled by the Company or the Subsidiary at the Sites or
otherwise and to the Shareholders' knowledge, no spill, discharge or release or
contamination or cleanup of or by Hazardous Materials has occurred on or to the
Sites by any third party; (vi) neither the Company nor the Subsidiary has used,
generated, treated, stored, disposed of, handled, transported or released any
Hazardous Material in a manner which would give rise to any
44
liability under any Environmental Laws; and (vii) neither the Company nor the
Subsidiary has released any other person from any claim under any Environmental
Law nor waived any rights or defenses concerning any environmental conditions at
any Sites or in connection with the Company's or the Subsidiary's use, ownership
and/or operation of its assets and properties. The Company has either delivered
to Investor or made available for inspection by Investor or its representatives
or agents copies of all environmental audits or similar studies or reports
prepared by or at the direction of the Company regarding any of the Sites.
3.23 Authorized and Outstanding Capital Stock. The authorized capital
----------------------------------------
stock of the Company consists of 1,000,000 shares of common stock, $.01 par
value per share, of which 59,056 shares have been issued and are outstanding.
3.24 Intellectual Property Matters.
-----------------------------
(a) Schedule 3.24 hereto sets forth a complete list of all
trademarks, trade names, product identifiers and/or trade dresses of any type
whatsoever which are presently used in the business of the Company (the
"Trademarks"). Except as set forth on Schedule 3.24, (a) each of the Trademarks
is valid and registered in the name of the Company on the Principal Register of
the United States Patent and Trademark Office and in the foreign countries
indicated thereon, (b) as of the date hereof, to the Shareholders' knowledge
there is no infringement of the Trademarks by others, (c) the use of the
Trademarks in the business of the Company (as the business is now being
conducted by the Company) does not result in any material infringement of the
rights of others in the United States, and the Shareholders have no knowledge of
any such claim as to any Trademarks registered in the foreign countries
identified on Schedule 3.24, (d) the Company is the sole and legal owner of the
Trademarks in
45
the countries indicated on Schedule 3.24 and in all other jurisdictions in which
the Company uses any Trademark and, as of the date hereof, has no knowledge of
any claim by any other person that such other person is the legal owner of such
Trademarks, and (e) the Company has not granted any license or right to use any
Trademark to any other person.
(b) Schedule 3.24 hereto sets forth a complete list of all
patents, patent applications, inventions, invention disclosures of any type
whatsoever which are presently used in the business of the Company (the
"Patents"). Except as set forth on Schedule 3.24, (a) each of the Patents is
valid and registered in the name of the Company in the United States Patent and
Trademark Office and in the foreign countries indicated thereon, (b) as of the
date hereof, to the Shareholders' knowledge there is no infringement of the
Patents by others, (c) the use of the Patents in the business of the Company (as
the business is now being conducted by the Company) does not result in any
material infringement of the rights of others in the United States, and the
Shareholders have no knowledge of any such claim as to any Patents registered in
the foreign countries identified on Schedule 3.24, (d) the Company is the sole
and legal owner of the Patents in the countries indicated on Schedule 3.24 and
in all other jurisdictions in which the Company uses any Patent and, as of the
date hereof; has no knowledge of any claim by any other person that such other
person is the legal owner of such Patents, and (e) the Company has not granted
any license or right to use any Patent to any other person.
(c) Schedule 3.24 hereto sets forth a complete list of all
copyrights of any type whatsoever which are presently used in the business of
the Company (the "Copyrights"). Except as set forth on Schedule 3.24, (a) each
of the Copyrights is valid and registered in the name of the Company in the
United States Copyright Office and in the foreign
46
countries indicated thereon, (b) as of the date hereof, to the Shareholders'
knowledge there is no infringement of the Copyrights by others, (c) the use of
the Copyrights in the business of the Company (as the business is now being
conducted by the Company) does not result in any material infringement of the
rights of others in the United States, and the Shareholders have no knowledge of
any such claim as to any Copyrights registered in the foreign countries
identified on Schedule 3.24, (d) the Company is the sole and legal owner of the
Copyrights in the countries indicated on Schedule 3.24 and in all other
jurisdictions in which the Company uses any Copyright and, as of the date
hereof; has no knowledge of any claim by any other person that such other person
is the legal owner of such Copyrights, and (e) the Company has not granted any
license or right to use any Copyright to any other person.
(d) The Company has obtained a written agreement from each and
every employee of the Company which provides that each such employee will
maintain the confidentiality of trade secrets and/or proprietary information of
the Company.
3.25 Inventory. All of the Company's inventory and supplies held for sale
---------
or use in connection with operating the business of the Company (the
"Inventory") was purchased or manufactured in the ordinary course of business
and is owned by the Company, free and clear of all liens, security interests and
encumbrances except as set forth on Schedule 3.25. The Inventory is maintained
on the financial records of the Company using historical valuation methods and
practices consistent with those used in preparing the Unaudited 1997 Financial
Statements and in accordance with GAAP. The Company's current inventory
consists of items of a quality which are saleable in the ordinary course of
business at prevailing prices. Since January 1, 1997, the Company has continued
to replenish its Inventory in the ordinary course
47
of business consistent with past practice, and has not made any material change
in its Inventory policies or procedures.
3.26 Transactions with Affiliates. Except as set forth on Schedule 3.26,
----------------------------
no officer, director, employee or shareholder of the Company nor any member of
any such person's immediate family or any entity in which any of the foregoing
has an interest (collectively, a "Related Party") is presently, or within the
last year has been, a party to any transaction or arrangement with the Company,
including, without limitation, any contract, lease or other agreement (a)
providing for the furnishing of services (other than as an officer, director or
employee) or assets by, (b) providing for the rental of real property from, or
(c) otherwise requiring payments to (other than for (i) dividends or
distributions to any shareholder in his or her capacity as such or (ii)
compensation to any officer, director or employee in his or her capacity as
such) such Related Party. Each such transaction shown on Schedule 3.26 is on
terms no less favorable to the Company than could be obtained from an
unaffiliated third party, except as set forth on Schedule 3.26.
3.27 Accounts Receivable. All accounts receivable of the Company that are
-------------------
reflected on the December 26, 1997 Balance Sheet or the Final Closing Balance
Sheet, (collectively, the "Accounts Receivable") represented or will represent
valid obligations arising from sales actually made or services actually
performed in the ordinary course of business. Unless paid prior to the
Effective Date, the Accounts Receivable are or will be as of the Effective Date
current and collectible net of the respective reserves shown on the December 26,
1997 Balance Sheet or the Final Closing Balance Sheet (which reserves are
adequate and calculated consistent with past practice and, in the case of the
reserve as the Effective Date, will not represent a material adverse change in
the composition of such Accounts Receivable in terms
48
of aging). Subject to such reserves, each of the Accounts Receivable either has
been or will be collected in full, without any set-off. Neither the Shareholders
nor the Company have received notice of any contest, claim, or right of set-off,
other than returns in the ordinary course of business, under any contract with
any obligor of an Accounts Receivable relating to the amount or validity of such
Accounts Receivable. Schedule 3.27 contains a true and complete list of all
Accounts Receivable as of the date of the December 26, 1997 Balance Sheet, which
list sets forth the aging of such Accounts Receivable. Schedule 3.27 contains a
list of all customers who have received extended payment terms (over 30 days)
since January 1, 1997.
3.28 Various Relationships. Except as set forth on Schedule 3.28, neither
---------------------
the Shareholders nor the Company have received notice that any of the Company's
material customers, distributors or suppliers intends to cease retaining,
purchasing from, selling to or dealing with the Company in the matter in which
such transactions have previously occurred or that any such customer,
distributor or supplier intends to alter in any significant respect the amount
of such retention, purchases or sales or the extent of dealings with the
Company. None of the Company's material customers, distributors and suppliers
has, since January 1, 1997, decreased materially its purchases, services or
supplies to the Company.
3.29 Labor Matters. Neither the Company nor the Subsidiary is a party to
-------------
any labor agreement with respect to its employees with any labor organization,
union, group or association and there are no employee unions (nor any other
similar labor or employee organizations). In the past five years, neither the
Company nor the Subsidiary has experienced any attempt by organized labor or its
representatives to make it conform to demands of organized labor relating to its
employees or to enter into a binding agreement with organized
49
labor that would cover the employees of the Company or the Subsidiary. There is
no labor strike, slow-down or other work stoppage pending or, to the
Shareholders' knowledge, threatened against the Company or the Subsidiary. The
Company and the Subsidiary are in compliance in all material respects with all
applicable laws respecting employment practices, employee health, safety or
welfare, employee documentation, terms and conditions of employment and wages
and hours and is not and has not engaged in any unfair labor practice. There is
no unfair labor practice charge or complaint against the Company or the
Subsidiary pending before the National Labor Relations Board or any other
domestic or foreign governmental agency arising out of the conduct of its
business.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Newco and Investor, jointly and severally, represent and warrant to the
Shareholders that as of the date of this Agreement:
4.01 Organization and Corporate Authority; Binding Obligation. Investor
--------------------------------------------------------
and Newco are each corporations duly organized, validly existing and in good
standing under the laws of their respective states of incorporation, and each of
Newco and Investor has full corporate power and authority to carry on its
business as it is now conducted, and is entitled to own, lease or operate the
properties and assets it now owns, leases or operates. Each of Newco and
Investor is qualified to do business, is in good standing and has all required
and appropriate licenses in each jurisdiction in which its failure to obtain or
maintain such qualification, good standing or licensing (i) would have a
material adverse effect on the financial condition, earnings, liabilities,
operations, operating results, business or assets of Newco or Investor, or (ii)
would result in a material breach of any of the other representations,
50
warranties or covenants set forth in this Agreement. Each of Newco and Investor
has all requisite corporate power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby. This Agreement and the
Noncompetition Agreement have been duly authorized by all necessary corporate
action and constitute (or upon execution and delivery will constitute) legal,
valid and binding obligations of Newco and Investor, enforceable against each of
them in accordance with their respective terms, except as enforcement may be
limited by equitable principles or by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to creditors' rights generally.
