EXHIBIT 10.21
AGREEMENT OF REFORMATION AND AMENDMENT
THIS AGREEMENT OF REFORMATION AND AMENDMENT (the "Agreement") is made as
of the 31st day of March, 1998 (the "Agreement Date"), by and among Michael C.
Higgins and Michael S. Cannon (collectively, the "Stockholders" and,
individually, a "Stockholder") and ZMAX Corporation, a Delaware corporation
("ZMAX").
RECITALS
A. The Stockholders formerly owned all the outstanding shares of
Century Services, Inc., a Maryland corporation ("CSI") having proprietary
rights in and ownership of specialized computer software and a workforce with
specialized skills relating to the correction of the Year 2000 problem. On
November 6, 1996 (the "Original Effective Date"), the Stockholders entered
into a Stock Purchase Agreement (the "Acquisition Agreement") with ZMAX, which
at that time was a public company with no operations, whereby ZMAX acquired
all of the issued and outstanding shares of CSI from the Stockholders in
exchange for the issuance by ZMAX to the Stockholders of 3,200,000 shares of
ZMAX common stock, par value $.001 per share ("ZMAX Stock"). On the Original
Effective Date, all of the 3,200,000 shares of ZMAX Stock were recorded in the
names of the Stockholders, with 1,600,000 shares of ZMAX Stock being recorded
in the name of each Stockholder, and with the Stockholders having all voting
rights and dividend and distribution rights (including the right to receive
liquidating distributions) with respect to all 3,200,000 shares of ZMAX Stock.
B. In order to incentivize the Stockholders, both of whom became
senior members of the management of ZMAX after the Original Effective Date and
one of whom became a member of the Board of Directors of ZMAX after the
Original Effective Date, to increase the cash flow of ZMAX, the parties agreed
that 2,800,000 shares (the "Restricted Stock") of ZMAX Stock issued to the
Stockholders under the Acquisition Agreement would be subject to restrictions
on transferability as contained in Section 1.5 of the Acquisition Agreement.
Under the terms of the Acquisition Agreement, the shares of Restricted Stock
were deposited into escrow with Powell, Goldstein, Frazer & Murphy (the
"Escrow Agent"), pursuant to an Earn Out Stock Escrow Agreement dated the
Original Effective Date (the "Escrow Agreement") among ZMAX, the Escrow Agent
and the Stockholders. The Acquisition Agreement provides that one (1) share of
Restricted Stock will be released from escrow and delivered to each
Stockholder for every $1.25 of Cash Flow (as defined in Section 1.5 of the
Acquisition Agreement) generated by CSI. The Acquisition Agreement and the
Escrow Agreement contain additional restrictions on the release of the
Restricted Shares from escrow; however, neither the Acquisition Agreement nor
the Escrow Agreement provides a definite term for which the release provisions
will apply to the Restricted Stock. Even after the Restricted Stock was placed
into escrow, the Stockholders continue to have all voting rights and dividend
and distribution rights (including the right to receive liquidating
distributions) on the Restricted Stock.
C. In connection with the execution of the Acquisition Agreement, the
parties entered into the following additional agreements as of the Original
Effective Date: (1) the Stockholders Agreement (the "Stockholders Agreement"),
pursuant to which all 3,200,000 shares of the ZMAX Stock owned by the
Stockholders (including the Restricted Stock) remain subject to various rights
and restrictions (described in Recital D below); (2) a Compensation Escrow
Agreement with the Bank of Alexandria, which is no longer in effect as of the
date hereof; (3) an Employment Agreement between Michael Higgins and ZMAX,
which remains in effect as of the date hereof (the "Higgins Employment
Agreement"), and an Employment Agreement between Michael Cannon and ZMAX,
which is no longer in effect as of the date hereof (the "Cannon Employment
Agreement")(with the Higgins Employment Agreement and the Cannon Employment
Agreement being collectively referred to as the "Employment Agreements"); and
(4) Stock Pledge and Security Agreements, which are no longer in effect as of
the date hereof.