4.02 Agreement not a Breach. The execution of this Agreement and the
----------------------
Noncompetition Agreement by Newco and Investor and the fulfillment, performance
and compliance with the terms and provisions of this Agreement by Newco and
Investor will not (or event which upon provision of notice or lapse of time or
both would become such a default) (i) conflict with or result in a breach of any
provision of Newco's Articles of Incorporation or Bylaws or the Investor's
Certificate of Incorporation or Bylaws; (ii) conflict with, violate or result in
a breach of the terms, conditions or provisions of, or constitute a default or
result in the acceleration of any obligation under, or result in the
cancellation or modification of, or permit termination of, any material
agreement or instrument to which Newco or Investor is a party or by which Newco
or Investor is bound; (iii) accelerate, or constitute an event entitling the
holder of any Indebtedness of Newco or Investor to accelerate the maturity of
any such Indebtedness of Newco or Investor, permit subordination of any
Indebtedness of Newco or Investor to any other Indebtedness of Newco or Investor
to which it was not already subordinated; (iv) conflict with or violate the
provisions of any law or any judgment, decree, order, regulation, arbitration
award or rule of any court or governmental authority or any
51
covenant or restriction binding upon Newco or Investor, including, without
limitation, the Articles of Incorporation, Certificate of Incorporation or
Bylaws of Newco or Investor; (v) violate or result in the modification,
termination or loss of any permit, license or other authorization applicable to
Newco or Investor; or (vi) result in the creation of any lien, charge or
encumbrance upon any assets of Newco or Investor under any agreement or
instrument to which Newco or Investor is a party or by which Newco or Investor
is bound, unless any such matter set forth in item (i) - (vi) above would not
result in a material adverse effect on the financial condition, earnings,
liabilities, operations, operating results, business or assets of Newco or
Investor.
4.03 Consents and Approvals of Governmental Authorities. Except as set
--------------------------------------------------
forth in Schedule 4.03 hereto, no consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority is required in connection with the execution, delivery and performance
of this Agreement and the Noncompetition Agreement by Newco or Investor and the
consummation by Newco or Investor of the transactions contemplated hereby.
4.04 Brokers Commission or Finder's Fee. Neither Newco or Investor has
----------------------------------
retained any broker or finder or agreed to become obligated to pay any fee or
commission to any broker or finder for or on account of the transactions
contemplated by this Agreement.
4.05 Litigation. There is no pending, or to the knowledge of Newco or
----------
Investor, threatened, claim, suit, arbitration proceeding, governmental
(including, without limitation, foreign) proceeding or investigation or other
proceeding of any character against Newco or Investor or any judgment, decree,
injunction or order of any court or governmental authority against Newco or
Investor that could reasonably be expected to have a material adverse effect
52
on the financial condition, earnings, liabilities, operations, operating
results, business or assets of Newco or Investor, or prevent, hinder or delay
consummation of the transactions contemplated by this Agreement, declare the
same unlawful, or cause the rescission thereof.
4.06 Consents of Non-Governmental Third Parties. Except as set forth in
------------------------------------------
Schedule 4.06 hereto, no consent, waiver or approval of any non-governmental
third party is necessary for the execution and delivery of this Agreement or the
consummation by Newco or Investor of the transactions contemplated hereby.
4.07 Accredited Investor. Newco and Investor represent and warrant that
-------------------
at the Closing each will be an "Accredited Investor" as such term is defined in
Rule 501 under Regulation D of the 1933 Act (as hereinafter defined).
4.08 Purchase for Investment. Investor acknowledges that it is acquiring
-----------------------
the common stock of the Company and the New Preferred Stock for its own account
and not with a view to, or present intention of, distribution thereof in
violation of the Securities Act of 1933, as amended (the "1933 Act") or any
applicable state securities laws, and the common stock of the Company and the
New Preferred Stock will not be disposed of in contravention of the 1933 Act or
applicable state securities laws. Investor also acknowledges that no public
market now exists for the common stock of the Company or the New Preferred Stock
and that it is unlikely that a public market for such stock will develop.
4.09 Shares Not Registered. Newco and Investor acknowledge that neither
---------------------
the common stock of the Company nor the New Preferred Stock has been registered
under the 1933 Act or any state securities laws and, therefore, cannot be sold,
and must be held
53
indefinitely, unless subsequently registered under the 1933 Act and state
securities laws or unless an exemption from such registration is available.
4.10 Economic Risk. Newco and Investor acknowledge that their investment
-------------
in the common stock of the Company and the New Preferred Stock involves a high
degree of risk and represent that they are able to bear the economic risk of
such investment for an indefinite period of time.
4.11 Financing. Investor and Newco have sufficient funds available to
---------
them to deliver the Agreed Purchase Price as set forth in Article II at the
Closing and to consummate the transactions contemplated by this Agreement.
ARTICLE V
CERTAIN AGREEMENTS
5.01 Certain Employee Matters.
------------------------
(a) General Employees. Investor agrees that following the
-----------------
Closing it will cause the Company to provide that all employees of the Company
who are employed immediately prior to the Closing will be given full credit for
all accrued vacation and holiday pay and all accumulated sick pay of such
employees provided that nothing in this Agreement shall be deemed to constitute
an agreement to employ any such employee for any length of time.
(b) Incentive Payments. Investor acknowledges that, as an
------------------
incentive to the continued employment and productivity of the Company's
employees through to the Effective Date, the Company has agreed to pay to
substantially all of its employees (each such eligible employee, an "Incentive
Employee") an incentive payment (each an "Incentive
54
Payment"). The aggregate amount of such Incentive Payments as of the date of
this Agreement is as specified in Exhibit A hereto. The Investor acknowledges
that such Incentive Payments are to be paid at or immediately following the
Effective Date, and, to the extent that, for administrative convenience, such
Incentive Payments are to be paid immediately following the Effective Date as
specified in a schedule (the "Incentive Payment Schedule) that shall be
delivered to the Investor at least five (5) business days prior to the Closing,
Investor hereby agrees to cause the Company to pay such deferred Incentive
Payments within five (5) days following the Effective Date, in all cases subject
to applicable withholding requirements.
5.02 Tax Matters.
-----------
(a) Tax Returns Required to Be Filed Prior to the Effective Date.
------------------------------------------------------------
The Company shall prepare and file or cause to be filed all Tax Returns of the
Company and the Subsidiary that are required to be filed prior to the Effective
Date (determined after giving effect to any applicable extensions of time in
which to make such filings) and shall pay or cause to be paid all Taxes shown or
reported to be due and payable by the Company and the Subsidiary on such Tax
Returns.
(b) Preparation of 1997 Tax Returns Due Following Closing and
---------------------------------------------------------
Payment of Taxes. Prior to the due date applicable thereto, the Company shall
- ----------------
file all Tax Returns required to be filed by the Company and the Subsidiary with
respect to the 1997 calendar year and having a due date (determined after giving
effect to any applicable extensions of required filing dates) following the
Effective Date (the "1997 Tax Returns"). The 1997 Tax Returns for U.S. federal
and state income and franchise Taxes (the "1997 Income Tax Returns") shall be
prepared, by Arthur Andersen under the direction of Lovaas, in
55
accordance with applicable law and, to the extent not inconsistent with
applicable law, on a basis consistent with the past practices of the Company,
and shall be delivered to the Company at least 30 days prior to the due date
thereof. The Company shall (i) provide Lovaas and Arthur Andersen with such
information and such access to the Company's books and records, and at such
times, as may reasonably be requested by Lovaas or Arthur Andersen for purposes
of preparing and timely filing the 1997 Income Tax Returns, and (ii) file such
1997 Income tax Returns as prepared under the direction of Lovaas, provided,
however, if Investor shall disagree with any item reported or reflected in such
a Tax Return, such dispute shall be resolved as provided for under Section
5.02(g). All 1997 Tax Returns other than the 1997 Income Tax Returns shall be
prepared, under the direction of the Company, by the Company or such Tax Return
preparers as may be selected by the Company, provided, however, that in all
cases such Tax Returns shall be prepared in accordance with the applicable law
and, to the extent not inconsistent with applicable law, on a basis consistent
with the items and positions reflected in the 1997 Income Tax Returns. All such
1997 Tax Returns shall be prepared using the Company's normal tax accounting
methods and elections, and all reasonable costs and expenses incurred in
preparing and filing the 1997 Tax Returns shall be paid by the Company. To the
extent that the Taxes shown or reported on such 1997 Tax Returns do not exceed
the reserves therefor as set forth in the account for accrued taxes payable or
similar account included in the Final Balance Sheet Tax Liabilities and taken
into account in the Working Capital Adjustment under Section 2.12 hereof; the
Investor shall timely pay (or cause the timely payment of) such Taxes; to the
extent that such Taxes exceed such reserves, the Shareholders shall pay such
excess amount to the Company no later than three days prior to the due date
(including extensions) for the filing of the applicable 1997 Tax Returns. Any
refunds of such 1997 Taxes, whether pursuant to an amended return or any Tax
Proceeding, shall be
56
paid to or for the benefit of the Shareholders. Any additional 1997 Taxes in
excess of the Taxes reflected on the 1997 Tax Returns which at any time are
assessed or imposed upon the Company, whether pursuant to an amended return or
any Tax Proceeding, shall, to the extent they exceed such reserves therefor
included in the Final Balance Sheet Tax Liabilities, be paid by the Shareholders
promptly upon demand therefor by the Investor.
(c) Preparation of 1998 Tax Returns Due Following Closing and
---------------------------------------------------------
Payment of Taxes.
- ----------------
(i) Short Period Returns. The parties acknowledge and agree
--------------------
that the Company shall be required to file a short period U.S. federal income
tax return as an S corporation for the period commencing December 27, 1997, and
ending as of the Effective Date (if an election under Code Section 338(h)(10) is
made) or as of the day immediately preceding the Effective Date (if no such
election under Code Section 338(h)(10) is made). As used herein the term "Short
Period Return" shall refer collectively to such short period S corporation
return and any other short period return (ending as of the Effective Date and
covering Taxes other than the federal Taxes covered by the S corporation short
period return) which the Company or the Subsidiary is required to file with any
Tax authority with respect to the short 1998 period ending on the Effective Date
(or the day immediately preceding the Effective Date, as applicable). The
Company shall file (or shall cause the Subsidiary to file, as applicable) each
such Short Period Return prior to the due date therefor (determined after giving
effect to any applicable extensions of required filing dates). The Short Period
Returns for U.S. federal and state income and franchise Taxes (the "1998 Short
Period Income Tax Returns") shall be prepared by Arthur Andersen under the
direction of Lovaas, in accordance
57
with applicable law and, to the extent not inconsistent with applicable law, on
a basis consistent with the past practices of the Company, and shall be
delivered to the Company at least 30 days prior to the due date thereof. The
Company shall (i) provide Lovaas and Arthur Andersen with such information and
such access to the Company's books and records, and at such times, as may
reasonably be requested by Lovaas or Arthur Andersen for purposes of preparing
and timely filing the 1997 Short Period Income Tax Returns, and (ii) file such
1998 Short Period Income Tax Returns as prepared under the direction of Lovaas,
provided, however, if Investor shall disagree with any item reported or
reflected in such a Tax Return, such dispute shall be resolved as provided for
under Section 5.02(g). All Short Period Returns other than the 1998 Short Period
Income Tax Returns shall be prepared, under the direction of the Company, by the
Company or such Tax Return preparers as may be selected by the Company,
provided, however, that in all cases such Tax Returns shall be prepared in
accordance with the applicable law and, to the extent not inconsistent with
applicable law, on a basis consistent with the items and positions reflected in
the 1998 Short Period Income Tax Returns. All such Short Period Tax Returns
shall be prepared using the Company's or the Subsidiary's normal tax accounting
methods and elections based on a closing of the Company's or the Subsidiary's
books as of the applicable short period ending date, and all reasonable costs
and expenses incurred in preparing and filing the Short Period Returns shall be
paid by the Company. To the extent that the Taxes shown or reported on such
Short Period Returns do not exceed the reserves therefor as set forth in the
account for accrued taxes payable or similar account included in the Final
Balance Sheet Tax Liabilities and taken into account in the Working Capital
Adjustment under Section 2.12 hereof; the Investor shall timely pay (or cause
the timely payment of) such Taxes; to the extent that such Taxes exceed such
reserves, the Shareholders shall pay such excess amount to the Company no later
than three days prior to the
58
due date (including extensions) for the filing of the applicable Short Period
Returns. Any refunds of such Short Period Taxes, whether pursuant to an amended
return or any Tax Proceeding, shall be paid to or for the benefit of the
Shareholders. Any additional Short Period Taxes in excess of the Taxes reflected
on the Short Period Returns which at any time are assessed or imposed upon the
Company, whether pursuant to an amended return or any Tax Proceeding, shall, to
the extent they exceed such reserves therefor included in the Final Balance
Sheet Tax Liabilities, be paid by the Shareholders promptly upon demand therefor
by the Investor.
(ii) Full Year Returns. The parties acknowledge and agree
-----------------
that the Company and the Subsidiary may be required, with respect to certain
Taxes for the 1998 year, to file a full year return (herein a "Full Year
Return") reporting and accounting for such Taxes on an aggregate basis covering
both the 1998 period ending on the Effective Date (the "Pre-Closing Period") and
the 1998 period following the Effective Date (the "Post-Closing Period"). Prior
to the due date (including extensions) for any such Full Year Return, the
Company shall prepare and file (or shall cause the Subsidiary to prepare and
file) such Full Year Return using the Company's normal tax accounting methods
and elections, provided, however, that in all cases such Tax Returns shall be
prepared in accordance with applicable law and, to the extent not inconsistent
with applicable law, on a basis consistent with the items and positions
reflected in the 1998 Short Period Income Tax Returns, and all reasonable costs
and expenses incurred in preparing and filing such Full Year Returns shall be
paid by the Company. The Taxes reportable on such Full Year Returns (herein "FY
Taxes") that are attributable to the Pre-Closing Period shall be determined as
follows:
59
(x) in the case of Taxes that are either (1) based upon or
related to net income, or (2) imposed in connection with any sale or
other transfer or assignment of property (real or personal, tangible
or intangible), the FY Taxes attributable to the Pre-Closing Period
shall be deemed equal to the amount which would be payable if the
taxable year or period ended on the Effective Date (except that,
solely for purposes of determining the marginal Tax rate applicable to
net income during such period in a jurisdiction in which such Tax rate
depends upon the level of net income, annualized income may be taken
into account, if appropriate, in order to achieve an equitable sharing
of the FY Taxes); and
(y) in the case of Taxes not described in subparagraph (x) above
that are imposed on a periodic basis and measured by the level of any
item, the FY Taxes attributable to the Pre-Closing Period shall be
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
Straddle Period ending on the Effective Date and the denominator of
which is the number of calendar days in the entire relevant period.
To the extent that FY Taxes allocable to the Pre-Closing
Period do not exceed the reserves therefor as set forth in the account for
accrued taxes payable or similar account included in the Final Balance Sheet Tax
Liabilities and taken into account in the Working Capital Adjustment under
Section 2.12 hereof; the Company shall timely pay such
60
Taxes; to the extent that such Pre-Closing Period FY Taxes exceed such reserves,
the Shareholders shall pay such excess amount to the Company no later than three
days prior to the due date (including extensions) for the filing of the
applicable Full Year Return. Any refunds of such FY Taxes attributable to the
Pre-Closing Period, whether pursuant to an amended return or any Tax Proceeding,
shall be paid to or for the benefit of the Shareholders. Any additional FY Taxes
attributable to the Pre-Closing Period which at any time are assessed or imposed
upon or against the Company, whether pursuant to an amended return or any Tax
Proceeding, shall, to the extent they exceed such reserves therefor included in
the Final Balance Sheet Tax Liabilities, be paid by the Shareholders promptly
upon demand therefor by Investor.
(iii) Allocation Conventions. The preparation of Short
----------------------
Period Returns and the allocation of FY Taxes between the Pre-Closing Period and
the Post-Closing Period shall be based on a closing of the Company's and the
Subsidiary's books as of the Effective Date as provided in Section
5.02(c)(ii)(x); provided, however, that exemptions, allowances or deductions
--------- -------
that are calculated on an annual basis (including, but not limited to,
depreciation and amortization deductions) shall be allocated between the period
ending on such date and the period after such date in the proportion which the
number of days in each such period bears to the total number of days in the
applicable annual period; and provided further, if as of the Effective Date the
Company or the Subsidiary is a partner in any partnership which has a Tax year
that does not end as of the Effective Date, any Tax liability attributable to
such partnership's activities shall be allocated among the Pre-Closing Period
and the Post-Closing Period in the same manner based upon the number of days in
each such period.
61
(d) Tax Returns for Post-Acquisition Taxable Periods. Investor shall
------------------------------------------------
prepare or cause to be prepared the Tax Returns for Post-Acquisition Taxable
Periods and shall pay or cause to be paid all Taxes shown on such Tax Returns to
be due and payable.
(e) Tax Proceedings.
---------------
(1) Investor shall, promptly upon receipt of notice thereof by
Investor or Company, notify Lovaas in writing of any communication with respect
to any pending or threatened Tax Proceeding in connection with a Pre-Acquisition
Taxable Period, or a Straddle Period or otherwise with respect to a Pre-
Acquisition Tax Liability or a Shareholder Tax Liability (or an issue related
thereto). Investor shall include with such notification a true, correct and
complete copy of any written communication, and an accurate and complete written
summary of any oral communication, so received by Investor or Company. A
failure by Investor to give a timely notice hereunder shall not affect any right
of indemnification that Investor may have under Article VIII hereof except to
the extent that such failure results in the Shareholders becoming liable for the
Tax Liability in question.