D. The Stockholders Agreement has a term of three years and provides
that neither Stockholder may sell, pledge, encumber, give, bequeath or
otherwise transfer or dispose of any shares of ZMAX Stock (including the
Restricted Stock) during such three-year term without first complying with the
terms and conditions of the Stockholders Agreement or receiving the advance
written consent of ZMAX. On June 17, 1997, the Stockholders Agreement was
amended by the parties to give ZMAX a right of repurchase (in lieu of a
mandatory obligation to purchase) a Stockholder's shares of ZMAX Stock at the
Current Value Price of such shares in the event of a Stockholder's death. The
Stockholders Agreement, as amended, provides that in the event a Stockholder
is terminated from employment (with or without cause), becomes permanently
disabled, breaches the non-competition or non-disclosure provisions of his
Employment Agreement or dies, ZMAX generally has the right (but not the
obligation) to purchase all or a portion of the Stockholder's shares of ZMAX
Stock at the Current Value Price (as defined in Section 8 of the Stockholders
Agreement). The restrictions on the transferability of the Restricted Stock
remain in effect after a Stockholder's termination from employment without
cause, or in the event of disability or death. If a Stockholder is terminated
with cause from employment with ZMAX, his rights in any remaining Restricted
Stock are forfeited and such shares are to be returned to ZMAX.
E. On April 22, 1997 (the "Separation Date"), Michael Cannon and ZMAX
entered into a Separation Agreement (the "Separation Agreement"), pursuant to
which Mr. Cannon was terminated from employment under his Employment Agreement
without cause. In consideration for the early termination of his Employment
Agreement, ZMAX agreed to pay severance payments to Mr. Cannon in the amount
of $100,000 per annum through November 6, 1999, being the date on which his
Employment Agreement was to expire. In addition, Mr. Cannon agreed to resign
as an officer of ZMAX and to have the transfer restrictions relating to the
Restricted Stock contained in the Acquisition Agreement and the Escrow
Agreement continue to apply, even though Mr. Cannon was no longer an officer
of ZMAX. Beginning on the Separation Date and continuing until November 6,
1999, Mr. Cannon was to serve as a consultant to ZMAX for no additional
compensation, pursuant to a Consulting Agreement dated as of the Separation
Date (the "Consulting Agreement"). Mr. Cannon also agreed to have the
non-competition, non- solicitation and non-disclosure covenants of his
Employment Agreement continue for the time periods set forth in the Employment
Agreement.
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F. In the acquisition by ZMAX of all the outstanding shares of CSI
from the Stockholders, the original intent of the parties was that ZMAX issued
3,200,000 shares of ZMAX Stock (including the Restricted Stock) to the
Stockholders in consideration for their shares of CSI stock. The parties
further intended that the Stockholders were to have all rights of ownership in
the 3,200,000 shares of ZMAX Stock (including the Restricted Stock), subject
only to restrictions on transferability of the Restricted Stock that were to
be tied to the cash flow performance requirements of ZMAX as contained in
Section 1.5 of the Acquisition Agreement. After further review, the parties
believe that the combination of such cash flow performance requirements and
the transfer restrictions imposed under the Escrow Agreement have the mistaken
and unintended effect of requiring the Stockholders to earn the Restricted
Shares twice, once upon the original issuance of the shares by ZMAX in its
acquisition of CSI from the Stockholders and a second time following the
satisfaction of the cash flow requirements. To correct this mutual mistake of
material fact, the parties now desire to cause the Escrow Agent to release the
Restricted Stock from escrow, subject to the continuation of the same
restrictions on transferability of the Restricted Stock which presently exist
under the various agreements between the parties. The parties therefore now
desire to reform the existing agreements between the parties in the manner
hereinafter provided to correct such mutual mistake of material fact.
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein, the parties hereto intending to be legally bound and for
good and adequate consideration, the sufficiency of which is acknowledged,
agree to reform and amend the aforementioned agreements as follows:
1. INCORPORATION BY REFERENCE. The foregoing Recital paragraphs are
hereby incorporated in their entirety into this Agreement.
2. REFERENCES TO EARN OUT STOCK. All references to "Earn Out Stock"
contained in the Stockholders Agreement, the Acquisition Agreement and any
other agreement executed as of the Original Effective Date shall be changed to
"Restricted Stock," as that term is defined in the Recital paragraphs above.