(2) Lovaas shall have authority to represent the Shareholders in
any and all Tax Proceedings involving or relating to Pre-Acquisition Taxable
Periods, Straddle Periods (but only to the extent involving or relating to Pre-
Acquisition Tax Liabilities and/or Shareholder Tax Liabilities) or which
otherwise involve or relate to Pre-Acquisition Tax Liabilities and/or
Shareholder Tax Liabilities (all such Tax Proceedings are collectively referred
to herein as "Shareholder Tax Proceedings"). In addition to such right of
participation, at her election, as communicated to Investor in writing within 30
days following her receipt of the applicable notice pursuant to Section
5.02(e)(1) (a "Control Election"), Lovaas shall (A) have overall control of; any
Shareholder Tax Proceeding (but only to the extent involving Pre-
62
Acquisition Tax Liabilities and/or Shareholder Tax Liabilities) and (B) have
authority to employ counsel of her choice with respect to such matters;
provided, however, that Investor shall be permitted to participate in any such
-------
Shareholder Tax Proceedings and all hearings and settlement negotiations related
thereto. In any Shareholder Tax Proceeding as to which Lovaas has made a Control
Election hereunder, (i) with respect to any issue or matter in any such Tax
Proceeding which may reasonably be expected to have a material adverse effect on
the Company's liability for Post Acquisition Tax Liabilities, Lovaas shall not
settle or compromise any such issue or matter without the prior written consent
of the Investor, and (ii) the Shareholders shall be liable for any Investor Tax
Liabilities that are being contested in such Shareholder Tax Proceeding;
provided, however, the Shareholders shall not be liable for any Investor Tax
Liability with respect to which Investor refuses or otherwise fails to give its
approval of a settlement or compromise proposed by Lovaas. In the case of any
Shareholder Tax Proceeding as to which Lovaas does not make a Control Election
hereunder, the Company and Investor shall have control over and responsibility
for such Tax Proceeding, provided, however, Lovaas or her designated
representatives shall be permitted to participate in any such Tax Proceeding and
all hearings and settlement negotiations related thereto; and provided further,
with respect to any issue or matter in such Tax Proceeding which may reasonably
be expected to have a material adverse effect on the Shareholders' liability for
Pre-Acquisition Tax Liabilities and/or Shareholder Tax Liabilities (a "Material
Shareholder Tax Issue"), Company and Investor shall not settle or compromise any
such Material Shareholder Tax Issue without the prior written consent of Lovaas.
To the extent that any Shareholder Tax Proceeding described herein involves or
relates to an Investor Tax Liability, the Company shall bear the cost thereof;
and to the extent that such a Tax Proceeding involves or relates to a Pre-
63
Acquisition Tax Liability and/or a Shareholder Tax Liability, the Shareholders
shall bear the cost thereof; with a fair and reasonable allocation of costs to
be made in the case of a Tax Proceeding involving or relating to Investor Tax
Liabilities, on the one hand, and Pre-Acquisition Tax Liabilities and/or
Shareholder Tax Liabilities, on the other hand.
(3) Subject to Section 5.02(e)(2), the Investor and/or the
Company, as applicable, shall execute and deliver to Lovaas or any legal counsel
or other tax representative designated by Lovaas any power of attorney
reasonably requested by Lovaas or such legal counsel or other tax representative
in connection with any Tax Proceeding described in this Section 5.02(e).
(f) Cooperation: Maintenance and Retention of Records. Investor
--------------------------------------------------
shall, and shall cause the Company to, provide Lovaas with such assistance and
documents as may be reasonably requested by Lovaas in connection with (i) the
preparation of any Tax Return, (ii) the conduct of any Tax Proceeding, (iii) any
matter relating to Pre-Acquisition Tax Liabilities and (iv) any other matter
that is a subject of this Section 5.02. Investor and the Company shall retain
or cause to be retained all Tax Returns that are the subject of this Section
5.02 and all schedules, workpapers and material records or other documents
relating thereto, until the expiration of the statute of limitations (including
any waivers or extensions thereof) applicable with respect to the taxable years
to which such Tax Returns and other documents relate or until the expiration of
any additional period that Lovaas reasonably requests, in writing, with respect
to specific material records or documents. If Investor or the Company intends
to destroy any material records or documents, it shall provide Lovaas with
reasonable advance notice and the opportunity to copy or take possession of such
records and documents. The parties hereto will notify each other party in
writing of any waivers or extensions of the
64
applicable statute of limitations that may affect the period for which the
foregoing records or other documents must be retained.
(g) Disputes. If the parties disagree as to any matter arising
--------
out of this Section 5.02, the parties shall attempt in good faith to resolve
such dispute. If such dispute is not resolved within 15 days, the parties shall
jointly retain the Independent Accounting Firm to resolve the dispute. The fees
of the Independent Accounting Firm shall be borne equally by the parties having
the dispute, and the decision of such Independent Accounting Firm shall be final
and binding on all parties involved. Following the decision of the Independent
Accounting Firm, the parties shall each take or cause to be taken any action
that is necessary or appropriate to implement such decision of the Independent
Accounting Firm, including, without limitation, the prompt payment of Taxes as
directed by the Independent Accounting Firm.
(h) Nonforeign Affidavit. Shareholder shall furnish Investor an
--------------------
affidavit stating, under penalty of perjury, that the number specified therein
is the Shareholders' United States taxpayer identification number and that the
Shareholder is not a foreign person within the meaning of Section 1445(b)(2) of
the Code.
(i) Election Under Section 338(h)(10). Unless prohibited
---------------------------------
under applicable federal Tax law or Regulations, Investor and the Shareholders
hereby agree to join in making an election under Section 338(g) and Section
338(h)(10) of the Code (and/or any comparable election under applicable state
tax law) with respect to the acquisition of the Company by Investor. The
Shareholders and Investor shall cooperate in the making of such election,
including but not limited to executing and delivering such written consents and
65
providing such documents and information as may be required for purposes of
making an effective election under Code Section 338(h)(10), including the
completion and execution of Internal Revenue Service Form 8023-A. All costs and
expenses related to making such election, including the preparation and filing
of applicable election forms, shall be paid by the Company, and the Company
shall pay any state income or franchise tax liability imposed on the Company as
a result of such election.
(j) Survival. Notwithstanding any other provision of this
--------
Agreement, the covenants set forth in this Section shall survive until the
expiration of the respective statutes of limitations applicable to the periods
to which the Taxes relate.
5.03 Conduct of Business. Prior to the Effective Date and other than as
-------------------
set forth in Exhibit A, the Shareholders will cause the Company to conduct its
business only in the ordinary course of business and consistent with past
practices. Without limiting the generality of the foregoing, except as
contemplated by this Agreement, or as set forth in Exhibit A or as consented to
or approved in writing and in advance by an authorized officer of Investor, the
Shareholders covenant as follows with respect to the period between the date
hereof and the Effective Date:
(a) The Company will carry on its business in a manner
consistent with prior practice and only in the usual and ordinary course, and
the Company and the Shareholders will use commercially reasonable efforts to
preserve intact the present business organization, goodwill and reputation of
the Company, to keep available the services of its officers and employees and to
preserve the relationships with customers, suppliers, distributors and other
persons having business dealings with the Company;
66
(b) The Company will maintain its books, accounts and records
consistent with past practices and policies and in accordance with GAAP. The
Company will not materially change any of the Company's (A) accounting
principles or practices or make any material revaluation of any of the Company's
assets, including without limitation, any material write-offs, increases in any
reserves (including any reserve for taxes payable) or any write-off of the value
of inventory, property, plant, equipment or any other asset or materially
increase or change any assumptions underlying, or methods of calculating, any
bad debt, contingency or other reserves, (B) rebate or discount programs, (C)
collection practices, (D) promotion and/or advertising programs, (E) inventory
policies or practices, or (F) capital expenditure policies or programs;
(c) The Company will not make or adopt any change in its
Articles of Incorporation or Bylaws as in force and effect on the date hereof;
(d) The Company will not issue, redeem or purchase any shares of
capital stock of the Company or issue any options or other rights to purchase
any shares of capital stock of the Company, any securities convertible or
exchangeable for capital stock of the Company, or commit to do any of the
foregoing;
(e) Except as disclosed on Schedule 3.08, the Company will not
enter into or amend any employment contract or agreement with any former,
existing or prospective employee;
(f) The Company will not cancel, without full payment, any note,
loan or other obligation owing to the Company;
67
(g) The Company will not increase the compensation payable to or
the benefits afforded any of its employees or former employees, nor shall it
adopt or amend any employee benefit plan or compensation or commission
arrangement, except that compensation of personnel (other than those employees
set forth on Schedule 3.15, except as set forth on Schedule 5.03(g)) may be
increased in the ordinary course consistent with past practice;
(h) The Company will not sell or otherwise dispose of, or enter
into any agreement for the sale, lease or disposition of, or mortgage or
encumber or permit to exist any liens, claims or security interests on, any of
its assets or properties, except for sales of inventory and obsolete equipment
in the ordinary course of business consistent with past practices;
(i) The Company will maintain its existing insurance policies
covering it, unless comparable insurance is substituted therefor, and shall not
take any action to terminate or modify those insurance policies;
(j) The Company will observe and perform, and remain in material
compliance with, its respective obligations in agreements and contracts and not
enter into any agreements or contracts or incur any liabilities, commitments or
obligations which would require payments by the Company of more than $100,000
over any period of twelve months;
(k) The Company will cooperate with Investor and use
commercially reasonable efforts to take, or cause to be taken, all action
reasonably requested by Investor in connection with the financing of the
transactions contemplated by this Agreement, and to treat the transactions
contemplated by this Agreement as a recapitalization for financial reporting
68
purposes, including, without limitation, to assist Investor with any
presentation to Investor's and Company's accountants, financing sources and any
regulatory authority;
(1) The Company will use commercially reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary to satisfy the conditions set forth herein as soon as
practicable;
(m) The Company will not make any investment in any person or
entity whether by loan or advance, purchase of stock or other securities or
contribution to capital;
(n) The Company will use commercially reasonable efforts to not
take any action that causes any of the representations and warranties made
herein to be inaccurate as of the Effective Date;
(o) The Company will not enter into or commit to enter into any
transaction between the Company, on one hand, and any Related Party, on the
other hand;
(p) The Company will not guaranty the obligations of any third
party (other than the Subsidiary);
(q) The Company will not declare, set aside, pay or make any
dividend, distribution or redemption in respect of shares of the Company's
capital stock;
(r) The Company will not incur any Indebtedness other than (i)
pursuant to its presently existing revolving credit facility or (ii) as
described on Exhibit A;
69
provided, however that any Indebtedness incurred pursuant to subsection (ii)
above will not contain any prepayment restrictions or penalties; and
(s) The Company will not enter into any agreement, plan or
commitment to do any of the foregoing.
5.04 Access to Properties. Between the date hereof and the Effective
--------------------
Date, with reasonable prior notice, the Shareholders will give and will cause
the Company to give to authorized representatives of Investor full access with
the right to conduct inspections, during normal business hours, in such manner
as not to unduly disrupt normal business activities, to any and all premises,
properties, contracts, commitments, books, records and affairs of the Company,
and will cause the officers of the Company to furnish any and all financial,
technical and operating data and other information as Investor shall from time
to time reasonably request.
5.05 Confidentiality and Nonsolicitation. Pending the Closing, Investor
-----------------------------------
will hold in confidence all information obtained from the Shareholders or the
Company (or their officers, directors, employees, agents, advisors or
representatives) in connection with the transactions completed herein and will
use such information only for purposes related to the transactions contemplated
hereby. Investor further agrees that, pending the Closing, it will not disclose
any such information to any third party except upon the prior written consent of
the Shareholders, or except as required by law or except to its advisors and
financing sources who have been informed of the confidentiality of such
information. If the transactions contemplated hereby are not consummated,
Investor will return all such information to the Shareholders and continue to
honor the foregoing confidentiality and non-disclosure covenants for a period of
five years. Such obligation of confidentiality shall not extend to any
information (a) which is
70
shown to be or becomes generally known to others engaged in the same trade or
business as the Company (b) previously known to Investor prior to the start of
discussions leading to the execution of this Agreement, (c) obtained by Investor
in good faith from third parties who are not obligated to maintain the
information confidential or (d) that is or becomes public knowledge through no
act or omission by Investor or any of its directors, officers, employees,
professional advisors or other representatives. Furthermore, if the transactions
contemplated hereby are not consummated, Investor agrees that for a period of
three years it will not, nor will it permit its officers, directors, employees,
agents or representatives to, directly or indirectly solicit or attempt to
solicit any of the employees of the Company at the level of manager or above to
leave the Company or to become employees of or consultants to any other person
or entity.
5.06 Exclusive Nature of Agreement. Prior to the Closing, or such earlier
-----------------------------
date on which this Agreement is terminated in accordance with its terms, the
Shareholders, the Company and their officers, employees, agents, representatives
and trustees will not, directly or indirectly, solicit from any person, or
otherwise encourage any person to make, any inquiries or proposals, or furnish
information, relating to the acquisition, in whole or in part, of the assets or
securities of the Company (an "Acquisition Proposal") or engage in any
negotiations or enter into any agreement or understanding with any person (other
than Investor) regarding an Acquisition Proposal. The Shareholders will not
furnish any information concerning the Company to any person other than Investor
for the purpose of, or with the intent of, permitting such person or entity to
evaluate a possible Acquisition Proposal. The Shareholders and/or the Company
will notify the Investor immediately of any Acquisition Proposal and will
disclose
71
the terms of the Acquisition Proposal and identity of the party making the
Acquisition Proposal.
5.07 Consummation of Agreement: Cooperation. The parties shall use
---------------------------------------
commercially reasonable efforts to perform and fulfill all obligations on their
respective parts to be performed and fulfilled under this Agreement, and to
cause all the conditions precedent to the consummation of the transactions to be
timely satisfied, to the end that the transactions contemplated by this
Agreement shall be effected substantially in accordance with its terms. The
parties hereto shall cooperate with each other in such actions and in securing
requisite approvals and each party shall deliver such further documents as the
other party may reasonably request as necessary to evidence such transactions.
The execution of this Agreement by the Shareholders shall constitute a unanimous
written consent of the Shareholders approving the principal terms hereof in
accordance with Sections 603 and 1101 of the Corporations Code.
5.08 Maintenance of Corporate Name and Headquarters. Investor hereby
----------------------------------------------
covenants and agrees that for a period expiring on the fifth anniversary of the
Effective Date:
(a) The Company will retain the name "Hudson Respiratory Care
Inc." and will continue to do business under the names "Hudson RCI" and/or
"Hudson Respiratory Care Inc.";
(b) The products and equipment manufactured or distributed by the
Company shall continue to carry the "Hudson RCI" or "Hudson Respiratory Care
Inc." name; and
72
(c) The Company's principal executive office and manufacturing
facility shall be located in Temecula, California.
5.09 Maquiladora. No later than immediately prior to the Effective Date,
-----------
Lovaas shall transfer the 21% interest in the Subsidiary that she holds directly
to the Company in consideration of one dollar.
5.10 Conveyance Taxes. The Shareholders agree to assume liability for and
----------------
to hold Investor and the Company harmless against any stock transfer or other
similar taxes incurred as a result of the transactions contemplated hereby.
5.11 Termination of Equity Plan. Prior to the Effective Date, the
--------------------------
Shareholders shall cause the Company to take all actions necessary in order to
terminate its EPP Plan as of and upon payment of all EPP Liabilities on the
Effective Date. The names of and the amounts due to each EPP Participant as a
result of the transactions contemplated by this Agreement are as set forth on
the EPP Schedule. Each EPP Participant shall, upon receipt of the amount due
such EPP Participant as provided in the EPP Schedule, execute a release
acknowledging that the Company has no further obligation to such EPP Participant
under the EPP Plan. In addition, Richard K. Ruiz shall, upon receipt of payment
of the Ruiz Consulting Fee and the amount due him as provided in the EPP
Schedule, execute a release acknowledging that the Company has no further
obligation to him under the Ruiz Consulting Agreement, the EPP Plan or the
Employee & Plan Participation Agreement between the Company and Richard K. Ruiz,
dated July 1, 1995.
5.12 Consents, Etc.
-------------
73
(a) As soon as practicable after execution and delivery of this
Agreement, Investor and the Company shall, if necessary and with all costs to be
borne by Investor, file the Notification and Report Form required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") and, prior
to the Effective Date, shall make all other filings required under the HSR Act.
Each Shareholder, Investor and the Company covenants to use commercially
reasonable efforts to (i) obtain all consents, approvals and agreements of, and
to give all notices and make all other filings with, any third parties,
including governmental authorities, necessary to authorize, approve or permit
the consummation of the transactions contemplated hereby, and (ii) to cooperate
with one another with respect thereto, including providing any additional
information or other documents requested in connection with obtaining any
necessary approval under the HSR Act. In addition, subject to the terms and
conditions herein provided, each of the parties hereto covenants and agrees to
use his or its commercially reasonable efforts to take, or cause to be taken,
all action or do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to satisfy the conditions applicable to
such party set forth in Article VI or VII.
(b) The Company and the Shareholders will use commercially
reasonable efforts to obtain all waivers, estoppels, non-disturbance agreements,
consents and approvals (including, without limitation, consents required under
any leases and Material Contracts) required for the consummation of the
transactions contemplated hereby. In connection therewith, and in connection
with its negotiations for consents, the Company may not offer or consent to any
modification or amendment of any lease, or other contract, without Investor's
prior written consent. The Company agrees to transmit the consents to the
74
appropriate parties for approval promptly after the execution hereof, which
consents shall be subject to the reasonable approval of Investor. The Company
shall keep Investor advised of its progress in obtaining such consents.
(c) In the event Investor desires to make any modifications or
amendments to any of the leases for the Leased Real Property, then at the
request of Investor the Company shall cooperate with Investor and participate in
any negotiations to effectuate the foregoing; provided, however, that achieving
any such modifications or amendments shall not be a condition to Investor's or
Newco's obligations to consummate the transactions contemplated hereby.