3. REFORMATION AND AMENDMENT OF THE ACQUISITION AGREEMENT. The
parties hereby agree that the Acquisition Agreement is hereby reformed and
amended retroactive as of the Original Effective Date as provided below, so
that the Restricted Stock is no longer held in escrow under the Escrow
Agreement, but nevertheless the restrictions on transferability continue to be
in effect, subject only to the cash flow performance requirements contained in
Section 1.5 of the Acquisition Agreement. The parties further agree that the
Stockholders Agreement is reformed and amended as provided below to include in
the Stockholders Agreement the cash flow performance requirements presently
contained in the Acquisition Agreement, with such cash flow performance
requirements continuing to be a restriction on the transfer of the Restricted
Stock, as set forth below in Section 4 of this Agreement. Therefore, the
parties hereby reform and amend the Acquisition Agreement as follows:
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(A) Section 1.3 of the Acquisition Agreement is hereby reformed
and amended to require the release of the Restricted Stock from the escrow,
immediately following the execution of this Agreement. The parties agree to
terminate the escrow as set forth in Section 5 of this Agreement.
(B) Sections 1.5, 1.6, 1.7, 1.8 and 1.9 of the Acquisition
Agreement are hereby deleted in their entirety, and substantially similar
sections thereto are inserted into Section 1 of the Stockholders Agreement, as
set forth below in Section 4 of this Agreement.
4. REFORMATION AND AMENDMENT OF THE STOCKHOLDERS AGREEMENT. The
parties hereby agree that the Restricted Stock shall be subject to the terms
and conditions of the Stockholders Agreement retroactive to the Original
Effective Date, subject to the following restrictions, terms and conditions:
(A) Section 1 of the Stockholders Agreement is hereby reformed
and amended to reflect that the Restricted Stock is subject to cash flow
performance requirements and certain other provisions formerly contained in
the Acquisition Agreement. Accordingly, the first full paragraph of Section 1
of the Stockholders Agreement is renumbered as subparagraph (a) of Section 1
thereof, the last sentence of Section 1 of the Stockholders Agreement is
deleted in its entirety and, in lieu thereof, the following language is hereby
inserted as new subparagraph (b) of Section 1 of the Stockholders Agreement:
"(b) RESTRICTED STOCK. (1) Two Million Eight Hundred Thousand
(2,800,000) shares of the ZMAX Stock issued to the Stockholders
(the "Restricted Stock") shall not be subject to sale, pledge,
encumbrance, gift, bequest, or other transfer or disposal under
any circumstance whatsoever, unless and until such shares are
released from such restrictions under this Section 1(b). The
Restricted Stock will be released quarterly to the Stockholders on
a pro rata basis to each Stockholder. One share of Restricted
Stock will be released for each $1.25 of Cash Flow (as defined
below) generated by CSI. For purposes of this Section 1(b), the
term "Cash Flow" means, with respect to each CSI fiscal year
quarter or other period, all operating revenues from sales and
services and licensing and franchising income (but excluding
proceeds from loans or capital infusions and proceeds from sales,
exchanges and other dispositions of property or rights not in the
ordinary course of business), LESS direct operating expenses
including software licensing fees and a provision for CSI's income
taxes calculated based on the then-applicable statutory rates (but
excluding capital expenses, depreciation, amortization, debt
service, dividends and intercompany charges other than charges
that would be direct operating expenses if paid by CSI). Cash Flow
will be determined by Arthur Andersen (or such other independent
accounting firm then serving CSI) for the relevant period on a
cash basis. Upon the completion of the review and filing of the
required SEC financial reports for the applicable quarter, and in
no case later than ninety (90) days following the close of such
financial quarter, ZMAX will cause Arthur Andersen to prepare a
statement of Cash Flow ("Cash Flow Statement") for each fiscal
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year quarter which will set forth an itemized calculation of Cash
Flow and calculate the number of shares of Restricted Stock (to
the nearest whole number of shares) based on the Cash Flow for the
relevant period and to deliver the Cash Flow Statement to ZMAX.
Upon receipt of the Cash Flow Statement, ZMAX will fax the Cash
Flow Statement to each Stockholder. Upon approval of the Cash Flow
Statement as evidenced by the signing of the Cash Flow Statement
by both ZMAX and each Stockholder, such shares will no longer be
deemed Restricted Stock for purposes of this Agreement and shall
be subject to the remaining provisions of this Agreement.