(d) Within five (5) business days after the execution hereof, the
Company shall obtain and deliver to Investor (i) copies of any existing title
insurance policies in the possession of the Company or its affiliates with
respect to each of the Fee Real Properties, and (ii) copies of any surveys of
any Fee Real Properties in the possession of the Company or its affiliates. As
promptly as possible after the execution of this Agreement, but in no event
later than twenty-five (25) business days after the execution hereof, the
Company shall obtain for and deliver to Investor (i) a commitment for title
insurance for each of the Fee Real Properties, ALTA 1970 Form "B" (or the
equivalent which is reasonably satisfactory to Investor), issued by Chicago
Title (the "Title Company"), including all schedules and exhibits thereto,
together with true, correct and legible copies of all instruments giving rise to
any exceptions to title to each of the Fee Real Properties (collectively, the
"Title Commitment"), and (ii) a current ALTA survey (the "Survey") of each Fee
Real Property, certified to the Company, Investor's lender or financer, and the
Title Company, in form reasonably acceptable
75
to Investor. The cost of each Title Commitment and Survey shall be borne solely
by the Company. Within ten (10) business days after Investor's receipt of the
last of the Title Commitment and Survey, Investor shall give notice to the
Company specifying all matters shown on the Title Commitment or disclosed by the
Survey which (x) are in an amount in excess of $10,000, if monetary, (other than
assessments in connection with property tax bills not yet due and payable) or
(y) materially and adversely affect the use of the property as it is currently
being used, and are reasonably disapproved by Investor (any such item is
referred to herein as a "Disapproved Exception"). The Company shall cure or
remove any Disapproved Exception on or before the Effective Date. With respect
to Fee Real Property, no later than the Effective Date, the Company shall cause
to be delivered to Investor the irrevocable commitment of the Title Company to
issue an extended coverage policy of title insurance (the "Title Policies"),
ALTA 1970 Form "B" (or the equivalent which is reasonably satisfactory to
Investor), insuring that the Company owns fee title to each Fee Real Property.
The cost of such Title Policies shall be borne solely by the Company.
(e) No later than five (5) business days prior to the Closing,
Investor shall deliver to the Shareholders the Investor Transaction Expense
Schedule and the New Debt Schedule.
5.13 Accounting Treatment. The Company shall use commercially reasonable
--------------------
efforts, and take all reasonably necessary steps requested by Investor (and at
Investor's expense), in order to obtain the recording of the Merger as a
recapitalization for financial reporting purposes, including, without
limitation, to assist Investor and its affiliates with any presentation to
Investor's and the Company's accountants or any applicable regulatory authority
with regard to such recording. Furthermore, the Company agrees to deliver to
Investor before
76
March 1, 1998, Financial Statements prepared in accordance with Regulation S-X
promulgated under the Securities Act of 1933, as amended, and such Financial
Statements will not differ in any material respect from the Financial Statements
delivered in accordance with Section 3.05 hereof.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF INVESTOR
The obligation of Investor to consummate the transactions contemplated
hereby shall be subject to the satisfaction, on or prior to the Effective Date,
of each of the following conditions any one or more of which may be waived by
Investor:
6.01 Performance of Agreements. The Shareholders and the Company shall
-------------------------
have performed in all material respects their respective obligations and
agreements contained in this Agreement required to be performed prior to the
Closing, and the Shareholders and the Company shall have delivered to Investor a
certificate to such effect.
6.02 Representations and Warranties True. The representations and
-----------------------------------
warranties of the Shareholders contained in this Agreement shall each be true
and correct in all material respects on the date hereof and on the Effective
Date as if made again on such Date, and at the Closing the Shareholders shall
have delivered to Investor certificates to such effect.
6.03 No Pending or Threatened Claim. No condition or restriction of any
------------------------------
governmental or regulatory authority shall be in effect and no claim, action,
suit, investigation or other proceeding shall be pending or threatened before
any court or governmental or regulatory authority that presents a substantial
risk of the restraint or prohibition of the
77
transactions contemplated by this Agreement or the obtaining of material damages
or other relief in connection therewith.
6.04 Opinion of the Company's Counsel. Investor shall have been furnished
--------------------------------
at the Closing with an opinion of the Company's counsel, dated the Effective
Date, in form and substance reasonably satisfactory to Investor, to the effect
that:
(a) The Company is a corporation and is duly organized, validly
existing and in good standing under the laws of the State of California.
(b) All corporate actions by the board of directors and the
Shareholders of the Company required to be taken by or on the part of the
Company to authorize the execution, delivery and performance of this Agreement
by the Shareholders and the Company have been duly and properly taken.
(c) This Agreement has been duly authorized, executed and
delivered by the Shareholders and the Company, and constitutes valid and binding
obligations of each of the Shareholders and the Company, enforceable against
each of them, in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or other laws affecting the
enforcement of creditors' rights generally and general principles of equity.
(d) Except as set forth in Schedule 3.04 hereto, the execution
and delivery of this Agreement by the Shareholders and by the Company and the
consummation of the transactions contemplated hereby by the Shareholders and by
the Company do not (i) violate any constitutional or statutory provision or
requirement, or to such counsel's knowledge, violate any material judicial or
administrative order, consent decree, judgment or
78
decree applicable to the Shareholders or the Company; (ii) conflict with any
terms, conditions or provisions of the Articles of Incorporation or Bylaws of
the Company or the organizational documents of the Trust; (iii) result in a
material breach of or default under the Material Contracts or (iv) to such
counsel's knowledge, result in the creation of any lien, charge or encumbrance
upon any of the assets or property of the Company under any such Material
Contract, other than such liens, charges or encumbrances which would not have a
Material Adverse Effect.
6.05 No Material Adverse Change. After the date hereof, there shall not
--------------------------
have occurred any event, circumstance or occurrence which could reasonably be
expected to cause a Material Adverse Effect. Investor shall have received a
certificate addressed to it from the Shareholders dated the Effective Date to
the foregoing effect.
6.06 Employee Participation. The employees of the Company shall have
----------------------
invested at least $6.5 million in Investor, of which at least $3 million will
have been contributed by Richard W. Johansen, $1 million will have been
contributed by Lougene Williams and $1 million will have been contributed by Jay
R. Ogram.
6.07 Hart-Scott-Rodino. All applicable requirements under the Hart-Scott-
-----------------
Rodino Antitrust Improvements Act of 1976 and the rules promulgated thereunder
shall have been met, including all applicable waiting periods, and neither the
Department of Justice nor the Federal Trade Commission shall have raised
objections to the transactions contemplated hereby.
79
6.08 Agreement Not to Compete. Helen Hudson Lovaas shall have entered
------------------------
into an agreement not to compete substantially in the form attached hereto as
Exhibit E with the Company and Investor.
6.09 Consents. All material consents, approvals and waivers from third
--------
parties and governmental authorities necessary to the transactions as
contemplated hereby shall have been obtained.
6.10 EPP Plan Terminated. The EPP Plan shall have been terminated and the
-------------------
Company shall have no obligation under the EPP Plan to make any payment to
employees or former employees other than with respect to the scheduled EPP
Liabilities.
6.11 Shareholder Agreement. Lovaas shall have entered into a shareholder
---------------------
agreement on substantially the terms set forth in Exhibit F hereto with
Investor.
6.12 Accounting Matters. Investor shall have received Statement of
------------------
Auditing Standards No. 50 letters from Arthur Andersen, LLP and/or Deloitte &
Touche, LLP concurring with the recapitalization treatment of the transactions
contemplated by this Agreement.
6.13 Transactions with Affiliates. The transactions or agreements set
----------------------------
forth on Schedule 6.13 shall have been terminated by the Company or appropriate
notice of termination shall have been given in the manner described in Schedule
6.13.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLER
80
The obligations of the Shareholders and the Company to consummate the
transactions contemplated hereby shall be subject to the satisfaction, on or
prior to the Effective Date, of each of the following conditions, any one or
more of which may be waived by Lovaas:
7.01 Performance of Agreements. The Investor shall have performed in all
-------------------------
material respects its obligations and agreements contained in this Agreement
required to be performed prior to the Closing, and Investor shall have delivered
to Lovaas a certificate to such effect.
7.02 Representations and Warranties True. The representations and
-----------------------------------
warranties of Investor contained in this Agreement shall be true and correct in
all material respects on the date hereof and on the Effective Date, as if made
again on such date, and at the Closing Investor shall have delivered to Lovaas a
certificate to such effect.
7.03 Opinion of Investor's Counsel. The Shareholders shall have been
-----------------------------
furnished with an opinion of counsel to Investor, dated the Effective Date, to
the effect that:
(a) Investor is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it is
incorporated.
(b) All corporate actions required to be taken by or on the part
of Investor to authorize the execution, delivery and performance of this
Agreement by Investor have been duly and properly taken.
(c) This Agreement has been duly authorized, executed and
delivered by Investor, and constitutes valid and binding obligations of
Investor, enforceable against it, in accordance with its terms, except as such
enforceability may be limited by
81
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors' rights generally and general principles of equity.
(d) The execution and delivery of this Agreement by Investor and
the consummation of the transactions contemplated hereby by Investor do not (i)
violate any constitutional or statutory provision or requirement, or to such
counsel's knowledge, violate any material judicial or administrative order,
award, consent decree, judgment or decree applicable to Investor; (ii) conflict
with any terms, conditions or provisions of the Certificate of Incorporation or
Bylaws of Investor; or (iii) to such counsel's knowledge, result in the creation
of any lien, charge or encumbrance upon any of the assets or property of
Investor under any such agreement or instrument, other than such liens, charges
or encumbrances which, separately or in the aggregate, would not have a material
adverse effect on Investor.
7.04 No Pending or Threatened Claim. No condition or restriction of any
------------------------------
governmental or regulatory authority shall be in effect and no claim, action,
suit, investigation or other proceeding shall be pending or threatened before
any court or governmental or regulatory authority that presents a substantial
risk of the restraint or prohibition of the transactions contemplated by this
Agreement or the obtaining of material damages or other relief in connection
therewith.
7.05 Shareholder Agreement. Lovaas shall have entered into a shareholder
---------------------
agreement on substantially the terms set forth on Exhibit F hereto with
Investor.