(2) If ZMAX and the Stockholders cannot agree on the Cash
Flow Statement prepared by the independent accounting firm for any
quarter, the ZMAX Board of Directors will prepare and sign a Cash
Flow Statement and fax it to the Stockholders. If the ZMAX Board
of Directors' Cash Flow Statement is approved by the Stockholders,
as evidenced by the signatures of the Stockholders, such shares
will no longer be deemed Restricted Stock for purposes of this
Agreement and shall be subject to the remaining provisions of this
Agreement. If the Stockholders are not satisfied with the Cash
Flow Statement prepared by the ZMAX Board of Directors (the
"Dispute"), the Stockholders may submit the Dispute to binding
arbitration administered by the American Arbitration Association
("AAA") under its Commercial Arbitration Rules, except where those
rules are supplemented or modified by the express terms of this
section. The parties agree that binding arbitration is the
exclusive remedy for resolving any Dispute. The Stockholders may
initiate arbitration by sending notice of its intention to
arbitrate the Dispute to ZMAX, which notice must be accompanied by
a brief setting forth the nature of the Dispute and the remedy
sought, which brief may not exceed 25 typed pages (the
"Arbitration Notice"). The Stockholders must also file at the
regional office of the AAA three copies of the Arbitration Notice
and Brief and the arbitration provision of this Agreement together
with the required filing fee. ZMAX must file a responsive brief
within 15 business days of receipt of the Stockholders'
Arbitration Notice and Brief, which responsive brief may not
exceed 25 typed pages. Any arbitration proceedings will be in
Washington, D.C. If the parties are able to agree on one
arbitrator within 15 days of the date the Arbitration Notice is
filed with the AAA, the Dispute will be heard by that arbitrator.
If the parties are unable to agree on one arbitrator, then an
arbitrator will be selected from an impartial roster of
arbitrators provided by the AAA in accordance with the AAA rules.
There will be no discovery permitted by the parties in the
arbitration proceedings provided that each party will be permitted
to take one oral deposition of the other party or unless otherwise
mutually agreed to by the parties. ZMAX agrees to be bound by Rule
30(b)(6) of the Federal Rules of Civil Procedures "Deposition of
an Organization," as amended from time to time or any successor
rule. The arbitrator will issue a decision within 30 days of his
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or her appointment. The decision of the arbitrator must set forth
in reasonable detail the reasoning supporting the decision of the
arbitrator. The decision rendered by the arbitrator will be final
and binding on the parties and judgment on the decision rendered
by the arbitrator may be entered in any court having jurisdiction.
Each party will pay its own costs and expenses related to the
arbitration procedures. This agreement to arbitrate is
specifically enforceable under the prevailing arbitration law and
survives the termination of this Agreement.
(3) If any Stockholder is terminated by CSI for cause (as
defined in the Stockholder's employment agreement with CSI) or
violates the non-competition, non-solicitation or proprietary
information restrictions in his employment agreement with CSI, the
Restricted Stock issued in the name of the Stockholder shall be
delivered to the Transfer Agent of ZMAX for reissuance in the name
of ZMAX.
(4) The Stockholders will be entitled to vote the Restricted
Stock even though it is subject to the restrictions in Section
1(b)(1) hereof. If an annual or special meeting of the ZMAX
stockholders is called, the Stockholders will be entitled to
receive notice of such meeting and to attend such meeting and vote
all of the shares of Restricted Stock issued in their names, in
person or by proxy.
(5) The Stockholders are entitled to receive dividends or
other distributions made by ZMAX (including distributions in
liquidation) on the Restricted Stock."
(B) The restrictive legend set forth in Section 11 of the
Stockholders Agreement is hereby amended to delete the second paragraph of the
legend and the following language is hereby inserted in lieu thereof:
"Notice is hereby given that the sale, assignment, pledge,
hypothecation, transfer or other disposition of the shares of
Stock represented by this certificate is restricted under the
terms of a Stockholders Agreement dated as of November 6, 1996, as
amended (the "Stockholders Agreement"), a copy of which is on file
at the office of the Corporation, and all of the provisions of the
amended Stockholders Agreement are incorporated by reference in
this certificate."
(C) The notice provisions of Section 14 of the Stockholders
Agreement are hereby amended, by substituting the following names and
addresses in lieu of those shown in the original Stockholders Agreement:
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"If to the Corporation: ZMAX Corporation
20251 Century Boulevard, Suite 400
Germantown, Maryland 20874
Attention: James T. McCubbin
Telephone: 301-353-9500
Fax: 301-353-9501
If to the Stockholders: Michael C. Higgins
12408 Rivers Edge Drive
Potomac, Maryland 20854
Telephone: 301-926-6771
And/or (as applicable): Michael S. Cannon
142 Brightmoor Court
Henderson, Nevada 89014
Telephone: 702-270-4503"
(D) The termination provisions of Section 15 of the Stockholders
Agreement are hereby amended to reflect an extension of the term of the
Stockholders Agreement with respect to the Restricted Stock, as follows:
"15. TERMINATION OF AGREEMENT. With the exception of Section 1(b)
of this Agreement, this Agreement will be effective for a period
of three (3) years from the date of this Agreement [November 6,
1996]. The restrictions contained in Section 1(b) of this
Agreement shall be effective for a period of five (5) years from
the date of this Agreement."
5. REFORMATION AND AMENDMENT OF THE SEPARATION AGREEMENT. Section 5
of the Separation Agreement is hereby reformed and amended to reflect the
changes made by this Agreement, as follows:
"5. RESTRICTED STOCK. The holder hereof acknowledges that
1,400,000 shares of ZMAX Corporation ("ZMAX") common stock (the
"Restricted Stock") is subject to transfer restrictions imposed
under the Stockholders Agreement, dated as of November 6, 1996, as
amended from time to time (the "Stockholders Agreement"), among
ZMAX, Michael S. Cannon and Michael C. Higgins. The holder hereby
acknowledges and agrees that his Restricted Stock will be released
from the restrictions only if the cash flow performance
requirements of that section are met, and until released, shall
not be subject to sale, pledge, hypothecation, transfer or
disposal in any manner whatsoever."
6. TERMINATION OF THE ESCROW AGREEMENT. The parties agree that the
Escrow Agreement shall terminate immediately following execution of this
Agreement. To that end, the parties agree to notify the Escrow Agent in
writing of such termination of the Escrow Agreement, with such written notice
from the parties hereto to the Escrow Agent to be in the form of Exhibit A
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attached hereto and made part hereof. ZMAX shall use its best efforts to cause
the Escrow Agent to deliver to ZMAX the Escrow Shares (as defined in the
Escrow Agreement) in a timely manner. Upon receipt by ZMAX of such Escrow
Shares, ZMAX shall deliver the certificates evidencing such Escrow Shares to
its Transfer Agent with instructions for the Transfer Agent to reissue
replacement certificates therefor which contain the new restrictive legend set
forth above in Section 4(b) of this Agreement.
7. MISCELLANEOUS.
(a) NO OTHER AMENDMENTS. Except as reformed and modified by this
Agreement, the Stockholders Agreement, the Acquisition Agreement, the
Separation Agreement, and the Higgins Employment Agreement remain unchanged
and in full force and effect. The Escrow Agreement shall be deemed to be
terminated retroactive as of the Original Effective Date.
(b) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
(c) GOVERNING LAW; SEVERABILITY. This Agreement will be governed
by and construed in accordance with the laws of the State of Maryland,
excluding that body of law pertaining to conflict of laws. If any provision of
this Agreement is for any reason found to be unenforceable, the remainder of
this Agreement will continue in full force and effect.
(d) DUE AUTHORIZATION. The Agreement is has been duly authorized
by the parties, and duly executed on behalf of each party, including the duly
authorized officers of ZMAX in the manner required by all laws and regulations
applicable to ZMAX.
(e) ASSIGNMENT. This Agreement may be assigned only with the
advance written consent of the non-assigning party.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Agreement Date.
Attest/Witness: ZMAX Corporation, Inc., a
Delaware corporation
By: /s/JAMES T. MCCUBBIN By: /s/MICHAEL C. HIGGINS
-------------------- ---------------------
Name: James T. McCubbin Name: Michael C. Higgins
Its: Assistant Secretary Its: President
/s/JAMES T. MCCUBBIN /s/MICHAEL C. HIGGINS
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James T. McCubbin Michael C. Higgins
President
/s/JAMES T. MCCUBBIN /s/MICHAEL S. CANNON
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James T. McCubbin Michael S. Cannon