7.06 Hart-Scott-Rodino. All applicable requirements under the Hart-Scott-
-----------------
Rodino Antitrust Improvements Act of 1976 and the rules promulgated thereunder
shall have been met, including all applicable waiting periods, and neither the
Department of Justice nor the Federal Trade Commission shall have raised
objection to the transactions contemplated hereby.
82
ARTICLE VIII
INDEMNIFICATION
8.01 Indemnification by the Shareholders. The Shareholders shall jointly
-----------------------------------
and severally indemnify and hold harmless the Surviving Corporation and its
respective officers, directors, and employees in respect of any and all claims,
actions, suits or other proceedings and any and all losses, costs, expenses,
liabilities, fines, penalties, interest, and damages, whether or not arising out
of any claim, action, suit or other proceeding (and including reasonable counsel
and accountants' fees and expenses and all other reasonable costs and expenses
of investigation, defense or settlement of claims and amounts paid in
settlement) ("Damages") incurred by, imposed on or borne by the Surviving
Corporation or resulting from:
(a) The breach of any of the representations or warranties made
by the Shareholders in this Agreement; or
(b) The breach or the failure of performance by the Shareholders
of any of the covenants that they are to perform hereunder.
Damages shall exclude any amount with respect to which the Surviving
Corporation shall be entitled to receive and shall have received payment under
any insurance policy which provides coverage for the liability to which such
amount relates.
8.02 Indemnification by Investor. Investor shall indemnify and hold
---------------------------
harmless the Shareholders, in respect of any and all Damages incurred by,
imposed on or borne by the Shareholders resulting from:
83
(a) The breach of any of the representations or warranties made
by Investor in this Agreement; or
(b) The breach or the failure of performance by Investor of any
of the covenants that it is to perform hereunder.
8.03 Claims for Indemnification. Whenever any claim shall arise for
--------------------------
indemnification hereunder, the party entitled to indemnification (the
"indemnified party") shall promptly notify the other party or parties (the
"indemnifying party") of the claim and, when known, the facts constituting the
basis for such claim; provided that the indemnified party's failure to give such
notice shall not affect any rights or remedies of an indemnified party hereunder
with respect to indemnification for Damages except to the extent that the
indemnifying party is materially prejudiced thereby. In the event of any claim
for indemnification hereunder resulting from or in connection with any claim or
legal proceedings by a third party, the notice to the indemnifying party shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom. The indemnified party shall not settle or compromise any
claim by a third party for which it is entitled to indemnification hereunder,
without the prior written consent of the indemnifying party (which shall not be
unreasonably withheld) unless suit shall have been instituted against it and the
indemnifying party shall not have taken control of such suit after notification
thereof as provided in Section 8.04 of this Agreement.
8.04 Defense by Indemnifying Party. In connection with any claim giving
-----------------------------
rise to indemnity hereunder or resulting from or arising out of any claim or
legal proceeding by a person who is not a party to this Agreement, the
indemnifying party at its sole cost and expense may, upon written notice to the
indemnified party, assume the defense of any such claim or legal proceeding if
it acknowledges to the indemnified party in writing its obligations to
84
indemnify the indemnified party with respect to all elements of such claim, and
thereafter diligently conducts the defense thereof with counsel reasonably
acceptable to the indemnifies party. The indemnified party shall be entitled to
participate in (but not control) the defense of any such action, with its
counsel and at its own expense. If the indemnifying party does not assume or
fails to conduct in a diligent manner the defense of any such claim or
litigation resulting therefrom, (i) the indemnified party may defend against
such claim or litigation, in such manner as it may deem appropriate, including,
but not limited to, settling such claim or litigation, after giving notice of
the same to the indemnifying party, on such terms as the indemnified party may
deem appropriate all at the expense of the indemnifying party, who shall
promptly reimburse all expenses incurred by the indemnified party, and (ii) the
indemnifying party shall be entitled to participate in (but not control) the
defense of such action, with its counsel and at its own expense. If the
indemnifying party thereafter seeks to question the manner in which the
indemnified party defended such third party claim or the amount or nature of any
such settlement, the indemnifying party shall have the burden to prove by a
preponderance of the evidence that the indemnified party did not defend or
settle such third party claim in a reasonably prudent manner. Each party agrees
to cooperate fully with the other, such cooperation to include, without
limitation, attendance at depositions and the provision of relevant documents as
may be reasonably requested by the indemnifying party, provided that the
indemnifying party will hold the indemnified party harmless from all of its
expenses, including reasonable attorney's fees, incurred in connection with such
cooperation by the indemnified party. The indemnifying party shall have the
right to elect to settle any such claim or demand, for monetary damages only,
subject to the consent of the indemnified party; provided, however, if the
-----------------
indemnified party fails to give such consent within 20 days of being
85
requested to do so, the indemnified party shall, at its expense, assume the
defense of such claim or demand and regardless of the outcome of such matter,
the indemnifying party's liability hereunder shall be limited to the amount of
any such proposed settlement. In the event the indemnifying party assumes the
defense of a claim or demand, the indemnified party shall have the right to
assume control of the defense of any claim or demand from the indemnifying party
at any time and to elect to settle such claim or demand; provided, however, the
-------- -------
indemnifying party shall have no indemnification obligations with respect to
such claim, demand or settlement except for the costs and expenses of such
indemnifying party incurred prior to the assumption of the defense of the claim
or demand by the indemnified party. Notwithstanding the foregoing, in the event
that the indemnified party reasonably determines in good faith that its interest
with respect to such claim cannot appropriately be represented by the
indemnifying party due to a conflict of interest, such indemnified party shall
have the right to assume control of the defense of, and to compromise or settle,
such claim (exercising reasonable business judgment) at the indemnifying party's
expense; provided; however, that any compromise or settlement shall be subject
to the indemnifying party's consent, which consent shall not be unreasonably
withheld.
8.05 Manner of Indemnification. All indemnification hereunder shall be
-------------------------
effected by payment of cash or delivery of a certified or official bank check to
the indemnified party.
8.06 Limitations on Indemnification. All representations and warranties
------------------------------
made by the parties herein or in any instrument or document furnished in
connection herewith shall survive the Closing and any investigation at any time
made by or on behalf of the parties hereto and (a) the representations and
warranties set forth in Section 3.02 will survive in perpetuity, (b) the
representations and warranties set forth in Sections 3.07 and 3.22 will survive
until the
86
expiration of the respective statute of limitations with respect to such matters
and (c) all other representations and warranties set forth herein or in any
instrument or document furnished in connection herewith will expire on the 15
month anniversary of the Effective Date, unless prior to such time a claim
specifying a breach of any such representation or warranty is submitted in
writing to the indemnifying party and identified as a claim for indemnification
pursuant to this Agreement. No claim or action for indemnity pursuant to
Sections 8.01 or 8.02 hereof or otherwise for breach of any representation or
warranty shall be asserted or maintained by any party hereto after the
expiration of such representation or warranty pursuant to the provisions of this
Section except for claims made in writing prior to such expiration and actions
(whether instituted before or after such expiration) based on any claim made in
writing prior to such expiration. All covenants will survive until satisfied in
accordance with their terms. Notwithstanding any provision of this Agreement to
the contrary, (i) the Shareholders shall have no obligation to indemnify any
person entitled to indemnity under Section 8.01 for breach of representations
and warranties (except the representations and warranties set forth in Section
3.07) unless the persons so entitled to indemnity thereunder have suffered
Damages in an aggregate amount in excess of $1 million and then only to the
extent of such excess; (ii) the Shareholders shall have no obligation to
indemnify any person entitled to indemnity under Section 8.01 for breach of the
representations and warranties set forth in Section 3.07 hereof unless the
persons so entitled to indemnity thereunder have suffered Damages in an
aggregate amount in excess of $150,000 and then only to the extent of such
excess; and (iii) except with respect to the representations and warranties set
forth in Section 3.07 hereof, the Shareholders' aggregate liability under
Section 8.01 for breach of representations and warranties shall in no event
exceed $15 million.
87
8.07 Exclusivity of Indemnification. The parties hereto agree that the
------------------------------
indemnification provisions of this Article VIII are intended to provide the
exclusive remedy as to all Damages they may incur arising from or relating to
the transactions contemplated hereby, and each party hereby waives, to the
extent it may do so, any other rights or remedies that may arise under any
applicable statute, rule or regulation; provided, however, that the foregoing
-----------------
shall not be interpreted to limit the types of remedies, including specific
performance or other equitable remedies, which may be sought by an indemnified
person in connection with a breach of any covenant or agreement contained herein
and shall not limit any available remedy for a willful misrepresentation or
breach by another party.
ARTICLE IX
TERMINATION
9.01 Termination. This Agreement may be terminated prior to the Closing
-----------
(a) by the mutual written consent of the parties hereto; (b) by either Investor
or Lovaas, at any time after May 31, 1998 if for any reason the Merger shall not
have been consummated by such date; (c) by Investor if there has been a material
misrepresentation or material breach on the part of the Shareholders in the
representations, warranties and covenants of the Shareholders set forth herein
which, if curable, has not been cured within 10 business days after notice
thereof by Investor; (d) by Lovaas, if there has been a material
misrepresentation or material breach on the part of Investor in the
representations, warranties and covenants of Investor set forth herein which, if
curable, has not been cured within 10 business days after notice thereof by
Lovaas; (e) by Investor upon delivery to Lovaas, of a written notice if any
event occurs which renders impossible of satisfaction one or more of the
conditions to Investor's obligations contained in Article VI hereof and
noncompliance is not waived by Investor; and (f) by Lovaas, upon
88
delivery to Investor of a written notice if any event occurs which renders
impossible of satisfaction one or more conditions to the Shareholders'
obligations contained in Article VII hereof and noncompliance is not waived by
Lovaas. The termination of this Agreement except pursuant to subsection (a)
shall not affect the right of any party to bring an action against another party
for breach of this Agreement.
ARTICLE X
GENERAL PROVISIONS
10.01 Notices. All notices, requests and demands to or upon the
-------
respective parties hereto to be effective shall be in writing (including by
facsimile) and, unless otherwise expressly provided herein, shall be delivered
during normal business hours by hand, by Federal Express, United Parcel Service
or other reputable overnight commercial delivery service, or by facsimile
notice, confirmation of receipt received, addressed as follows, or to such other
address as may be hereafter notified by the respective parties hereto:
(a) If to Lovaas or the Company, to:
Hudson Respiratory Care Inc.
27711 Diaz Road, P.O. Box 9020
Temecula, California
Attn: Richard W. Johansen
Facsimile Number: (909) 676-1578
89
With a copy to:
Gibson, Dunn & Crutcher LLP
4 Park Plaza
Irvine, California 92614
Attn: Gerard J. Kenny, Esq.
Facsimile Number: (714) 451-4220
and:
Salomon Smith Barney
333 S. Hope Street, Suite 3200
Los Angeles, California 90071
Attn: Mark Davis
Facsimile Number: (213) 253-1808
(b) If to Investor, to:
River Holding Corp.
c/o Freeman Spogli & Co.
11100 Santa Monica Boulevard, Suite 1900
Los Angeles, California 90025
Attn: Charles R. Rullman, Jr.
Facsimile Number: (310) 444-1870
90
With a copy to:
Riordan & McKinzie
300 South Grand Avenue, 29th Floor
Los Angeles, California 90071
Attn: Richard J. Welch, Esq.
Facsimile Number: (213) 229-8550
10.02 Entire Agreement. This Agreement constitutes the entire
----------------
understanding between the parties with respect to the subject matter hereof;
superseding all negotiations, prior discussions and preliminary agreements.
10.03 Governing Law. This Agreement and the rights and obligations of the
-------------
parties under this Agreement shall be governed by and construed in accordance
with the laws of the State of California, excluding its rules of conflicts of
law.
10.04 Consent to Jurisdiction and Forum Selection. The parties agree that
-------------------------------------------
all actions or proceedings arising in connection with this Agreement shall be
tried and litigated exclusively in the State and Federal courts located in the
County of Orange, State of California. The aforementioned choice of venue is
intended by the parties to be mandatory and not permissive in nature, thereby
precluding the possibility of litigation between the parties with respect to or
arising out of this Agreement in any jurisdiction other than that specified in
this paragraph. Each party hereby waives any right it may have to assert the
doctrine of forum non conveniens or similar doctrine or to object to venue with
respect to any proceeding brought in accordance with
91
this paragraph, and stipulates that the State and Federal courts located in the
County of Orange, State of California shall have in personam jurisdiction and
venue over each of them for the purpose of litigating any dispute, controversy
or proceeding arising out of or related to this Agreement. Each party hereby
authorizes and accepts service of process sufficient for personal jurisdiction
in any action against it as contemplated by this paragraph by registered or
certified mail, return receipt requested, postage prepaid, to its address for
the giving of notices as set forth in this Agreement, or in the manner set forth
in Section 10.01 of this Agreement for the giving of notice. Any final judgment
rendered against a party in any action or proceeding shall be conclusive as to
the subject of such final judgment and may be enforced in other jurisdictions in
any manner provided by law.
10.05 Attorneys' Fees. If either party to this Agreement shall bring any
---------------
action, suit, counterclaim or appeal for any relief against the other,
declaratory or otherwise, to enforce the terms hereof or to declare rights
hereunder (collectively, an "Action"), the prevailing party shall be entitled to
recover as part of any such Action its reasonable attorneys' fees and costs,
including any fees and costs incurred in bringing and prosecuting such Action
and/or enforcing any order, judgment, ruling or award granted as part of such
Action. "Prevailing party" within the meaning of this section includes, without
limitation, a party who agrees to dismiss an Action upon the other party's
payment of all or a portion of the sums allegedly due or performance of the
covenants allegedly breached, or who obtains substantially the relief sought by
it.
10.06 Amendment and Waiver. This Agreement may be amended only by a
--------------------
written instrument signed by the parties hereto. No failure to exercise and no
delay in exercising, on the part of any party, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege
92
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege. The rights, remedies, powers and
privileges herein provided are cumulative and not exclusive of any rights,
remedies, powers and privileges provided by law. The failure of any party to
insist upon a strict performance of any of the terms or provisions of this
Agreement, or to exercise any option, right or remedy herein contained, shall
not be construed as a waiver or as a relinquishment for the future of such term,
provision, option, right or remedy, but the same shall continue and remain in
full force and effect. No waiver by any party of any term or provision of this
Agreement shall be deemed to have been made unless expressed in writing and
signed by such party.
10.07 Captions. The captions of the Sections of this Agreement are for
--------
convenience only and shall not be considered or referred to in resolving
questions of construction.
10.08 Counterparts. This Agreement may be executed by one or more of the
------------
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
10.09 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder shall be assignable by any party without the written
consent of the others provided that Investor may assign its rights under this
Agreement (i) to a corporation, group or entity that purchases all or
substantially all of the assets or capital stock of the Company or Investor or
that succeeds to the rights of the Company or Investor by operation of law or
(ii) to any lender in connection with any Indebtedness incurred by Investor or
the Company.
93
10.10 Severability. Any portion or provision of the Agreement which is
------------
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining portions or
provisions hereof in such jurisdiction or, to the extent permitted by law,
rendering that or any other portion or provision of the Agreement invalid,
illegal or unenforceable in any other jurisdiction.
10.11 Expenses. Except as otherwise expressly provided herein, the
--------
parties shall, if the transactions contemplated hereby are not consummated, each
bear their own legal, accounting, investment banking and other fees and expenses
in connection with this Agreement and the transactions contemplated hereby. If
the transactions contemplated by this Agreement are consummated, the Company
shall pay all expenses of Investor and Newco in connection therewith.
10.12 Schedules. All schedules, exhibits, appendices and documents
---------
referred to in or attached to this Agreement are integral parts of this
Agreement as if fully set forth herein, and all statements appearing therein
shall be deemed disclosed for all purposes and not only in connection with the
specific representation to which they are explicitly referenced.
10.13 Records. After the Closing, Investor shall cause the Company to
-------
keep and preserve all books and records of the Company existing as of the
Closing for a period of at least three years after the Closing. Investor will
cause the Company to afford to the representatives of the Shareholders,
including its counsel and accountants, reasonable access to, and, at the
Shareholders' expense, copies of, the records retained by the Company during
normal business hours after the Effective Date upon reasonable notice for proper
business purposes. Investor and the Company shall also make their respective
officers and employees available to the
94
Shareholders at reasonable times and places after the Closing upon reasonable
notice for proper business purposes.
10.14 Further Assurances. From time to time after the Effective Date, at
------------------
Investor's request and without further consideration, the Shareholders shall
execute and deliver to Investor such documents and take such other action as
Investor may reasonably request in order to consummate more effectively the
transactions contemplated hereby and to carry out the intent of this Agreement.
From time to time after the Effective Date, at the request of the Shareholders
and without further consideration, the Investor shall execute and deliver to the
Shareholders such documents and take such other action as the Shareholders may
reasonably request in order to consummate more effectively the Merger and to
carry out the intent of this Agreement.
10.15 Publicity. The parties shall cooperate with each other in the
---------
development and distribution of all news releases and other public disclosures
relating to the transactions contemplated hereby. None of the parties shall
issue or make, or cause to have issued or made, any press release or
announcement concerning the transactions contemplated hereby without the advance
approval in writing of the form and substance thereof by the other party, unless
otherwise required by applicable law.
10.16 Definition of Knowledge. For purposes of this Agreement, whenever a
-----------------------
statement is qualified by "to the Shareholders' knowledge," "to the knowledge of
the Shareholders" or words of similar import, it is intended to indicate that
none of Lovaas, Richard W. Johansen, Lougene Williams or Jay R. Ogram have
actual knowledge of the inaccuracy of such statement.
95
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
River Holding Corp. (the "Investor")
By: /s/ Charles P. Rullman
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Name: Charles P. Rullman, Jr.
Title: President
By: /s/ Jon D. Ralph
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Name: Jon D. Ralph
Title: Vice President and Secretary
River Acquisition Corp. ("Newco")
By: /s/ Charles P. Rullman
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Name: Charles P. Rullman, Jr.
Title: President
By: /s/ Jon D. Ralph
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Name: Jon D. Ralph
Title: Vice President and Secretary
Title: Vice President and Secretary
Hudson Respiratory Care Inc. (the "Company")
By: /s/ Richard W. Johansen
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Name: Richard W. Johansen
Title: President and Chief Executive Officer
By: /s/ Jay R. Ogram
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Name: Jay R. Ogram
Title: Chief Financial Officer
Helen Lovaas Separate Property Trust
U/D/T dated 7/17/97
By: /s/ Helen Lovaas
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Helen Lovaas, Trustee
Helen Lovaas Trust No. 1
U/D/T dated 11/10/97
By: /s/ Helen Lovaas
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Helen Lovaas, Trustee